<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-K/A
(Amendment No. 2)
(Mark One)
[X] AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 28, 1997
OR
[ ] TRANSITION 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.)
2790 Mosside Boulevard, Monroeville, Pennsylvania 15146-2792
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 372-7701
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange on which
------------------------------
Title of each class registered
------------------- ----------
<S> <C>
Common Stock, $.01 Par Value New York Stock Exchange; Pacific Stock Exchange
Preferred Stock Depositary Shares New York Stock Exchange; Pacific Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant at June 13, 1997, was approximately $75,284,000
(based upon the closing sale price of its common stock on the New York Stock
Exchange as reported by The Wall Street Journal on such date.)
At June 13, 1997 the registrant had issued and outstanding an aggregate of
9,741,715 shares of its common stock, including 6,208 shares held in treasury.
Documents Incorporated by Reference
None.
<PAGE> 2
This report is an amendment to the International Technology Corporation annual
report on Form 10-K for the year ended March 28, 1997. The report is being
amended to (1) modify Management's Discussion and Analysis of Results of
Operations and Financial Condition; Results of Operations-Quanterra, Other
Income (Expense) and Income Taxes and Liquidity and Capital Resources, (2)
revise the presentation of cash flows relating to discontinued operations in
the Consolidated Statements of Cash Flows, (3) modify the disclosures in the
Notes to Condensed Consolidated Financial Statements, (4) file the financial
statements of Quanterra Inc. for the year ended December 31, 1995, under Item
14. Separate Financial Statements of Subsidiaries Not Consolidated and Fifty
Percent Owned Persons and (5) file the Consent of Ernst & Young LLP, under
Exhibit 23, related to the Quanterra Inc. financial statements.
The following items to the Company's annual report on Form 10-K/A are being
filed herewith:
PART II Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition
Item 8 Financial Statements and Supplementary Data
PART IV Item 14 Exhibits, Financial Statement Schedule and Reports on
Form 8-K
<PAGE> 3
INTERNATIONAL TECHNOLOGY CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 28, 1997
TABLE OF CONTENTS
Item PART II Page
- ---- ----
7 Management's Discussion and Analysis of Results of Operations
and Financial Condition....................................... 2
8 Financial Statements and Supplementary Data....................... 11
PART IV
14 Exhibits, Financial Statement Schedule and Reports on Form 8-K.... 38
1
<PAGE> 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
CONTINUING 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.
In 1996, the Company changed its fiscal year to consist of four
thirteen-week fiscal quarters with the fourth quarter ending on the last Friday
of March. Previously, the fiscal year ended on March 31 of each year.
2
<PAGE> 5
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
REVENUES
Revenues for fiscal year 1997 declined by 9.4% compared to a decline of
5.6% in fiscal year 1996. This decline in revenues generally reflected weak
demand in both the governmental 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 (see Restructuring Charge). During the fourth
quarter of fiscal year 1997, however, the Company experienced an 8% increase in
revenues to $95,712,000 from $88,579,000 in the fourth quarter of fiscal year
1996, principally due to consistent funding of DOD programs which had been
subject to reduced funding in late fiscal year 1996 and early fiscal year 1997
as a result of delays in the authorization of the federal budget.
Although revenue growth in the Company's core business is expected to be
modest in the near future due to the difficult industry-wide conditions, the
Company is actively seeking revenue growth and diversification through business
acquisitions (see Liquidity and Capital Resources). 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. Additionally, in May
1997, the Company acquired PHR Environmental Consulting, Inc., a small
consulting firm specializing in environmental and historical investigation.
Revenues for fiscal year 1996 of $400,042,000 were $23,930,000 lower than
the $423,972,000 of revenues for fiscal year 1995. Effective with the inception
of operations for Quanterra in the second quarter of fiscal year 1995, the
Company ceased recording any analytical services revenue. However, since a
portion of analytical services revenue historically was derived from the
Company's other operations, additional revenue is now being recorded related to
analytical services subcontracts performed by Quanterra (see Quanterra) for IT,
similar to other third party subcontracts. After excluding fiscal year 1996 and
1995 analytical services revenues other than those provided to the Company's
other operations, revenues for the Company declined 3.8% for fiscal year 1996,
primarily due to the slowdown of awards of federal governmental contract
delivery orders caused by the delayed authorization of the federal government
budget.
A substantial percentage of the Company's revenues during the three years
ended March 28, 1997 was earned through executing governmental contracts for
various federal, state and local agencies. Revenues from governmental contracts
accounted for 67% of the Company's revenues in fiscal year 1997, compared to 69%
and 71% in fiscal years 1996 and 1995, respectively. See the table in Business -
Operations - Customers - Federal, State and Local Governmental Clients for an
analysis of the Company's revenues attributable to federal, state and local
governmental contracts. Federal governmental revenues are derived principally
from work performed for the DOD and, to a lesser extent, the DOE. The Company
expects to increase its revenues from the DOE over time due to an expected
transition by the DOE over the next several years to emphasize remediation over
studies combined with the Company's favorable experience in winning and
executing similar work for the DOD and the Company's experience with DOE related
to its past performance of DOE studies. In the near term, the Company expects
that the percentage of total revenues from the execution of federal, state and
local governmental contracts will continue to be substantial.
Although increasing slightly as a percentage of total revenues, reflecting
management efforts to reduce the Company's reliance on government contracts, the
Company's revenues from commercial clients declined slightly in fiscal year 1997
compared to fiscal year 1996. The Company believes this is partly due to
increased emphasis by commercial clients on cost-effective solutions and partly
due to commercial clients delaying certain work until final Congressional action
is taken on the reauthorization of CERCLA. The Company is focusing more on
providing value-added consulting service and on negotiating partnering
arrangements with clients in an effort to provide commercial clients with more
cost-effective solutions. As for CERCLA, 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
3
<PAGE> 6
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
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 effectiveness of the remedies
available.
Revenues derived from large, complex thermal remediation contracts
utilizing the Company's HTTS thermal treatment technology were approximately
10%, 11% and 11% of revenues in fiscal years 1997, 1996 and 1995, respectively.
Incineration as a remedy under CERCLA continues to come under legislative and
regulatory pressures. Because of this issue and the relatively higher cost of
incineration, there are very few potential project opportunities in the United
States and the Company has been forced to seek alternative uses for its HTTS
equipment. The Company is actively pursuing foreign opportunities which utilize
the HTTS equipment. If alternative uses, such as foreign installations, cannot
be found or are uneconomical, there could be a negative effect to the Company
due to impairment of HTTS assets as well as lost project opportunities. At March
28, 1997, the net book value of IT's HTTS equipment was approximately
$11,200,000. The Company's backlog of contracts which utilize HTTS equipment was
approximately $10,000,000 at March 28, 1997 with such backlog to be performed
early in fiscal year 1998.
The Company's total funded and unfunded backlog at March 28, 1997 was
approximately $1,198,000,000 ($975,000,000 at March 29, 1996) including
approximately $280,000,000 of contracted backlog scheduled to be completed
during fiscal year 1998 and between $40,000,000 and $60,000,000 of additional
project work expected to be defined and performed in fiscal year 1998 under
existing governmental IDO contracts. Backlog revenues are expected to be earned
primarily over the next one to five years, with a substantial portion of the
backlog consisting of governmental contracts, many of which are subject to
annual funding and definition of project scope. The backlog amounts at March 28,
1997 and March 29, 1996 include $785,000,000 and $598,000,000, respectively, of
future work the Company estimates it will receive (based on historical
experience) under existing IDO programs. In accordance with industry practices,
substantially all of the Company's contracts are subject to cancellation, delay
or modification by the customer.
The Company's backlog at any given time is subject to changes in scope of
services required by the contracts leading to increases or decreases in backlog
amounts. These contracts subject to such scope changes have led to a number of
contract claims requiring negotiations with clients in the ordinary course of
business. (See Notes to Consolidated Financial Statements - Summary of
significant accounting policies - Contract accounting and accounts receivable.)
GROSS MARGIN
Gross margins were 10.5%, 14.5% and 14.6% of revenues in fiscal years
1997, 1996 and 1995, respectively. In the current year, gross margin was
adversely impacted by lower pricing due to competitive industry conditions and
by the continued shift in revenue mix toward larger projects and programs which
involve more subcontracting and carry a lower margin on revenues. Gross margin
percentage of 11.3% of revenues for the last six months of fiscal year 1997
improved from the 9.7% of revenues for the first half as overhead costs were
reduced due to organizational streamlining resulting from the recent corporate
restructuring (see Restructuring Charge). In the near term, the Company expects
to continue to experience the improved gross margins of the past six months. The
Company's ability to maintain or improve its gross margins is heavily dependent
on increasing utilization of professional staff, properly executing projects,
and successfully bidding new contracts at adequate margin levels.
Excluding a $5,300,000 provision for major litigation in fiscal year 1995
(see Notes to Consolidated Financial Statements - Commitments and contingencies
- - Central Garden), gross margin would have declined from 15.9% of revenues in
fiscal year 1995 to 14.5% in fiscal year 1996, primarily because of the
combination of the declining level of revenues, lower pricing due to competitive
industry conditions and a shift in revenue mix toward lower margin subcontracted
work.
4
<PAGE> 7
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were 9.2%, 9.5% and 10.0% of
revenues in fiscal years 1997, 1996 and 1995, respectively. Selling, general and
administrative expenses of $33,431,000 in fiscal year 1997 were $4,694,000 or
12.3% lower than the fiscal year 1996 level primarily due to the impact of the
corporate restructuring (see Restructuring Charge) initiated in the second
fiscal quarter of 1997. Selling, general and administrative expenses declined
from 10.2% in the first half of fiscal 1997 to 8.4% in the second half primarily
due to this corporate restructuring. Fiscal year 1996 selling, general and
administrative expenses of $38,125,000 represented a decrease of $4,351,000 or
10.2% from the prior year level, due to cost containment measures resulting from
continued management attention to expenses.
RESTRUCTURING CHARGE
In conjunction with the corporate restructuring to position the Company for
growth and diversification which was initiated in the second quarter of fiscal
year 1997, 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 March 28, 1997, $3,720,000 of
the charge remained to be paid over the next eight years. The restructuring
charge was taken in conjunction with an organizational realignment which is
expected to enable the Company to operate in a more efficient and client-focused
manner on an ongoing basis.
Additionally, during the first quarter of fiscal year 1998, the Company
will be relocating its corporate headquarters from Torrance, California to
Monroeville (Pittsburgh), Pennsylvania where the Company's largest office is
located. Beginning in the second quarter of fiscal year 1998, this will result
in reduced lease expenses as well as labor cost savings due to the consolidation
of certain functions, and travel cost savings, since much of the Company's
business, as well as its lenders and largest shareholders, are located in the
eastern United States. The move is anticipated to result in a charge in the
range of $2,000,000 to $3,000,000. The Company also anticipates it may take a
smaller charge in connection with the sale in the first quarter of fiscal year
1998 of its California remediation services business pursuant to a change in the
Company's approach to the market.
QUANTERRA
In June 1994, the Company and an affiliate of Corning Incorporated combined
the two companies' environmental analytical services businesses into a 50%/50%
jointly-owned company (Quanterra), which was recapitalized effective December
29, 1995, with IT retaining a 19% ownership interest. (See Liquidity and Capital
Resources and Notes to Consolidated Financial Statements - Quanterra.) IT's 50%
investment in Quanterra was accounted for under the equity method through
December 29, 1995, and the remaining 19% investment is now accounted for under
the cost method. In the nine months ended March 31, 1995, the initial period of
Quanterra's operations, the Company reported equity in net loss of Quanterra of
$9,827,000 (including a $9,264,000 charge for integration) and, in the six
months ended September 29, 1995, the Company reported equity in net loss of
Quanterra of $1,821,000. In the quarter ended December 29, 1995, the Company
reported equity in net loss of Quanterra of $24,595,000, principally related to
the recapitalization of Quanterra noted above. The events that led to the other
than temporary decline in the value of the Company's investment in Quanterra
occurred in December 1995 when it became evident that Quanterra's net loss would
increase significantly in comparison to the September 1995 quarterly results and
it became apparent that Quanterra would require additional capital from its
owners to meet its liquidity needs in 1996. These two events led to the
recapitalization transaction and the Company's loss recognition.
5
<PAGE> 8
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME (EXPENSE)
In fiscal year 1996, the Company reported in other income a pre-tax gain of
$1,090,000, related to the settlement of certain litigation concerning the Motco
project. (See Notes to Consolidated Financial Statements - Motco litigation
settlement.) This gain represented the settlement proceeds of $41,100,000 in
cash, net of the previously recorded $31,200,000 claim amount, $8,000,000 of
costs related to certain equipment specifically constructed for the Motco
project which has been idle since ceasing work on the project, and legal and
other expenses.
In fiscal year 1995, the Company recorded a charge of $3,800,000 to provide
for potential settlement and defense costs related to certain class action
shareholder litigation. The Company paid approximately this amount in cash in
fiscal year 1997 when the class action lawsuit was formally settled.
INTEREST, NET
Net interest expense was 1.5%, 1.6% and 1.7% of revenues in fiscal years
1997, 1996 and 1995, respectively. The following table shows net interest
expense for the three fiscal years ended March 28, 1997.
<TABLE>
<CAPTION>
Year ended
-------------------------------------------
March 28, March 29, March 31,
1997 1996 1995
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Interest incurred.................................... $ 7,168 $ 7,014 $ 8,065
Capitalized interest................................. - - (484)
Interest income...................................... (1,908) (569) (471)
-------- ------- -------
Interest, net...................................... $ 5,260 $ 6,445 $ 7,110
======== ======= =======
</TABLE>
During fiscal year 1997, the level of debt outstanding was relatively
unchanged from the prior year end level as the Company's refinancing was
completed in October 1995 and the related initial principal payments are not due
until 2001 on the Company's outstanding $65,000,000 senior secured notes.
Accordingly, interest incurred in fiscal year 1997 was $154,000 or 2.2% higher
than the corresponding amount for fiscal year 1996. Interest income of
$1,908,000 was $1,339,000 higher than the $569,000 in fiscal year 1996 due to
the full-year investment in cash equivalents of the excess proceeds of the
October 1995 refinancing (as discussed immediately below) and an increased level
of investment in cash equivalents beginning in November 1996 from the proceeds
of the Carlyle Investment (see Notes to Consolidated Financial Statements -
Preferred stock - Carlyle Investment).
In fiscal year 1996, the decline in interest incurred is due principally to
lower levels of outstanding debt during the second half of the fiscal year. This
resulted from debt paid down out of the $41,100,000 proceeds of the Motco
settlement. (See Notes to Consolidated Financial Statements - Motco litigation
settlement.) This decline in debt was partially offset by the refinancing of the
Company's senior notes in October 1995 through a $65,000,000 private placement,
which exceeded the $50,000,000 of debt being refinanced. These excess proceeds
were invested in cash equivalents which generated interest income over the
remainder of the year. There was no capitalized interest in fiscal year 1996 due
to the completion of the Company's major company-wide management information
systems project in fiscal year 1995, on which interest had been capitalized.
INCOME TAXES
For fiscal year 1997, in which the Company reported a loss from continuing
operations before income taxes of $8,956,000, the Company recorded an income tax
benefit of $179,000 which included a $4,602,000 tax charge resulting from the
adjustment of IT's deferred tax asset 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
6
<PAGE> 9
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
the restructuring charge (see Restructuring Charge). The Company's effective
income tax benefit rate is 2%, which is less then the 34% federal statutory rate
primarily due to the above tax charge, state income taxes and nondeductible
expenses (See Notes to Consolidated Financial Statements - Income taxes).
For fiscal year 1996, in which the Company reported a loss from continuing
operations before income taxes of $11,744,000, the Company recorded an income
tax benefit of $12,290,000 which included a $7,781,000 tax benefit resulting
from the adjustment of IT's deferred tax asset valuation allowance based on the
Company's reassessment of its ability to generate a sufficient level of future
earnings to realize a substantial portion of IT's related deferred tax asset.
For fiscal year 1995, in which the Company reported a loss from continuing
operations before income taxes of $1,297,000, the Company recorded a $2,383,000
income tax provision from continuing operations due to the nondeductibility of
certain expenses, including a significant portion of the charge for integration
related to the formation of Quanterra. (See Notes to Consolidated Financial
Statements - Quanterra.)
The Company's future tax rate is subject to the full realization of its
deferred tax asset of $32,116,000 (net of a valuation allowance of $9,741,000).
Realization of the tax asset is expected by management to occur principally as
closure expenditures related to the Company's inactive disposal sites over the
next several years are deductible in the years the expenditures are made and
upon the ultimate tax disposition of the Company's interest in Quanterra, but is
subject to the Company having a sufficient level of taxable income and taxable
capital gains. Because of the Company's position in the industry, recent
restructuring, existing backlog and acquisition strategies, management expects
that its future taxable income and the use of tax-planning strategies
(principally the matching of any future capital gains and losses during the
relevant carryforward or carryback period) will more likely than not allow the
Company to fully realize its deferred tax asset. The Company evaluates the
adequacy of the valuation allowance and the realizability of the deferred tax
asset on an ongoing basis.
DIVIDENDS
Dividends for fiscal year 1997 include cash dividends of $4,050,000
($4,200,000 in fiscal years 1996 and 1995) 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
$866,000 on the newly issued Cumulative Convertible Participating Preferred
Stock (Convertible Preferred Stock) purchased by Carlyle. (See Notes to
Consolidated Financial Statements - Preferred stock - Carlyle Investment.)
During the first two years ended November 21, 1998 in which the Convertible
Preferred Stock is outstanding and the stated annual dividends are 0% and a
stock dividend of 3%, respectively, dividends will be calculated and presented
in the statement of operations at a rate of approximately 6% per annum. The
additional imputed dividend of approximately 6% in the first year and 3% in the
second year will never be paid in cash or stock.
LOSS FROM CONTINUING OPERATIONS
The Company recorded losses from continuing operations of $13,693,000,
$3,654,000 and $7,880,000 for fiscal years 1997, 1996 and 1995, respectively. As
discussed above, operating income for each of the years was more than offset by
the equity in net loss of Quanterra and certain special charges. (See Gross
Margin, Restructuring Charge, Quanterra, and Other Income (Expense).)
DISCONTINUED OPERATIONS
In fiscal year 1995, the Company increased its provision for loss on
disposition of its discontinued transportation, treatment and disposal business
by $10,603,000 (net of income tax benefit of $6,397,000). This increased
provision
7
<PAGE> 10
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
primarily related to delays in the regulatory approval process at the Company's
inactive disposal facilities located in Northern California, an additional
accrual for estimated costs related to certain waste disposal sites where IT has
been named as a PRP, increased closure construction costs due to plan revisions
and to additional costs experienced due to the unusually heavy rainfall
experienced in Northern California in January through March 1995.
FOR FURTHER INFORMATION REGARDING THE COMPANY'S DISCONTINUED OPERATIONS,
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - DISCONTINUED OPERATIONS.
8
<PAGE> 11
INTERNATIONAL TECHNOLOGY CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $21,531,000 or 24.1%, to $110,705,000 at March
28, 1997 from $89,174,000 at March 29, 1996. The current ratio at March 28, 1997
was 2.21:1 which compares to 2.13:1 at March 29, 1996.
Cash provided by operating activities for fiscal year 1997 totaled
$24,795,000, a $10,614,000 increase from the $14,181,000 of cash provided by
operating activities in the prior fiscal year principally due to the improvement
in receivables management. The Company has revised its cash flows from operating
activities to include cash outflows related to discontinued operations of
$14,041,000, $11,704,000 and $11,324,000 in fiscal years 1997, 1996 and 1995,
respectively. These cash outflows related to discontinued operations relate to
previously accrued closure and post-closure costs for permitting and
construction to close inactive treatment and disposal sites and payments made
related to matters where the Company has been named as a potentially responsible
party on certain sites. For further information on these activities, see Notes
to Consolidated Financial Statements - Discontinued operations. Cash flows from
operating activities, excluding cash flows related to discontinued operations,
are $38,836,000, $25,885,000 and $13,575,000 in fiscal years 1997, 1996 and
1995, respectively. Capital expenditures were $3,361,000, $4,696,000 and
$10,533,000 for fiscal years 1997, 1996 and 1995, respectively. During fiscal
year 1997, capital expenditures decreased as the Company's decline in revenues
reduced the need for new equipment. Management believes capital expenditures in
fiscal year 1998 will remain stable or increase slightly from those of fiscal
year 1997, excluding any business acquisitions or strategic investments which
might be made by the Company. (See below and Business Operations - General.) The
Company does not expect to pay significant cash income taxes over the next
several years due to its net operating loss carryforwards. (See Notes to
Consolidated Financial Statements - Income taxes and Results of Operations -
Continuing Operations - Income Taxes.)
Long-term debt of $65,874,000 at March 28, 1997 was essentially unchanged
from the $65,611,000 at March 29, 1996. (See Notes to Consolidated Financial
Statements - Long-term debt.) The Company's ratio of debt (including current
portion) to equity declined over the past three years to 0.42:1 at March 28,
1997 from 0.47:1 and 0.56:1 at March 29, 1996 and March 31, 1995, respectively.
With regard to the transportation, treatment and disposal discontinued
operations, a number of items could potentially affect the liquidity and capital
resources of the Company, including changes in closure and post-closure costs,
realization of excess and residual land values, demonstration of financial
assurance and resolution of other regulatory and legal contingencies. (See Notes
to Consolidated Financial Statements - Discontinued operations.)
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 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 current fiscal year, 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. Although Quanterra has experienced net losses in the
past several years, the level of net loss has decreased over the past several
quarters, and Quanterra has recently neared break-even operations. The Company
will continue to evaluate the ultimate recoverability of its investment in
Quanterra (which is carried at $16,300,000 on the March 28, 1997 consolidated
balance sheet) on an ongoing basis and will recognize any impairment in value
should it occur. (See Notes to Consolidated Financial Statements - Quanterra.)
9
<PAGE> 12
INTERNATIONAL TECHNOLOGY CORPORATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On October 25, 1995, the Company executed a combined $125,000,000 financing
which includes $65,000,000 of senior secured notes with a group of major
insurance companies and a $60,000,000 syndicated bank revolving credit facility.
The financing package, which is subject to a borrowing base, is secured by the
accounts receivable and certain fixed assets of the Company. The senior secured
notes have an eight-year final maturity with no principal payments until the
sixth year, and the bank line has a term of five years.
In aggregate, at March 28, 1997, letters of credit totaling approximately
$20,000,000 related to the Company's insurance program, financial assurance and
bonding requirements were outstanding against the Company's $60,000,000 bank
line of credit. The Company had no outstanding cash advances under the line at
March 28, 1997. As of that date, the Company's borrowing base under its combined
financing package allowed for additional letters of credit or borrowings under
the line of credit of up to $580,000. At certain times (but not at March 28,
1997), the Company has been required to maintain cash on deposit with its credit
providers, due to the Company's borrowing base being insufficient to cover the
collateral required for the $65,000,000 senior notes and any outstanding letters
of credit, primarily as a result of reduced accounts receivable, which are the
principal component of the borrowing base. At March 28, 1997, the Company had
invested cash of approximately $73,000,000.
The Company has total bonding capacity of $135,000,000 at present, of which
approximately $94,000,000 is currently being utilized. The Company's bonding
lines generally require 5-10% collateral in the form of letters of credit.
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 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 $40,609,000 net proceeds to the Company (after related
offering costs of $4,391,000) will be used by IT to finance business
acquisitions, as well as for working capital and general corporate purposes (see
Notes to Consolidated Financial Statements - Preferred stock - Carlyle
Investment).
The Company continues to have significant cash requirements, including
expenditures for the closure of its inactive disposal sites and PRP matters (see
Notes to Consolidated Financial Statements - Discontinued operations), interest,
preferred dividend obligations and contingent liabilities. 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.
FORWARD LOOKING STATEMENTS
When used in the preceding discussion, the words "expects," "anticipates,"
"believes" and similar expressions are intended to identify, and nonhistorical
statements 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, funding of federal
government contracts, ongoing regulatory uncertainties which affect both
governmental and commercial clients, industry wide market factors, liabilities
and regulatory developments related to the Company's discontinued operations and
financial and liquidity trends.
10
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE FOR THE THREE YEARS IN THE PERIOD ENDED MARCH 28, 1997
CONSOLIDATED FINANCIAL STATEMENTS. PAGE
----
Report of Ernst & Young LLP, Independent Auditors..................... 12
Consolidated Balance Sheets ----- March 28, 1997 and March 29, 1996... 13
Consolidated Statements of Operations ----- Three Years Ended
March 28, 1997...................................................... 14
Consolidated Statements of Stockholders' Equity ----- Three
Years Ended March 28, 1997.......................................... 15
Consolidated Statements of Cash Flows ----- Three Years Ended
March 28, 1997...................................................... 16
Notes to Consolidated Financial Statements............................ 17
11
<PAGE> 14
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
International Technology Corporation
We have audited the accompanying consolidated balance sheets of International
Technology Corporation as of March 28, 1997 and March 29, 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 28, 1997. Our audits also
included the financial statement schedule listed in the index at Item 8. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Technology Corporation at March 28, 1997 and March 29, 1996 and
the consolidated results of operations and cash flows for each of the three
years in the period ended March 28, 1997 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Los Angeles, California
May 13, 1997
12
<PAGE> 15
INTERNATIONAL TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1997 1996
--------- --------
ASSETS (IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 78,897 $ 24,493
Accounts receivable, less allowance for doubtful
accounts of $2,055,000 in 1997 and $2,943,000 in 1996............. 108,207 126,832
Prepaid expenses and other current assets............................. 4,077 4,315
Deferred income taxes................................................. 11,324 12,149
-------- --------
Total current assets.............................................. 202,505 167,789
Property, plant and equipment, at cost:
Land and land improvements............................................ 1,330 1,783
Buildings and leasehold improvements.................................. 9,232 10,961
Machinery and equipment............................................... 140,630 144,218
------- -------
151,192 156,962
Less accumulated depreciation and amortization.................... 106,891 101,201
------- -------
Net property, plant and equipment............................ 44,301 55,761
Cost in excess of net assets of acquired businesses........................ 9,363 8,770
Investment in Quanterra.................................................... 16,300 12,975
Other assets ............................................................. 9,222 7,987
Deferred income taxes...................................................... 20,792 20,327
Long-term assets of discontinued operations................................ 40,048 41,705
-------- --------
Total assets.......................................................... $342,531 $315,314
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 29,571 $ 27,091
Accrued wages and related liabilities................................. 18,852 16,363
Billings in excess of revenues........................................ 7,227 2,044
Other accrued liabilities............................................. 13,788 15,794
Short-term debt, including current portion of long-term debt.......... 5,343 97
Net current liabilities of discontinued operations.................... 17,019 17,226
-------- --------
Total current liabilities......................................... 91,800 78,615
Long-term debt............................................................. 65,874 65,611
Long-term accrued liabilities of discontinued operations, net.............. 9,280 24,771
Other long-term accrued liabilities........................................ 5,904 5,452
Minority interest.......................................................... 820 -
Commitments and contingencies
Stockholders' equity:
Preferred stock, $100 par value; 180,000 shares authorized:
7% cumulative convertible exchangeable, 20,556 and 24,000 shares
issued and outstanding, respectively......................... 2,056 2,400
6% cumulative convertible participating, 45,000 shares issued
and outstanding.............................................. 4,204 -
Common stock, $.01 par value; 50,000,000 shares authorized; 9,744,583
and 9,149,552 shares issued and outstanding, respectively......... 97 91
Treasury stock at cost, 6,208 and 6,953 shares, respectively.......... (74) (84)
Additional paid-in capital............................................ 244,287 206,465
Deficit ............................................................. (81,717) (68,007)
------- --------
Total stockholders' equity........................................ 168,853 140,865
------- -------
Total liabilities and stockholders' equity............................ $342,531 $315,314
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
13
<PAGE> 16
INTERNATIONAL TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
MARCH 28, MARCH 29, MARCH 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues................................................... $ 362,131 $ 400,042 $ 423,972
Cost and expenses:
Cost of revenues........................................ 323,993 341,890 362,056
Selling, general and administrative expenses............ 33,431 38,125 42,476
Restructuring charge.................................... 8,403 - -
--------- --------- ---------
Operating income (loss).................................... (3,696) 20,027 19,440
Equity in net loss of Quanterra, including
loss on recapitalization in 1996 and
integration charge in 1995.............................. - (26,416) (9,827)
Other income (expense)..................................... - 1,090 (3,800)
Interest, net.............................................. (5,260) (6,445) (7,110)
--------- --------- ---------
Loss from continuing operations before income taxes........ (8,956) (11,744) (1,297)
Benefit (provision) for income taxes....................... 179 12,290 (2,383)
--------- --------- ---------
Income (loss) from continuing operations................... (8,777) 546 (3,680)
Discontinued operations (net of income taxes):
Loss from disposition................................... - - (10,603)
--------- --------- ---------
Net income (loss).......................................... (8,777) 546 (14,283)
Less preferred stock dividends............................. (4,916) (4,200) (4,200)
--------- --------- ---------
Net loss applicable to common stock........................ $ (13,693) $ (3,654) $ (18,483)
========= ========= =========
Net loss per share:
Continuing operations (net of preferred stock dividends) $ (1.48) $ (.41) $ (.89)
Discontinued operations:
From disposition...................................... - - (1.19)
--------- --------- ---------
$ (1.48) $ (.41) $ (2.08)
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
14
<PAGE> 17
INTERNATIONAL TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED MARCH 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
7% 6%
CUMULATIVE CUMULATIVE
CONVERTIBLE CONVERTIBLE
EXCHANGEABLE PARTICIPATING ADDITIONAL
PREFERRED PREFERRED COMMON TREASURY PAID-IN
STOCK STOCK STOCK STOCK CAPITAL DEFICIT TOTALS
--------- --------- --------- ----- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994................. $2,400 $ - $88 $ - $203,930 $(45,870) $160,548
Issuances of common stock.............. - - - - 556 - 556
Issuance of warrant and common stock
related to the formation of Quanterra - - 1 - 3,299 - 3,300
Dividends paid on preferred stock...... - - - - - (4,200) (4,200)
Net loss............................... - - - - - (14,283) (14,283)
------ ------ --- ---- -------- -------- --------
Balance at March 31, 1995................. 2,400 - 89 - 207,785 (64,353) 145,921
Repurchase of common stock............. - - - (740) - - (740)
Restricted stock awards, net........... - - 2 656 238 - 896
Retirement of warrant and common
stock resulting from the
recapitalization of Quanterra........ - - (1) - (2,399) - (2,400)
Issuances of common stock.............. - - 1 - 841 - 842
Dividends paid on preferred stock...... - - - - - (4,200) (4,200)
Net income............................. - - - - - 546 546
------ ------ --- ---- -------- -------- --------
Balance at March 29, 1996................. 2,400 - 91 (84) 206,465 (68,007) 140,865
Net proceeds from preferred stock and
warrants issued to Carlyle........... - 4,117 - - 36,492 - 40,609
Conversion of preferred stock.......... (344) - 7 - 337 - -
Restricted stock awards, net........... - - (1) 10 214 - 223
Dividends on preferred stock........... - 87 - - 779 (4,916) (4,050)
Cumulative translation adjustment...... - - - - - (17) (17)
Net loss............................... - - - - - (8,777) (8,777)
------ ------ --- ---- -------- -------- --------
Balance at March 28, 1997................ $2,056 $4,204 $97 $(74) $244,287 $(81,717) $168,853
====== ====== === ==== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
15
<PAGE> 18
INTERNATIONAL TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
MARCH 28, MARCH 29, MARCH 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $(8,777) $ 546 $(14,283)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Net loss from disposition of
discontinued operations ........................ - - 10,603
Depreciation and amortization..................... 14,363 14,502 19,150
Deferred income taxes ............................ 360 (13,744) (4,385)
Equity in net loss of Quanterra, including loss
on recapitalization in 1996 and integration
charge in 1995.................................. - 26,416 9,827
(Gain from) provision for settlement of lawsuits.. - (9,090) 9,100
Writedown of equipment............................ - 8,000 -
Minority interest in subsidiary................... (35) - -
Changes in assets and liabilities, net of effects from
acquisitions and dispositions of businesses:
Decrease (increase) in receivables................ 25,422 12,904 (21,149)
Decrease in prepaid expenses and
other current assets ........................... 601 1,416 486
Increase (decrease) in accounts payable........... 905 (2,204) 2,681
Increase (decrease) in accrued wages
and related liabilities......................... 2,473 (3,987) 1,636
Increase (decrease) in billings in
excess of revenues.............................. 5,183 (1,986) (5,338)
(Decrease) increase in other
accrued liabilities............................. (2,111) (6,613) 5,966
Increase (decrease) in other long-term
accrued liabilities............................. 452 (275) (719)
Decrease in liabilities of discontinued
operations...................................... (14,041) (11,704) (11,324)
--------- --------- ---------
Net cash provided by operating activities............ 24,795 14,181 2,251
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Motco settlement.......................... - 41,100 -
Capital expenditures.................................... (3,361) (4,696) (10,533)
Investment in Quanterra................................. (3,325) (5,475) (1,208)
Acquisition of businesses, net of cash acquired......... (1,455) (2,223) -
Other, net.............................................. 700 (655) 1,198
---------\ --------- ---------
Net cash (used for) provided by investing activities.... (7,441) 28,051 (10,543)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term borrowings...................... (438) (110,751) (55,965)
Long-term borrowings.................................... 962 89,598 63,802
Net proceeds from issuance of preferred stock........... 40,609 - -
Dividends paid on preferred stock....................... (4,050) (4,200) (4,200)
Issuances of common stock, net.......................... (33) 1,807 556
Repurchase of common stock.............................. - (740) -
--------- --------- ---------
Net cash provided by (used for) financing activities.... 37,050 (24,286) 4,193
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... 54,404 17,946 (4,099)
Cash and cash equivalents at beginning of year............. 24,493 6,547 10,646
--------- --------- ---------
Cash and cash equivalents at end of year................... $ 78,897 $ 24,493 $ 6,547
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
16
<PAGE> 19
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation and principles of consolidation
The consolidated financial statements include International Technology
Corporation (IT or the Company) and its wholly-owned and majority-owned
subsidiaries. The Company uses the equity method to account for certain joint
ventures which were entered into for the purpose of executing large remediation
projects and in which the Company does not have in excess of 50% of voting
control. Intercompany transactions are eliminated. Certain reclassifications
have been made to prior years' consolidated financial statements in order to
conform to the current year presentation.
Beginning in fiscal year 1996, the Company changed its fiscal year to
consist of four thirteen-week fiscal quarters with the fourth quarter ending on
the last Friday of March. Previously, the fiscal year ended on March 31 of each
year.
Estimates used in the preparation of the consolidated financial statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results inevitably will differ from those
estimates and such differences may be material to the consolidated financial
statements.
Cash equivalents
Cash equivalents include highly liquid investments with an original
maturity of three months or less.
Contract accounting and accounts receivable
The Company primarily derives its revenues from providing environmental
management services in the United States, principally to federal, state and
local governmental entities, large industrial companies, utilities and waste
generators. Services are performed under time-and-material, cost-reimbursement,
fixed-price and unit-bid contracts.
Revenues from time-and-material and cost-reimbursement contracts are
recognized as costs are incurred. Estimated fees on such contracts and revenues
on fixed-price and certain unit-bid contracts are recognized under the
percentage-of-completion method determined based on the ratio of costs incurred
to estimated total costs. Anticipated losses on contracts are recorded as
identified. Certain contracts include provisions for revenue adjustments to
reflect scope changes and other matters, including claims, which require
negotiations with clients in the ordinary course of business, leading to some
estimates of claim amounts being included in revenues. When such amounts are
finalized, any changes from the estimates are reflected in earnings.
17
<PAGE> 20
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Included in accounts receivable at March 28, 1997 are billed receivables,
unbilled receivables and retention in the amounts of $89,975,000, $12,305,000
and $7,982,000, respectively. Billed receivables, unbilled receivables and
retention from the U.S. Government as of March 28, 1997 were $42,501,000,
$9,162,000 and $4,105,000, respectively. At March 29, 1996, billed receivables,
unbilled receivables and retention were $108,830,000, $12,355,000 and
$8,590,000, respectively. Receivables from the U.S. Government as of March 29,
1996 were at approximately the same percentage to total receivables as the
balances reported at March 28, 1997.
Unbilled receivables typically represent amounts earned under the Company's
contracts but not billable according to the contract terms, which usually
consider the passage of time, achievement of certain milestones or completion of
the project. Generally, unbilled receivables are expected to be billed and
collected in the subsequent fiscal year. Included in unbilled receivables at
March 28, 1997 and March 29, 1996 are $9,200,000 and $8,500,000, respectively,
of claims related to the Helen Kramer project which is subject to a governmental
investigation. (See Commitments and contingencies-Helen Kramer contract.)
Billings in excess of revenues represent amounts billed in accordance with
contract terms, which are in excess of the amounts includable in revenue.
At March 28, 1997, accounts receivable are primarily concentrated in
federal, state and local governmental entities and in commercial clients in
which the Company does not believe there is any undue credit risk.
Property, plant and equipment
The cost of property, plant and equipment is depreciated using primarily
the straight-line method over the following useful lives of the individual
assets: buildings-20 to 30 years, land improvements-3 to 20 years, and machinery
and equipment-5 to 10 years including salvage value. The Hybrid Thermal
Treatment System(R) (HTTS(R)) transportable incineration units are depreciated
over the shorter of in-production operating days or on an 8-year straight-line
basis (idle basis) to salvage value. Most of the HTTS units are currently idle
and continue to be depreciated as described. Amortization of leasehold
improvements is provided using the straight-line method over the term of the
respective lease.
Interest
Interest incurred on qualified capital expenditures is capitalized and
included in the cost of such constructed assets. Interest incurred was
$7,168,000, $7,014,000 and $8,065,000 for fiscal years 1997, 1996 and 1995,
respectively. No interest was capitalized in fiscal years 1997 or 1996. Total
interest capitalized was $484,000 for fiscal year 1995.
Interest income is principally earned on the Company's investments in cash
equivalents and was $1,908,000, $569,000 and $471,000 in fiscal years 1997, 1996
and 1995, respectively. In fiscal year 1995, the Company received a combined
$278,000 of interest income resulting from a settlement of a lawsuit and an
income tax refund.
Intangible assets
Cost in excess of net assets of acquired businesses is amortized over 20
years on a straight-line basis. At March 28, 1997 and March 29, 1996,
accumulated amortization is $8,143,000 and $7,305,000, respectively. Other
intangibles, arising principally from acquisitions, are amortized on a
straight-line basis over periods not exceeding 20 years. The Company regularly
reviews the individual components of its intangible assets and recognizes, on a
current basis, any diminution in value.
18
<PAGE> 21
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Per share information
The consolidated financial statements as well as all footnote references to
the Company's common shares and stock options 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 at the Annual
Meeting of Stockholders on November 20, 1996.
Per share information is based on the weighted average number of
outstanding common shares and common share equivalents during each period which
aggregated 9,226,596 in 1997, 8,981,827 in 1996 and 8,889,327 in 1995. Common
share equivalents include dilutive stock options. For each fiscal year
presented, the computation of net income per share, assuming the conversion into
common shares of the Company's 7% Cumulative Convertible Exchangeable Preferred
Stock, is antidilutive. For fiscal year 1997, the computation of net income per
share, assuming the conversion into common shares of the Company's 6% Cumulative
Participating Preferred Stock, is antidilutive. (See Preferred stock.)
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement 128 on the
calculation of basic earnings per share and fully diluted earnings per share for
fiscal 1997, 1996 and 1995 is not expected to be materially different.
Fair value of financial instruments
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet approximates its fair value.
Investment in Quanterra: The Company has a 19% ownership interest in
Quanterra (see Quanterra), in which the remaining 81% interest is held by
Corning Incorporated. The determination of fair value of the Company's
investment in this untraded, closely held entity is not practicable.
Long and short-term debt: A reasonable estimate of the fair value for the
9.42% senior secured notes was based upon a discounted cash flow analysis. The
carrying amount of other debt approximates its fair value.
19
<PAGE> 22
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments are:
<TABLE>
<CAPTION>
March 28, 1997 March 29, 1996
------------------------- -------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 78,897 $ 78,897 $ 24,493 $ 24,493
Investment in Quanterra 16,300 Not 12,975 Not
practicable practicable
to determine to determine
Long and short-term debt:
9.42% senior secured notes 65,000 63,329 65,000 64,759
Other 6,217 6,217 708 708
</TABLE>
LONG-LIVED ASSETS
In March 1995, the FASB issued Statement of Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and
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 value. 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 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 (see Discontinued
operations) are accounted for under APB Opinion No. 30, "Reporting the Results
of Operations" and are not subject to SFAS No. 121.
CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES:
Supplemental cash flow information is:
<TABLE>
<CAPTION>
Year ended
--------------------------------------------
March 28, March 29, March 31,
1997 1996 1995
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Interest paid, net of amounts
capitalized $ 6,713 $ 7,184 $ 7,230
Interest received 1,730 293 317
Income taxes paid 287 1,860 782
Income tax refunds received 1,178 2 989
Acquisition liabilities assumed 6,346 1,155 -
</TABLE>
QUANTERRA:
In June 1994, the Company and an affiliate of Corning Incorporated
(Corning) combined the two companies' environmental analytical services
businesses into a newly formed 50%/50% jointly-owned company (Quanterra). In
connection with the formation, the Company contributed the $38,766,000 net
assets of its analytical business into Quanterra and recorded this investment at
the historical cost of the assets contributed. Additionally, IT incurred cash
transaction costs of $1,208,000, issued to Corning 83,250 shares of IT common
stock and a five-year warrant to purchase 500,000 shares of IT common stock at
$20.00 per share, which were valued together at a fair market value of
$3,300,000, and agreed to indemnify Quanterra and Corning from certain
liabilities arising prior to the closing of the transaction. Corning contributed
an equivalent amount of assets as IT as determined by an arms length negotiation
and supported by an independent analysis of fair market value. Upon the closing
of the formation of Quanterra, an
20
<PAGE> 23
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
integration plan was implemented to eliminate redundant laboratory facilities
and duplicative overhead and systems. These costs included severance,
disposition of non-productive assets and the termination of certain facility
leases. IT's portion of the charge for integration was $9,264,000, including
$2,869,000 incurred directly by IT.
In January 1996, the Company and Corning completed an agreement to
recapitalize Quanterra which resulted in a change in Quanterra's ownership to
19% by IT and 81% by Corning. IT decided it would be in the best interest of the
Company to negotiate a structure for its Quanterra investment that would sustain
Quanterra's future potential but limit future IT capital requirements. This
approach allowed IT to invest its available resources in its core business. The
recapitalization included a $25,000,000 infusion of new equity in Quanterra, of
which $2,500,000 was contributed by IT. In addition, IT sold a common stock
interest in Quanterra to Corning in consideration of the exchange of 83,250
shares of IT stock and warrants to purchase 500,000 shares of IT common stock,
previously issued to Corning in connection with the formation of Quanterra.
These shares and warrants were subsequently retired by IT. IT also received a
put option allowing it to sell its shares to Quanterra at market value in the
year 2003. The Company reported a pre-tax charge of $24,595,000 to reflect the
impairment in the value of IT's investment resulting from and subsequent to the
recapitalization transaction. The events that led to the other than temporary
decline in the value of the Company's investment in Quanterra occurred in
December 1995 when it became evident that Quanterra's net loss would increase
significantly in comparison to the September 1995 quarterly results and it
became apparent that Quanterra would require additional capital from its owners
to meet its liquidity needs in 1996. These two events led to the
recapitalization transaction and the Company's loss recognition. As a result of
the recapitalization, IT's investment in Quanterra, which was previously
accounted for under the equity method, is currently accounted for on the cost
basis.
Although Quanterra has experienced net losses in the past several years,
the level of net loss has decreased over the past several quarters, and
Quanterra has recently neared break-even operation. The Company will continue to
evaluate the ultimate recoverability of its investment in Quanterra (which is
carried at $16,300,000 on the March 28, 1997 consolidated balance sheet) on an
ongoing basis and will recognize any impairment in value should it occur.
Summarized income statement data for Quanterra for fiscal years 1997, 1996
and 1995 (nine months) is the following: revenues - $72,900,000 in 1997,
$94,100,000 in 1996 and $92,400,000 in 1995; operating loss - $16,700,000 in
1997, $14,400,000 in 1996 and $18,900,000 in 1995; and net loss - $10,600,000 in
1997, $11,300,000 in 1996 and $12,900,000 in 1995. Quanterra's revenues from IT
were $8,100,000, $15,700,000 and $12,000,000 in fiscal years 1997, 1996 and 1995
(nine months), respectively.
DISCONTINUED OPERATIONS:
Overview
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. In connection with the divestiture, from December 1987
through March 31, 1994, the Company cumulatively recorded a provision for loss
on disposition of transportation, treatment and disposal discontinued operations
(including the initial provision and two subsequent adjustments) in the amount
of $149,589,000, net of income tax benefit of $26,482,000. 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
March 31, 1995, the Company recorded a further increase in the provision for
loss on disposition of $10,603,000, net of income tax benefit of $6,397,000,
primarily for increased closure costs resulting from additional delays in the
regulatory approval process and costs (increasing the provision from
$149,589,000 to $160,192,000) related to certain waste disposal sites where IT
has been named as a PRP. The Company has incurred costs of $15,698,000 in 1997,
$11,704,000 in 1996 and $11,324,000 in 1995 relating to the closure plans and
construction and PRP matters. The Company expects to incur significant costs
over the next several years. At March 28, 1997, the Company's consolidated
balance sheet included accrued liabilities of approximately $26,300,000 to
21
<PAGE> 24
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
complete the closure and post-closure of its disposal facilities and the PRP
matters, net of certain trust fund and annuity investments, restricted to
closure and post-closure use.
The $26,300,000 in accrued liabilities includes reserves of $43,779,000 for
the closure, clean up and post closure care of the Company's Northern California
Sites and $3,221,000 for the settlement of alleged liabilities with regard to
the OII, GBF and other third party site clean up matters, netted against
$20,700,000 of related assets predominantly consisting of trust funds and
annuity investments noted above.
The annuities and trust fund assets are held in a legally binding trust
agreement by a third party trustee naming DTSC as the beneficiary of the trust.
The trust agreement was entered into pursuant to a 1989 consent agreement
between the Company and DTSC. As closure and post closure obligations are met by
the Company, DTSC is obligated to release funds from the trusts to reimburse the
Company to pay for work completed.
The provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and estimates,
including those discussed below. The adequacy of the provision for loss has been
currently reevaluated in light of the developments since the adoption of the
divestiture plan, and management believes that the provision as adjusted is
reasonable; however, the ultimate effect of the divestiture on the consolidated
financial condition, liquidity and results of operations 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, liquidity and results of operations of the Company.
Northern California Facilities
With regard to the Company's transportation, treatment and disposal
discontinued operations, the Company has previously completed closure of its
Montezuma Hills and Benson Ridge facilities and is pursuing closure of its
inactive Panoche and Vine Hill Complex facilities. On November 17, 1995, the
California EPA, Department of Toxic Substances Control (DTSC) approved the final
closure plan and post-closure plan for the Vine Hill Complex facility. The
approved final closure plan provides for solidification and capping of waste
sludges and installation of underground barriers and groundwater control
systems. Substantial remediation has already been completed over both the past
year since approval of the plan and over the prior several years based upon
interim approvals by DTSC, and the final closure is scheduled to be
substantially completed in fiscal year 1998 with final completion in 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 environmentally
superior. 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 implemented, 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 DTSC continues to consider comments by the Company, and by
other interested parties supporting alternative plans, and it is uncertain what
plan DTSC may ultimately approve. The Company expects a plan and all necessary
permits to be approved in mid-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, liquidity and results of operations of the Company. Pending approval
of a closure plan, the Company has requested permission, and the DTSC has agreed
through the amendment of a previously issued consent order, to allow the Company
to promptly excavate drums buried in a portion of the facility. The drums are
the alleged source of low levels of contaminants which have migrated through
groundwater underneath a portion of municipally-owned land adjacent to the
facility.
22
<PAGE> 25
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997, 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 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 March 28, 1997 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 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. This review is
proceeding and initially recommends, on a non-binding basis, strategies for
limiting growth in the area. Ultimately, if the developers' plans change or the
developers are unable to obtain entitlements, 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.
Operating Industries, Inc. Superfund Site
In June 1986, USEPA notified a number of entities, including the Company,
that they were PRPs under the Comprehensive Environmental Response, Compensation
and Liability Act (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 the Company was also
served with lawsuits 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.
23
<PAGE> 26
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 which the Company paid $5,400,000 to the USEPA. 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 a release of liability for future or final OII remedies. In September
1996, the USEPA released a final record of decision selecting the final remedy
for the site. Response costs for the final remedy are estimated by USEPA to be
approximately $161,800,000. The Company believes that this estimate does not
take into account the benefits of certain work to be performed under the
previous consent decrees and therefore substantially overstates the remaining
cost.
In April 1996, the Company reached a settlement of the lawsuits with the
Steering Committee, pursuant to which the Company 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. The Company
does not agree with these claims. The Company's agreement with the Steering
Committee to cooperate and share costs 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 to which
Steering Committee members and the Company are subject, or otherwise), the cost
to the Company of concluding this matter could materially increase.
GBF Pittsburg Site
In September 1987, the Company was served with a Remedial Action Order
(RAO) issued by the DTSC, concern ing 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 Company's predecessor's 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 1992,
continued to accept municipal waste. Water quality samples from monitoring wells
in the vicinity of the site were ana lyzed 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 these other PRPs
(the PRP group) further investigated the nature and extent of any subsurface
contamination beneath the site and beyond its borders. The PRP group submitted
Remedial Investigation and Feasibility Study (RI/FS) reports which were 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
restates previous RAOs and directs all previously named PRPs to undertake
specific additional tasks including the closure of the municipal landfill.
24
<PAGE> 27
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 preferred by DTSC but 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. After a period of public review
and comment, in June 1997, the DTSC completed and released a final RAP selecting
DTSC's original preferred alternative of actively pumping and treating
groundwater from both the alleged source points of contamination and the edge of
the allegedly contaminated groundwater plume emanating from the site, which DTSC
estimated to cost between $18,000,000 and $33,000,000, depending upon whether
certain options for discharge of produced waters are available. The PRP group
continues to believe that its preferred alternative of continued limited site
monitoring, which was estimated to cost approximately $4,000,000, is
appropriate. As part of the RAP, the DTSC also advised the PRP group of its
position that both the group and the current owner/operators are responsible for
paying the future closure and postclosure costs of the overlying municipal
landfill, which have been estimated at approximately $4,000,000.
The Company and the PRP group initiated litigation (Members of the
GBF/Pittsburg Landfill(s) Respondents Group, etc., et al, v. State of California
Environmental Protection Agency Contra Costa County, California Superior Court
Case No. C97-02936) challenging the final RAP, and the ultimate outcome of the
litigation and any other available remedies cannot be predicted at this time.
As a part of the draft RAP that the PRP group submitted in January 1996,
the group asserted that other PRPs at the site (principally, the current and
past owner/operators of the site) were responsible for approximately 85% of the
site's remediation costs, and that the PRP group was responsible for no more
than approximately 15% of such costs. The Company has paid approximately 50% of
the PRP group's costs to-date on an interim basis. The current owner/operators
claimed in response that the Company and other members of the PRP group were
responsible for at least 89% of the site's remediation costs and that they were
responsible for only a small percentage of such costs. They also demanded
indemnity from the Company pursuant to the lease agreement under which IT
Corporation's predecessor operated the site, which demand the Company has
rejected. In the draft RAP released in October 1996 the DTSC released a draft
non-binding allocation suggesting that the Company is responsible for 15% of the
site's response costs, that the generators and others who are part of the PRP
group are responsible for 35% of such costs and that the current owner/operators
and others are responsible for 50% of such costs. In the final RAP the DTSC
assigned the Company and the other members of the PRP group collective
responsibility for 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 attempting to continue to cooperate with the generators and other
members of the PRP group to effect an appropriate allocation of responsibility
for site costs.
The Company and the PRP group are evaluating their potential remedies,
including judicial review, with respect to the final RAP, and the ultimate
outcome of any available remedies cannot be predicted at this time.
The PRP group has also filed an application with the appropriate RWQCB for
designation of the site as a containment zone which, if approved, would
facilitate the PRP group's preferred remedial alternative. The DTSC has advised
the PRP group that if, at some point, the RWQCB designates all or part of the
site as a containment zone, DTSC will work with the PRPs to either amend or
modify the final RAP as appropriate. In the interim, however, DTSC will require
that the PRPs comply with the existing RAO, including implementation of the
final RAP.
The PRP group has initiated litigation (Members of the GBF/Pittsburg
Landfill(s) Respondents Group, etc., et al, v. Contra Costa Waste Service, etc.,
et al. U.S. District Court, N. Dist Cal, Case No. C96-03147SI) 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 and, currently, with respect to
DTSC's attempts to cause the selection of its preferred remedial alternative.
The current
25
<PAGE> 28
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 could have a material adverse effect
on the Company's consolidated financial condition, liquidity and results of
operations.
Environmental Protection Corporation Sites
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. In March 1997, the Company was
notified by a potentially responsible party which performed work at another site
near Bakersfield, California, formerly operated by EPC known as the Westside
Facility, that IT was considered a potentially responsible party to share in the
costs of that cleanup, which has been completed.
IT transported various waste streams both generated by IT and on behalf of
its customers to the Eastside Facility and the Westside Facility at various
times during those facilities' operations and it was a minority shareholder in
EPC for a period of its operations. In January 1996, the PRP group for the
Eastside Facility (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, the potential costs associated with the remediation
of the Eastside Facility will not be reasonably estimable until completion of
the RI/FS.
Other Site Cleanup Actions
The Company, as a major provider of hazardous waste transportation,
treatment and disposal operations in California prior to the December 1987
adoption of its strategic restructuring program, has been named a PRP at a
number of other sites and may from time to time be so named at additional sites
and may also face damage claims by third parties for alleged releases or
discharges of contaminants or pollutants arising out of its transportation,
treatment and disposal discontinued operations. The Company has either denied
responsibility and/or is participating with others named by the USEPA and/or the
DTSC in conducting investigations as to the nature and extent of contamination
at the sites. Based on the Company's experience in resolving claims against it
at a number of sites and upon current information, in the opinion of management,
with advice of counsel, claims with respect to sites not described above at
which the Company has been notified of its alleged status as a PRP will not
individually or in the aggregate result in a material adverse effect on the
consolidated financial condition, liquidity and results of operations of the
Company.
The Company has initiated against a number of its past insurers claims for
recovery of certain damages and costs with respect to both its Northern
California sites and certain PRP matters. The carriers dispute their allegations
to the Company and the Company expects them to continue to contest the claims.
The Company has included in its provision for loss on disposition of
discontinued operations (as adjusted) an amount that, in the opinion of
management, with advice of counsel, represents a probable recovery with respect
to those claims.
26
<PAGE> 29
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 28, March 29,
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Senior secured notes, due 2001 - 2003........................ $ 65,000 $ 65,000
Other........................................................ 6,217 708
--------- ---------
71,217 65,708
Less current portion ....................................... 5,343 97
--------- ---------
$ 65,874 $ 65,611
========= =========
</TABLE>
Aggregate amounts of long-term debt maturing in the five years following
March 28, 1997 are $5,343,000, $749,000, $75,000, $50,000 and $21,667,000,
respectively.
On October 25, 1995, the Company executed a combined $125,000,000 financing
which included $65,000,000 of 8.67% senior secured notes with a group of major
insurance companies and a $60,000,000 syndicated bank revolving credit facility.
The financing package, which is subject to a borrowing base, is secured by the
accounts receivable and certain fixed assets of the Company. The senior secured
notes have an eight-year final maturity with no principal payments until the
sixth year, and the bank line has a term of five years. 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 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. The Company is in compliance with its covenants as of March
28, 1997.
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. At
March 28, 1997, this provision increased the cost of the facilities by 0.75%
with the senior notes currently bearing interest at 9.42%.
In aggregate, at March 28, 1997, letters of credit totaling approximately
$20,000,000 related to the Company's insurance program, financial assurance
requirements and bonding requirements were outstanding against the Company's
$60,000,000 bank line of credit. The Company had no outstanding cash advances
under the line at March 28, 1997. As of that date, the Company's borrowing base
under its combined financing arrangement allowed for additional letters of
credit or borrowings under the line of credit of up to $580,000. At March 28,
1997, interest on borrowings under the Company's revolving line of credit is at
the bank's prime rate plus 1.25%, or in the case of Eurodollar borrowings, at
the interbank offered rate plus 2.25%. The Company is subject to a 0.5% per
annum charge on the unused portion of the commitment.
27
<PAGE> 30
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES:
The benefit for income taxes, net of changes in the deferred tax valuation
allowance, consists of the following:
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------------
March 28, March 29, March 31,
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ (764) $ 1,098 $ -
State 215 346 371
----------- ---------- -----------
(549) 1,444 371
----------- ---------- -----------
Deferred:
Federal 336 (11,942) (1,828)
State 57 (1,792) (2,557)
Foreign (23) - -
----------- ---------- -----------
370 (13,734) (4,385)
----------- ---------- -----------
Total benefit $ (179) $ (12,290) $ (4,014)
=========== ========== ===========
</TABLE>
The benefit for income taxes is included in the statements of operations as
follows:
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------------
March 28, March 29, March 31,
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Continuing operations $ (179) $ (12,290) $ 2,383
Discontinued operations - - (6,397)
----------- --------- ----------
Total benefit $ (179) $ (12,290) $ (4,014)
=========== ========= ==========
</TABLE>
A reconciliation of the provision (benefit) for income taxes on continuing
operations computed by applying the federal statutory rate of 34% to the loss
from continuing operations before income taxes and the reported provision
(benefit) for income taxes of continuing operations is as follows:
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------------
March 28, March 29, March 31,
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Income tax benefit computed at
statutory federal income tax rate $ (3,045) $ (3,993) $ (441)
State income taxes, net of federal tax
benefit, if any 179 (954) 424
Equity in income (loss) of foreign subsidiaries - - 57
Amortization of cost in excess of net assets
of acquired businesses 100 199 200
Equity in net loss of Quanterra - (2,366) 2,366
Research credit - - (212)
Federal deferred tax asset valuation
allowance adjustment 2,597 (5,539) -
Other (principally nondeductible items) (10) 363 (11)
--------- -------- --------
Total provision (benefit) $ (179) $(12,290) $ 2,383
========= ======== ========
</TABLE>
28
<PAGE> 31
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At March 28, 1997, the Company had net operating loss (NOL) carryforwards
of approximately $47,779,000 for tax reporting purposes expiring primarily in
2007 through 2012. The Company also has tax credit carryforwards of
approximately $2,601,000 which expire in various years through 2008 and
alternative minimum tax credit carryforwards of approximately $2,240,000 with no
expiration.
At March 28, 1997 and March 29, 1996, the Company had deferred tax assets
and liabilities as follows:
<TABLE>
<CAPTION>
March 28, March 29,
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Closure accruals - discontinued operations $ 18,468 $ 24,854
NOL carryforwards 20,481 9,109
Tax basis in excess of book basis in Quanterra 11,145 11,145
Alternative minimum tax credit carryforwards 2,240 3,246
Investment and other tax credit carryforwards 2,601 2,350
Other accrued liabilities 11,193 7,581
Other, net 3,053 2,042
-------- --------
Gross deferred tax asset 69,181 60,327
Valuation allowance for deferred tax asset (9,471) (4,869)
-------- --------
Total deferred tax asset 59,710 55,458
Deferred tax liabilities:
Tax depreciation in excess of book depreciation (9,235) (6,047)
Asset basis difference - discontinued operations (13,012) (11,997)
Other, net (5,347) (4,938)
-------- --------
Total deferred tax liabilities (27,594) (22,982)
-------- --------
Net deferred tax asset $ 32,116 $ 32,476
======== ========
Net current asset $ 11,324 $ 12,149
Net noncurrent asset 20,792 20,327
-------- --------
Net deferred tax asset $ 32,116 $ 32,476
======== ========
</TABLE>
During the year ended March 28, 1997, the Company increased its deferred
tax asset valuation allowance from $4,869,000 to $9,471,000. This change was
principally due to 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 restructuring charge (see Restructuring Charge). Because of
the Company's position in the industry, recent restructuring, existing backlog
and acquisition strategies, management expects that its future taxable income
and the use of tax-planning strategies (principally the matching of any future
capital gains and losses during the relevant carryforward or carryback period)
will more likely than not allow the Company to fully realize its deferred tax
asset. The Company evaluates the adequacy of the valuation allowance and the
realizability of the deferred tax asset on an ongoing basis.
During the year ended March 29, 1996, the Company decreased its deferred
tax asset valuation allowance from $12,650,000 to $4,869,000. The cumulative
impact of the resolution in fiscal year 1996 of a number of uncertainties led to
a reassessment of the Company's ability to generate a sufficient level of future
earnings to realize a greater portion of its related deferred tax asset,
resulting in the release of valuation allowance. Matters resolved in fiscal year
1996 included: (1) the $41,100,000 settlement of the Motco Trust lawsuit related
to a major contract performed by the Company, which resulted in a substantial
tax gain (see Motco litigation settlement), (2) the $125,000,000 refinancing of
the Company's senior notes and revolving credit line at efficient rates on a
long-term basis thereby mitigating the potential impact of higher future
interest expenses (see Long-term debt), (3) the final approval from California
state regulators for the closure plan related to the Vine Hill Complex facility,
resolving certain of the uncertainties regarding the ultimate costs for closure
of the facility (see
29
<PAGE> 32
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Discontinued operations), (4) the settlement of past costs related to the OII
disposal facility PRP action (see Discontinued operations), (5) the
recapitalization of Quanterra (see Quanterra), and (6) the settlement of the
majority of the lawsuits related to the Central Garden litigation (see
Commitments and contingencies - Central Garden).
During the year ended March 31, 1995, the Company decreased the deferred
tax asset valuation allowance to $12,650,000, principally to offset an
adjustment made to reduce the gross deferred tax asset to recognize the federal
benefit of net operating losses for state purposes.
COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company's operating lease obligations are principally for buildings and
equipment. Generally, the Company is responsible for property taxes and
insurance on its leased property. At March 28, 1997, future minimum rental
commitments under noncancelable operating leases with terms longer than one year
aggregate $34,558,000 and require payments in the five succeeding years and
thereafter of $7,656,000, $7,022,000, $5,603,000, $4,260,000, $2,966,000, and
$7,051,000, respectively.
Rental expense related to continuing operations was $12,564,000 (including
$2,184,000 of the restructuring charge), $11,037,000 and $11,550,000 for fiscal
years 1997, 1996 and 1995, respectively.
CONTINGENCIES
Helen Kramer contract
In May 1993, the Company received an administrative subpoena from the
Office of the Inspector General (OIG) of the USEPA seeking documents relating to
certain of the Company's claims which were submitted to the U.S. Army Corps of
Engineers with regard to the Helen Kramer remediation contract, a completed
project which the Company performed in joint venture. Since August 1992, the
Defense Contract Audit Agency (DCAA) has been conducting an audit of certain
claims submitted by the joint venture, and the Company has been subject to a
continuing investigation into the claims. Government investigators have
interviewed employees of the joint venture, the Company's joint venture partner,
and the Company. Remedies which the government could pursue as a result of the
investigation include damages, penalties, and forfeiture of all or part of the
Company's claims. The Company is currently engaged in settlement discussions
concerning these allegations.
In October 1993, a shareholder of the Company alleged that the acts giving
rise to the Helen Kramer investigation constituted, among other things, a waste
of the Company's assets and demanded that the Company institute an action
against those responsible for the alleged wrongdoing. The Audit Committee
(Committee) of the Board of Directors investigated the allegations of the OIG.
The Committee, acting with the assistance of outside counsel and experts,
determined that there was no evidence of intentional wrongdoing or negligence by
the Company or any employee. The Board approved the report of the Committee and
advised counsel to the shareholder of its conclusions in September 1994. The
Company has not received any further communication from the shareholder or her
counsel.
Central Garden
In July 1992, the Company responded to an emergency call to clean up a
chemical spill at a finished product warehouse facility leased by Central Garden
& Pet Supply Company (Central) in Baton Rouge, Louisiana. While cleanup was
under way, a fire began which damaged the warehouse facility. A total of nine
lawsuits arising from the fire were filed against the Company including three
actions brought by residents of a nearby apartment complex alleging personal
injuries and property
30
<PAGE> 33
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
damage caused by smoke from the fire (including Gravois, Tinnea, and Gordillo et
al. v. IT Corporation, et al., 19th Judicial District, Parish of East Baton
Rouge, Louisiana, Case Nos. 383,887, 396,376 and 396,375).
The parties to all the lawsuits alleged, among other things, that the
Company was the cause of the fire and of approximately $23,000,000 in damages
(not including punitive damages). The Company in pleadings denied responsibility
for the fire and the claimed damages. In March and April 1996, the Company and
its insurer settled or reached settlements-in-principle regarding six of the
nine lawsuits against the Company brought by those claiming principally property
damage, which settlements were completed and approved by the court.
The Company has not yet been able to reach settlements of the claims
asserted in the Gravois action and in the two other related cases by nearby
apartment dwellers and others who claim personal injuries, damages to their
residences, related personal property damage, and punitive damages. While the
Company is pursuing settlement of these matters, the Company is defending them
vigorously and believes that it has meritorious challenges to some of the
damages claimed and meritorious claims for contribution against others. Trial of
the Gravois case has been set for December 8, 1997.
The Company's insurance carrier defended the actions which were settled and
is defending the three remaining actions subject to a reservation of its rights
to contest coverage at a later date. The Company may face reimbursement claims
by its carrier, based on assertions that the Company's policies do not cover
damages resulting from the fire because of allegations that such damages are
excluded pollution liabilities or punitive damages.
In fiscal year 1995, the Company recorded a $5,300,000 charge to cost of
revenues, covering both defense and potential settlement costs, to provide for
its self-insured retention under its general liability insurance coverage for
the Central Garden matter. The Company paid this amount in cash principally in
fiscal year 1996. Based on discovery to-date, should any of the three remaining
cases proceed to trial, there is a risk that the Company will be found liable
for at least some damages. If the Company is held liable for damages, there is
the further risk that the Company could be held liable for punitive damages.
Should any of the three remaining cases proceed to trial and result in a
significant award of damages against the Company, or should the Company be
required to pay significant amounts in settlement of any of the cases, any of
which are not substantially covered by the Company's insurance policies,
additional litigation costs would be recorded related to the matter.
Other
The Company is subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, all such other pending claims are
either adequately covered by insurance or, if not insured, will not individually
or in the aggregate result in a material adverse effect on the consolidated
financial condition, liquidity and results of operations of the Company.
The Company maintains a liability insurance program which includes
commercial general liability, product liability, automotive liability,
employer's liability, workers' compensation, all risk property coverage,
consultants' environmental liability (including errors and omissions),
employment practices liability and directors' and officers' liability insurance
coverage. A portion of the Company's commercial general liability, product
liability, automotive liability and workers' compensation insurance is provided
through arrangements which require the Company to indemnify the insurance
carriers for all losses and expenses under the policies and to support the
indemnity commitments with letters of credit and is, in effect, a self-insurance
layer.
Environmental Impairment Liability coverage for IT's inactive treatment,
storage and disposal facilities located in Northern California is provided
through the Company's captive insurance subsidiary, which has issued a
$32,000,000 policy which meets the current requirements of both federal and
state law. See Discontinued operations for information regarding certain legal
and governmental proceedings affecting the Company's treatment, storage and
disposal facilities.
31
<PAGE> 34
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESTRUCTURING CHARGE:
In conjunction with the corporate restructuring to position the Company for
growth and diversification which was initiated in the second quarter of fiscal
year 1997, 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. As part of the plan of
termination, the Company laid-off 133 employees and paid over $2,460,000 in
termination benefits. In addition, the Company approved a plan to close 5 leased
facilities and reduce the size of 11 other leased facilities by either sublease
or abandonment. At March 28, 1997, $3,720,000 of the charge remained to be paid.
Most of the remaining costs to be paid relate to the facility closures and
office space reductions which will be paid out over the terms of the lease. One
of these facility closures has a remaining lease obligation of about 8 years.
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.
MOTCO LITIGATION SETTLEMENT:
Noncurrent other assets at March 31, 1995 included a claim amount of
$31,200,000 representing direct costs incurred in excess of those recovered to
that date under the Motco Site Trust Fund contract.
On December 4, 1991, the Company announced the suspension of work at the
Motco project, the cleanup of a Superfund site in Texas and the filing of a
$56,000,000 breach of contract lawsuit against the Motco Trust, the PRP group
that agreed to finance remediation of the site, and Monsanto Company, the leader
of the PRP group. In May 1995, a federal court judge issued a judgment in favor
of IT in the amount of approximately $66,000,000, including attorneys' fees and
interest.
In August 1995, the Company settled the litigation and received $41,100,000
of cash from the Motco Trust. In the second quarter of fiscal year 1996, the
Company reported in other income a pre-tax gain of $1,090,000, which represented
the settlement proceeds, net of the previously recorded $31,200,000 claim
amount, $8,000,000 of costs related to certain equipment specially constructed
for the Motco project which has been idle since ceasing work on the project, and
legal and other expenses.
GOVERNMENTAL REGULATION:
The Company is subject to extensive regulation by applicable federal, state
and local agencies. All facets of the Company's business are conducted in the
context of a complex statutory, regulatory and governmental enforcement
framework and a highly visible political environment. The Company's operations
must satisfy stringent laws and regulations applicable to performance. Future
changes in regulations may have an adverse effect on the Company's business.
PREFERRED STOCK:
Carlyle Investment
At the November 20, 1996 Annual Meeting of Stockholders, IT's shareholders
voted to approve a $45,000,000 investment (the Carlyle Investment) by The
Carlyle Group (Carlyle), a Washington, D.C. based merchant banking firm. The
Carlyle Investment consists of 45,000 shares of 6% Cumulative Convertible
Participating Preferred Stock, par value $100 per share (Convertible Preferred
Stock) and warrants to purchase 1,250,000 shares of IT common stock, par value
$.01 per share. The net proceeds to IT (after related offering costs of
$4,391,000) from the Carlyle Investment were $40,609,000.
Assuming the conversion of all of the Convertible Preferred Stock into IT
common stock and the 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, to November 20, 2001, the holders of
the Convertible Preferred Stock have the right to elect a majority
32
<PAGE> 35
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Convertible Preferred Stock ranks, as to dividends and liquidation,
pari passu to the Company's 7% Preferred Stock (see 7% Preferred Stock) and
prior to the Company's common stock. The Convertible Preferred Stock is entitled
to cumulative annual dividends. No dividends will be payable in the first year;
dividends will be paid quarterly in kind for the second year at the rate of 3%
per annum. Thereafter, dividends will be paid quarterly in cash at the rate of
6% per annum. The Convertible Preferred Stock is entitled to a liquidation
preference of $1,000 per share.
The Convertible Preferred Stock and warrants may at any time, at the option
of Carlyle, be converted into IT common shares. The conversion price of the
Convertible Preferred Stock is $7.59 per share and the exercise price of the
warrants is $11.39 per share. The Company will be entitled at its option to
redeem all of the Convertible Preferred Stock at its liquidation preference plus
accumulated and unpaid dividends on or after November 21, 2003.
Although the first two years' dividends are paid at a rate of 0% and 3%,
respectively, dividends will be imputed during this period at a rate of
approximately 6% per annum. Imputed dividends were $866,000 in fiscal year 1997.
Any imputed dividends will never be paid in cash or stock.
7% Preferred stock
In a September 1993 public offering, the Company issued 2,400,000
depositary shares, each representing a 1/100th interest in a share of the
Company's 7% Cumulative Convertible Exchangeable Preferred Stock (7% Preferred
Stock). The depositary shares entitle the holder to all proportional rights and
preferences of the 7% Preferred Stock, including dividend, liquidation,
conversion, redemption and voting rights and preferences.
The 7% Preferred Stock ranks, as to dividends and liquidation, pari passu
to the Convertible Preferred Stock (see Carlyle Investment) and prior to the
Company's common stock. The dividend per annum and liquidation preference for
each share of 7% Preferred Stock are $175 and $2,500, respectively, and for each
depositary share are $1.75 and $25, respectively. Dividends on the 7% Preferred
Stock and depositary shares are cumulative and payable quarterly.
The 7% Preferred Stock is convertible at the option of the holder into
shares of the Company's common stock at a conversion price of $23.36 per share,
subject to adjustment under certain circumstances. On any dividend payment date,
the 7% Preferred Stock is exchangeable at the option of the Company, in whole
but not in part, for 7% Convertible Subordinated Debentures Due 2008 in a
principal amount equal to $2,500 per share of Preferred Stock (equivalent to $25
per depositary share). The 7% Preferred Stock may be redeemed at any time, at
the option of the Company, in whole or in part, initially at a price of
$2,622.50 per share of Preferred Stock (equivalent to $26.225 per depositary
share) and thereafter at prices declining to $2,500 per share of Preferred Stock
(equivalent to $25 per depositary share) on or after September 30, 2003.
Additionally, the 7% Preferred Stock has a special conversion right that
becomes effective in the event of certain significant transactions affecting
ownership or control of the Company. In such situations, the special conversion
right would, for a limited period, reduce the then prevailing conversion price
to the greater of the market value of the common stock or $12.68 per share. The
Carlyle Investment (see Carlyle Investment) triggered this special conversion
right. On January 9, 1997, holders of 344,308 depositary shares elected to
convert such shares to 678,816 shares of IT common stock.
The 7% Preferred Stock is non-voting, except that holders are entitled to
vote as a separate class to elect two directors if the equivalent of six or more
quarterly dividends (whether consecutive or not) on the 7% Preferred Stock are
in arrears. Such voting rights will continue until such time as the dividend
arrearage on the 7% Preferred Stock has been paid in full.
33
<PAGE> 36
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK INCENTIVE PLANS:
Summary
At the November 20, 1996 Annual Meeting of Stockholders, IT's shareholders
voted to approve the Company's 1996 Stock Incentive Plan (1996 Plan) which
provides for the issuance of the Company's common stock or any other security or
benefit with a value derived from the value of its common stock. Options are
granted at exercise prices equal to or greater than the quoted market price at
the date of grant. At March 28, 1997, the maximum number of shares of the
Company's common stock that may be issued pursuant to awards granted under the
1996 Plan is 79,000. At April 1 of each year, the maximum number of shares
available for award under the 1996 Plan will be increased by an amount which
represents 2% of the number of the Company's common stock which are issued and
outstanding at that date. During fiscal year 1997, 171,000 stock options were
granted under the 1996 Plan, which expires in fiscal year 2002.
The Company's 1991 Stock Incentive Plan (1991 Plan) and 1983 Stock
Incentive Plan (1983 Plan) provided for the granting of incentive and
non-qualified stock options and the issuance of the Company's common stock or
any other security or benefit with a value derived from the value of its common
stock. No shares are available for grant under these plans as such authority to
grant as to the 1991 Plan expired in March 1996 and as to the 1983 Plan expired
in September 1993. Options granted under the plans and outstanding at March 28,
1997 will expire at various dates through March 7, 2006.
Changes in the number of shares represented by outstanding options under
the 1996 Plan, the 1991 Plan and the 1983 Plan during the fiscal years ended
March 28, 1997, March 29, 1996 and March 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
Year ended
----------------------------------------------------
March 28, March 29, March 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at beginning
of year 744,847 784,895 791,191
Options granted
(1997, $8.63 per share;
1996, $10.50 - $13.00 per share;
1995, $10.00 - $14.50 per share) 171,000 39,750 358,255
Options exercised
(1997, 1996, and
1995 - $11.50 per share) (3,629) (575) (1,794)
Options expired and forfeited (164,539) (79,223) (362,757)
--------- --------- ---------
Outstanding at end of year (1997,
$8.63 - $32.50 per share) 747,679 744,847 784,895
========= ========= =========
Vested options 473,257 462,793 371,241
========= ========= =========
</TABLE>
The weighted-average grant date fair values of options granted to employees
in fiscal years 1997, 1996 and 1995 were $8.63, $11.96 and $11.60, respectively.
The weighted-average exercise price for all options outstanding at the end of
fiscal years 1997, 1996 and 1995 were $15.96, $17.55 and $18.57, respectively.
The weighted-average exercise price of options currently exercisable at the end
of fiscal years 1997, 1996 and 1995 was $19.04, $20.64 and $23.18, respectively.
The
34
<PAGE> 37
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
weighted-average exercise price of options exercised in fiscal years 1997, 1996
and 1995 was $11.50 for all three years and the weighted-average exercise price
for expired and forfeited options in fiscal years 1997, 1996 and 1995 was
$18.53, $24.78 and $25.32, respectively. The weighted-average remaining
contractual life of options outstanding at the end of fiscal years 1997, 1996
and 1995 was 6.8 years, 6.0 years and 6.8 years, respectively.
Compensation cost
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
SFAS No. 123 provides that, if its optional method of accounting for stock
options is not adopted (and which the Company has not adopted), disclosure is
required of pro forma net income and net income per share. In determining the
pro forma information for stock options granted in fiscal years 1997 and 1996,
the fair value for these options were estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate based upon zero-coupon U.S. Treasury Notes
of 6.38% in fiscal years 1996 and 1997; no dividend yield; volatility factor of
the expected market price of the Company's common stock of 0.342 to 0.384; and a
weighted average expected life of each option of 6.6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferrable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
If compensation cost for the Company's stock options had been determined
based on the fair value at the grant dates as defined by FAS123, the Company's
net loss applicable to common stock and net loss per common share would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Year ended
-----------------------------------------
March 28, 1997 March 29, 1996
-------------- --------------
(In thousands, except per share data)
<S> <C> <C>
Net loss applicable to common stock
As reported $ (13,693) $ (3,654)
Pro forma $ (13,735) $ (3,671)
============= ============
Net loss per common share
As reported $ (1.48) $ (.41)
Pro forma $ (1.49) $ (.41)
============= ============
</TABLE>
Additionally, under the 1991 Plan, the Company awarded shares of
nonvested restricted stock to officers and key employees which amounted to none,
266,019 and 50,000 in fiscal years 1997, 1996 and 1995, respectively. Vesting of
awards is dependent upon continued employment and, in the case of certain
performance-related awards, the sustained level of a target
35
<PAGE> 38
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
market price for the Company's common stock that exceeds the related market
price on the date of grant. On March 28, 1997, the total number of shares of
restricted stock outstanding was 197,638. The cost of restricted stock awards is
generally expensed over the vesting period, which ranges from two to five years,
and amounted to $575,000 in fiscal year 1997 and $568,000 in fiscal year 1996.
MAJOR CUSTOMERS:
A total of 59%, 65% and 63% of the Company's revenues during fiscal years
1997, 1996 and 1995, respectively, were from federal governmental agencies,
primarily the U.S. Department of Defense (DOD) and the U.S. Department of Energy
(DOE). In fiscal years 1997, 1996 and 1995, the DOD provided 42%, 51% and 47%,
respectively, of the Company's revenues. The DOE provided 14%, 11% and 12% of
the Company's revenues during fiscal years 1997, 1996 and 1995, respectively.
EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution, contributory pension and profit
sharing plan (the Plan), covering all employees with one year of continuous
service. The Company funds current costs as accrued, and there are no unfunded
vested benefits. Through June 30, 1995, the Plan required a minimum annual
contribution of 4% of participants' eligible compensation; thereafter, the
required minimum annual contribution is 3% of participants' eligible
compensation. Additionally, beginning July 1, 1995, the Company contributes up
to 2% of participants' eligible compensation by matching 50% of each
participant's contribution (up to 4% of eligible compensation) to the Company's
voluntary 401(k) savings plan. The Plan currently allows a maximum contribution
of up to 8% of participants' eligible compensation up to $150,000 annually. The
Company's contributions, as a percentage of participants' eligible compensation,
were 4.44%, 4.33% and 5% for fiscal years 1997, 1996 and 1995, respectively.
Pension and profit sharing expense was $3,614,000, $3,601,000 and
$4,081,000 for fiscal years 1997, 1996 and 1995, respectively.
The Company presently provides certain health care benefits for retirees
who are over age 60, completed a specified number of years of service and
retired by December 31, 1996, the date upon which the Company amended the plan
to cease allowing new participants to join upon their retirement. In fiscal year
1997, the Company made net contributions of approximately $78,000 toward these
benefits. Commencing in fiscal year 1994, the Company accrued the expected cost
of providing these benefits to an employee and the employee's covered dependents
during the years that the employee rendered the necessary service and recognized
its Accumulated Postretirement Benefit Obligation (APBO) of $733,000 on a
delayed basis (over 20 years) as a component of net periodic postretirement
benefit cost. In fiscal year 1997, upon the amendment of the plan, the Company
estimated its remaining liability to be $300,000 and adjusted its accrual
accordingly.
36
<PAGE> 39
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTERLY RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED):
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997:
Revenues............................................. $ 81,416 $ 92,490 $ 92,513 $ 95,712
Gross margin......................................... 7,779 9,139 9,723 11,497
Income (loss) from continuing operations............. (1,541) (8,890) 371 1,283
Net loss applicable to common stock.................. (2,591) (9,940) (924) (238)
Net loss per share .................................. $ (.28) $ (1.09) $ (.10) $ (.02)
========= =========== =========== ==========
1996:
Revenues............................................. $100,292 $ 106,259 $ 104,912 $ 88,579
Gross margin......................................... 16,944 15,174 14,651 11,383
Income (loss) from continuing operations............. 2,345 2,355 (4,687) 533
Net income (loss) applicable to common stock......... 1,295 1,305 (5,737) (517)
Net income (loss) per share ......................... $ .14 $ .15 $ (.64) $ (.06)
========= ========== =========== ==========
</TABLE>
During the second fiscal quarter of 1997, the Company recorded a $8,403,000
($.92 per share) pre-tax and after tax (see Income taxes) restructuring charge
in connection with an organizational realignment (see Restructuring charge).
In the third quarter of fiscal year 1996, the Company reported a
$14,600,000 ($1.62 per share) after tax loss related to the recapitalization of
Quanterra (see Quanterra) and a $7,500,000 ($.83 per share) deferred tax asset
valuation allowance adjustment. (See Income taxes.)
37
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
SEPARATE FINANCIAL STATEMENTS OF SUBSIDIARIES NOT CONSOLIDATED AND FIFTY PERCENT
OWNED PERSONS
Quanterra Inc. Financial Statements - December 31, 1995
EXHIBITS
These Exhibits are numbered in accordance with the Exhibit
Table of Item 601 of Regulation S-K.
Exhibit No. Description
- ----------- -----------
23 Consent of Ernst & Young LLP, Independent Auditors
38
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment No.2 on Form 10-K/A
to its Form 10-K for the year ended March 28, 1997 to be signed on its behalf by
the undersigned, thereunto duly authorized, in Monroeville, Pennsylvania on the
20th day of March, 1998.
INTERNATIONAL TECHNOLOGY CORPORATION
By: ANTHONY J. DELUCA
----------------------------------
Anthony J. DeLuca
President and Chief Executive Officer
39
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8; No. 2-95647 and No. 33-11486) and in the related Prospectuses
pertaining to the International Technology Corporation 1983 Stock Incentive
Plan, in the Registration Statement (Form S-8; No. 33-52974) and in the related
Prospectus pertaining to the International Technology Corporation 1991 Stock
Option Plan in the Registration Statement (Form S-8; No. 33-60861) relating to
the shares of restricted stock to be issued under the Special Turnaround Plan,
in the Registration Statement (Form S-8; No. 33-60881) relating to the
additional shares under the 1991 Stock Incentive Plan, in the Registration
Statement (Form S-8; No. 333-00651) relating to the shares issued under the IT
Corporation Retirement Plan, in the Registration Statement (Form S-8;
No. 333-28721), and in the related Prospectus pertaining to the 1996 Stock
Incentive Plan, and in the Registration Statement (Form S-8; No. 333-26143),
and in the related Prospectus pertaining to the 1997 International Technology
Corporation Non-Employee Director Stock Plan Director Fees, of our report dated
March 28, 1995 except for Note 4 as to which the date is June 28, 1995, with
respect to the financial statements of Quanterra Incorporated included as an
Exhibit in this Annual Report (Form 10-K/A) of International Technology
Corporation for the year ended March 28, 1997.
ERNST & YOUNG LLP
Denver, Colorado
March 23, 1997
<PAGE> 1
EXHIBIT 99
Financial Statements
QUANTERRA, INC.
December 31, 1994 and June 28, 1994
with Report of Independent Auditors
<PAGE> 2
QUANTERRA, INC.
Financial Statements
December 31, 1994 and June 28, 1994
CONTENTS
Report of Independent Auditors ............................................. 1
Audited Financial Statements
Balance Sheets ............................................................. 2
Statement of Operations .................................................... 4
Statement of Shareholders' Equity .......................................... 5
Statement of Cash Flows .................................................... 6
Notes to Financial Statements .............................................. 7
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Quanterra, Inc.
We have audited the accompanying balance sheets of Quanterra, Inc. as of
December 31, 1994 and June 28, 1994, and the related statements of operations,
shareholders' equity and cash flows for the six months ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quanterra, Inc. at December 31,
1994 and June 28, 1994, and the results of its operations and its cash flows for
the six months ended December 31, 1994 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
March 28, 1995, except for Note 4, as to
which the date is June 28, 1995
1
<PAGE> 4
QUANTERRA, INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 28,
1994 1994
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,612 $ 1,420
Accounts receivable and unbilled revenues:
Accounts receivable, net of allowance for
uncollectible accounts of $1,679
and $1,572 at December 31, 1994 and June 28, 1994,
respectively 37,625 28,939
Unbilled revenues 4,423 4,796
--------------------------------
42,048 33,735
Prepaid expenses and other assets 1,266 2,273
Deferred income taxes 7,926 2,889
--------------------------------
Total current assets 57,852 40,317
Deferred income taxes 974 -
Property and equipment--at cost, less accumulated depreciation
and amortization of $56,454 and $57,519 at December 31, 1994
and June 28, 1994, respectively 59,428 61,654
Intangible assets:
Goodwill 8,853 9,238
Other 645 645
Less accumulated amortization (1,985) (1,710)
--------------------------------
7,513 8,173
Other assets:
Deferred financing costs, less accumulated
amortization of $99 at December 31, 1994 893 793
Property held for sale 850 850
Other noncurrent 1,216 1,174
--------------------------------
2,959 2,817
--------------------------------
Total assets $128,726 $112,961
================================
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 28,
1994 1994
--------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,335 $ 3,746
Accounts payable to related parties 3,413 1,390
Accrued payroll and other accrued expenses 5,645 6,407
Accrued integration costs 13,264 2,329
Current portion of long-term debt 3,750 -
Current portion of capital lease obligations 47 270
--------------------------------
Total current liabilities 37,454 14,142
Long-term debt, net of current portion 41,350 36,100
Capital lease obligations, net of current portion 706 728
Deferred income taxes - 1,267
Commitments and contingencies
Shareholders' equity:
Common stock:
Class A shares, $.01 par value:
Authorized shares - 1,500
Issued and outstanding shares - 1,056 - -
Class B shares, $.01 par value:
Authorized shares - 1,500
Issued and outstanding shares - 1,056 - -
Additional paid-in capital 60,724 60,724
Accumulated deficit (11,508) -
--------------------------------
Total shareholders' equity 49,216 60,724
--------------------------------
Total liabilities and shareholders' equity $128,726 $112,961
================================
</TABLE>
See accompanying notes.
3
<PAGE> 6
QUANTERRA, INC.
STATEMENT OF OPERATIONS
(in thousands)
For the six months ended December 31, 1994
Net revenues $ 66,758
Cost of sales 49,815
---------
Gross profit 16,943
Selling, general and administrative 13,422
Integration costs 20,878
---------
Loss from operations (17,357)
Interest expense 1,429
---------
Loss before income tax benefit (18,786)
Income tax benefit 7,278
---------
Net loss $(11,508)
=========
See accompanying notes.
4
<PAGE> 7
QUANTERRA, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
For the six months ended December 31, 1994
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 28, 1994 1,056 $ - 1,056 $ - $60,724 $ - $60,724
Net loss - - - - - (11,508) (11,508)
--------------------------------------------------------------------------------------------------
Balance,
December 31, 1994 1,056 $ - 1,056 $ - $60,724 $(11,508) $49,216
==================================================================================================
</TABLE>
See accompanying notes.
5
<PAGE> 8
QUANTERRA, INC.
STATEMENT OF CASH FLOWS
(in thousands)
For the six months ended December 31, 1994
OPERATING ACTIVITIES
Net loss $(11,508)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,954
Write-off of property and equipment against
integration costs 2,883
Write-off of goodwill 366
Changes in operating assets and liabilities:
Deferred income taxes (7,278)
Accounts receivable (8,686)
Unbilled revenues 373
Prepaid expenses and other assets 1,007
Deferred financing costs (199)
Other assets (42)
Accounts payable 7,589
Accounts payable to related parties 2,023
Accrued payroll and other accrued expenses (762)
Integration costs accrual 10,935
--------
Net cash provided by operating activities 1,655
INVESTING ACTIVITIES
Purchase of property and equipment (5,218)
--------
Net cash used in investing activities (5,218)
FINANCING ACTIVITIES
Principal payments under capital lease obligations (245)
Borrowings on long-term debt 9,000
--------
Net cash provided by financing activities 8,755
--------
Net increase in cash and cash equivalents 5,192
Cash and cash equivalents at beginning of year 1,420
========
Cash and cash equivalents at end of year $ 6,612
========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 805
See accompanying notes.
6
<PAGE> 9
QUANTERRA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Quanterra, Inc. ("the Company") was formed under the laws of the state of
Delaware on June 28, 1994, upon the combination of Enseco Incorporated
("Enseco"), a division of MetPath, Inc. ("MetPath"), itself a subsidiary of
Corning Inc., and International Technology Analytical Services ("ITAS"), a
division of International Technology Corporation ("ITC"). Metpath and ITC each
own 50% of the voting stock. Quanterra provides environmental analytical
services, consisting primarily of laboratory tests, to a variety of customers in
the business of environmental testing and cleanup.
BASIS OF ACCOUNTING
The assets and liabilities contributed by Enseco and ITC were recorded at
historical cost as reflected on the accounts of the respective entities prior to
formation of the Company.
REVENUE RECOGNITION
The Company recognizes income on the accrual basis. As professional services are
performed, revenues relating thereto are accrued. On a current basis, provision
for losses is made for any costs and expenses in excess of billable revenues.
Unbilled revenues represent amounts earned but not yet billable under the terms
of the agreements with customers.
CREDIT RISK
Credit is extended based on an evaluation of the customer's financial condition,
and collateral is generally not required. The Company's customers consist
primarily of companies in the environmental consulting industry, agencies of the
United States government and oil and gas companies, representing 65%, 8% and 11%
of the total accounts receivable balance at December 31, 1994, respectively. The
customers are located throughout the United States.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers cash and cash
equivalents with a maturity of three months or less to be cash.
7
<PAGE> 10
QUANTERRA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING PERIOD
The Company's year end is the 52- or 53-week period ending on the Sunday closest
to December 31. The period reported upon as the six-month period ended December
31, 1994 effectively ended on January 1, 1995.
PROPERTY AND EQUIPMENT
For financial reporting purposes, depreciation and amortization are provided
using the straight-line method over the following estimated useful lives:
Buildings and improvements 18 to 30 years
Leasehold improvements 15 to 28 years
Furniture and fixtures 5 to 10 years
Machinery and equipment 7 to 8 years
Vehicles and other 3 to 5 years
INTANGIBLE ASSETS
The Company's intangible assets consist of goodwill, resulting from cost in
excess of net assets of acquired businesses, and other intangible assets,
arising principally from acquisitions. Goodwill and other intangible assets are
amortized on a straight-line basis over 20 and 8 years, respectively.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"), which requires that the Company account for income taxes using the
liability method. Under SFAS No. 109, deferred income taxes are provided for
temporary differences in recognizing certain income and expense items for
financial reporting and tax reporting purposes.
RECLASSIFICATIONS
Certain reclassifications of June 28, 1994 amounts have been made to conform
with the December 31, 1994 presentation.
8
<PAGE> 11
QUANTERRA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 28,
1994 1994
------------------------------
<S> <C> <C>
At cost:
Land $ 1,968 $ 1,968
Buildings and improvements 32,490 32,437
Machinery and equipment 60,963 62,562
Machinery and equipment under capital leases 1,727 1,727
Furniture and fixtures 2,943 4,018
Leasehold improvements 4,898 8,068
Vehicles and other 411 418
Construction in progress 10,482 7,975
------------------------------
115,882 119,173
Less accumulated amortization (56,454) (57,519)
------------------------------
$ 59,428 $ 61,654
==============================
</TABLE>
3. INCOME TAXES
Benefit for federal and state income taxes for the six months ended December 31,
1994 is as follows (in thousands):
Deferred:
Federal $6,126
State 1,152
------
$7,278
======
The Company's effective tax rate differs from the federal statutory rate of 34
percent as a result of state taxes and the nondeductibility of certain expenses.
9
<PAGE> 12
QUANTERRA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1994 and June 28, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 28,
1994 1994
-------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued integration costs $ 6,341 $2,084
Net operating loss carryforwards 1,783 -
Accrued vacation and payroll expenses 2,380 1,708
Allowance for uncollectible accounts receivable 636 623
Other 385 70
-------------------------------
Total deferred tax assets $11,525 $4,485
===============================
Deferred tax liabilities:
Accelerated depreciation $ 2,241 $2,473
Software development costs 384 390
-------------------------------
Total deferred tax liabilities $ 2,625 $2,863
===============================
</TABLE>
At December 31, 1994, the Company has net operating loss carryforwards of
$4,845,000 which are available to offset future taxable income. These
carryforwards, which are expected to be fully utilized, expire in the year 2009.
4. LONG-TERM DEBT
On June 28, 1994, the Company signed a Credit Agreement with a financial
institution allowing the Company to obtain credit in the aggregate principal
amount of up to $60,000,000, in the forms of a term advance, working capital
advances and letters of credit. At December 31, 1994, the outstanding balance on
the loan was $45,100,000, which represented a term advance of $30,000,000 that
cannot be borrowed again once repaid and a working capital advance of
$15,100,000. The Company must repay outstanding balances under the term advance
through quarterly payments of $1,875,000 beginning in September 1995. Mandatory
prepayments and working capital advance commitment reductions may be required at
the end of each calendar year based on cash flows in excess of a projection
agreed upon by the Company and the financial institution. All outstanding
amounts become due on the termination date of the agreement, June 28, 1999.
10
<PAGE> 13
QUANTERRA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
Working capital advances constitute a revolving credit agreement whereby
advances are made to the Company based on eligible receivables, as defined,
through June 28, 1999, not to exceed $30,000,000. At December 31, 1994,
$15,100,000 has been excluded from current liabilities because the Company
intends that at least that amount would remain outstanding under this agreement
for an uninterrupted period extending beyond one year from December 31, 1994.
Interest is payable quarterly and is calculated as either:
1. The higher of the following rates plus 0% to .75% depending on the
performance level of the Company based on certain ratios:
o the financial institution's base rate;
o a formula based on a three-week moving average of rates for
three-month certificates of deposit, the daily percentages
specified during such three-week period by the Federal Reserve
System for determining the maximum reserve requirement, and the
average during such three-week period of rates estimated for
determining the amount payable to the Federal Deposit Insurance
Corporation for insuring deposits of the financial institution;
o 1/2 of 1% above the Federal Funds rate; or
2. The rate obtained by dividing the rate at which deposits of similar
amount and time period are offered by a financial institution in
London, United Kingdom by a percentage equal to 100% minus the
reserve percentage issued by the Federal Reserve System for
determining the maximum reserve requirement for financial
institutions in New York City with respect to liabilities or assets,
plus .75% to 1.75% depending on the performance level of the Company
based on certain ratios.
The effective interest rate at December 31, 1994 was 6.724%.
Substantially all assets of the Company are pledged as collateral on the loan.
Additionally, the financial institution has the right to require the
shareholders of the Company to make capital contributions to the Company if the
Company violates certain financial covenants. On a quarterly basis, the Company
must pay a commitment fee of 3/8 of 1% per annum on unused credit facilities. At
December 31, 1994, the Company
11
<PAGE> 14
QUANTERRA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
had available unused credit facilities of $14,900,000 for purposes of working
capital advances and letters of credit.
The Company is required to meet various financial and nonfinancial covenants
under the credit agreement, including a maximum leverage ratio which decreases
periodically over the term of the agreement and a minimum net worth, minimum
cash flow and minimum interest coverage ratio, each of which increase
periodically over the term of the agreement.
Subsequent to year end, the Company amended its Credit Agreement whereby its
shareholders made capital contributions totaling $5 million which were applied
to outstanding term advance principal repayment installments in direct order of
maturity. Among the items amended were the elimination of the maximum leverage
and minimum cash flow ratios, the modification of the minimum net worth and
minimum interest coverage ratios and the payment of an amendment fee equal to
1/8 of one percent of the aggregate commitment. The amendment is effective
through March 31, 1996, when all conditions and covenants revert back to the
original terms of the Credit Agreement.
Based on the outstanding loan balance at December 31, 1994, aggregate maturities
of long-term debt are as follows (in thousands):
1995 $ 3,750
1996 7,500
1997 7,500
1998 7,500
1999 18,850
-------
$45,100
=======
12
<PAGE> 15
QUANTERRA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASE COMMITMENTS
The Company occupies premises under leases expiring at various dates through
2004, and leases equipment under noncancelable operating and capital leases
expiring at various dates through 2004. Future minimum payments, by year and in
the aggregate, under the capital leases and noncancelable operating leases with
initial or remaining terms of one year or more consisted of the following at
December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-----------------------------
<S> <C> <C> <C>
1995 $ 201 $ 6,112
1996 160 4,593
1997 165 3,200
1998 170 2,069
1999 175 1,564
Thereafter 950 3,048
-----------------------------
Total minimum lease payments 1,821 $20,586
=======
Less amounts representing interest 1,068
--------
Present value of net minimum lease payments $ 753
=======
</TABLE>
The Company leases certain facilities and equipment from related parties with
annual operating lease payments of approximately $522,000 terminating in 1999,
which are included in the above operating lease commitment schedule. The Company
incurred lease expense of approximately $4,068,000 in 1994. In addition, the
Company leases certain property to related parties (see Note 8).
6. SHAREHOLDERS' EQUITY
On June 28, 1994, the Company entered into a Shareholders' Agreement with its
shareholders, MetPath and ITC, which defined the terms of the organization of
the Company, of its financing and of the sales and transfers of its shares. As
required by the agreement, the Company issued 1,056 shares of Class A Voting
Common Stock, par value $.01, to MetPath and 1,056 shares of Class B Voting
Common Stock, par value $.01, to ITC in consideration for the transfer of net
assets of Enseco and ITAS, respectively. The two classes of common stock have
equal voting rights.
13
<PAGE> 16
QUANTERRA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
Under the same agreement, the Company is obligated to issue to MetPath and ITC
one additional share of common stock for each $11,261 or portion thereof that
MetPath or ITC may contribute to the Company up to a maximum of 444 shares each.
The shareholders are prohibited from pledging, encumbering, selling or otherwise
transferring any shares of the Company during the three-year period ending June
28, 1997. The Shareholders' Agreement will remain in effect until liquidation or
dissolution of the Company or until such time that MetPath and ITC in the
aggregate own less than 40% of the outstanding common stock of the Company.
Dividends may be declared and paid to shareholders in cash, property or stock of
the Company. No dividends may be declared or paid on Class B common stock until
an aggregate amount of cash dividends has been declared and paid on the Class A
common stock equal to $4,000,000. Additionally, to the extent that a total of
$4,000,000 of cash dividends has not been paid to holders of Class A common
stock by June 28, 1997, interest must first be paid to the Class A common
shareholders on the difference between $4,000,000 and the amount paid as of June
28, 1997, before dividends may be declared or paid on Class B common stock.
7. INTEGRATION COSTS
In July 1994, the Company recorded an integration cost of $20,878,000 in order
to effectively and efficiently consolidate the two merging companies, Enseco and
ITAS. Included in the charges are the expected costs of employee separations,
facility consolidations, asset retirements, relocations and related costs.
During 1994 the Company charged $9,431,000 to the integration accrual, which
included employee termination costs and costs related to the closing of plant
locations. Other operations were consolidated where appropriate. The Company
anticipates remaining consolidation steps to be completed in 1995.
8. RELATED PARTY TRANSACTIONS
The Company utilizes certain services provided by its shareholders, Metpath, a
subsidiary of Corning, Inc. ("Corning and subsidiary") and ITC. Certain services
include, but are not limited to utilization of shareholders' employees, use of
nationwide phone contracts and reimbursement of health and retirement plan
payments made by the shareholders on behalf of the Company. Amounts outstanding
and included in related party accounts payable to Corning and subsidiary were
$2,384,000 and $1,390,000 at December 31,
14
<PAGE> 17
QUANTERRA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
1994 and June 28, 1994, respectively. Amounts outstanding and included in
related party accounts payable to ITC were $1,029,000 at December 31, 1994. In
addition, the Company provides certain environmental analytical services for
ITC. The Company recognized revenues of $4,545,000 for the six months ended
December 31, 1994 from ITC. Amounts outstanding from ITC and included in
accounts receivable at December 31, 1994 were $4,852,473.
During 1994 the Company entered into an agreement whereby it will lease its
Somerset, New Jersey facility to ITC. The lease will commence in April 1995 and
will terminate in March 2005. ITC will make monthly rental payments of $23,667
through February 2000 and $31,667 thereafter through March 2005.
MetPath and ITC agreed to provide certain administrative and support services to
the Company in return for full compensation by the Company.
9. LITIGATION AND CONTINGENCIES
The Company from time to time is subject to routine litigation incidental to its
business. The Company believes that the results of any pending legal proceedings
will not have a material adverse effect on the financial condition of the
Company.
15
