<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarter ended March 26, 1999
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
--------
The IT Group, Inc.
(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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ..X.. No ........
At April 23, 1999 the registrant had issued and outstanding an aggregate of
22,700,795 shares of its common stock.
<PAGE>
THE IT GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 26, 1999
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
as of March 26, 1999 (unaudited) and
December 25, 1998.................................................... 3
Condensed Consolidated Statements of Operations
for the Fiscal Quarter ended March 26, 1999
and March 27, 1998 (unaudited)....................................... 4
Condensed Consolidated Statements of Cash Flows
for the Fiscal Quarter ended March 26, 1999
and March 27, 1998 (unaudited)....................................... 5
Notes to Condensed Consolidated Financial
Statements (unaudited)............................................... 6-12
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition........................ 13-20
Item 3 Quantitative and Qualitative Disclosures about
Market Risk.......................................................... 20
PART II. OTHER INFORMATION
Item 1 Legal Proceedings.................................................... 21
Item 6. Exhibits and Reports on Form 8-K..................................... 22
Signatures........................................................... 23
</TABLE>
2
<PAGE>
PART I
Item 1. Financial Statements
THE IT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 26, December 25,
1999 1998
-------------- -------------
(Unaudited)
ASSETS (In thousands)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 25,229 $ 21,265
Receivables, net................................................ 341,079 338,589
Prepaid expenses and other current assets....................... 18,777 17,308
Deferred income taxes........................................... 15,927 15,919
--------- ---------
Total current assets........................................... 401,012 393,081
Property, plant and equipment, at cost:
Land and land improvements...................................... 498 2,166
Buildings and leasehold improvements............................ 13,603 15,072
Machinery and equipment......................................... 88,386 81,763
--------- ---------
102,487 99,001
Less accumulated depreciation and amortization................. 54,630 51,331
--------- ---------
Net property, plant and equipment............................. 47,857 47,670
Cost in excess of net assets of acquired businesses.............. 356,515 356,619
Other assets..................................................... 20,287 17,469
Deferred income taxes............................................ 90,339 93,719
Long-term assets of discontinued operations...................... 40,048 40,048
--------- ---------
Total assets................................................. $ 956,058 $ 948,606
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................................ $ 145,265 $ 150,912
Accrued liabilities............................................. 86,184 88,183
Billings in excess of revenues.................................. 4,492 8,219
Short-term debt, including current portion of long-term debt.... 18,500 17,603
Current liabilities of discontinued operations, net............. 5,669 7,904
--------- ---------
Total current liabilities...................................... 260,110 272,821
Long-term debt................................................... 386,567 364,824
8% convertible subordinated debentures........................... 40,235 40,235
Other long-term accrued liabilities.............................. 25,847 31,979
Minority interest................................................ 581 579
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized;
22,683,547 and 22,675,917 shares issued........................ 227 227
Preferred stock, $100 par value; 180,000 shared authorized:
7% cumulative convertible exchangeable, 20,556 shares issued
and outstanding, 24,000 shares authorized..................... 2,056 2,056
6% cumulative convertible participating, 46,095 shares issued
and outstanding............................................... 4,609 4,609
Additional paid-in capital...................................... 349,268 348,794
Deficit......................................................... (112,791) (116,984)
--------- ---------
243,369 238,702
Treasury stock at cost, 24,531 and 47,484 shares................ (29) (74)
Accumulated other comprehensive income.......................... (622) (460)
--------- ---------
Total stockholders' equity..................................... 242,718 238,168
--------- ---------
Total liabilities and stockholders' equity..................... $ 956,058 $ 948,606
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
THE IT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal quarter ended
--------------------
March 26, March 27,
1999 1998
---------- ---------
(Unaudited)
<S> <C> <C>
Revenues........................................................ $257,974 $136,038
Cost and expenses:
Cost of revenues.............................................. 224,677 118,838
Selling, general and administrative expenses.................. 14,826 10,592
Special charges - 5,694
-------- --------
Operating income................................................ 18,471 914
Interest expense, net........................................... 8,833 4,583
-------- --------
Income (loss) before income taxes............................... 9,638 (3,669)
Provision (benefit) for income taxes............................ 3,855 (141)
-------- --------
Net income (loss) from continuing operations.................... 5,783 (3,528)
Discontinued operations -- closure costs
(net of $3,040 income tax benefit)............................ - 4,960
-------- --------
Income (loss) before extraordinary item......................... 5,783 (8,488)
Extraordinary item -- loss on early extinguishment of debt
(net of $3,497 income tax benefit)............................ - 5,706
-------- --------
Net income (loss)............................................... 5,783 (14,194)
Preferred stock dividends....................................... (1,590) (1,558)
-------- --------
Net income (loss) applicable to common stock.................... $ 4,193 $(15,752)
======== ========
Net income (loss) per share basic:
Earnings (loss) from continuing operations (net of preferred
stock dividends)........................................... $ 0.19 $ (0.52)
Loss from discontinued operations............................. - (0.51)
Extraordinary item -- early extinguishment of debt.............. - (0.59)
-------- --------
$ 0.19 $ (1.62)
======== ========
Net income (loss) per common share diluted...................... $ 0.17 $ (1.62)
======== ========
Weighted average common shares outstanding:
Basic........................................................... 22,640 9,733
======== ========
Diluted......................................................... 29,273 9,733
======== ========
</TABLE>
See accompanying notes
4
<PAGE>
THE IT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal quarter ended
-----------------------
March 26, March 27,
1999 1998
---------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ 5,783 $ (14,194)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 6,321 5,630
Deferred income taxes..................................... 3,372 (3,310)
Net loss from disposition of discontinued operations...... - 4,960
Extraordinary charge for early retirement of debt......... - 3,640
Other..................................................... 704 (1,104)
Changes in assets and liabilities, net of effects
from acquisitions:
Changes in assets and liabilities......................... (22,844) 187
Decrease in site closure costs of discontinued operation.. (2,235) (1,982)
-------- ---------
Net cash used for operating activities....................... (8,899) (6,173)
Cash flows from investing activities:
Capital expenditures......................................... (3,480) (2,226)
Acquisition of businesses.................................... (2,240) (157,772)
Cash on deposit as collateral................................ - (480)
Other, net................................................... (1,349) (1,504)
-------- ---------
Net cash used for investing activities....................... (7,069) (161,982)
Cash flows from financing activities:
Financing costs.............................................. (1,078) (4,613)
Net borrowing of long-term debt.............................. 22,564 144,310
Net issuance of common stock................................. 36 -
Dividends paid on preferred stock............................ (1,590) (905)
-------- ---------
Net cash provided by financing activities.................... 19,932 138,792
-------- ---------
Net increase (decrease) in cash and cash equivalents............ 3,964 (29,363)
Cash and cash equivalents at beginning of period................ 21,265 54,128
-------- ---------
Cash and cash equivalents at end of period...................... $ 25,229 $ 24,765
======== =========
</TABLE>
See accompanying notes.
5
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of significant account policies:
The condensed consolidated financial statements included herein have been
prepared by The IT Group, Inc. (IT or the Company), without audit, and
include all adjustments of a normal, recurring nature which are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the fiscal quarter and year to date period ended March 26,
1999, pursuant to the rules of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations although the Company believes that the disclosures in such
financial statements are adequate to make the information presented not
misleading.
These condensed consolidated financial statements should be read in
conjunction with the Company's annual report on Form 10-K for the fiscal year
ended December 25, 1998. The results of operations for the fiscal period
ended March 26, 1999 are not necessarily indicative of the results for the
full fiscal year. The December 25, 1998 balance sheet amounts were derived
from audited financial statements.
2. Business acquisitions:
Fluor Daniel GTI, Inc.
On December 3, 1998, the Company acquired the outstanding common stock of
Fluor Daniel GTI, Inc. (GTI), an environmental consulting, engineering and
construction management services company. GTI operates mainly throughout the
United States with minor foreign operations. Total consideration amounted to
$69.4 million plus approximately $2.0 million in transaction costs. This
transaction was accounted for as a purchase in accordance with Accounting
Principles Board (APB) No. 16. The excess of the purchase price over the fair
value of assets acquired and liabilities assumed in the merger of $16.3
million is primarily classified as cost in excess of net assets of acquired
businesses and is being amortized over forty years.
The estimated fair value of the assets acquired and liabilities assumed of GTI
are as follows:
<TABLE>
<CAPTION>
Description Amount
----------- -------------
(In thousands)
<S> <C>
Current assets .............................................................................. $91,644
Property and equipment....................................................................... 3,587
Intangibles, primarily cost in excess of net assets of acquired businesses................... 16,324
Other long term assets....................................................................... 5,972
Current liabilities.......................................................................... 46,130
</TABLE>
As a result of the merger with GTI, the Company has adopted a plan and
commenced the process of closing specific overlapping facilities and reducing
consolidated employment. The acquired balance sheet includes an accrual of
$7.9 million for the estimated GTI severance, office closure costs and lease
termination costs of which $4.4 million has been paid through March 26, 1999.
The balance, relating primarily to office lease costs, will be paid over the
next four years.
The purchase price allocation is preliminary and based upon information
currently available. Management is continuing to gather and evaluate
information regarding the valuation of assets and liabilities at the date of
the acquisition. Management does not anticipate material changes to the
preliminary allocation.
OHM Acquisition
In January 1998, the Company entered into a merger agreement to acquire OHM
Corporation (OHM), an environmental and hazardous waste remediation company
servicing primarily industrial, federal government and local government
agencies located in the United States. The transaction was effected through a
two-step process for a total purchase price of $303.4 million consisting of
(a) the acquisition of 54% of the total outstanding shares through a cash
tender offer (Tender
6
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Offer), which was consummated on February 25, 1998, at $11.50 per share for
13.9 million shares of OHM common stock, for a total consideration of $160.2
million plus $4.6 million in acquisition costs and (b) the acquisition on
June 11, 1998 of the remaining 46% of the total outstanding shares through
the exchange of 12.9 million shares of Company common stock valued at $8.04
per share, or $103.8 million and payment of $30.8 million plus $4.0 million
in acquisition costs.
This transaction was accounted for as a step acquisition and therefore the
effects of the first phase of the merger were included in the March 27, 1998
financial statements and the effects of both phases were included in the June
26, 1998 financial statements. The excess of the purchase price over the fair
value of assets acquired and liabilities assumed in the merger of $328.5
million is classified as cost in excess of net assets of acquired businesses
with amortization over forty years.
The estimated fair value of the assets acquired and liabilities assumed of
OHM as adjusted are as follows:
<TABLE>
<CAPTION>
Description Amount
------------ -------------
(In thousands)
<S> <C>
Current assets................................................................... $117,309
Property and equipment........................................................... 19,324
Cost in excess of net assets of acquired businesses.............................. 328,495
Other long term assets........................................................... 72,666
Current liabilities.............................................................. 126,385
Long term liabilities, primarily debt............................................ 107,924
</TABLE>
As a result of the merger with OHM (the OHM Merger), the Company adopted a
plan and completed the process of closing specific overlapping facilities and
reducing consolidated employment. The acquired balance sheet includes an
accrual of $13.9 million for the estimated OHM severance, office closure
costs and lease termination costs of which $10.0 million has been paid
through March 26, 1999. The balance relating primarily to office lease costs
is anticipated to be paid over the next seven years.
7
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Earnings per share:
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
For the three months ended
---------------------------
March 26, March 27,
1999 1998
-------------- -----------
(In thousands, except per share data)
<S> <C> <C>
Numerator:
Net income (loss) from continuing operations and before extraordinary
items............................................................. $ 5,783 $ (3,528)
Preferred stock dividends.......................................... (1,590) (1,558)
------- --------
Numerator for basic earnings per share - net income (loss)
available to common stockholders.................................. 4,193 (5,086)
Discontinued operations -- closure costs (net of income
tax benefit)...................................................... - (4,960)
Extraordinary charge for early retirement of debt (net of
income tax benefit)............................................... - (5,706)
------- --------
Net income (loss) applicable to common stock....................... $ 4,193 $(15,752)
======= ========
Effect of conversion of dilutive securities:
Preferred stock dividends......................................... 692 -
------- --------
Numerator for diluted earnings per share net income
(loss) applicable to common stock................................. $ 4,885 $(15,752)
======= ========
Denominator:
Denominator for basic earnings per share-
weighted average shares........................................... 22,640 9,733
Effect of conversion of dilutive securities:
Common equivalent shares.......................................... 560 -
Convertible preferred stock....................................... 6,073 -
------- --------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions........................................... 29,273 9,733
======= ========
Net income (loss) per share basic:
Earnings from continuing operations (net of preferred stock
dividends)........................................................ $ 0.19 $ (0.52)
Earnings from discontinued operations.............................. - (0.51)
Extraordinary item - early extinguishment of debt.................. - (0.59)
------- --------
$0.19 $ (1.62)
======= ========
Net income (loss) per share diluted.................................. $ 0.17 $ (1.62)
======= ========
</TABLE>
In June 1998, approximately 12.9 million shares were issued in connection with
the second step of the OHM Merger (see Item 1. Financial Statements - Notes to
Condensed Consolidated Financial Statements, Note 2).
8
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Recent accounting pronouncements:
In June of 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted as of the first fiscal quarter
of the year 2000. The Company intends to adopt FASB No. 133 by the effective
date although earlier adoption is permitted. The statement requires the swap
agreements, used by the Company to manage the interest rate risks associated
with the variable nature of the Company's Credit Facilities, to be recorded
at fair market value and reflected in earnings. The Company has evaluated
its existing interest rate contracts and management does not believe that
the impact of adopting this new standard will be material to the Company's
financial statements.
5. Discontinued operations:
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 the sale of some
facilities and closure of certain other facilities. As of March 26, 1999,
two of the Company's inactive disposal sites have been formally closed, a
third is substantially closed, and the fourth is in the process of closure.
At March 26, 1999, the Company's condensed consolidated balance sheet
included accrued liabilities of $5.7 million to complete the closure and
post-closure of its disposal facilities and the PRP matters, net of certain
trust fund and annuity investments, restricted by trust agreements with the
California EPA Department of Toxic Substance Control to closure and post-
closure use. There were no significant developments with these operations
during the quarter.
The provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and
estimates. The adequacy of the provision for loss is periodically
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.
6. Contingencies:
For information regarding legal proceedings of the Company's continuing
operations, please see the note "Commitments and contingencies" in the Notes
to Consolidated Financial Statements in the Company's Transition Report on
Form 10-K for the fiscal year ended December 25, 1998 (as amended through
Amendment No. 1); current developments regarding continuing operations'
legal proceedings are discussed in Part II of this filing. See Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Financial Condition - Transportation, Treatment and Disposal Discontinued
Operations for information regarding the legal proceedings of the
discontinued operations of the Company.
7. Contract accounting and accounts receivable:
Included in accounts receivable, net at March 26, 1999 are billed
receivables, unbilled receivables and retention in the amounts of $270.7
million, $60.9 million and $9.5 million, respectively. Billed receivables,
unbilled receivables and retention from the U.S. Government as of March 26,
1999 were $144.3 million, $44.1 million and $2.6 million, respectively. At
December 25, 1998, billed receivables, unbilled receivables and retention
were $269.0 million, $60.6 million and $9.0 million, respectively. Billed
receivables, unbilled receivables and retention from the U.S. Government as
of December 25, 1998 were $145.6 million, $37.5 million and $2.2 million,
respectively.
Unbilled receivables typically represent amounts earned under the Company's
contracts but not yet billable according to the contract terms, which
usually consider the passage of time, achievement of certain milestones,
negotiation of change orders or completion of the project. Generally,
unbilled receivables are expected to be billed and collected in the
subsequent year.
9
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Billings in excess of revenues represent amounts billed in accordance with
contract terms, which are in excess of the amounts includable in revenue.
Included in accounts receivable at March 26, 1999 is approximately $30.9
million associated with claims and unapproved change orders, which are
believed by management to be probable of realization. Most of these claims
and change orders are being negotiated or are in arbitration and should be
settled within one year. This amount includes contract claims in litigation
(see Item 1. Financial Statements - Notes to Condensed Consolidated
Financial Statements, Note 6). While management believes no material loss
will be incurred related to these claims and change orders, the actual
amounts realized could be materially different than the amount recorded.
8. Special charges:
A special charge of $5.7 million was recorded in the fiscal quarter ended
March 27, 1998 for integration costs associated with the acquisition of OHM,
including $2.2 million of costs for severance and $3.5 million of costs and
other related items for closing and consolidating the Company's offices with
OHM's offices. As part of the plan of integration, the Company identified
slightly more than 100 IT employees in the operating group and
administrative support functions, to be laid off. In addition, the Company
approved a plan for restructuring IT offices in which it would close three
leased facilities, reduce the size of three more facilities and sublease a
portion of eight additional facilities. As of March 26, 1999, $0.8 million
of the integration charge remained to be paid. The remaining costs relate to
the facility closures and office consolidations and will be paid over the
remaining terms of the leases. Most of these lease commitments will be paid
within the next three years. One lease requires payments over the next six
years.
9. Income taxes:
For the first quarter ended March 26, 1999, the Company recorded an income
tax provision of $3.9 million, reflecting an income tax rate of 40% on
income of $9.6 million which is based upon the estimated tax rate for the
entire year.
Based on a net deferred tax asset of $106.3 million (net of a valuation
allowance of $50.3 million) at March 26, 1999 and assuming a net federal and
state effective tax rate of 40%, the level of future earnings necessary to
fully realize the deferred tax asset would be approximately $266.0 million.
The Company evaluates the adequacy of the valuation allowance and the
realizability of the deferred tax asset on an ongoing basis. Because of the
Company's position in the industry, recent acquisitions, restructuring and
existing backlog, management expects that its future taxable income will
more likely than not allow the Company to fully realize its net deferred tax
asset.
10. Long-term debt:
As amended to date, the Company's credit facilities consist of an eight-year
amortizing term loan (term loans) of $228.0 million and a six-year revolving
credit facility (revolving loans) of $185.0 million that contains a sublimit
of $50.0 million for letter of credit issuance. The term loans made under
the credit facilities bear interest at a rate equal to LIBOR plus 2.75% as
adjusted per annum (or the lender's base rate plus 1.75% per annum) and
amortize on a semi-annual basis in aggregate annual installments of $4.5
million until June, 2004, with the remainder payable in eight equal
subsequent quarterly installments. The revolving loans made under the credit
facilities bear interest at a rate equal to LIBOR plus 2.25% as adjusted per
annum (or the lender's base rate plus 1.25% per annum).
On March 5, 1999, the lenders under the Company's credit facilities approved
the third amendment to the loan agreement. The third amendment allowed for
the acquisitions of the Environment and Facilities Management Group (EFM) of
ICF Kaiser International, Inc. and Roche Limited Consulting Group (Roche)
(see Item 1. Financial Statements - Notes to Condensed Consolidated
Financial Statements, Note 11) as permitted acquisitions under the credit
facilities, increased the amount of subordinated notes that could be issued
by the Company from $150.0 million to $250.0 million and amended the
definition of change of control to permit certain sales by the Carlyle
Investors of the 6% Preferred Stock (or Common Stock into which such
preferred stock may have been converted). The third amendment further
provides that excess proceeds from the issuance of subordinated notes
utilized to reduce the revolving credit facility portion of the credit
facilities would not affect the future availability to the Company under the
revolving facility.
10
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On April 9, 1999, the Company issued $225.0 million of 11.25% subordinated
notes due 2009. Proceeds were utilized to fund the acquisitions of EFM and
Roche, pay certain expenses of the subordinated notes offering and to pay
down $125.0 million under the revolving credit facility (see Item 1.
Financial Statements - Notes to Condensed Consolidated Financial Statements,
Note 11).
Letters of credit outstanding at March 26, 1999 were $12.4 million, of which
$8.6 million were issued under the revolving credit facility.
The Company also has various miscellaneous outstanding notes payable and
capital lease obligations totaling $10.0 million. These notes payable mature
at various dates between April 1999 and November 2000, at interest rates
ranging from 7.5% to 8.6%.
11. Subsequent events:
On February 5, 1999, the Company signed an agreement to acquire all of the
stock of Roche for $10.0 million plus two potential earnout payments. Roche
is based in Quebec City, Canada and provides engineering and construction
services to wastewater, paper, mining and transportation industries
worldwide. Roche had revenue of approximately $28.0 million in its most
recent year ended December 31, 1998. The acquisition closed on March 31,
1999.
On March 8, 1999, the Company signed an agreement to acquire specified
assets of EFM from ICF Kaiser International, Inc. (Kaiser) for $82.0 million
in cash reduced by $8.0 million representing working capital retained by
Kaiser. EFM provides environmental remediation, program management and
technical support for United States Government agencies including the DOD,
National Aeronautics and Space Administration and the DOE as well as private
sector environmental clients. EFM had revenue of approximately $106.0
million for the calendar year ended December 31, 1998. The acquisition
closed on April 9, 1999.
On April 9, 1999, the Company completed the private placement of $225.0
million of subordinated notes (Notes). The Company received $215.8 million
in proceeds from this offering, net of expenses of $9.2 million. The Notes
have an 11.25% fixed rate of interest payable every six months in cash
commencing in 1999 and will be redeemable in or after 2004 at a premium. The
Notes are general unsecured obligations of the Company, subordinated to the
Company's credit facilities (see Item 1. Financial Statements - Notes to
Condensed Consolidated Financial Statements, Note 10) and other senior
indebtedness and pari passu with other existing future indebtedness unless
the terms of that indebtedness expressly provide otherwise. The proceeds of
the Notes were used to fund the Roche and EFM acquisitions and to refinance
existing indebtedness under the Company's revolving credit facility.
Paydowns of the Company's revolving facility allow for subsequent re-
borrowing under the facility.
12. Operating segments:
Organization
The IT Group, Inc. has four reportable segments: Engineering & Construction
(E & C), Consulting & Ventures (C & V), Outsourced Services and
International. The Company's E & C segment manages complex hazardous waste
remediation projects of all sizes involving the assessment, planning and
execution of the decontamination and restoration of property, plant and
equipment that have been contaminated by hazardous substances. The C & V
segment provides a wide range of consulting services including environmental
permitting, facility siting and design, strategic environmental management,
environmental compliance/auditing, risk assessment/management, pollution
prevention, waste minimization, environmental information systems, and data
management. The Outsourced Services segment provides full service
capabilities for operations, maintenance, management and construction at
federal, state and local government facilities and in the private sector.
The Company's International segment is designed to meet the global needs of
the Company's U.S. based clients and to invest in businesses or enter into
joint ventures to pursue and perform international projects. The Company's
international operations include a 50.1% investment in a Taiwan-based
wastewater treatment design/build firm and with the acquisition
11
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of GTI in December 1998, the Company expanded its international presence and
provides environmental services through offices located in Europe and
Australia.
Segment Information
<TABLE>
<CAPTION>
Outsourced
E & C C & V Services International Total
-------- ------- -------- ------------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Quarter ended March 26, 1999
Revenues............................................... $178,670 $48,782 $ 23,332 $ 7,190 $257,974
Segment profit......................................... 19,850 7,539 1,325 206 28,920
Quarter ended March 27, 1998
Revenues............................................... $105,744 $23,475 $ 6,819 $ - $136,038
Segment profit (loss).................................. 11,751 2,963 948 (1,363) 14,299
</TABLE>
<TABLE>
<CAPTION>
Quarter ended
------------------------
March 26, March 27,
1999 1998
--------- ---------
<S> <C> <C>
Profit or Loss
Total profit for reportable segments.................................................. $ 28,920 $14,836
Unallocated amounts:
Corporate selling, general and administrative expense................................ (10,449) (8,228)
Special charges (a).................................................................. - (5,694)
Interest expense, net................................................................ (8,833) (4,583)
--------- ---------
Income (loss) before income taxes, extraordinary item
and discontinued operations.......................................................... $ 9,638 $(3,669)
======== =========
</TABLE>
(a) Special charges, not included in the measurement of segment profit
(loss), represents OHM integration costs, primarily severance and office
consolidations.
13. Other accumulated comprehensive income
Other accumulated comprehensive income, which consists of foreign currency
translation adjustments, was $0.6 million and $0.2 million for the three
months ended March 26, 1999 and March 27, 1998, respectively.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition.
THE IT GROUP, INC.
FOR QUARTER ENDED MARCH 26, 1999
RESULTS OF OPERATIONS
Overview
We are a leading provider of diversified, value-added services in the areas of
environmental consulting, engineering and construction and remediation. In
addition, we are leveraging our core project management competencies to offer
our clients a variety of outsourcing services such as facilities management. We
have a strong reputation for both the high quality of our work and the breadth
of the services we provide.
Our clients are federal, state and local governments in the U.S. and commercial
businesses worldwide. We obtained 61% of our revenues for the three months ended
March 26, 1999 from the federal government under more than 100 contracts that
range in length from one to ten years. In addition, we serve 1,500 commercial
clients on projects which range in length from one month to more than one year.
For the three months ended March 26, 1999, our revenues were $258.0 million.
Approximately 90% of our backlog at March 26, 1999 was under federal government
programs, and approximately 84% is expected to be charged to our clients on a
cost-reimbursable basis. Many of our commercial contracts are evergreen
contracts and are typically not part of our backlog.
In the course of providing our services, we routinely subcontract services.
These subcontractor costs are passed through to clients and, in accordance with
industry practice, and are included in our revenue. Our cost of revenue includes
subcontractor costs, salaries, direct and indirect overhead costs such as rents,
utilities and travel directly attributable to projects. Our selling, general and
administrative expenses are comprised primarily of costs related to the
executive offices, corporate accounting, information technology, marketing and
bid and proposal costs. These costs are generally unrelated to specific client
projects. In addition, we include in these expenses amortization of intangible
assets such as goodwill resulting from acquisitions.
Revenues and Gross Margins
Company. Revenues for the three months ended March 26, 1999 increased $122.0
million or 84.7% to $258.0 million, compared to revenues of $136.0 million
reported in the three months ended March 27, 1998. This significant increase in
revenues is primarily attributable to the acquisitions of OHM Corporation (OHM)
and Fluor Daniel GTI, Inc. (GTI).
Our gross margin for the quarter ended March 26, 1999 increased to 12.9% of
revenues, a slight increase from 12.6% of revenues reported in the quarter ended
March 27, 1998. In the 1999 fiscal year, we expect to maintain these gross
margin levels. However, our ability to maintain or improve our gross margin
levels is heavily dependent on various factors including utilization of
professional staff, proper execution of projects, successful bidding of new
contracts at adequate margin levels and continued realization of overhead
savings achieved upon the complete integration of recent acquisitions.
Engineering & Construction. Revenues from the Engineering & Construction
segment were $178.7 million for the three months ended March 26, 1999 compared
to $105.7 million for the three months ended March 27, 1998, an increase of
approximately 70% primarily attributable to the OHM acquisition. Our
Engineering & Construction segment includes revenues from the Department of
Defense (DOD), Department of Energy (DOE) and commercial clients. Revenues from
the DOD and a small number of other government agencies were $115.6 million in
the three months ended March 26, 1999 or $52.5 million greater than the $63.1
million of DOD revenues in the three months ended March 27, 1998. DOE revenues
of $23.5 million in the three months ended March 26, 1999 were $10.3 million
higher than the $13.2 million of DOE revenues reported in the three months ended
March 27, 1998. Commercial revenues were $39.5 million in the three months
ended March 26, 1999 or $9.5 million higher than the $30.0 million of commercial
revenues reported in the three months ended March 27, 1998.
13
<PAGE>
THE IT GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
A substantial percentage of our revenues continue to be earned from federal
government contracts with various federal agencies. Revenues from federal
governmental contracts accounted for 61% of our consolidated revenues in both
the three months ended March 26, 1999 and the three months ended March 27, 1998.
Although the percentage of revenues from federal government contracts remained
about the same for the two comparable periods, the absolute dollars of federal
government revenues increased to $158.4 million in the three months ended March
26, 1999 compared to $83.4 million in the three months ended March 27, 1998.
This increase is primarily attributable to the OHM acquisition. Federal
government revenues are derived principally from work performed for the DOD and,
to a lesser extent, the DOE. We expect to continue to earn a substantial
portion of our Engineering & Construction revenues from the DOD indefinite
delivery order contracts which are primarily related to remedial action work.
In addition, management expects to increase our revenues from the DOE in the
future due to an expected transition by the DOE over the next several years to
emphasize remediation, as opposed to studies, combined with our favorable
experience in winning and executing similar work for the DOD and our past
performance on DOE contracts. We have begun to benefit from this transition
with the commencement in 1998 of a $122.0 million project to perform the
excavation, pretreatment and drying of an estimated one million tons of
materials for the DOE's Fernald Environmental Management Project.
The increase in commercial revenues in this segment for the three months ended
March 26, 1999 is primarily attributable to the OHM acquisition. However,
revenue growth from the commercial sector, excluding recent acquisitions, could
be restricted in fiscal 1999 partly due to increased emphasis on competitive
bids and commercial clients delaying certain work until final Congressional
action is taken on the reauthorization of CERCLA. 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 could further decrease the
demand for our services, as clients anticipate and adjust to the new
regulations. These factors have been partially offset by an increased desire on
the part of commercial clients for strategic environmental services that provide
an integrated, proactive approach to environmental issues and that are driven by
economic, as opposed to legal or regulatory, concerns. Further, legislative or
regulatory changes could also result in increased demand for our 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 clients' views on the cost effectiveness of the remedies available.
Our Engineering & Construction segment profit was $19.9 million for the three
months ended March 26, 1999 compared to the $11.8 million segment profit for the
three months ended March 27, 1998. This increase is primarily attributable to
the OHM acquisition. The Engineering & Construction segment profit was 11.1% of
Engineering & Construction revenues for the three months ended March 26, 1999
and March 27, 1998.
Consulting & Ventures. Revenues from our Consulting & Ventures (C & V)segment
were $48.8 million for the three months ended March 26, 1999 compared to $23.5
million reported during the three months ended March 27, 1998, an increase of
approximately 108%. Most of the revenues from Consulting & Ventures are derived
from commercial clients. The increase in these revenues is primarily due to the
GTI acquisition in December 1998. Excluding any future acquisitions, revenue
growth from the commercial sector could be restricted as discussed above under
Engineering & Construction.
Our Consulting & Ventures segment profit was $7.5 million in the three months
ended March 26, 1999, an increase of 154% when compared to the $3.0 million
segment profit reported in the three months ended March 27, 1998. The Consulting
& Ventures segment profit was 15.5% and 12.6% of Consulting & Ventures revenues
for the three months ended March 26, 1999 and the three months ended March 27,
1998, respectively. The increase in absolute dollars and as a percentage of
revenue is primarily attributable to the cost savings related to the acquisition
of GTI.
Outsourced Services. Outsourced Services revenues were $23.3 million for the
three months ended March 26, 1999 compared to $6.8 million reported in the three
months ended March 27, 1998. This increased revenue is attributable to the OHM
acquisition and the inclusion of its outsourcing operations in our results of
operations for the entire three months ended March 26, 1999, as opposed to the
one month of revenues included in the three months ended March 27, 1998. Our
outsourcing operations provide a range of project, program and construction
management services to the DOD as well as state and local government agencies.
Our Outsourced Services segment profit was $1.3 million for the three months
ended March 26, 1999, an increase of $0.4 million when compared to the $0.9
million segment profit reported in the three months ended March 27, 1998. The
14
<PAGE>
THE IT GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
outsourcing segment profit was 5.7% of the outsourcing revenues for the
three months ended March 26, 1999.
International. International revenues were $7.2 million for the three months
ended March 26, 1999 compared to no revenues for the three months ended March
27, 1998. The increase is the result of the GTI acquisition on December 3, 1998
and an adjustment to certain projects performed in Taiwan by our 50.1% owned
subsidiary CMIT for the three months ended March 27, 1998.
Our International segment reported a profit of $0.2 million for the
three months ended March 26, 1999 compared to a loss of $1.4 million in the
three months ended March 27, 1998. This improvement is primarily due to
improved project margins on several projects in Taiwan in the three months ended
March 26, 1999. We undertook to improve management oversight, project
management skills and change order negotiation efforts. We believe these
efforts will minimize future potential losses and provide the basis for
profitable Taiwan operations. The GTI acquisition increased the size of the
International platform with operations primarily in Australia, the United
Kingdom and Italy. The GTI acquisition included approximately $80.0 million of
contract backlog for work to be performed for the U.S. Air Force Center for
Environmental Excellence under a worldwide five-year indefinite delivery order
cost-reimbursable contract. We expect to increase the segment further with the
acquisition of Roche completed on March 31, 1999 (see Item 1. Financial
Statements - Notes to Condensed Consolidated Financial Statements, Note 11).
Backlog. Our total funded and unfunded backlog at March 26, 1999 was
approximately $3.5 billion. We expect to earn revenues from our backlog
primarily over the next one to five years, with a substantial portion of the
backlog consisting of federal government contracts many of which are subject to
annual funding and definition of project scope. The backlog at March 26, 1999
includes $2.6 billion of future work we estimate we will receive (based on
historical experience) under existing indefinite delivery order programs. In
accordance with industry practices, substantially all of our contracts are
subject to cancellation, delay or modification by the customer.
Our backlog at any given time is subject to changes in scope of services which
may lead to increases or decreases in backlog amounts. These scope changes have
led to a number of contract claims requiring negotiations with clients in the
ordinary course of business. (See Item 1. Financial Statements - Notes to
Condensed Consolidated Financial Statements--Summary of significant accounting
policies -- Contract accounting and accounts receivable.)
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 5.7% of revenues for the three
months ended March 26, 1999 compared to 7.8% of revenues in the three months
ended March 27, 1998. This decrease is primarily attributable to the
elimination of certain duplicative overhead functions and other cost savings
achieved as a result of the OHM acquisition. In fiscal 1999, management expects
selling, general and administrative expenses to decrease slightly as a
percentage of revenue because we anticipate additional cost savings to be
achieved from the GTI acquisition that occurred on December 3, 1998, as well as
cost savings from the recently completed EFM acquisition.
Selling, general and administrative expenses include goodwill amortization
expense of $2.6 million for the three months ended March 26, 1999 and $0.3
million for the three months ended March 27, 1998. The significant increase to
goodwill amortization is primarily due to the OHM acquisition. Selling, general
and administrative expenses (excluding goodwill) were 4.7% of revenues for the
three months ended March 26, 1999 and 7.6% of revenues for the three months
ended March 27, 1998.
15
<PAGE>
THE IT GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
Special Charges
A special charge of $5.7 million for integration costs associated with the
acquisition of OHM was recorded in the quarter ended March 27, 1998 as outlined
below:
<TABLE>
<CAPTION>
Three Months Ended March 27, 1998
----------------------------------
Cash/ Special Reserve balance
Noncash Charges Activity at 3/26/99
------- ------- -------- ---------------
<S> <C> <C> <C> <C>
(In thousands)
Integration costs--OHM acquisition
Severance ................................ Cash $ (2,197) $ 2,197 $ --
Duplicative offices/assets................ Cash (2,478) 1,658 (820)
Other..................................... Cash (1,019) 1,019 --
-------- ------- ------
Total..................................... $ (5,694) $ 4,874 $ (820)
======== ======= ======
</TABLE>
The $5.7 million special charge for integration costs associated with the
acquisition of OHM included $2.2 million of costs for severance and $3.5 million
of costs and other related items for closing and eliminating duplicative
offices. As part of the plan of integration, we laid-off more than 100 IT
employees, primarily in the operating group and administrative support
functions. In addition, as part of the plan we closed three leased facilities,
reduced the size of three more facilities and subleased a portion of eight
additional facilities. As of March 26, 1999, $0.8 million of the integration
charge remained to be paid. The remaining costs relate to the facility closures
and office consolidations and will be paid over the remaining terms of the
leases. Most of these lease commitments will be paid within the next three
years. One lease requires payments over the next six years.
Interest, Net
Net interest expense represented 3.4% of revenues in both the quarter ended
March 26, 1999 and the quarter ended March 27, 1998. In absolute dollars, net
interest expense was $8.8 million and $4.6 million for the three months ended
March 26, 1999 and March 27, 1998, respectively. This increase in the net
interest expense is due principally to the increased level of debt required to
finance the OHM and GTI acquisitions.
Income Taxes
The Company recorded an income tax provision (benefit) for the three month
period ended March 26, 1999 and March 27, 1998 in the amount of $3.9 million and
($0.1) million, respectively. The provision for income tax was calculated
utilizing an effective tax rate of 40% of income for the three months ended
March 26, 1999. The benefit for income taxes for the three months ended March
27, 1998 was calculated utilizing a 38% effective rate on income excluding
special charges and giving effect to changes in the Company's deferred tax
valuation allowance. See Item 1. Financial Statements - Notes to Condensed
Consolidated Financial Statements, Note 9.
Extraordinary Item
For the three months ended March 27, 1998, we recorded a $5.7 million charge,
net of income tax benefit of $3.5 million, for the early extinguishment of $65.0
million of senior debt which was refinanced in connection with the acquisition
of OHM. We incurred a $5.6 million payment for the make whole interest provision
as a result of retiring our $65.0 million senior debt early in accordance with
the loan agreement. In addition, we also expensed approximately $3.6 million
related to the unamortized loan origination expenses associated with issuing the
$65.0 million senior debt.
Dividends
Our reported dividends for the first quarter ended March 26, 1999 and March 27,
1998 were $1.6 million for each quarter. Our reported dividends for first
quarter ended March 27, 1998 include imputed dividends of $.5 million, which are
not payable in cash or stock.
16
<PAGE>
THE IT GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
Our dividends are summarized below:
<TABLE>
<CAPTION>
Fiscal quarter ended
----------------------
March 26, March 27,
Dividend Summary on Preferred Stock 1999 1998
- ----------------------------------- ---------- ----------
<S> <C> <C>
7% Cumulative convertible exchangeable
Cash dividend.......................... $ 898,000 $ 899,000
6% Cumulative convertible participating
Cash dividend.......................... 692,000 -
Imputed non-cash dividend.............. - 480,000
In kind 3% stock dividend.............. - 179,000
---------- ----------
Total............................... $1,590,000 $1,558,000
========== ==========
</TABLE>
Discontinued Operations
In the three months ended March 27, 1998, we increased our provision for loss on
disposition of our discontinued transportation, treatment and disposal business
by $5.0 million net of income tax benefit of $3.0 million. This increased
provision primarily related to an additional accrual for closure costs related
to the former Panoche disposal site. In March 1998, we obtained approval by the
California Department of Toxic Substances Control (DTSC) of the final closure
and post closure plan for the last of our four inactive treatment, storage and
disposal facilities. The approved plans allow us to proceed with the completion
of final closure construction and provides for future submittal of technical
studies that will be utilized to determine final aspects and costs of closure
construction and monitoring programs for the former Panoche disposal site.
For further information regarding our discontinued operations, see Item 1. Notes
to Consolidated Financial Statements - Discontinued Operations and Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Financial Condition Transportation, Treatment and Disposal Discontinued
Operations.
17
<PAGE>
THE IT GROUP, INC.
FINANCIAL CONDITION
Working capital at March 26, 1999 was $140.9 million which is an increase of
$20.6 million from the December 25, 1998 working capital of $120.3 million. The
current ratio at March 26, 1999 was 1.54:1 which compares to 1.44:1 at December
25, 1998.
Cash used by operating activities, which includes cash outflows related to
discontinued operations, for the three months ended March 26, 1999 totaled $8.9
million compared to $6.2 million used by operating activities in the
corresponding period of last year primarily due to the increase in accounts
receivable resulting from the payment of liabilities accrued in connection with
the OHM and GTI acquisitions and payment of certain transaction and financing
costs previously accrued. Capital expenditures of $3.5 million for the three
months ended March 26, 1999 were $1.3 million greater than the prior fiscal year
principally due to increased capital expenditure requirements as a result of the
acquisitions of OHM and GTI.
Cash used for the acquisition of businesses, net of cash acquired was $2.2
million and $157.8 million for the three months ended March 26, 1999 and the
three months ended March 27, 1998, respectively. For the three months ended
March 27, 1998, cash used to acquire businesses includes the purchase of 54% of
OHM for $152.8 million net of $12.0 million of cash acquired, the purchase of
Jellinek Schwartz and Connolly, Inc. for $4.5 million and the purchase of
Landbank, Inc. for $0.5 million. For the three months ended March 26, 1999, the
$2.2 million cash used to acquire businesses is also due to payments related to
these smaller acquisitions.
Long-term debt of $426.8 million at March 26, 1999 increased from $405.1 million
at December 25, 1998 primarily due to seasonal working capital requirements. The
ratio of total debt, including current portion, to equity was 1.83:1 at March
26, 1999 and was 1.77:1 at December 25, 1998. With the April 9, 1999 closing of
the $225.0 million subordinated note offering and the acquisition of EFM and
Roche, availability under the revolving credit facility and cash balances
totaled $150.0 million. (See Item 1. Financial Statements - Notes to Condensed
Consolidated Financial Statements, Note 10.)
The Company continues to have significant cash requirements, including interest,
operating lease payments, preferred dividend obligations, the potential
requirements of future acquisitions as the Company pursues its growth and
diversification strategy, expenditures for the closure of its inactive disposal
sites and PRP matters (see Transportation, Treatment and Disposal Discontinued
Operations), required term loan and subordinated debenture principal payments,
and contingent liabilities. In connection with the Company's plans for continued
internal growth and growth through acquisitions, additional capital sources may
be required.
On April 9, 1999, the Company completed the private placement of $225.0 million
of subordinated notes (Notes). The Notes have a 11.25% fixed rate of interest
payable semiannually in cash commencing October 1999 and will be redeemable in
or after 2004 at a premium. The Notes are general unsecured obligations of the
Company, subordinated to the Company's credit facilities (see Item 1. Financial
Statements - Notes to Condensed Consolidated Financial Statements, Note 10) and
other senior indebtedness and pari passu with other existing future indebtedness
unless the terms of that indebtedness expressly provide otherwise. The proceeds
of the Notes were used to fund the Roche and EFM acquisitions, pay expenses of
the offering and to refinance existing indebtedness.
18
<PAGE>
THE IT GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Transportation, Treatment and Disposal Discontinued Operation
As a part of the Company's discontinued transportation, treatment, and disposal
operations, the Company operated a series of treatment, storage and disposal
facilities in California, including four major disposal facilities. Closure
plans for all four of these facilities have now been approved by all applicable
regulatory agencies. As of March 26, 1999, two of the Company's inactive
disposal sites have been formally closed, a third is substantially closed, and
the fourth is in the process of closure.
On March 18, 1998, the DTSC certified the Environmental Impact Report and
approved the Closure Plan for the Panoche facility. The approved plans provide
for submittal of technical studies that will be utilized to determine final
aspects, details and costs of closure construction and monitoring programs.
While IT believes that the approved closure plans substantially reduce future
cost uncertainties to complete the closure of the Panoche facility, the ultimate
costs will depend upon the results of the technical studies called for in the
approved plans. Closure construction for the plan is scheduled to be completed
in the fall of 2000.
Closure and post-closure costs are incurred over a significant number of years
and are subject to a number of variables including, among others, negotiations
regarding the details of site closure and post-closure, with DTSC, the United
States Environmental Protection Agency (USEPA), the California State Water
Resources Control Board, the California Air Resources Board, Regional Water
Quality Control Boards, Air Quality Management Districts, various other state
authorities and certain applicable local regulatory agencies. Operation of the
facilities in the closure and post-closure periods is also subject to regulation
by the same agencies. Closure costs are comprised principally of engineering,
design and construction costs and of caretaker and monitoring costs during
closure. 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. 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 approved plans, or if the Company is required to perform unexpected
remediation work at the facilities in the future or to pay penalties for alleged
noncompliance with regulations or permit conditions.
With regard to the residual land at the inactive disposal facilities (a
substantial component of which is adjacent to those facilities and was never
used for waste disposal), there were no significant developments during the
quarter.
With respect to the Operating Industries, Inc. Superfund site in Monterey
Park, California, for which USEPA notified a number of entities, including the
Company, that they were PRPs, there were no significant developments during the
quarter.
With respect to the GBF Pittsburg landfill site near Antioch, California, there
were no significant developments during the quarter.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
State of Readiness
Our core financial and administrative software systems are certified as Year
2000 compliant by the vendor. During the twelve months ended March 27, 1998, we
established an integration test plan to test this software and verify Year 2000
compliance. In February 1998, we completed the integration tests which verified
that the Company's core financial and administrative software systems were Year
2000 compliant. Our core hardware was also tested and was found to be fully
compliant with the Year 2000 requirements. We have been communicating with
clients, suppliers, financial institutions and others with which we do business
to coordinate Year 2000 conversion. A significant portion of our business (61%)
is attributable to the U.S. federal government (see "Business--Operations--
Clients"). If the U.S. federal government is not Year 2000 compliant, there
could be a delay in the collection of accounts receivable from the U.S. federal
government in January 2000. At this time, we cannot predict the impact
19
<PAGE>
THE IT GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
on our consolidated financial condition, liquidity and results of operations of
the U.S. federal government's Year 2000 readiness. However, we do not believe
there will be any significant delays in the collection of our accounts
receivable.
Costs
We have prepared a detailed conversion plan and have estimated the total cost of
Year 2000 compliance to be approximately $3.1 million. As of March 26, 1999, we
have incurred costs of approximately $1.3 million to address year 2000 issues.
All of the costs have been or will be charged to operating expense and funded
through operating cash flows.
Risks and Contingencies
We are currently developing a contingency plan to address how we will handle the
most reasonably likely worst case scenarios including situations where our
clients, suppliers, financial institutions and others are not Year 2000
compliant on January 1, 2000. We do not have control over these third parties
and, as a result, cannot currently estimate to what extent future operating
results may be adversely affected by the failure of these third parties to
successfully address their Year 2000 issues. However, our contingency plan will
include actions designed to identify and minimize any third party exposures and
management believes that, based on third party exposures identified to date,
these issues should be resolved by the year 2000.
FORWARD LOOKING STATEMENTS
Statements of the Company's or management's intentions, beliefs, expectations or
predictions for the future, denoted by the words "anticipate", "believe",
"estimate", "expect", "project", "imply", "intend", "foresee", and similar
expressions are forward-looking statements that reflect the current views of the
Company and its management about future events and are subject to certain risks,
uncertainties and assumptions. Such risks, uncertainties and assumptions
include those identified in the "Business - Operations" and "Legal Proceedings"
sections of the Company's Transition Report on Form 10-K (as amended) for the
year ended December 25, 1998, and the business opportunities (or lack thereof)
that may be presented to and pursued by the Company, changes in laws or
regulations affecting the Company's operations, as well as competitive factors
and pricing pressures, bidding opportunities and success, project results,
management's judgment regarding revenue recognition and adequacy of reserves,
success in pursuing claims and change orders, ability to collect receivables on
a timely basis, to manage its cash resources, results of litigation, funding of
backlog, matters affecting contracting and engineering businesses generally,
such as the seasonality of work and weather and clients' timing of projects, the
ability to generate a sufficient level of future earnings to utilize the
Company's deferred tax assets, the ultimate costs and results of closure and
divestiture of the Company's discontinued operations, the effects of the
integration of OHM, GTI, EFM and any other major acquisitions and achievement of
expected synergies therefrom, and industry-wide market factors other general
economic and business conditions and other factors, many of which are beyond the
control of the Company. The Company's actual results could differ materially
from those projected in such forward-looking statements as a result of such
factors.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in the Company's exposure to market risk from
December 25, 1998.
20
<PAGE>
PART II
THE IT GROUP, INC.
Item 1. Legal Proceedings.
The continuing operations litigation to which the Company is a party is more
fully discussed in the note "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements in the Company's Annual Report on Form 10-K,
as amended, for the fiscal year ended December 25, 1998. See also Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Transportation, Treatment and Disposal Discontinued Operations for information
regarding litigation related to the discontinued operations of the Company.
Except as noted, there have been no material changes in any of the Company's
legal proceedings since the date of the Company's Annual Report on Form 10-K.
21
<PAGE>
THE IT GROUP, INC.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. These exhibits are numbered in accordance with the Exhibit
Table of Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- --------------------------------------------------------------
<S> <C>
4(ii) Indenture Agreement, dated as of April 9, 1999, between
IT, certain subsidiary guarantors of IT and The Bank of
New York, as trustee. (1)
10(ii) 29. Amendment Agreement, dated March 31, 1999, between the
Company, Roche Limited Consulting Group and others. (2)
30. Purchase Agreement, dated as of April 6, 1999, between IT,
certain subsidiary guarantors of IT, Donaldson, Lufkin & Jenrette
Securities Corporation and Salomon Smith Barney. (1)
31. Registration Rights Agreement, dated as of April 9, 1999,
between IT, certain subsidiary guarantors of IT, Donaldson,
Lufkin & Jenrette Securities Corporation and Salomon Smith Barney. (1)
99. "The Company" section from the Offering Memorandum Summary for
the Company's 11.25% Senior Subordinated Notes due 2009. (3)
________________
(1) Filed as an Exhibit to Registrant's Registration Statement
on Form S-4, filed April 23, 1999.
(2) Filed as an Exhibit to Registrant's Current Report on Form
8-K, filed April 23, 1999.
(3) Filed as an Exhibit to Registrant's Current Report on Form
8-K filed March 22, 1999.
(b) Reports on Form 8-K
1. Current Report on Form 8-K, filed March 12, 1999, reporting under Item 5
the announcement of the Asset Purchase Agreement entered into by the Registrant
and ICF Kaiser International, Inc.
2. Current Report on Form 8-K, filed March 22, 1999, reporting under Item 5
the commencement of the offering of the 11.25% Senior Subordinated Notes due
2009.
3. Current Report on Form 8-K, filed April 23, 1999, reporting under Item 2
the completion of the Asset Purchase Agreement with ICF Kaiser International,
Inc. and the completion of the acquisition of Roche Limited Consulting Group.
</TABLE>
22
<PAGE>
THE IT GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE IT GROUP, INC.
(Registrant)
/s/ ANTHONY J. DELUCA May 7, 1999
- ---------------------------------------- ------------------------
Anthony J. DeLuca
President and Chief Executive Officer
and Duly Authorized Officer
/s/ PHILIP O. STRAWBRIDGE May 7, 1999
- ---------------------------------------- ------------------------
Philip O. Strawbridge
Senior Vice President, Chief
Administrative Officer and
Principal Financial Officer
/s/ HARRY J. SOOSE, JR. May 7, 1999
- ---------------------------------------- ------------------------
Harry J. Soose, Jr.
Vice President, Finance and
Principal Accounting Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 26, 1999; AND ITS
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 26,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> MAR-26-1999
<CASH> 25,229
<SECURITIES> 0
<RECEIVABLES> 341,079
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 401,012
<PP&E> 102,487
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<TOTAL-ASSETS> 956,058
<CURRENT-LIABILITIES> 260,110
<BONDS> 426,802
0
6,665
<COMMON> 227
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<TOTAL-COSTS> 224,677
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