<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
----------------
(Mark One)
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from March 28, 1998 to December 25, 1998
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 (Zip Code)
offices)
Registrant's telephone number, including area code: (412) 372-7701
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, $.01 Par Value New York Stock Exchange; Pacific Exchange
Preferred Stock Depositary Shares New York Stock Exchange; Pacific 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 common stock held by
non-affiliates of the registrant at March 5, 1999, was approximately
$264,868,334 (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 March 5, 1999 the registrant had issued and outstanding an aggregate of
22,637,858 shares of its common stock, including 44,949 shares held in
treasury.
Documents Incorporated by Reference
Certain information included in the registrant's definitive proxy statement
to be filed with the Securities and Exchange Commission for the Annual Meeting
of Stockholders of the registrant to be held on May 19, 1999 is incorporated by
reference into Part III hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE IT GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE NINE MONTHS ENDED DECEMBER 25, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
---- ----
<C> <S> <C>
PART I
1 Business.......................................................... 3
General........................................................... 3
Industry Overview and Trends...................................... 4
Acquisitions...................................................... 5
Recent Events..................................................... 6
Benefits of the Acquisitions...................................... 7
Operations........................................................ 7
General........................................................... 7
Engineering and Construction...................................... 7
Consulting and Ventures........................................... 8
Outsourced Services............................................... 9
International..................................................... 9
Clients........................................................... 10
Backlog........................................................... 11
Technology Development and Patents................................ 11
Contracts......................................................... 12
Competition....................................................... 12
Regulatory........................................................ 13
Environmental Contractor Risks.................................... 16
Insurance......................................................... 17
Concentration of Revenues......................................... 17
Government Contractor Risks....................................... 17
Fixed-Price Contracts............................................. 18
Closure of Inactive Disposal Sites and Potential CERCLA
Liabilities....................................................... 18
Substantial Leverage.............................................. 19
Ability to Service Debt........................................... 20
History of Losses................................................. 20
Fluctuations in our Quarterly Operating Results................... 21
Management of Growth.............................................. 21
Risks of Achievement of Cost Savings and Integration of
Operations........................................................ 22
Control of Board of Directors..................................... 22
International Operations.......................................... 22
Reliance on Key Personnel......................................... 23
Discontinued Operations........................................... 23
Employees......................................................... 23
2 Properties........................................................ 24
3 Legal Proceedings................................................. 24
4 Submission of Matters to a Vote of Shareholders................... 24
----------------
4A Executive Officers of the Company................................. 25
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Item Page
---- ----
<C> <S> <C>
PART II
5 Market for the Registrant's Common Stock and Related Shareholder
Matters........................................................... 26
6 Selected Financial Data........................................... 27
7 Management's Discussion and Analysis of Results of Operations and
Financial Condition............................................... 27
8 Financial Statements and Supplementary Data....................... 44
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 76
PART III
10 Directors and Executive Officers of the Registrant................ 76
11 Executive Compensation............................................ 79
12 Security Ownership of Certain Beneficial Owners and Management.... 80
13 Certain Relationships and Related Transactions.................... 83
PART IV
14 Exhibits, Financial Statement Schedule and Reports on Form 8-K.... 88
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
The IT Group, Inc. (we or IT or the Company) is 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.
We provide services through four business platforms: Engineering &
Construction, Consulting & Ventures, Outsourced Services and International. The
following table provides a brief overview of our four operating platforms. For
more information on our platforms, see "Business--Operations".
<TABLE>
<CAPTION>
Percentage of
Revenue for Revenue for
the Nine the Nine
Months Ended Months Ended
Platform December 25, 1998 December 25, 1998 Clients Primary Services Provided
-------- ----------------- ----------------- ------- -------------------------
(In millions)
<C> <C> <C> <C> <S>
Engineering & $597.9 78.9% DOD Assessment, planning and
Construction DOE execution for:
EPA Hazardous waste design
State and local agencies and remediation
Private sector Decontamination and
decommissioning remedial
construction
Consulting & $79.4 10.5% Private sector clients Remedial investigations
Ventures U.S. Government clients Feasibility studies
Environmental permitting
Facility siting and
design
Environmental compliance
auditing
Risk
assessment/management
Health and safety
program design
Outsourced $70.4 9.3% DOD Facilities, operation,
Services State and local facilities maintenance and
Private sector clients construction
Construction management
services
International $9.8 1.3% U.S. and international Engineering, remediation
governments and consulting
Private sector Wastewater
treatment/design
Infrastructure,
engineering
and construction
</TABLE>
Our clients are federal, state, and local governments in the U.S. and
commercial businesses worldwide. We obtained 69% of our revenues for the nine
months ended December 25, 1998 from the federal government under more than 100
contracts that range in length from one to ten years. In addition, we serve
more than 1,500 commercial clients on projects which range in length from one
month to more than one year. As of December 25, 1998 we employed over 5,600
persons in a network of over 80 domestic and over ten international offices.
Approximately 90% of our backlog at December 25, 1998 was under federal
government programs and approximately 82% is expected to be charged to our
clients on a cost-reimbursable basis. Many of our commercial contracts are
evergreen contracts that are typically not part of our backlog.
3
<PAGE>
Industry Overview and Trends
According to industry sources, from 1993 to 1997, the portion of the
domestic environmental services industry in which we compete grew from
approximately $25.4 billion in 1993 revenues to approximately $26.5 billion in
1997 revenues, which equates to a compound annual growth rate of approximately
1.1%.
Demand for our environmental services is driven by a number of factors,
including:
. the needs of the U.S. Department of Defense and Department of Energy to
restore sites formerly used for weapons production or military bases;
. the need to comply with federal, state and municipal environmental
regulation and enforcement regarding the quality of the environment;
. the need to bring aging production facilities into compliance with
current environmental regulations;
. the need to minimize waste generation on an ongoing basis; and
. the need to reduce or forestall liability associated with pollution-
related injury and damage.
A significant portion of future DOD and DOE environmental expenditures will
be directed to cleaning up hundreds of military bases and to restore former
nuclear weapons facilities. DOD has stated that there is an urgent need to
ensure that the hazardous wastes present at these sites, often located near
population centers, do not pose a threat to the surrounding population, and, in
connection with the closure of many military bases, there is an economic
incentive to make sure that the environmental restoration enables these sites
to be developed commercially by the private sector. DOE has long recognized the
need to stabilize and safely store nuclear weapons materials and to clean up
areas contaminated with hazardous and radioactive waste. According to federal
government publications, the DOD's budget for environmental remediation will be
approximately $2.5 billion annually for the next five years and the DOE's
budget will be approximately $5.7 billion annually for the same period.
Significant environmental laws have been enacted in the U.S. in response to
public concern about the environment. These laws and the implementing
regulations affected nearly every industrial activity, and efforts to comply
with the requirements of these laws create demand for our services. The
principal federal legislation that has created a substantial market for us, and
therefore has the most significant effect on our business, includes the
following:
. The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, or CERCLA, established the Superfund program to clean up
existing, often abandoned, hazardous waste sites and provides for
penalties and significant damages for noncompliance with EPA orders. As
of September 1998, the EPA identified approximately 1,370 sites as being
significantly contaminated with hazardous materials and, therefore,
named them as Superfund sites. Only approximately 41% of these sites
have been remediated.
. The Resource Conservation and Recovery Act of 1976, or RCRA, provides a
comprehensive scheme for the regulation of hazardous waste from the time
of generation to its ultimate disposal, and sometimes thereafter, as
well as the regulation of persons engaged in the treatment, storage and
disposal of hazardous waste.
. The Clean Air Act as amended in 1970 empowered the EPA to establish and
enforce National Ambient Air Quality Standards, National Emission
Standards for Hazardous Air Pollutants and limits on the emission of
various pollutants. The 1990 amendments to the Clean Air Act
substantially increased the number of sources emitting a regulated air
pollutant which will be required to obtain an operating permit; the
amendments also addressed the issues of acid rain and ozone protection.
. The Clean Water Act of 1972, established a system of standards, permits
and enforcement procedures for the discharge of pollutants to surface
water from industrial, municipal and other wastewater sources.
4
<PAGE>
For more discussion of the regulatory environment in which we operate, see
"Business--Operations--Regulatory".
In recent years, our industry has experienced a slowing in revenue growth,
which is principally attributable to spending patterns of commercial customers.
We attribute this slowdown to, among other things:
. decreased federal, state and local enforcement of regulations, and
. delay in the reauthorization of CERCLA.
These factors have been partially offset by an increased desire on the part
of commercial clients for strategic environmental services, which:
. provide an integrated, proactive approach to environmental issues, and
. are driven by economic, as opposed to legal or regulatory concerns.
In addition, there is a growing international market arising from the
increased awareness on the part of foreign governments and private sector
entities of the need for additional and/or initial environmental regulations,
studies and remediation.
Traditionally DOD has maintained most of its own facilities and performed
its own facility activities, but it is now in the process of transferring many
of these responsibilities to private contractors and private owners. The
privatization market has been created by the government's selling an asset or
revenue stream, such as military housing and electric, water and wastewater
utilities on a military base, to a private company, which is then responsible
for maintenance and operation. The outsourcing market has been created by
private contractors' taking over site activities currently conducted by
government, often military, personnel.
From 1991 to 1998, our industry has experienced substantial consolidation.
According to industry sources, the top ten firms in the environmental services
industry accounted for approximately 46% of the industry measured by 1998
revenue, up from approximately one third in 1991. This consolidation has been
driven by:
. the benefits of economies of scale;
. growing demand for full service business oriented solutions;
. the shift from commercial to government procurement of environmental
services as a result of the conversion of military sites to peaceful
uses.
Acquisitions
Since March 1996, we have acquired eight firms representing an aggregate
$770.0 million in revenue at the time of acquisition.
5
<PAGE>
The following table provides some basic information on these acquisitions.
<TABLE>
<CAPTION>
Most Recent
Fiscal Year
Revenues
Date of Prior to
Acquisition Name Location(s) Business Acquisition
----------- ---- ----------- -------- -----------
(In
millions)
<C> <C> <C> <S> <C>
Mar. 1996 Gradient Massachusetts Environmental/human $5
Corporation health risk assessment
Litigation support
Nov. 1996 Chi Mei IT Taiwan Wastewater treatment $12
design/build
May 1997 PHR California Historical pollution $3
Environmental Washington, DC liability research and
Consultants, Inc. investigation
Sept. 1997 Pacific California Environmental consulting $10
Environmental and engineering services
Group, Inc.
Jan. 1998 Jellinek, Schwartz & Washington, DC Science-based $12
Connolly, Inc. Colorado environmental consulting
England and advocacy services
Mar. 1998 LandBank, Inc. Colorado Real estate acquisition $3
and restoration company
Feb. and OHM Corporation Over 30 regional offices Leading diversified $525
June 1998 services firm providing
a broad range of
services for
governmental and private
sector clients
Leading provider of
operations, maintenance
and construction
outsourcing services
Dec. 1998 Fluor Daniel Over 30 offices in Broad-based $200
GTI, Inc. North America environmental services
Europe and firm
Australia
</TABLE>
Recent Events
On February 5, 1999, we signed an agreement to acquire all of the issued and
outstanding capital stock of Roche Limited Consulting Group (Roche) for an
initial payment of $10.0 million in cash, plus two potential earnout payments.
Roche, an engineering, construction and consulting company based in Canada, is
primarily focused on infrastructure development including transportation and
water/wastewater treatment facilities. Roche also has completed projects in the
pulp and paper and mining markets. Roche operates exclusively outside the U.S.,
and has current project experience in more than 20 countries. We have
collaborated with Roche on projects during the past two years, and we believe
that this acquisition will add to our strategic consulting capabilities and
experience and expertise in international markets. Roche has approximately 700
employees and had revenue of $28.3 million in its most recent year ended
December 31, 1998. The acquisition is expected to close in April 1999.
On March 8, 1999, we signed an agreement to acquire specified assets and
assume specified liabilities of the Environment and Facilities Management Group
(EFM Group) of ICF Kaiser International, Inc. (Kaiser) for a purchase price of
$82.0 million reduced by $8.0 million representing working capital retained by
Kaiser. The
6
<PAGE>
EFM Group provides environmental remediation, program management and technical
support for United States Government agencies including the DOD, National
Aeronautics and Space Administration (NASA) and the DOE as well as private
sector environmental clients. The EFM Group has approximately 500 employees and
had revenue of approximately $106 million for the calendar year ended December
31, 1998. The acquisition is expected to close in April 1999.
At the same time we announced the EFM acquisition, we announced that our
obligation to complete the purchase of EFM was subject to financing, and we
have begun the sale of $200.0 million in senior subordinated notes in a private
placement (the Notes). Concurrently with the filing on this Report on Form 10-
K, the Company is filing a Report on Form 8-K to make information from the
offering memorandum for the Notes publicly available, including pro forma
financial information, financial statements from the acquired companies, and a
description of our business, as though the acquisitions had been completed at
the beginning of calender year 1998.
Benefits of the Acquisitions
We believe our recent acquisitions add capabilities that are complementary
to our existing services, and offer us cost savings and other synergies. We
also believe that our matrix organization and our comprehensive management
information system allow us to:
. efficiently integrate acquired operations,
. eliminate duplicative costs,
. centralize common functions,
. consolidate locations that serve the same common areas and
. use our low cost structure to bid successfully on new projects.
In connection with the OHM acquisition, we implemented a cost reduction
program that eliminated approximately $32.0 million in costs on an annualized
basis within six months of acquiring the business, principally through
headcount reduction and duplicative facilities closures. In connection with the
GTI acquisition, we executed a similar plan that has resulted in approximately
$18.7 million of annualized cost savings being realized.
OPERATIONS
General
We provide services through four platforms: Engineering & Construction,
Consulting & Ventures, Outsourced Services and International. We do not own or
operate facilities involved in the on-going commercial disposal of hazardous
waste.
Engineering & Construction
Most of our business is the management of complex hazardous waste
remediation projects. These projects involve the assessment, planning and
execution of the decontamination and restoration of property, plant and
equipment that have been contaminated by hazardous substances. These projects
usually require the cleanup of land sites where hazardous or radioactive
substances have been disposed. These sites can pose threats to adjacent
buildings, production facilities and storage sites and the surrounding rivers,
streams and groundwater. These projects require considerable technical
engineering and analysis to identify the substances involved, the extent of the
contamination, the appropriate alternatives for containing or removing the
contamination, and the selection of the technologies for treatment to perform
the cleanup of the site. They also require strong project management and
construction and remediation skills to control costs and to meet required
schedules.
7
<PAGE>
Our Engineering & Construction platform provides full-service DOD and DOE
delivery order program management, engineering and design services, remedial
construction, specialized equipment and decontamination/decommissioning
capabilities. Remedial construction services offered by this platform include:
. excavation and isolation,
. installation of subsurface recovery systems,
. bioremediation approaches,
. chemical treatment,
. soil washing,
. fixation or stabilization,
. facility or site closures,
. solidification,
. landfill cell construction and
. slurry wall and cap installation
We use our Engineering & Construction skills to develop partnering
arrangements with clients in which we become the primary supplier of all
client environmental management services and assist clients in innovatively
reducing total environmental costs.
The following is an example of the type of project performed by our
Engineering & Construction platform. We completed an approximately $70.0
million site remediation and restoration project for the DOD at Fort Ord in
Monterey, California as part of the DOD's base closure program. The project
site consisted of an 8,000 acre military site. We provided a range of services
at this site, including:
. removal of lead and copper from 3.2 miles of beach;
. removal and transportation of over 2.0 million cubic yards of soils and
waste;
. consolidation and closure of four landfills totaling 144 acres;
. restoration of a 44 acre site for a municipal park; and
. revegetation of 100 acres of disturbed property with native species.
Consulting & Ventures
Our Consulting & Ventures platform helps clients comply with environmental
and/or health and safety regulations. This platform also assists clients in
developing corporate policies and procedures in areas such as pollution
prevention and waste minimization so that they integrate environmental
regulations into their business decisions.
Our Consulting & Ventures platform provides a wide range of consulting
services including the following:
. environmental permitting,
. facility siting and design,
. strategic environmental management,
. environmental compliance/auditing,
. risk assessment/management,
. air quality assessment/management,
8
<PAGE>
. pollution prevention and waste minimization,
. environmental information systems,
. data management and
. industrial hygiene.
The following is an example of the type of project performed by our
Consulting & Ventures platform. Under a $6.0 million contract with a large,
diversified manufacturing company, we conducted a remedial
investigation/feasibility study on a Superfund site located at a 95-acre coke
plant in Ironton, Ohio. After conducting the study, we prepared a remedial
design/action plan, which included construction services and the design of
facilities and bioremediation and groundwater management. Our plan resulted in
substantial savings for the client.
Outsourced Services
Through our Outsourced Services platform, we have broad capabilities for
operations, maintenance, management and construction at federal facilities and
in the private sector. This platform is a leading provider of project, program
and construction management services to the DOD and state and local government
agencies. As a result of the OHM acquisition, we are leveraging our core
competencies into new, high-growth service areas, especially toward outsourcing
and privatization occurring in federal, state and local governments. These core
competencies meet facilities management needs in the private sector as well.
Our Outsourced Services platform also offers recurring services that are not
dependent on regulatory enforcement.
The following is an example of the type of project performed by our
Outsourced Services platform. We have been awarded a third consecutive contract
by the Air Force for construction management services over a five year period
at Hill Air Force Base in Utah. The value of this contract is approximately
$95.0 million, and involves projects ranging from small renovation and
replacement work to the installation of sophisticated centrifuge technology. We
also are coordinating the activities of several subcontractors that are
performing on-going construction activities.
International
We are building our International platform to meet the global environmental
needs of our U.S.-based clients. In November 1996, we bought 50.1% of the stock
of Chi Mei Scientech/Entech, a Taiwan-based wastewater treatment design/build
firm, now doing business as Chi Mei IT. As a part of our purchase of GTI, we
acquired GTI's subsidiaries in Australia, Italy and the United Kingdom. We also
entered into a four-year marketing agreement with Fluor Daniel, Inc. that is
expected to provide us project diversification on a worldwide basis. In
February 1999, we signed an agreement to acquire Roche, a 700 employee firm
based in Canada. Roche has current project experience in over 20 countries.
Also, we have in the past, and may in the future, enter into joint venture
agreements or investments for international projects. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Results of Operations--Continuing Operations--Revenues."
The following is an example of the type of project performed by our
International platform. We were appointed to design, install and operate a soil
vapor extraction system to remediate a former gasworks site in London, England,
under a contract for approximately (Pounds)500,000 (or approximately $800,000).
Under a detailed design, created to speed installation and minimize
commissioning time, we were able to treat an area of 43,000 square meters.
During the course of the project, we bioremediated or volatillised over 100
tons of contaminated soil. The site will now be redeveloped as a major
exhibition site.
9
<PAGE>
Clients
Our clients are federal, state and local governments and commercial
businesses worldwide.
Federal, State and Local Governmental Clients
Due to our technical expertise, project management experience and full-
service capabilities, we have successfully bid on and executed CERCLA and RCRA-
related contracts for many federal and other government agencies. See
"Business--Operations--Regulations."
Federal government contracts are typically awarded through competitive
bidding pursuant to federal procurement regulations and involve several
bidders. After a successful bidder is selected, there is usually a period for
contract negotiations. Government contracts also typically have annual funding
limitations and are limited by public sector budgeting constraints. Some of
these contracts provide a maximum amount of services that may be performed by
us, and specific services are authorized from time to time through a series of
task orders under the master contract.
Many of these government contracts are multi-year Indefinite Delivery Order
(IDO) agreements. These programs provide estimates of what the agency expects
to spend, and our program management and technical staffs work closely with the
client to define the scope and amount of work required. While these contracts
do not initially provide us with any specific amount of work, as projects are
defined, the work is awarded to us without further formal competitive bidding.
Approximately 40% of our revenues for the nine months ended December 25, 1998
were from IDOs.
Although we generally serve as the prime contractor on our federal
government contracts, or as a part of a joint venture which is the prime
contractor, we also serve as a subcontractor to other prime contractors on some
federal government programs. As has become typical in the environmental
industry, we have entered and may continue to enter into joint venture or
teaming arrangements with competitors when bidding on the largest, most complex
contracts.
The table below sets forth the percentage of revenues we receive from
federal, state and local government contracts as a percentage of our
consolidated revenues.
<TABLE>
<CAPTION>
Twelve Months Ended Nine Months Ended
------------------------- -----------------
March 28, March 27, December 25,
1997 1998 1998
Source --------- --------- ------------
<S> <C> <C> <C>
Federal government:
DOD........................ 42% 47% 52%
DOE........................ 14 9 10
Other federal agencies..... 3 2 7
---------- ---------- ---
59 58 69
State and local governments.. 8 5 5
---------- ---------- ---
Total...................... 67% 63% 74%
========== ========== ===
</TABLE>
Bidding Process
We have a set of company-wide estimating and proposal development procedures
designed to provide consistency across all operating platforms during the
preparation of both commercial and government proposals. Our shared services
group implements these procedures and provides resources to our business
platforms for preparation of cost estimates, proposals and bid submittals. Each
of our platforms has responsibility for responding to customer solicitations.
The final decision requires coordination between operations management,
business development personnel and corporate management. Before our bid is
submitted to a client, the approach and pricing are reviewed by operations and
estimating management, which
10
<PAGE>
performs a risk evaluation of commercial terms and conditions and technical
aspects of the bid opportunity. Pricing then is established in accordance with
an authority limits matrix that is issued by our legal department.
Commercial Clients
We serve numerous commercial clients including chemical, petroleum and other
manufacturing firms, utilities, real estate and transportation service
companies and law firms. Much of our commercial work represents new contracts
awarded by existing clients. No single commercial client accounted for 10% or
more of our consolidated revenues in the nine months ended December 25, 1998,
or during fiscal years 1998 or 1997. Although in recent years enforcement of
CERCLA has diminished, clients are still seeking strategic, integrated
solutions to their environmental problems, which we seek to provide.
Backlog
As of December 25, 1998, we had existing backlog of $3.5 billion including
approximately $0.9 billion of funded backlog, of which $0.7 billion is expected
to be completed during 1999. Approximately 90% of our backlog at December 25,
1998 was under government programs, for which funds have already been
appropriated. In addition, approximately 82% of our backlog 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.
The predictability and stability of our backlog permits us to manage our fixed
costs appropriately, minimize our overhead and bid selectively on new work.
Technology Development and Patents
Our technology development program focuses on innovative applications to
client projects of new and existing technologies and methods. The program has
four principal goals:
. to support project managers and clients to ensure successful application
of environmental technologies,
. to continue to improve technologies developed in-house through use on
client projects,
. to evaluate and implement technologies developed by others that present
commercial opportunities for us, and
. to improve third party technologies for enhanced client value.
We emphasize several technologies including bioremediation. For example, we
have used naturally occurring organisms in our patented BIOFAST(R) system to
clean a number of sites. We have licensed from a third party "barrier wall and
reactive gate technology," which assists in the decomposition of contaminants,
and continue to apply it to client projects. The EPA has also extended for a
third year our contract to operate its Test & Evaluation Facility in
Cincinnati, Ohio, which is available for private party sponsored technology
evaluations. It also provides treatability testing and process development
services on contaminated waste waters, sludges and soils. Major efforts this
year focused on safe drinking water and water treatment processes including
filtration and disinfection technologies. We also have improved our
environmental information management technologies. We have received extensive
patent coverage for the Manage IT system, which we use to manage and track
hazardous waste at client sites. Through the use of proprietary and other
environmental information management systems, we have become a leading user of
advanced data base management technology to serve clients' needs.
We hold over 20 patents for various environmental technologies. Two specific
patents cover certain design features of equipment used in our on-site
remediation business. The first patent is for a filtration system to remove
pollutants from flowing creeks and streams and the second, known as a Portable
Method for Decontaminating Earth, is for a decontamination system to remove
contaminants from the soil through a
11
<PAGE>
process commonly known as soil vapor extraction. We also have the X*TRAX(R) and
LT*X(R) thermal desorption processes. The X*TRAX(R) and LT*X(R) systems are
waste treatment processes that thermally separate organic contaminants from
soils or solids and then treat the resulting organic vapor stream.
Contracts
We enter into various types of contracts with our clients, including fixed-
price and cost-reimbursable plus fixed fee and award fee contracts. For the
nine months ended December 25, 1998, 20% of our revenue was derived from fixed-
price contracts and 80% from cost-reimbursable plus fixed fee and award fee
contracts. Under a fixed-price contract, the client agrees to pay a specified
price for our performance of the entire contract. Under a cost-plus contract,
we charge clients negotiated rates based on our direct and indirect costs plus
a fee component. Our ability to perform profitably under fixed-price and other
types of contracts often depends on our ability to identify, manage and recover
on claims for differing and unanticipated conditions and other changes. For a
description of the risks we face with our fixed-price contracts, see
"Business--Operations--Fixed-Price Contracts" and "Business--Operations--
Government Contractor Risks."
We provide our services under contracts, purchase orders or retainer
letters. We bill all of our clients periodically based on costs incurred, on
either an hourly-fee basis or on a percentage of completion basis, as the
project progresses. Generally, our contracts do not require that we provide
performance bonds, although we typically require our subcontractors to post a
bond. A performance bond, issued by a surety company, guarantees the
contractor's performance under the contract. If the contractor defaults under
the contract, the surety will, in its discretion, step in to finish the job or
pay the client the amount of the bond. We have signed indemnity agreements with
our two sureties to indemnify them from obligations under bonds that arise from
our failure to perform under contracts for which bonds are issued. If, however,
the contractor does not have a performance bond and defaults in the performance
of a contract, the contractor is responsible for all damages resulting from the
breach of contract. These damages include the cost of completion, together with
possible consequential damages such as lost profits. To date, we have not
incurred material damages beyond the coverage of any performance bond, and we
have never had a bond called where the surety has been required to take over a
project or pay damages.
For the nine months ended December 25, 1998 subcontractor costs comprised
approximately 30% of our revenues. The absence of qualified subcontractors with
whom we have a satisfactory relationship could adversely affect the quality of
our services and our ability to perform under some of our contracts.
Competition
We believe that the principal competitive factors in all areas of our
business are:
. technical proficiency,
. operational experience,
. price,
. breadth of services offered, and
. local presence.
We compete with a diverse array of small and large organizations including
the following:
. national or regional environmental management firms;
. national, regional and local architectural, engineering and construction
firms;
12
<PAGE>
. environmental management divisions or subsidiaries of international
engineering, construction and systems companies; and
. hazardous waste generators that have developed in-house capabilities.
Increased competition, combined with changes in client procurement
procedures, has resulted in, among other things:
. lower contract margins,
. more fixed-price or unit-price contracts, and
. contract terms that increasingly require us to indemnify our clients
against damages or injuries to third parties and property and
environmental fines and penalties.
The entry of large systems contractors and international engineering and
construction firms into the environmental services industry has increased
competition for major federal government contracts and programs, which have
been our primary source of revenue in recent years. In addition, our industry
recently has been subject to intense consolidation. We are participating
actively in this consolidation to support our growth and diversification
strategy. However, we cannot assure that we will be able to compete
successfully given the intense competition and trends in our industry.
Regulatory
Our clients and we are subject to extensive and evolving environmental laws
and regulations. The level of enforcement of these laws and regulations affects
the demand for many of our services and creates certain significant risks and
potential opportunities for us in providing our services. Regulatory
enforcement and changes may also affect our inactive disposal sites in Northern
California. See "Business--Operations-- Environmental Contractor Risks" and our
"Notes to Consolidated Financial Statements--Discontinued Operations."
Over the past several years, interested parties have proposed a number of
significant changes to existing environmental laws. Most of the proposed
changes have been delayed in Congress. The proposals would overhaul the
government regulatory process, require regulatory risk assessments and cost-
benefit analyses and reduce requirements for reporting to the government.
Although the impact of these proposed changes upon our business cannot yet be
fully predicted, the proposed changes in regulations and the perception that
enforcement of current environmental laws has been reduced, appear to have
decreased the demand for some of our services, as clients anticipate and adjust
to the potential changes. Proposed changes could result in increased or
decreased demand for some of our services. For example, if regulatory changes
decrease the cost of remediation projects or result in more funds being spent
for actual remediation, that portion of our business could increase while
amounts spent for studies could decrease. The ultimate impact of the proposed
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 remedies
available under the changed regulations.
The principal environmental legislation and proposed changes in those laws
affecting us and our clients is described below:
Comprehensive Environmental Response, Compensation and Liability Act of
1980. CERCLA governs the cleanup of sites at which there have been or may be
releases or threatened releases of hazardous substances into the environment.
CERCLA provides that any person who (1) currently or at the time of disposal of
a hazardous substance, owned or operated any facility at which hazardous
substances were released, (2) arranged for disposal, treatment, or
transportation of hazardous substances by others or (3) accepted hazardous
substances for transport to facilities or sites from which there is a release
or threatened release of hazardous substances, is liable for the costs of
cleanup and damages to natural resources. These persons are called potentially
responsible parties (PRPs). CERCLA provides that the federal government can
either clean up these sites itself or order the PRPs to do so. CERCLA created
the Hazardous Substance Superfund to be used by
13
<PAGE>
the federal government to pay for certain cleanup efforts. When the federal
government expends Superfund money for remedial activities, it must seek
reimbursement from the PRPs. CERCLA generally imposes strict, joint and several
retroactive liability upon PRPs.
CERCLA's Superfund taxing authority expired in December 1995, and CERCLA's
authority to expend funds originally expired in September 1994. However,
Congress has extended the EPA's authority to use funds on an interim basis.
Congress to date has linked long-term reinstatement of Superfund's taxing and
spending authority to comprehensive reauthorization and revision of CERCLA. The
Congressional Budget Office estimates that the Superfund trust fund has
sufficient funds for the CERCLA program through the year 2001.
A number of changes in CERCLA have been proposed. The suggested changes
include changes in cleanup standards, remedy selection, the amount of funds
available for cleanup, and CERCLA's provision for allocating responsibility for
cleanups. We believe Congress' failure to reauthorize CERCLA, and continuing
uncertainty concerning the details of the legislation, have resulted in project
delays and/or the failure of clients to initiate projects. Arguments over state
participation in CERCLA programs and provisions for damages to natural
resources make passage of a bill reauthorizing CERCLA more uncertain. Potential
exhaustion of the monies in the Superfund trust may accelerate the passage of
legislation reauthorizing CERCLA.
In response to Congressional and private sector pressure and, in part, to
avoid more sweeping changes by Congress, the EPA has relaxed regulatory
requirements and enforcement. For example, the EPA has attempted, through
various regulatory initiatives, to make it easier to redevelop "brownfields,"
i.e., lightly to moderately contaminated urban sites. Brownfields sites
nationally have been estimated to number in the hundreds of thousands. Similar
legislation has also been introduced, and a number of states have initiated
similar programs. The EPA is currently attempting to raise funds for
brownfields programs through bond programs. While we believe such programs
offer additional opportunities, we cannot predict the ultimate impact of these
programs.
Resource Conservation and Recovery Act of 1976. RCRA restricts the land
disposal of certain wastes, prescribes more stringent management standards for
hazardous waste disposal sites, sets standards for underground storage tank
(UST) management and provides for corrective action procedures. RCRA also
imposes liability and stringent management standards on generators or
transporters of hazardous waste and owners or operators of waste treatment,
storage or disposal facilities.
RCRA's requirement that USTs be upgraded to double-walled tanks with leak
detection systems became effective on December 22, 1998, with some 250,000
tanks estimated to remain in violation nationwide. We believe that increased
state and EPA enforcement actions for UST noncompliance will prompt increased
repair or replacement of these tanks. Further, in November 1998, the EPA
adopted its new Hazardous Waste Identification Rule regulation, allowing more
flexible and cost-effective approaches to site cleanups. In particular, the
final rule streamlines permitting, treatment and technological requirements for
waste remediation.
Clean Air Legislation. The Clean Air Act requires compliance with National
Ambient Air Quality Standards for specific pollutants and empowers the EPA to
establish and enforce limits on the emission of various pollutants from
specific types of facilities. The Clean Air Act Amendments of 1990 modified the
Clean Air Act in a number of significant areas. Among other changes, these
amendments
. established emissions allowances for sulfur and nitrogen oxides,
. established strict requirements applicable to emissions of air toxics,
. established a facility-wide operating permit program for all major
sources of regulated pollutants,
. established requirements for management of accidental releases of toxic
air pollutants, and
. created significant new penalties, both civil and criminal, for
violations of the Clean Air Act.
14
<PAGE>
Although the EPA recently promulgated regulations significantly tightening
standards for ozone and particulate emissions, and these regulations might
eventually increase demand for our air quality services, the proposals have met
with substantial opposition (including court challenges) and their ultimate
fate and impact remain uncertain. Also, while world leaders recently agreed to
the "Kyoto Protocol" (treaty) to reduce greenhouse gas emissions, and these
proposals could increase demand for our air quality services, they have also
met with substantial opposition, and their ultimate fate remains uncertain.
Also uncertain are the fate and impact of proposals for tax credits for
greenhouse gas emission reductions as an alternative to the Kyoto Protocol.
The Price Anderson Act (PAA). Approximately 11% of our $3.5 billion in
backlog consists of projects in our energy and nuclear services business. We
service the need of the DOE in converting its weapons facilities to civilian
purposes and the need of the nuclear power industry in the decontamination and
decommissioning of nuclear power plants. We expect this portion of our business
to continue to grow as up to 35 operating commercial power plants reach the end
of their useful lives over the next 20 years.
The PAA promotes and regulates the nuclear power industry in the U.S. The
PAA comprehensively regulates the manufacture, use and storage of radioactive
materials, and promotes the nuclear power industry by offering broad
indemnification to nuclear power plant operators and DOE contractors. While the
PAA's indemnification provisions are broad, it has not been determined whether
they apply to all liabilities that might be incurred by a radioactive materials
cleanup contractor such as us. Also, the PAA expires in 2002. Because nuclear
power remains controversial and no new nuclear plants are planned in the U.S.,
it is not clear that the PAA and its indemnification provisions will be
extended beyond 2002. Our business could be adversely affected if the PAA were
not extended beyond 2002.
The Food Quality Protection Act (FQPA) of 1996. FQPA has created an
increased demand for agricultural chemical registration and defense services.
JSC, one of our recent acquisitions, is a leading supplier of these services.
Also, the regulatory initiatives incorporated in FQPA, including more
comprehensive risk evaluation and management for hazardous chemicals, are
likely to influence future EPA policies and practices. Such regulatory
developments may increase demand for our services.
Other Federal and State Environmental Laws. Our clients also use our
services in complying with, and our operations are subject to regulation under,
among others, the following federal laws:
. the Toxic Substances Control Act,
. the Clean Water Act,
. the Safe Drinking Water Act,
. the Occupational Safety and Health Act, and
. the Hazardous Materials Transportation Act.
Many states also have passed Superfund-type legislation and other
regulations and policies to cover more detailed aspects of hazardous materials
management. This legislation addresses such topics as:
. air pollution control,
. UST and aboveground storage tank (AST) management,
. water quality,
. solid waste,
. hazardous waste,
. surface impoundments,
15
<PAGE>
. site cleanup, and
. wastewater discharge.
Environmental Contractor Risks
Although we believe that we generally benefit from increased environmental
regulation, and from enforcement of those regulations, increased regulation,
enforcement and private litigation also create significant risks for us. These
risks include potentially large civil and criminal liabilities from violations
of environmental laws and regulations and liabilities to clients and to third
parties for damages arising from performing services for clients. Our failure
to observe the laws or the terms and conditions of licenses and permits we hold
could adversely impact our ability to carry on our business as presently
conducted.
Liabilities Arising out of Environmental Laws and Regulations
Our operations are subject to regulation by a number of federal and other
laws and agencies. As such, we may be held directly liable for failure to abide
by these laws. Any such failure could lead to our debarment or suspension as a
government contractor. Companies that are subject to environmental liabilities
have also sought to expand the reach of the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) or (Superfund), the Resource
Conservation and Recovery Act (RCRA) and similar state statutes to make
contractor firms responsible for cleanup costs. These companies claim that
environmental contractors are owners or operators of hazardous waste facilities
or that they arranged for treatment, transportation or disposal of hazardous
substances. If we are held responsible under CERCLA or RCRA for damages caused
while performing services or otherwise, we may be forced to bear this liability
by ourselves, notwithstanding the potential availability of contribution or
indemnification from other parties. Further, one of our businesses involves the
purchase and redevelopment of environmentally impaired property. As the owner
of such properties, we may be required to clean up all contamination at these
sites, even if we did not place it there. We use insurance and other risk
mitigation techniques to manage these risks but we cannot guarantee the
adequacy of those measures.
Potential Liabilities to Clients and Third Parties
In performing services for our clients, we could become liable for breach of
contract, personal injury, property damage, negligence and other causes of
action. The damages available to a client are potentially large and could
include consequential damages.
Many potential clients, particularly in connection with projects involving
large scale cleanups, try to shift to contractors the risk of completing the
project, if the contamination is either more extensive or difficult to resolve
than they anticipated. In this competitive market, clients increasingly try to
pressure contractors to accept greater risks of performance, liability for
damage or injury to third parties or property and liability for fines and
penalties. We have from time to time been involved in claims and litigation
involving disputes over such issues.
Environmental management contractors also potentially face liabilities to
third parties for property damage or personal injury stemming from a release of
toxic substances resulting from a project performed for clients. These
liabilities could arise long after completion of a project.
Over the past several years, the EPA and other federal agencies have
constricted significantly the circumstances under which they will indemnify
their contractors against liabilities incurred in connection with CERCLA
projects and continue their attempts to renegotiate previously agreed
indemnities.
16
<PAGE>
Insurance
We maintain liability insurance programs that are structured to provide
coverage for major and catastrophic losses. We self insure against losses that
may occur in the ordinary course of business. Effective April 1, 1998, our
liability insurance program provides for coverage of up to $75.0 million. This
coverage has a $500,000 deductible. We also carry pollution liability insurance
with policy limits of up to $35.0 million. This coverage has a $1.0 million
deductible. However, we cannot assure that any future claims will not exceed
our coverages.
In preceding years, our insurance program required us to self-insure for the
first $5.0 million retention for each of its general liability, automobile
liability and contractor's pollution liability coverages. We are obligated to
indemnify our insurance carriers against liabilities and costs of defense,
subject to certain limitations for each of these kinds of coverage, up to that
$5.0 million limit. Letters of credit support this indemnity commitment.
Although we believe our insurance program is appropriate for the management
of our risks, our insurance policies may not fully cover our operations. Policy
coverage exclusions, retaining risks through deductible and self-insured
retention programs, or losses in excess of the coverage may cause all or a
portion of one or more losses not to be covered by our insurance.
Concentration of Revenues
Agencies of the federal government are among our most significant clients.
For the nine months ended December 25, 1998, approximately 69% of our net
revenue was derived from federal agencies as follows:
. 52% from the DOD;
. 10% from the DOE; and
. 7% from other federal agencies.
Many of our contracts with federal government agencies require annual
funding approval and may be terminated at their discretion. A reduction in
spending by federal government agencies could limit the continued funding of
our existing contracts with them and could limit our ability to obtain
additional contracts. These limitations, if significant, could have a material
adverse effect on our business.
Government Contractor Risks
As a major provider of services to governmental agencies, we face the risks
associated with government contracting, which include the risk of substantial
civil and criminal fines and penalties for violations of applicable regulations
and the risk of public scrutiny of our performance at high profile sites.
Government contracting requirements are complex, highly technical and subject
to varying interpretations. As a result of our government contracting business,
we have been, are and expect in the future to be, the subject of audits and
investigations by governmental agencies, including the Defense Contract Audit
Agency (the DCAA) and the EPA's Office of Inspector General (EPAOIG). During
the course of an audit, the DCAA or EPAOIG may disallow costs if it determines
that we improperly accounted for such costs in a manner inconsistent with Cost
Accounting Standards. Under the type of "cost reimbursable" government
contracts that we typically perform, only those costs that are reasonable,
allocable and allowable are recoverable under the Federal Acquisition
Regulations and Cost Accounting standards. At present, there are several
unresolved and/or ongoing audits of our billings dating back to 1995 (and, in
some instances, earlier years as well). A disallowance of a significant amount
of our costs could have a material adverse effect on our business.
In addition to the damage to our business reputation, the failure to comply
with the terms of one or more of our government contracts could also result in
our suspension or debarment from future government contract projects for a
significant period of time. This could result in a material adverse effect on
our business. On or
17
<PAGE>
about September 2, 1998, OHM Corporation, one of its subsidiaries, and The IT
Group entered into a Compliance Agreement with the EPA to address alleged past
practices by OHM that, according to the EPA, may constitute a basis for our
suspension and/or debarment. A breach of the Compliance Agreement by us or any
of our subsidiaries is potentially cause for our immediate suspension from work
and/or debarment. In this regard, EFM also has several open audits by EPAOIG
and investigations involving both the Department of Justice and EPAOIG.
Fixed-Price Contracts
We enter into various types of contracts with our clients, including fixed-
price contracts. For the nine months ended December 25, 1998, approximately 20%
of our net revenue was derived from fixed-price contracts. Fixed-price
contracts protect clients but expose us to a number of risks. These risks
include:
. underestimation of costs;
. problems with the appropriate choice of technologies;
. unforeseen costs or difficulties;
. delays beyond our control; and
. economic and other changes that may occur during the contract period.
The risks we face under fixed-price contracts could have a material adverse
effect on our business.
Closure of Inactive Disposal Sites and Potential CERCLA Liabilities
Before 1987, we were a major provider of hazardous waste transportation,
treatment and disposal operations in California. In December 1987, we adopted a
strategic restructuring program that included a formal plan to divest our
transportation, treatment and disposal operations and we stopped taking new
business. Closure plans for all four of these facilities have now been approved
by all applicable regulatory agencies. Closure construction has been completed
at three of these facilities (Montezuma Hills, Benson Ridge and Vine Hill). At
December 25, 1998, our consolidated balance sheet included accrued liabilities
of approximately $7.9 million to complete the closure and post-closure of our
disposal facilities and the potentially responsible party (PRP) matters, net of
certain trust fund and annuity investments, restricted to closure and post-
closure use and net of anticipated insurance settlements.
Impact of Uncertainty in Closure Cost Estimates
Closure and post-closure costs associated with our inactive disposal sites
are incurred over a significant number of years and are subject to a number of
variables. We have estimated the impact of these costs in our provision for
loss on disposition of discontinued operations. However, closure and post-
closure costs could be higher than estimated if regulatory agencies were to
require procedures significantly different than those in the plans developed by
us or if there are additional delays in the closure plan approval process.
Since recording our initial provision for loss, we have been required to make
four upward adjustments to the provision. During each of the three fiscal years
ended December 25, 1998, we funded accrued costs of $11.1 million, $14.9
million and $15.7 million relating to our closure plans and construction and
PRP matters. We expect to incur costs over the next several years; however, we
expect the nature of the costs to change from closure design and construction
to post-closure monitoring.
Closure plans for our Panoche facility, the final facility to be closed,
were approved on March 18, 1998. 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 we believe that
the approved closure
18
<PAGE>
plans substantially reduce future cost uncertainties, the ultimate costs will
depend upon the results of the technical studies called for in the approved
plans. Closure construction under the plans is scheduled for completion in the
fall of 2000.
Uncertainties in Carrying Value of Long-Term Assets
The carrying value of our long-term assets of transportation, treatment and
disposal discontinued operations of $40.0 million at December 25, 1998 is
principally comprised of unused residual land at the inactive disposal
facilities and assumes that sales will occur at market prices estimated by us
based on certain assumptions about entitlements, development agreements and
other factors. A portion of the residual land is the subject of a local
community review of our development strategy, which will be the subject of
public hearings and City Council deliberation through the second quarter of
1999. We can make no assurances as to the timing of development or sales of any
of our residual land, or our ability to ultimately liquidate the land for the
sale prices assumed. If our assumptions are not realized, the value of the land
could be materially different from the current carrying value.
Impact of Possible PRP Liabilities
As a major provider of hazardous waste transportation, treatment and
disposal operations in California prior to the December 1987 adoption of our
strategic restructuring program, we have been named a PRP at a number of other
sites including the GBF Pittsburg Superfund site, and may from time to time be
so named at additional sites, and also may face damage claims by third parties
for alleged releases or discharges of contaminants or pollutants arising out of
our transportation, treatment and disposal discontinued operations.
Summary
Our provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and estimates,
including those discussed above. We periodically reevaluate the adequacy of
this provision in light of developments since our adoption of the divestiture
plan, and we believe that the provision as adjusted is reasonable. However, the
ultimate effect of the divestiture on our consolidated financial condition,
liquidity and results of operations is dependent on future events, the outcome
of which we cannot determine at this time. 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 we are required to perform unexpected remediation work at the
facilities in the future or to pay penalties for alleged noncompliance with
regulations or permit conditions. Outcomes significantly different from those
used to estimate the provision for loss could result in a material adverse
effect on our business.
For additional information about our discontinued operations, see the "Notes
to the Consolidated Financial Statements--Discontinued Operations".
Substantial Leverage
We have now and, after the Note offering, will continue to have a
significant amount of indebtedness. The following chart shows certain important
credit statistics as of the dates or at the beginning of the periods specified
below without giving effect to the Note offering or the EFM or Roche
acquisitions:
<TABLE>
<CAPTION>
At December 25, 1998
--------------------
<S> <C>
Total indebtedness......................................... $422,662
Stockholders' equity....................................... $238,168
Debt to equity ratio....................................... 1.8:1
</TABLE>
19
<PAGE>
Our substantial indebtedness could have important consequences. For example,
it could:
. increase our vulnerability to general adverse economic conditions;
. limit our ability to pursue our acquisition business strategy;
. limit our ability to obtain necessary financing or bonding, fund future
working capital, capital expenditures and other general corporate
requirements;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business and the environmental services industry;
. place us at a competitive disadvantage compared to our competitors that
have less debt; and
. limit, along with the financial and other restrictive covenants in our
indebtedness, our ability to borrow additional funds. And, failing to
comply with those covenants could result in an event of default which,
if not cured or waived, could have a material adverse effect on us.
We may be able to incur substantial additional indebtedness in the future.
During 1998, we amended and restated our credit facilities so that they now
provide for a $228.0 million eight-year term loan and a $185.0 million six-year
revolving credit facility. At December 25, 1998, we had outstanding $225.8
million of borrowings under the term loan and $143.0 million under the
revolving credit facility. If new debt is added to our current debt levels, the
related risks that we now face could increase.
For more information on our indebtedness, see "Notes to Consolidated
Financial Statements--Long-term debt" and "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Liquidity and Capital
Resources".
Ability to Service Debt
Our ability to make payments on and to refinance our indebtedness and to
fund planned capital expenditures and any future acquisitions will depend on
our ability to generate cash in the future. Our success is dependent upon our
results of operations, which are heavily dependent on various factors,
including managing utilization of our professional staff, properly executing
projects and successfully bidding new contracts at adequate margin levels.
This, to a certain extent, is also subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe our cash flow from operations, available
cash and available borrowings under our credit facilities will be adequate to
meet our future liquidity needs, excluding acquisitions, for the next twelve
months.
We can make no assurance, however, that our business will generate
sufficient cash flow from operations or that future borrowings will be
available to us under our credit facilities in an amount sufficient to enable
us to pay our indebtedness or to fund our other liquidity needs.
History of Losses
The following table shows the losses we have incurred in our five most
recent fiscal periods. We cannot assure you that we will not continue to incur
losses. For a more detailed discussion of our operating results and special
charges, see "Management's Discussion and Analysis of Results of Operations and
Financial Condition."
20
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended
------------------------------------------ Nine Months Ended
March 31, March 29, March 28, March 27, December 25,
1995 1996 1997 1998 1998
--------- --------- --------- ---------- -----------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net loss applicable to
common stock........... $(18,483) $(3,654) $(13,693) $(23,193) $(12,091)
Net income (loss)
applicable to common
stock, excluding
special charges........ $ 7,000 $ 4,600 $ (5,300) $ 2,800 $ 11,200
</TABLE>
Fluctuations in our Quarterly Operating Results
Our quarterly revenues, expenses and operating results may fluctuate
significantly due to a number of factors, including:
. the seasonality of the spending cycle of our public sector clients,
notably the federal government;
. employee hiring and utilization rates;
. the number and significance of client projects commenced and completed
during a quarter;
. delays incurred in connection with a project;
. the ability of our clients to terminate projects without penalties;
. weather conditions.
Variations in any of these factors could cause significant fluctuations in
our operating results from quarter to quarter and could result in net losses.
Management of Growth
We are growing rapidly through acquisitions. Our revenues were $400.0
million for the twelve months ended March 29, 1996 and since that time, we have
acquired eight companies representing an aggregate of $770.0 million in annual
revenue at the time of acquisition. Our growth presents numerous managerial,
administrative, operational and other challenges.
Furthermore, our business strategy calls for continued growth and
diversification through acquisitions. Identifying and pursuing future
acquisition opportunities requires a significant amount of management time and
skill. Additionally, acquisitions involve certain risks that could cause our
actual growth or operating results to differ from our or others' expectations.
For example:
. We may not be able to identity suitable acquisition candidates or to
acquire additional companies on favorable terms;
. We may not be able to obtain the necessary financing, on favorable terms
or at all, to finance any of our potential acquisitions;
. We may fail to successfully integrate or manage these acquired companies
due to differences in business backgrounds or corporate cultures or
inadequate internal systems or controls;
21
<PAGE>
. These acquired companies may not perform as we expect;
. If we fail to successfully integrate any acquired company or are unable
to improve our internal systems and controls fast enough to accommodate
our growth, our reputation could be damaged. This could make it more
difficult to market our services or to acquire additional companies in
the future;
. The acquisition and integration process could take significant time away
from management's responsibilities for supervising the ongoing business.
Risks of Achievement of Cost Savings and Integration of Operations
Our future success depends in part on our ability to achieve cost savings
from our acquisitions. We cannot guarantee that we will realize any cost
savings or other benefits from our recent acquisitions other than those already
realized, or that we will realize any cost savings or other benefits from
future acquisitions.
Control of Board of Directors
In November 1996, The Carlyle Group and some of its affiliates acquired
45,000 shares of our 6% cumulative convertible participating preferred stock
and warrants to purchase 1,250,000 shares of our common stock. As a result of
paid-in-kind dividends, paid through December 25, 1998, Carlyle now holds
46,095 shares of convertible preferred stock, which totals approximately 21%,
or approximately 24% assuming the warrants are exercised, of the voting power
of the Company. The terms of our convertible preferred stock provide that until
November 20, 2001, the holders of our convertible preferred stock have the
right to elect a majority of the Board of Directors, as long as they continue
to hold at least 20% of the voting power of the Company. In addition, the sale
by Carlyle of its interests under specific conditions constitute events of
default under our credit facilities. For more information on our relationship
with Carlyle, see "Management--Board of Directors," "Description of Capital
Stock" and our "Notes to Consolidated Financial Statements--Preferred Stock--
Carlyle Investment."
International Operations
For the nine months ended December 25, 1998, approximately 1.3% of our
revenues came from international operations. Our international operations in
general are subject to a number of risks including:
. foreign currency risks,
. differences in accounting practices,
. work stoppages,
. transportation delays and interruptions,
. political instability,
. expropriation and nationalization,
. tariffs and import and export controls,
22
<PAGE>
. differing licensing and permit requirements,
. conflicting U.S. and foreign laws.
We cannot predict what effect, if any, these risks would have on our
business.
Reliance on Key Personnel
Our future success is significantly dependent on our senior management team,
which has significant experience. We have entered into employment agreements
with a number of our senior executives. The loss of the services of our senior
executives could have a material adverse effect on our business. In addition,
we also are dependent on the continuing contributions of our platform and
project managers, scientists and other professionals and other key personnel,
particularly those employees who maintain close relationships with our clients,
which relationships are extremely important to our continued success. Our
failure to attract and retain key personnel also could have a material adverse
effect on our business.
DISCONTINUED OPERATIONS
At December 25, 1998, our consolidated balance sheet included accrued
liabilities of $7.9 million to complete the closure and post-closure of our
disposal facilities and the PRP matters, net of trust fund and annuity
investments, restricted to closure and post-closure use and anticipated
insurance settlement proceeds. In December 1987, we 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 others. Subsequent to this date, we ceased obtaining
new business for these operations. We have funded previously accrued costs of
$11.1 million for the nine months ended December 25, 1998, $14.9 million in the
twelve months ended March 27, 1998 and $15.7 million in the twelve months ended
March 28, 1997 relating to our closure plans and construction and PRP matters.
We expect to incur costs over the next several years, but the nature of the
costs will change from closure design and construction to post-closure
monitoring. See "Business--Operations--Closure of Inactive Disposal Sites and
Potential CERCLA Liabilities," "Management's Discussion and Analysis of Results
of Operations and Financial Condition--Liquidity and Capital Resources" and our
"Notes to Consolidated Financial Statements--Discontinued Operations" for more
information on the financial implications of our discontinued operations.
EMPLOYEES
At December 25, 1998, without giving effect to the EFM and Roche
acquisitions, we employed approximately 5,600 employees. Many of these are
professional level employees, including over 700 engineers, 300 environmental
scientists, 300 geologists and 500 other specialists in related fields. In
addition, our professional employees hold in the aggregate over 950 masters
degrees and 150 PhD's. Our ability to retain, expand and utilize our staff,
including those employees that have primary responsibility for maintaining
client relationships, will be a significant factor in our future success. None
of our employees are represented by labor unions under Company-wide collective
bargaining agreements. However, we do employ union labor from time to time on a
project-specific basis. We consider our relations with our employees to be
good.
23
<PAGE>
ITEM 2. PROPERTIES.
We own or lease property in 36 states, the District of Columbia, the United
Kingdom, Italy and Australia. Excluding discontinued operations, we own
approximately 54 acres and lease approximately 1.8 million square feet of
property for various uses, including
. regional and project offices,
. technology and process development laboratories,
. field remediation support service facilities, and
. corporate offices.
We consider these facilities adequate for our present and anticipated
activities.
Additionally, we own approximately 2,800 acres related to discontinued
operations, principally in Northern California, of which approximately 900
acres were used for hazardous waste disposal facilities and approximately 1,900
are adjacent to those facilities, but were never used for waste disposal.
ITEM 3. LEGAL PROCEEDINGS.
Continuing Operations Legal Proceedings
We are subject from time to time to a number of different types of claims
arising in the ordinary course of our business, including contractual disputes
with clients, subcontractors and suppliers, claims for professional negligence,
environmental claims, governmental audits and investigations and claims for
personal injuries and property damage. We do not believe that any of these
claims will have a material adverse effect on our business. See our "Notes to
Consolidated Financial Statements--Commitments and Contingencies--
Contingencies" for information regarding the legal proceedings related to our
continuing operations.
Discontinued Operations Legal Proceedings
We have been, are and may in the future be subject from time to time to a
number of different types of claims arising out of our discontinued operations
including environmental claims for recovery of all or a portion of the cleanup
costs at sites we previously owned or operated or to which we took our or a
client's wastes, including claims for personal injuries and property damage. We
do not believe any of these claims will have a material adverse effect on our
business. See our "Notes to Consolidated Financial Statements--Discontinued
Operations" for information regarding the legal proceedings related to our
transportation, treatment and disposal discontinued operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
We submitted one matter to a vote of our shareholders during the quarter
ended December 25, 1998.
Pursuant to a Consent Statement dated October 23, 1998, we requested that
our stockholders grant their written consent in lieu of voting at a special
meeting to the amendment of the Company's Certificate of Incorporation to
change its name to "The IT Group, Inc." As of November 16, 1998, the initial
date through which we announced we would continue the solicitation, we received
the approval of approximately 89% of the shares entitled to consent. On October
22, 1998, the record date for soliciting consents, there were outstanding
24
<PAGE>
and entitled to vote 22,628,433 shares of common stock, and 45,819 shares of 6%
Convertible Preferred Stock convertible into 6,036,653 shares of common stock,
for a total of 28,665,086 shares of common stock entitled to consent on an as-
converted basis, and they approved the name change as follows:
<TABLE>
<CAPTION>
For Against & Withheld Non-votes
--- ------------------ ---------
<S> <C> <C>
25,519,802 24,472 3,120,812
</TABLE>
In addition, all 45,819 shares of 6% Convertible Preferred Stock, voting as
a single class, approved the name change.
On December 23, 1998, we filed with the Delaware Security State the
Certificate of Amendment of our Certificate of Incorporation finally changing
our name to "The IT Group, Inc."
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The following table provides information as of December 25, 1998 regarding
our executive officers and the positions they hold. The officers are appointed
annually by the Board of Directors to serve at the discretion of the Board.
<TABLE>
<CAPTION>
First elected
officer of
Name Age Position the Company
- ---- --- -------- -------------
<S> <C> <C> <C>
Anthony J. DeLuca....... 51 Chief Executive Officer and President 1990
David L. Backus......... 57 Senior Vice President, Outsourced Services and International 1998
James G. Kirk........... 60 Vice President, General Counsel and Secretary 1996
James R. Mahoney........ 60 Senior Vice President, Consulting and Ventures 1991
Raymond J. Pompe........ 64 Senior Vice President, Engineering and Construction 1988
Philip O. Strawbridge... 44 Senior Vice President, Chief Administrative Officer 1998
</TABLE>
Mr. DeLuca was named Chief Executive Officer and President of the Company on
July 22, 1997 and President and Acting Chief Executive Officer and a director
of the Company as of July 1, 1996. Prior thereto, Mr. DeLuca had been Senior
Vice President and Chief Financial Officer of the Company since March 1990.
Before joining the Company Mr. DeLuca had been a partner at the public
accounting firm Ernst & Young LLP.
Mr. Backus joined us as Senior Vice President, Outsourced Services and
International in December 1998 in connection with the GTI acquisition. Mr.
Backus joined GTI in 1992 as Vice President of GTI's Western Operations. Prior
to joining GTI, Mr. Backus was employed by Morrison Knudsen Corporation from
1975 to 1992 in various executive positions, including Group Vice President of
Morrison Knudsen's Environmental Group. From 1972 to 1975, Mr. Backus was the
Director of Business Development for M.K. Ferguson Company. Prior to that, Mr.
Backus was involved in the construction business.
Mr. Kirk, who joined the Company as General Counsel, Eastern Operations, in
1991, was named Vice President, General Counsel and Secretary in September
1996. Prior to joining the Company, Mr. Kirk served as Vice President and
General Counsel for Limbach Constructors from 1978 to 1991. From 1973 to 1978,
Mr. Kirk was Assistant General Counsel for Dravo Corporation.
Mr. Mahoney, who joined the Company in January 1991 as Senior Vice President
and Director of Technology, was named Senior Vice President, Corporate
Development and Sales in April 1992, Senior Vice President, Technical
Operations and Corporate Development in March 1995, and Senior Vice President,
Consulting and Ventures in July 1996. Prior to joining the Company, Mr. Mahoney
was Director of the National Acid Precipitation Assessment Program, a U.S.
government research and assessment program, from 1988 to 1991. From 1984 to
1987, Mr. Mahoney served in various environmental managerial capacities with
Bechtel Group, Incorporated, a major engineering and construction firm.
25
<PAGE>
Mr. Pompe joined the Company in 1988 as Vice President, Construction and
Remediation, was named Senior Vice President, Project Operations, in March
1995, and Senior Vice President, Engineering and Construction in July 1996.
Prior to joining the Company, Mr. Pompe was employed by Dravo Corporation, a
major construction firm, from 1956 to 1988 in various executive capacities,
most recently as Senior Vice President responsible for construction projects.
Mr. Strawbridge joined the Company through the Company's acquisition of OHM
Corporation ("OHM") in May 1998 as Senior Vice President and Chief
Administrative Officer. Mr. Strawbridge joined OHM Corporation in February 1996
as Senior Vice President, Chief Financial and Administrative Officer and was
given the additional responsibility of President of OHM's wholly owned
subsidiary OHM Energy Services in October, 1996. Prior to joining OHM, Mr.
Strawbridge was employed by Fluor Corporation from 1988 to 1996 in various
managerial capacities including Senior Director of Contracts and Finance and
acting Vice President of Fluor Daniel Fernald. From 1976 to 1988, Mr.
Strawbridge was employed by the U.S. Government in various management and
executive capacities.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
Our common stock is listed on the New York Stock Exchange (NYSE) and Pacific
Stock Exchange under the symbol ITX. The following table sets forth the high
and low sale prices of the common stock, as reported by the NYSE for the
periods indicated.
<TABLE>
<CAPTION>
Quarter ended High Low
- ------------- -------- ---------
<S> <C> <C>
June 27, 1997................................................ $ 8 1/4 $ 6 3/8
September 26, 1997........................................... 9 1/4 6 13/16
December 26, 1997............................................ 9 9/16 7
March 27, 1998............................................... 10 5/8 7 3/8
June 26, 1998................................................ 11 1/2 8 7/8
September 25, 1998........................................... 10 1/4 5
December 25, 1998............................................ 11 1/2 5 1/2
</TABLE>
On March 5, 1999, the closing sale price of the common stock on the NYSE as
reported by The Wall Street Journal was $13.9375 per share. On that date there
were 2,020 stockholders of record.
We have not paid a cash dividend on our common stock for the nine months
ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve
months ended March 28, 1997. We have no present intention to pay cash dividends
on our common stock in the foreseeable future in order to retain all earnings
for investment in our business. Our credit agreements prohibit cash dividends
on common stock.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth income statement information for the
Company's continuing operations and other financial information for the nine
months ended December 25, 1998 (the transition period as a result of our change
in fiscal year) and the periods ended March 27, 1998, March 28, 1997, March 29,
1996 and March 31, 1995. Share and per share data have been restated to reflect
the one-for-four reverse stock split effective November 21, 1996.
<TABLE>
<CAPTION>
Nine Months Twelve Months Ended
Ended ------------------------------------------
December 25, March 27, March 28, March 29, March 31,
1998 1998 1997 1996 1995
------------ --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
INFORMATION
Revenues................ $757,435 $442,216 $362,131 $400,042 $423,972
Gross margin............ 90,961 51,090 38,138 58,152 61,916
Special charges......... 24,971 14,248 8,403 -- --
Loss from continuing
operations (net of
preferred stock
dividends)............. (12,091) (12,527) (13,693) (3,654) (7,880)
Loss per common share
from continuing
operations............. (0.63) (1.28) (1.48) (0.41) (0.89)
Weighted average shares
outstanding............ 19,149 9,737 9,227 8,982 8,889
OTHER FINANCIAL
INFORMATION
Working capital......... $120,260 $ 74,924 $110,705 $ 89,174 $ 73,838
Costs in excess of net
assets of acquired
businesses............. 356,619 211,878 9,363 8,770 7,728
Total assets............ 948,606 709,217 342,531 315,314 362,152
Long-term debt.......... 405,059 284,697 65,874 65,611 80,189
Long-term accrued
liabilities............ 31,979 27,528 15,184 30,223 45,207
Stockholders' equity.... 238,168 148,150 168,853 140,865 145,921
</TABLE>
No cash dividends were paid on common shares for any period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
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 69% of our revenues for the nine
months ended December 25, 1998 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 nine months ended December 25, 1998, our revenues
were $757.4 million. Approximately 90% of our backlog at December 25, 1998 was
under federal government programs, and approximately 82% 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, are included in our revenue. Our cost of
27
<PAGE>
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.
Acquisitions
Since 1996, we have made eight acquisitions to expand and diversify our
business to meet our strategic objectives. The following table provides some
information on these acquisitions.
<TABLE>
<CAPTION>
Most Recent
Fiscal Year
Date of Revenues
Acquisition Name Location(s) Business Prior to Acquisition
----------- ---- ----------- -------- --------------------
(In millions)
<C> <C> <C> <S> <C>
Mar. 1996 Gradient Massachusetts Environmental/human $5
Corporation health risk assessment
Litigation support
Nov. 1996 Chi Mei IT Taiwan Wastewater treatment $12
design/build
May 1997 PHR California Historical pollution $3
Environmental Washington, DC liability research and
Consultants, Inc. investigation
Sept. 1997 Pacific California Environmental consulting $10
Environmental and engineering services
Group, Inc.
Jan. 1998 Jellinek, Schwartz & Washington, DC Science-based $12
Connolly, Inc. Colorado environmental consulting
England and advocacy services
Mar. 1998 LandBank, Inc. Colorado Real estate acquisition $3
and restoration company
Feb. and OHM Corporation Over 30 regional offices Leading diversified $525
June 1998 services firm providing
a broad range of
services for
governmental and private
sector clients
Leading provider of
operations, maintenance
and construction
outsourcing services
Dec. 1998 Fluor Daniel Over 30 offices in Broad-based $200
GTI, Inc. North America, environmental services
Europe and firm
Australia
</TABLE>
On February 5, 1999, we signed an agreement to acquire all of the
outstanding common stock of Roche Limited Consulting Group (Roche) for an
initial payment of $10.0 million in cash, 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 has approximately 700 employees and had revenue of $28.3 million in its
most recent year ended December 31, 1998. The acquisition is expected to close
in April 1999.
28
<PAGE>
On March 8, 1999, we signed an agreement to acquire specified assets of the
Environment and Facilities Management Group (EFM Group) of ICF Kaiser
International, Inc. (Kaiser) for a purchase price of $82.0 million reduced by
$8.0 million representing working capital retained by Kaiser. We also agreed to
assume specified liabilities. The EFM Group provides environmental remediation,
program management and technical support for United States Government agencies
including the DOD, National Aeronautics and Space Administration (NASA) and the
DOE as well as private sector environmental clients. The EFM Group has
approximately 500 employees and had revenue of $105.9 million for the calendar
year ended December 31, 1998. The acquisition is expected to close in April
1999.
Change in Fiscal Year
In June 1998, we changed our fiscal year-end from the last Friday in March
to the last Friday in December of each year effective with the nine months
ended December 25, 1998. Accordingly, the following discussion compares
financial results for a nine-month period to a full twelve-month year.
Likewise, the financial results for the nine-month period ended December 25,
1998 include OHM's results for the entire nine-month period while the financial
results for the twelve-month period ended March 27, 1998 include only one month
of OHM financial results because we acquired 54% of OHM on February 25, 1998.
In addition, our operating results will be discussed based on the business
platforms we established when we adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" for the nine months ended December 25, 1998. These platforms
include Engineering & Construction, Consulting & Ventures, Outsourced Services
and International.
Nine Months Ended December 25, 1998 Compared to Twelve Months Ended March 27,
1998
Revenues and Gross Margin
Company. Revenues for the nine months ended December 25, 1998 were $757.4
million, an increase of approximately 71%, when compared to the $442.2 million
in revenues reported in the twelve months ended March 27, 1998. This increase
is primarily attributable to higher revenues in the Engineering & Construction
platform resulting from the OHM acquisition.
Our gross margin for the nine months ended December 25, 1998 was 12.0%,
slightly higher than the 11.6% gross margin reported in the twelve months ended
March 27, 1998. In the 1999 fiscal year, management expects 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 completed integration of recent acquisitions.
Engineering & Construction. Revenues from the Engineering & Construction
platform were $597.9 million for the nine months ended December 25, 1998
compared to $346.1 million for the twelve months ended March 27, 1998, an
increase of approximately 73%. Our Engineering & Construction platform 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 $363.0 million in the nine months ended December 25,
1998 or $163.6 million greater than the $199.4 million of DOD revenues in the
twelve months ended March 27, 1998. DOE revenues of $79.8 million in the nine
months ended December 25, 1998 were $39.3 million higher than the $40.5 million
of DOE revenues reported in the twelve months ended March 27, 1998. Commercial
revenues were $155.1 million in the nine months ended December 25, 1998 or
$48.9 million higher than the $106.2 million of commercial revenues reported in
the twelve months ended March 27, 1998.
A substantial percentage of our revenues continue to be earned from federal
governmental contracts with various federal agencies. Revenues from federal
governmental contracts accounted for 69% of our revenues in the nine months
ended December 25, 1998 compared to 58% in the twelve months ended March 27,
1998. The increase in government revenues for the nine months ended December
25, 1998 both in absolute dollars and as
29
<PAGE>
a percentage of revenue is primarily attributable to the OHM acquisition.
Federal governmental revenues are derived principally from work performed for
the DOD and, to a lesser extent, the DOE and are thus included in our
Engineering & Construction platform. 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 of DOE studies. We believe that we have begun to benefit
from this transition by the DOE 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 for the nine months ended December 25,
1998 is primarily attributable to the OHM acquisition. However, revenue growth
from the commercial sector, excluding recent acquisitions, could be restricted
in the near term 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 platform segment profit was $63.8 million for
the nine months ended December 25, 1998, an increase of 72% when compared to
the $37.0 million segment profit for the twelve months ended March 27, 1998.
This increase is primarily attributable to the OHM acquisition. The Engineering
& Construction segment profit was 10.7% of Engineering & Construction revenues
for both the nine months ended December 25, 1998 and for the twelve months
ended March 27, 1998.
Consulting & Ventures. Revenues from our Consulting & Ventures (C & V)
platform were $79.4 million for the nine months ended December 25, 1998
compared to $79.6 million reported during the twelve months ended March 27,
1998, a decrease of approximately 0.3%. Most of the revenues from Consulting &
Ventures are derived from commercial clients. The increase in these revenues on
an annualized basis is primarily due to four acquisitions of specialized
companies during the twelve months ended March 27, 1998 as well as the GTI
acquisition during the nine months ended December 25, 1998. For a description
of our recent acquisitions, see "Acquisitions." Excluding any future
acquisitions, revenue growth from the commercial sector could be restricted as
discussed above under Engineering & Construction.
Our Consulting & Ventures platform segment profit was $10.6 million for the
nine months ended December 25, 1998, an increase of 45% when compared to the
$7.3 million segment profit reported in the twelve months ended March 27, 1998.
The Consulting & Ventures segment profit was 13.4% and 9.2% of Consulting &
Ventures revenues for the nine months ended December 25, 1998 and the twelve
months ended March 27, 1998, respectively. The increase in absolute dollars and
as a percentage of revenue is primarily attributable to the acquisitions of JSC
and GTI.
Outsourced Services. Outsourced Services revenues were $70.4 million for the
nine months ended December 25, 1998 compared to $6.8 million reported in the
twelve months ended March 27, 1998. This increased revenue is almost entirely
attributable to the OHM acquisition and the inclusion of its outsourcing
30
<PAGE>
operations in our results of operations for the nine months ended December 25,
1998, as opposed to the one month of results included in the twelve months
ended March 27, 1998. OHM's 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 platform segment profit improved to $7.9 million for
the nine months ended December 25, 1998, an increase of $7.0 million when
compared to the $0.9 million segment profit reported in the twelve months ended
March 27, 1998. This increase is also a result of the OHM acquisition.
International. International revenues, primarily from our 50.1% investment
in Chi Mei IT, a subsidiary operating in Taiwan, were $9.8 million for the nine
months ended December 25, 1998 compared to $9.6 million for the twelve months
ended March 27, 1998. The increase, on an annualized basis, is the result of
Chi Mei increased project volume and the GTI acquisition on December 3, 1998.
See "Business--Operations--International" for a more detailed description of
the International platform.
Our International platform reported a loss of $0.4 million for the nine
months ended December 25, 1998 compared to a loss of $1.4 million in the twelve
months ended March 27, 1998. This improvement is primarily due to improved
project margins on several Chi Mei projects. Through the Chi Mei board of
directors, 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 Chi Mei
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 platform further with the
acquisition of Roche in 1999 (see "Notes to Consolidated Financial Statements--
Subsequent Events").
Backlog. Our total funded and unfunded backlog at both December 25, 1998 and
March 27, 1998 was approximately $3.5 billion. At December 25, 1998, the
backlog included approximately $525.0 million of funded contracted backlog
scheduled to be completed during 1999 and approximately $320.0 million of
unfunded project work expected to be defined and performed in 1999 under
existing indefinite delivery order contracts. 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 governmental contracts, many of which are
subject to annual funding and definition of project scope. The backlog at both
December 25, 1998 and March 27, 1998 includes $2.7 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 "Notes to Consolidated
Financial Statements--Summary of significant accounting policies--Contract
accounting and accounts receivable").
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 5.5% of revenues for the
nine months ended December 25, 1998 compared to 7.2% of revenues in the twelve
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 revenues because the full effect of the cost savings from the OHM
acquisition will be realized. In addition, we anticipate additional cost
savings to be achieved from the GTI acquisition that occurred on December 3,
1998.
31
<PAGE>
Selling, general and administrative expenses include goodwill amortization
expense of $7.0 million for the nine months ended December 25, 1998 and $1.4
million for the twelve 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 4.6% of revenues for the
nine months ended December 25, 1998 and 6.9% of revenues for the twelve months
ended March 27, 1998.
Special Charges
We recorded special charges of $25.0 million for the nine months ended
December 25, 1998 compared to $14.2 million for the twelve months ended March
27, 1998. For the nine months ended December 25, 1998 we recorded a non-cash
charge of $25.0 million, including $10.6 million (net of cash proceeds of $5.8
million) related to the sale of our investment in Quanterra, Incorporated and
$14.4 million, related to the write-down of assets associated with the HTTS(R)
business. A summary of the special charges incurred during the nine months
ended December 25, 1998 is outlined below:
<TABLE>
<CAPTION>
Nine Months Ended December 25, 1998
-----------------------------------------------
Cash/ Special Reserve balance
Noncash Charges Activity at 12/25/98
------- -------------- -------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Write-off of the Quanterra
Investment.................... Noncash $(10,550) $10,550 $--
Write-down of the assets--
Primarily the Hybrid Thermal
Treatment System(R)........... Noncash (14,421) 14,421 --
-------- ------- ---
Total........................ $(24,971) $24,971 $--
======== ======= ===
</TABLE>
Quanterra. On May 27, 1998, our Board of Directors considered and approved
the divestiture of certain non-core assets including our 19% common stock
ownership interest in Quanterra, Incorporated, an environmental laboratory
business. This charge of $10.6 million represented the net book value of our
investment in Quanterra less proceeds of $5.8 million from a sale completed in
June 1998. No additional cash was expended in connection with the writeoff.
Hybrid Thermal Treatment System(R). On May 27, 1998, our Board of Directors
considered and approved the divestiture of the assets associated with our
Hybrid Thermal Treatment System(R) (HTTS(R)) business. This resulted in a
charge of $14.4 million representing the net book value of these assets less
estimated salvage value.
32
<PAGE>
The special charges of $14.2 million recorded in the twelve months ended
March 27, 1998 included $5.7 million for integration costs associated with the
acquisition of OHM, a $3.9 million non-cash charge related to a project claim
settlement, a $2.8 million charge associated with the relocation of our
corporate headquarters, and a $1.8 million loss from the sale of a small
remediation services business. A summary of the special charges incurred during
the twelve months ended March 27, 1998 is outlined below:
<TABLE>
<CAPTION>
Twelve Months Ended March 27, 1998
-----------------------------------------------
Cash/ Special Reserve balance
Noncash Charges Activity at 12/25/98
------- -------------- -------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Integration costs--OHM
acquisition
Severance................... Cash $ (2,197) $ 2,197 --
Duplicative offices/assets.. Cash (2,478) 1,226 $(1,252)
Other....................... Cash (1,019) 1,019 --
Claim Settlement
Helen Kramer................ Noncash (3,943) 3,943 --
Relocation of Corporate
Headquarters
Severance and relocation.... Cash (1,743) 1,743 --
Duplicative offices/assets.. Cash (710) 710 --
Other....................... Cash (358) 358 --
Sale of remediation business.. Noncash (1,800) 1,800 --
-------- ------- -------
Total....................... $(14,248) $12,996 $(1,252)
======== ======= =======
</TABLE>
OHM Acquisition. 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 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 December 25, 1998,
$1.3 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 seven
years.
Helen Kramer. In December 1997, we settled a contract claim which has been
outstanding in excess of five years with the US Army Corps of Engineers, the
Environmental Protection Agency and the Department of Justice (jointly
Government) arising out of work performed by our joint venture with Davy
International at the Helen Kramer Superfund project. On December 26, 1997, the
joint venture received a $14.5 million payment from the Government to resolve
all outstanding project claims related to additional work resulting from
differing site conditions. In early January 1998, the joint venture paid $4.3
million to the Government to resolve related civil claims by the Government.
Our share of the joint venture results is 60%, accordingly, we received net
cash of $6.0 million, our proportionate share of the settlement. In December
1997, we recorded a non-cash pre-tax charge of $3.9 million because the cash
received was less than the receivables related to this project which totaled
approximately $9.9 million.
Relocation of Corporate Headquarters and Sale of Remediation Business. The
special charges that occurred in the first quarter of the twelve months ended
March 27, 1998 resulted from the relocation of our corporate headquarters from
Torrance, California to Monroeville (Pittsburgh), Pennsylvania and the sale of
our California based small project remediation services business. The
headquarters relocation consolidated the corporate overhead functions with our
largest operations office and moved us closer to our lenders and largest
shareholders, which are located in the Eastern United States. As a result of
this relocation, we incurred a pre-tax charge of $2.8 million. The relocation
charge included $0.8 million of costs for severance, $0.9 million of
33
<PAGE>
costs for the relocation of some employees, $0.7 million of costs related to
the closure of the offices in Torrance, California and $0.4 million of other
related costs. As part of this relocation, 32 employees were laid off,
primarily corporate management and administrative support personnel. As of
December 25, 1998, these amounts have been paid. In May 1997, we incurred a
non-cash pre-tax charge of $1.8 million to sell our California based small
projects remediation services business.
Interest, Net
Net interest expense was 3.3% of revenues for the nine months ended December
25, 1998 and 1.8% for the twelve months ended March 27, 1998. The following
table shows net interest expense for these comparative periods:
<TABLE>
<CAPTION>
Nine Months Twelve Months
Ended Ended
December 25, March 27,
1998 1998
------------ -------------
(In thousands)
<S> <C> <C>
Interest incurred.................................... $25,876 $10,730
Capitalized interest................................. -- (10)
Interest income...................................... (981) (2,751)
------- -------
Interest, net...................................... $24,895 $ 7,969
======= =======
</TABLE>
The increase in interest expense is primarily attributable to the credit
facilities used in the OHM acquisition (see "Notes to Consolidated Financial
Statements--Long-term debt").
Income Taxes
For the nine months ended December 25, 1998, we reported a loss from
continuing operations of $0.7 million and recorded an income tax charge of $9.7
million before adjusting for the special charge. We also provided a deferred
tax asset valuation adjustment for a portion of the special charges and
recognized a tax benefit of $3.0 million on the divestiture of the HTTS(R)
business (see "Special Charges"). The total net tax charge is $6.7 million. Our
effective income tax rate from continuing operations is more than the federal
statutory rate primarily due to the valuation adjustment for the above charge
and amortization of cost in excess of net assets of acquired businesses (see
"Notes to Consolidated Financial Statements--Income taxes").
For the twelve months ended March 27, 1998, we reported a loss from
continuing operations before income taxes and an extraordinary item of $2.2
million and recorded an income tax charge of $4.2 million after adjusting for
the special charge and a $2.3 million deferred tax asset valuation adjustment
prior to the acquisition of OHM. We also recognized a tax benefit of $3.5
million on an extraordinary charge for the early extinguishment of debt and a
$3.0 million benefit for a loss from disposition of a discontinued operation.
The total net tax benefit is $2.4 million. Our effective income tax rate from
continuing operations is more than the federal statutory rate primarily due to
the above charge, state income taxes and nondeductible expenses (see "Notes to
Consolidated Financial Statements--Income taxes").
We will need to have approximately $288.0 million of future earnings to
fully realize our deferred tax asset of $109.6 million (net of a valuation
allowance of $50.3 million) at December 25, 1998, assuming a net 38% federal
and state tax rate. We evaluate the adequacy of the valuation allowance and the
realizability of the deferred tax asset on an ongoing basis. Because of our
position in the industry, recent acquisitions and restructuring, and existing
backlog, management expects that our future taxable income will more likely
than not allow us to fully realize our recorded deferred tax asset of $109.6
million. The increase in gross deferred tax asset is primarily due to the
acquisitions of OHM and GTI.
34
<PAGE>
Extraordinary Item
For the twelve 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, 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 nine months ended December 25, 1998 were $4.7
million and $6.2 million for the twelve months ended March 27, 1998. Our
reported dividends include imputed dividends on our Convertible Preferred Stock
of $0.9 million for the nine months ended December 25, 1998 and $2.1 million
for the twelve months ended March 27, 1998, which are not payable in cash or
stock. Commencing with November 21, 1997, our Convertible Preferred Stock
outstanding accrued a 3% in-kind stock dividend for one year during which the
statement of operations also included an imputed dividend at a rate of
approximately 3% per annum. This additional imputed dividend of $0.9 million
for the nine months ended December 25, 1998 and $0.5 million for the twelve
months ended March 27, 1998, will never be paid in cash, except for fractional
shares, and represents the amortization of the fair market value adjustment
recorded since the date of issuance. Commencing with November 21, 1998, our
outstanding Convertible Preferred Stock is entitled to a 6% cumulative cash
dividend payable quarterly. We reported cash dividends on our outstanding
depositary shares each representing 1/100 of a share of our 7% cumulative
convertible exchangeable preferred stock (the 7% Preferred Stock) of $2.7
million in the nine months ended December 25, 1998 and $3.6 million for the
twelve months ended March 27, 1998. The decrease in cash dividends between the
March 27, 1998 and December 25, 1998 fiscal periods of $0.9 million is due to
the shortened fiscal period.
Our dividends are summarized below:
<TABLE>
<CAPTION>
Nine Months Twelve Months
Ended Ended
December 25, March 27,
1998 1998
------------ -------------
(In thousands)
<S> <C> <C>
7% Cumulative convertible exchangeable cash
dividend.......................................... $2,697 $3,595
6% Cumulative convertible participating
--Imputed non-cash dividend...................... 860 2,105
--In kind 3% stock dividend...................... 894 467
--Cash dividend.................................. 213 --
------ ------
Total.......................................... $4,664 $6,167
====== ======
</TABLE>
Twelve Months Ended March 27, 1998 Compared to Twelve Months Ended March 28,
1997
Revenues and Gross Margin
Company. Revenues for the twelve months ended March 27, 1998 were $442.2
million or 22% higher than the $362.1 million in revenues reported in the
twelve months ended March 28, 1997. The twelve months ended March 27, 1998
include the results of OHM Corporation since February 25, 1998, the date on
which we acquired a 54% controlling interest. Revenues related to OHM in the
twelve months ended March 27, 1998 were $42.1 million.
Gross margins were 11.6% of revenues in the twelve months ended March 27,
1998 and 10.5% in the twelve months ended March 28, 1997. The improved gross
margin was due to spreading fixed overhead costs over higher revenue levels.
35
<PAGE>
Engineering & Construction. Engineering & Construction revenues were $346.1
million in the twelve months ended March 27, 1998 compared to $308.6 million in
the twelve months ended March 28, 1997, an increase of approximately 12%. DOD
revenues were $199.4 million in the twelve months ended March 27, 1998 or $45.9
million greater than the $153.5 million of DOD revenues in the twelve months
ended March 28, 1997. The strong improvement in DOD activity was due to
increased funding of the DOD indefinite delivery order programs and an increase
in the number of DOD contracts being executed. In addition, OHM contributed
about $20.0 million to the increase in DOD revenues in the twelve months ended
March 27, 1998. DOE revenues of $40.5 million in the twelve months ended March
27, 1998 were $9.1 million lower than the $49.6 million of DOE revenues
reported in the twelve months ended March 28, 1997. Commercial revenues were
$106.2 million in the twelve months ended March 27, 1998 or $0.7 million higher
than the $105.5 million in commercial revenue reported in the twelve months
ended March 28, 1997.
Our Engineering & Construction platform segment profit of $37.0 million in
the twelve months ended March 27, 1998 increased 43% over the $25.9 million
segment profit reported in the twelve months ended March 28, 1997. This
increase is primarily a result of the increase in higher margin, DOD revenues.
The Engineering & Construction segment profit was 10.7% and 8.4% of Engineering
& Construction revenues for the twelve months ended March 27, 1998 and the
twelve months ended March 28, 1997, respectively.
Consulting & Ventures. Consulting & Ventures revenues of $79.6 million in
the twelve months ended March 27, 1998 exceeded the twelve months ended March
28, 1997 revenues of $48.8 million by $30.8 million, an increase of
approximately 63%. This increase is primarily attributable to the acquisitions
of specialized companies primarily serving targeted commercial markets.
Our Consulting & Ventures platform segment profit was $7.3 million in the
twelve months ended March 27, 1998 compared to $0.7 million in the twelve
months ended March 28, 1997. The increase in segment profit is also due to the
acquisitions that occurred in the twelve months ended March 27, 1998. The
Consulting & Ventures segment profit was 9.1% and 1.4% of Consulting & Ventures
revenues for the twelve months ended March 27, 1998 and the twelve months ended
March 28, 1997, respectively.
Outsourced Services. Outsourced Services revenues in the twelve months ended
March 27, 1998 were $6.8 million, from the OHM acquisition, compared to none in
the twelve months ended March 28, 1997. As discussed previously, the OHM
acquisition occurred on February 25, 1998 and consequently no revenue from OHM
was included in the twelve months ended March 28, 1997 results.
Outsourced Services reported $0.9 million in segment profit in the twelve
months ended March 27, 1998 compared to none in the twelve months ended March
28, 1997.
International. International revenues were $9.6 million in the twelve months
ended March 27, 1998 compared to $4.7 million in the twelve months ended March
28, 1997. This increase is the result of the Chi Mei acquisition in October
1996.
The International platform segment loss of $1.4 million in the twelve months
ended March 27, 1998 compares to segment profit of $0.2 million in the twelve
months ended March 28, 1997. The higher loss is the result of losses on
selected international projects.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 7.2% of revenues in the
twelve months ended March 27, 1998 and 9.2% in the twelve months ended March
28, 1997. Selling, general and administrative expenses of $31.8 million in the
twelve months ended March 27, 1998 were $1.7 million or 5.0% lower than the
twelve months ended March 28, 1997 level primarily due to the full year impact
of the corporate restructuring initiated at the end of the second fiscal
quarter of 1997 and the relocation of our corporate headquarters in the first
quarter of the twelve months ended March 27, 1998 which resulted in reduced
lease expense and labor cost as
36
<PAGE>
we integrated and consolidated management and corporate functions into our
largest facility (see "Special Charges").
Selling, general and administrative expenses include goodwill amortization
of $1.4 million for the twelve months ended March 27, 1998 and $0.8 million for
the twelve months ended March 28, 1997. Selling, general and administrative
expenses, excluding goodwill, were 6.9% of revenues for the twelve months ended
March 27, 1998 and 9.0% of revenues for the twelve months ended March 28, 1997.
Special Charges
Special charges of $14.2 million were recorded in the twelve months ended
March 27, 1998. These special items include $5.7 million for integration costs
associated with the acquisition of OHM, $3.9 million non-cash charge related to
the Helen Kramer project claim settlement, $2.8 million charge associated with
the relocation of our corporate headquarters, and $1.8 million loss from the
sale of a small remediation services business. See previous table on Special
Charges incurred in the twelve months ended March 27, 1998.
Corporate Restructuring. Special charges of $8.4 million were recorded in
the twelve months ended March 28, 1997. The special charge relating to a
corporate restructuring included $3.4 million for severance, $4.1 million for
closing and reducing the size of selected offices and $0.9 million for other
related items. As part of the restructuring plan, we laid-off 133 employees and
paid over $2.5 million in termination benefits. In addition, we approved a plan
to close five leased facilities and reduce the size of eleven other leased
facilities by either sublease or abandonment. 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 leases. One of these facility closures has a
remaining lease obligation of approximately six years. A summary of the special
charges incurred during the twelve months ended March 28, 1997 is outlined
below:
<TABLE>
<CAPTION>
Twelve Months Ended March 28, 1997
-----------------------------------------------
Cash/ Special Reserve balance
Noncash Charges Activity at 12/25/98
------- -------------- -------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Corporate Restructuring:
Severance and relocation...... Cash $(3,400) $3,400 $ --
Duplicative offices/assets.... Cash (4,100) 3,227 (873)
Other......................... Cash (903) 903 --
------- ------ -----
Total....................... $(8,403) $7,530 $(873)
======= ====== =====
</TABLE>
Interest, Net
Net interest expense was 1.8% of revenues in the twelve months ended March
27, 1998 and 1.5% of revenues in the twelve months ended March 28, 1997. The
following table shows net interest expense for these comparative periods:
<TABLE>
<CAPTION>
Twelve Months Ended
-------------------
March 27, March 28,
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Interest incurred........................................... $10,730 $ 7,168
Capitalized interest........................................ (10) --
Interest income............................................. (2,751) (1,908)
------- -------
Interest, net............................................. $ 7,969 $ 5,260
======= =======
</TABLE>
The increase in the twelve months ended March 27, 1998 net interest expense
compared to the twelve months ended March 28, 1997 of $2.7 million is
attributable to the credit facilities used in the OHM acquisition
37
<PAGE>
(see "Notes to Consolidated Financial Statements--Long-term debt"). Loan
origination costs, fees and interest expense incurred for the period February
25, 1998 to March 27, 1998 related to the acquisition of OHM stock were
approximately $3.4 million.
Income Taxes
For the twelve months ended March 27, 1998, we reported a loss from
continuing operations before income taxes and an extraordinary item of $2.2
million and recorded an income tax charge of $4.2 million after adjusting for
the special charge and a $2.3 million deferred tax asset valuation adjustment
prior to the acquisition of OHM. We also recognized a tax benefit of $3.5
million on an extraordinary charge for the early extinguishment of debt and a
$3.0 million benefit for a loss from disposition of a discontinued operation.
The total net tax benefit is $2.4 million. Our effective income tax rate from
continuing operations is more than the federal statutory rate primarily due to
the above charge, state income taxes and nondeductible expenses (see "Notes to
Consolidated Financial Statements--Income taxes").
For the twelve months ended March 28, 1997, in which we reported a loss from
continuing operations before income taxes of $9.0 million, we recorded an
income tax benefit of $0.2 million which included a $4.6 million tax charge
resulting from the adjustment of our deferred tax asset valuation allowance
based on our assessment of the uncertainty as to when we will generate a
sufficient level of future earnings to realize the deferred tax asset created
by the special charges (see "Special Charges").
Dividends
Our dividends are summarized below:
<TABLE>
<CAPTION>
Dividend Summary on
Preferred Stock
-------------------
March 27, March 28,
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
7% Cumulative convertible exchangeable cash dividend....... $3,595 $4,050
6% Cumulative convertible participating
--Imputed non-cash dividend.............................. 2,105 866
--In kind 3% stock dividend (including cash paid of
$12,000 for fractional shares).......................... 467 --
------ ------
Total.................................................. $6,167 $4,916
====== ======
</TABLE>
Commencing with November 21, 1997, our Convertible Preferred Stock
outstanding accrued a 3% in-kind stock dividend for one year during which the
statement of operations also included an imputed dividend at a rate of
approximately 3% per annum.
Discontinued Operations
At December 25, 1998, our consolidated balance sheet included accrued
liabilities of $7.9 million to complete the closure and post-closure of our
disposal facilities and the PRP matters net of trust fund and annuity
investments, restricted to closure and post-closure use and anticipated
insurance settlement proceeds. In the twelve 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 announced approval by the California Department of
Toxic Substances Control 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
38
<PAGE>
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 "Notes to
Consolidated Financial Statements--Discontinued operations."
39
<PAGE>
THE IT GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $45.4 million or 60.6% to $120.3 million at
December 25, 1998 from $74.9 million at March 27, 1998 as a result of the
acquisitions of OHM and GTI. The current ratio at December 25, 1998 was 1.44:1
which compares to 1.38:1 at March 27, 1998.
Cash used by operating activities for the nine months ended December 25,
1998 totaled $34.5 million compared to $19.5 million of cash used for operating
activities in the twelve months ended March 27, 1998. This $15.0 million
increase is principally due to an increase in working capital requirements as a
result of the OHM acquisition. The $34.5 million of cash used for operating
activities during the nine months ended December 25, 1998 also includes $11.1
million of costs associated with our discontinued operations (see "Notes to
Consolidated Financial Statements--Discontinued operations"). We expect our
discontinued operations cash usage for the twelve months ended December 31,
1999 to be less than $8.0 million.
Capital expenditures were $6.9 million, $4.8 million and $3.4 million for
the nine months ended December 25, 1998, the twelve months ended March 27, 1998
and the twelve months ended March 28, 1997, respectively. Capital expenditures
for the nine months ended December 25, 1998 were $2.1 million higher than the
twelve months ended March 27, 1998 due primarily to computer related
expenditures required to integrate our recent acquisitions. We expect capital
expenditures to increase to approximately $14.0 million in fiscal year 1999 due
to information technology upgrades required to integrate recent acquisitions.
Cash used for the acquisition of businesses, net of cash acquired was $81.3
million and $163.2 million for the nine months ended December 25, 1998 and the
twelve months ended March 27, 1998, respectively. On February 25, 1998, we
purchased 54% of OHM for $160.2 million which is included in the Consolidated
Statements of Cash Flows net of $12.0 million of cash acquired. On June 11,
1998, we paid $34.8 million as part of the consideration to acquire the balance
of OHM. On December 3, 1998, we acquired GTI for $69.4 million (or $40.1
million net of $29.3 million in cash acquired). We also acquired speciality
consulting firms PHR, PEG, JSC and LandBank for cash during the twelve months
ended March 27, 1998. These acquisition agreements, along with the acquisition
of Beneco by OHM, include potential future contingent payments. The total
potential future contingent payments range from a low of $1.9 million to a
maximum of approximately $19.1 million.
We do not expect to pay significant cash income taxes over the next several
years due to our net operating loss carryforwards. (See "Notes to Consolidated
Financial Statements--Income taxes" and "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Income Taxes".)
In connection with the OHM acquisition, we entered into a $240.0 million
credit facility which was used to complete the cash tender offer to acquire 54%
of OHM, to refinance our $65.0 million principal amount of senior notes and for
working capital purposes until we acquired the balance of OHM on June 11, 1998.
On June 11, 1998, the credit facilities were amended and restated to effect a
$378.0 million refinancing. Under this refinancing, we initially borrowed
$228.0 million under term loan provisions and approximately $85.0 million
through a revolving credit facility. On September 14, 1998, the lenders under
the credit facilities approved the first amendment, increasing the revolving
credit facility from $150.0 million to $185.0 million.
Long-term debt, including OHM's 8% convertible subordinated debentures, of
$405.1 million at December 25, 1998 increased from $284.7 million at March 27,
1998 primarily due to the acquisitions of OHM and GTI. (See "Notes to
Consolidated Financial Statements--Long-term debt".) Our ratio of total debt,
including current portion, to equity was 1.77:1 at December 25, 1998, 2.03:1 at
March 27, 1998 and 0.42:1 at March 28, 1997. See "Notes to Consolidated
Financial Statements--Long-term debt".
Due to conditions existent in the long-term credit markets during the third
and fourth quarter of 1998, we utilized our revolving credit facility and
current cash flow as described above to finance the acquisition of GTI.
40
<PAGE>
As a result of the utilization of funds for acquisition purposes and a $28.8
million increase in unbilled receivables related to certain government projects
which, according to the contract terms can not be billed until certain
milestones are achieved, we have utilized a larger portion of our existing
revolving credit capacity than would normally be expected. Between the date of
the GTI acquisition and mid March 1999, we have had average daily availability
under our revolving credit facilities and cash of $25.0 million. We continue to
have significant cash requirements including interest, operating lease
payments, preferred dividend obligations, required term loan and subordinated
debenture principal payments, the potential acquisition contingent payments
discussed above, expenditures for the closure of our inactive disposal sites
and PRP matters (see "Transportation, Treatment and Disposal Discontinued
Operations") and contingent liabilities.
The EFM and Roche acquisitions require an aggregate cost which (excluding
potential earnout payments) we estimate to be approximately $85.4 million. To
finance the acquisitions and to pay down borrowings under our revolving credit
facilities, and with improving conditions in the capital markets, we have begun
a private placement of $200 million of senior subordinated notes (Notes). If
the offering is completed, the Notes will have a fixed rate of interest payable
every six months in cash commencing in 1999 and will be redeemable on or after
2004. The Notes will be general unsecured obligations, subordinated to
borrowings under our credit facilities and other senior indebtedness and pari
passu with other existing future indebtedness unless the terms of that
indebtedness expressly provide otherwise.
As of December 25, 1998, on an as adjusted basis after giving effect to the
Note offering and the EFM and Roche acquisitions, the aggregate amount of debt
including the current portion would have been approximately $518.2 million, and
approximately $127.7 million would have been available for additional working
and acquisition capital under the revolving credit facilities.
Our obligation to close the EFM acquisition is subject to the successful
completion of the Note offering and if the acquisition does not close on or
before May 27, 1999, either party can terminate the agreement and we will
forfeit $5.5 million in payments we will have made under the agreement by that
time. Our obligations to close the Roche acquisition are not subject to any
financing contingencies, however, we have agreed with Roche's shareholders to
purchase certain shareholders' interests for approximately $3.5 million by
March 31, 1999 and to postpone the purchase of the remaining interests until
completion of the Note offering.
Quantitative and Qualitative Disclosures About Market Risk
The following discussion of our exposure to various market risks contains
"forward looking statements" that involve risks and uncertainties. These
projected results have been prepared utilizing certain assumptions considered
reasonable in the circumstances and in light of information currently available
to us. Nevertheless, because of the inherent unpredictability of interest
rates, actual results could differ materially from those projected in such
forward-looking information.
At December 25, 1998, we had fixed-rate debt totaling $44.5 million in
principal amount and having a fair value of $40.7 million. These instruments
are fixed rate and, therefore, do not expose us to the risk of earnings loss
due to changes in market interest rates. However, the fair value of these
instruments would decrease to approximately $40.0 million if interest rates
were to increase by 10% from their levels at December 25, 1998.
At December 25, 1998, we had floating-rate long-term debt totaling $368.8
million in principal amount and having a fair value of $368.8 million. These
borrowings are under our Bank Credit Facilities (see "Notes to Consolidated
Financial Statements--Long-term debt"). We have entered into a swap agreement
with a notional amount of $126.0 million as required by our credit facilities
and to reduce our exposure to adverse fluctuations in interest rates relating
to this debt. We have not entered into any other derivative financial
instruments for trading purposes. If floating rates were to increase by 10%
from December 25, 1998 levels, we would incur additional interest expense of
approximately $1.8 million.
41
<PAGE>
As discussed in our Notes to Consolidated Financial Statements--Discontinued
Operations, our consolidated balance sheet includes $7.9 million of accrued
liabilities to complete the closure and post-closure of our disposal facilities
and other matters, net of certain trust fund and annuity investments which are
restricted to closure and post-closure use and insurance recovery. These trust
fund assets total $20.1 million at December 25, 1998 and consist predominately
of high quality common stocks, fixed rate AAA rated corporate and government
bonds, and annuity investments which provide for periodic payments into the
trust fund. If interest rates were to increase by 10% from their levels at
December 25, 1998, the decrease in fair value of the fixed-rate debt securities
would not be material to us. If the market prices of the individual equity
securities were to decrease by 10% from their levels at December 25, 1998, the
resulting loss in fair value of these securities would not be material to us.
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 recently hired a Year 2000
Program Director and have begun communicating with clients, suppliers,
financial institutions and others with which we do business to coordinate Year
2000 conversion. A significant portion of our business (69%) 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 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 December
25, 1998, we have incurred costs of approximately $0.5 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.
42
<PAGE>
FORWARD LOOKING STATEMENTS
Statements of our 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 our current views about future events and are
subject to risks, uncertainties and assumptions. Such risks, uncertainties and
assumptions include those identified in the "Business" section of this report
and the following:
. changes in laws or regulations affecting our operations, as well as
competitive factors and pricing pressures,
. bidding opportunities and success,
. project results, including success in pursuing claims and change orders,
. management of our cash resources, particularly in light of our
substantial leverage,
. funding of backlog,
. matters affecting contracting and engineering businesses generally, such
as the seasonality of work and the impact of weather and clients' timing
of projects,
. our ability to generate a sufficient level of future earnings to utilize
our deferred tax assets,
. the ultimate closure costs of our discontinued operations,
. the success of our acquisition strategy, including the effects of the
integration of recent acquisitions and any future acquisitions,
including the proposed acquisitions of EFM and Roche described in this
report, and achievement of expected cost savings and other synergies
therefrom, and
. industry-wide market factors and other general economic and business
conditions.
Our actual results could differ materially from those projected in these
forward-looking statements as a result of these factors, many of which are
beyond our control.
43
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE FOR THE NINE MONTHS ENDED DECEMBER 25, 1998
AND TWO YEARS ENDED MARCH 27, 1998
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................... 45
Consolidated Balance Sheets--December 25, 1998 and March 27, 1998...... 46
Consolidated Statements of Operations--Nine Months Ended December 25,
1998
and Years Ended March 27, 1998 and March 28, 1997..................... 47
Consolidated Statements of Stockholders' Equity--Nine Months Ended
December 25, 1998 and Years Ended March 27, 1998 and March 28, 1997... 48
Consolidated Statements of Cash Flows--Nine Months Ended December 25,
1998
and Years Ended March 27, 1998 and March 28, 1997..................... 49
Notes to Consolidated Financial Statements............................. 50
Financial Statement Schedule.
II. Valuation and qualifying accounts.................................. 95
</TABLE>
Schedules not filed herewith are omitted because of the absence in all
material respects of conditions under which they are required or because the
information called for is shown in the consolidated financial statements or
notes thereto.
44
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors
The IT Group, Inc.
We have audited the accompanying consolidated balance sheets of The IT
Group, Inc. as of December 25, 1998 and March 27, 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the nine months ended December 25, 1998 and for each of the two years in the
period ended March 27, 1998. 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 The IT Group, Inc. at December 25, 1998 and March 27, 1998 and the
consolidated results of its operations and its cash flows for the nine months
ended December 25, 1998 and each of the two years in the period ended March 27,
1998 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
Pittsburgh, Pennsylvania
February 15, 1999, except for the
subsequent event footnote as to
which the date is March 8, 1999
45
<PAGE>
THE IT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 25, March 27,
1998 1998
------------ ---------
(In thousands)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 21,265 $ 24,765
Accounts receivable, less allowance for doubtful
accounts of $18,958,000 and $19,026,000,
respectively......................................... 338,589 210,630
Prepaid expenses and other current assets............. 17,308 25,523
Deferred income taxes................................. 15,919 12,750
--------- ---------
Total current assets................................ 393,081 273,668
Property, plant and equipment, at cost:
Land and land improvements............................ 2,166 846
Buildings and leasehold improvements.................. 15,072 18,222
Machinery and equipment............................... 81,763 159,433
--------- ---------
99,001 178,501
Less accumulated depreciation and amortization...... 51,331 102,480
--------- ---------
Net property, plant and equipment................. 47,670 76,021
Cost in excess of net assets of acquired businesses.... 356,619 211,878
Investment in Quanterra................................ -- 16,300
Other assets........................................... 17,469 17,557
Deferred income taxes.................................. 93,719 73,745
Long-term assets of discontinued operations............ 40,048 40,048
--------- ---------
Total assets........................................ $ 948,606 $ 709,217
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 150,912 $ 82,597
Accrued wages and related liabilities................. 44,929 38,395
Billings in excess of revenues........................ 8,219 3,723
Other accrued liabilities............................. 43,254 42,091
Short-term debt, including current portion of long-
term debt............................................ 17,603 16,738
Net current liabilities of discontinued operations.... 7,904 15,200
--------- ---------
Total current liabilities........................... 272,821 198,744
Long-term debt......................................... 364,824 240,147
8% convertible subordinated debentures................. 40,235 44,550
Long-term accrued liabilities of discontinued
operations, net....................................... -- 3,773
Other long-term accrued liabilities.................... 31,979 23,755
Minority interest...................................... 579 50,098
Commitments and contingencies
Stockholders' equity:
Preferred stock, $100 par value; 180,000 shares
authorized
7% cumulative convertible exchangeable, 20,556
issued and outstanding, 24,000 shares authorized... 2,056 2,056
6% cumulative convertible participating, 46,095 and
45,271 shares issued and outstanding............... 4,609 4,451
Common stock, $.01 par value; 50,000,000 shares
authorized; 22,675,917 and 9,737,589 shares issued,
respectively......................................... 227 97
Treasury stock at cost, 47,484 and 8,078 shares,
respectively......................................... (74) (74)
Additional paid-in capital............................ 348,794 246,681
Deficit............................................... (116,984) (104,893)
Accumulated other comprehensive income (deficit)...... (460) (168)
--------- ---------
Total stockholders' equity.......................... 238,168 148,150
--------- ---------
Total liabilities and stockholders' equity.......... $ 948,606 $ 709,217
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE>
THE IT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended --------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
<S> <C> <C> <C>
Revenues............................... $757,435 $442,216 $362,131
Cost and expenses:
Cost of revenues..................... 666,474 391,126 323,993
Selling, general and administrative
expenses............................ 41,828 31,774 33,431
Special charges...................... 24,971 14,248 8,403
-------- -------- --------
Operating income (loss)................ 24,162 5,068 (3,696)
Other income, net...................... -- 716 --
Interest, net.......................... (24,895) (7,969) (5,260)
-------- -------- --------
Loss from continuing operations before
income taxes.......................... (733) (2,185) (8,956)
(Provision) benefit for income taxes... (6,694) (4,175) 179
-------- -------- --------
Loss from continuing operations........ (7,427) (6,360) (8,777)
Discontinued operations--closure costs
(net of $3,040 income tax benefit).... -- (4,960) --
-------- -------- --------
Loss before extraordinary item......... (7,427) (11,320) (8,777)
Extraordinary item--early
extinguishment of debt (net of $3,497
income tax benefit)................... -- (5,706) --
Net loss............................... (7,427) (17,026) (8,777)
Less preferred stock dividends......... (4,664) (6,167) (4,916)
-------- -------- --------
Net loss applicable to common stock.... $(12,091) $(23,193) $(13,693)
======== ======== ========
Net loss per share basic and diluted:
Continuing operations (net of
preferred stock dividends).......... $ (0.63) $ (1.28) $ (1.48)
Discontinued operations--loss from
remediation......................... -- (0.51) --
Extraordinary item--early
extinguishment of debt.............. -- (0.59) --
-------- -------- --------
$ (0.63) $ (2.38) $ (1.48)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE>
THE IT GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For nine months ended December 25, 1998 and
two years ended March 27, 1998
(In thousands)
<TABLE>
<CAPTION>
7% 6%
cumulative cumulative Accumulated
convertible convertible Other
exchangeable participating Additional Comprehensive
preferred preferred Common Treasury paid-in Income
stock stock stock stock capital Deficit (Deficit) Totals
------------ ------------- ------ -------- ---------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 29,
1996................... $2,400 $ -- $ 91 $(84) $206,465 $ (68,007) $ -- $140,865
Comprehensive income:
Net loss.............. -- -- -- -- -- (8,777) -- (8,777)
Foreign currency
translation
adjustments net of
tax.................. -- -- -- -- -- -- (17) (17)
--------
Comprehensive loss..... (8,794)
--------
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)
------ ------ ---- ---- -------- --------- ----- --------
Balance at March 28,
1997................... 2,056 4,204 97 (74) 244,287 (81,700) (17) 168,853
Comprehensive income:
Net loss.............. -- -- -- -- -- (17,026) -- (17,026)
Foreign currency
translation
adjustments net of
tax.................. -- -- -- -- -- -- (151) (151)
--------
Comprehensive loss..... (17,177)
--------
Restricted stock....... -- -- -- -- 223 -- -- 223
Dividends on preferred
stock................. -- 247 -- -- 2,232 (6,167) -- (3,688)
Stock options
exercised............. -- -- -- -- (61) -- -- (61)
------ ------ ---- ---- -------- --------- ----- --------
Balance at March 27,
1998................... 2,056 4,451 97 (74) 246,681 (104,893) (168) 148,150
Comprehensive income:
Net loss.............. -- -- -- -- -- (7,427) -- (7,427)
Foreign currency
translation
adjustments net of
tax.................. -- -- -- -- -- -- (292) (292)
--------
Comprehensive loss..... (7,719)
--------
Restricted stock....... -- -- -- -- 38 -- -- 38
Dividends on preferred
stock................. -- 158 -- -- 1,421 (4,664) -- (3,085)
IT shares issued in
exchange for OHM
stock, net of stock
issue costs........... -- -- 130 -- 100,654 -- -- 100,784
------ ------ ---- ---- -------- --------- ----- --------
Balance at December 25,
1998................... $2,056 $4,609 $227 $(74) $348,794 $(116,984) $(460) $238,168
====== ====== ==== ==== ======== ========= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE>
THE IT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended --------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $ (7,427) $ (17,026) $ (8,777)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities:
Net loss from discontinued
operations....................... -- 4,960 --
Extraordinary charge for early
retirement of debt............... -- 3,640 --
Depreciation and amortization..... 20,094 13,158 14,363
Non-recurring special charges..... 24,971 5,743 --
Deferred income taxes............. 6,187 678 370
Other............................. 13 (980) (45)
Changes in assets and liabilities, net
of effects from acquisitions and
dispositions of businesses:
(Increase) decrease in receivables.. (88,612) 386 25,422
(Increase) decrease in prepaid
expenses and other current assets.. (364) (717) 601
Increase (decrease) in accounts
payable............................ 65,359 (7,687) 905
(Decrease) increase in accrued wages
and related liabilities............ (14,825) (4,471) 2,473
Increase (decrease) in billings in
excess of revenues................. 4,496 (4,634) 5,183
(Decrease) increase in other accrued
liabilities........................ (30,190) 1,591 (2,111)
(Decrease) increase in other long-
term accrued liabilities........... (3,126) 733 452
Decrease in liabilities of
discontinued operations............ (11,069) (14,914) (14,041)
--------- --------- --------
Net cash (used for) provided by
operating activities............... (34,493) (19,540) 24,795
Cash flows from investing activities:
Capital expenditures.................. (6,860) (4,766) (3,361)
Investment in Quanterra............... -- -- (3,325)
Proceeds from sale of equity interest
in Quanterra......................... 5,750 -- --
Proceeds from disposition of business -- 2,800 --
Acquisition of businesses, net of cash
acquired............................. (81,332) (163,189) (1,455)
Other, net............................ 1,003 (4,896) 700
--------- --------- --------
Net cash used by investing
activities........................... (81,439) (170,051) (7,441)
Cash flows from financing activities:
Financing costs....................... (6,179) (4,113) --
Repayments of long-term borrowings.... (409,690) (68,666) (438)
Long-term borrowings.................. 531,015 210,940 962
Net proceeds from issuance of
preferred stock...................... -- -- 40,609
Dividends paid on preferred stock..... (2,714) (2,702) (4,050)
Issuances of common stock, net........ -- -- (33)
--------- --------- --------
Net cash provided by financing
activities........................... 112,432 135,459 37,050
--------- --------- --------
Net (decrease) increase in cash and cash
equivalents............................ (3,500) (54,132) 54,404
Cash and cash equivalents at beginning
of period.............................. 24,765 78,897 24,493
--------- --------- --------
Cash and cash equivalents at end of
period................................. $ 21,265 $ 24,765 $ 78,897
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies:
Basis of presentation and principles of consolidation
The consolidated financial statements include The IT Group, Inc. (formerly
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 in which the Company does not have in excess of 50%
of voting control. Intercompany transactions are eliminated.
On June 9, 1998, the Board of Directors of IT approved a change in IT's
fiscal year end from the last Friday in March of each year to the last Friday
of December of each year. The report covering the transition period is IT's
Annual Report on Form 10-K for the nine months ended December 25, 1998.
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.
Recent Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement will be 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 effect of market volatility on interest rates will have a material
effect on earnings for the existing contracts including anticipated
modifications.
50
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Transition Period
The Company elected to change its fiscal year-end from the last Friday in
March to the last Friday in December effective for the nine months ended
December 25, 1998. Comparative information for the nine months ended December
25, 1998, December 26, 1997 and December 27, 1996 is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
December 25, December 26, December 27,
1998 1997 1996
------------ ------------ ------------
(unaudited) (unaudited)
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues............................... $757,435 $306,178 $266,419
Cost of revenues....................... 666,474 271,572 239,778
-------- -------- --------
Gross profit........................... 90,961 34,606 26,641
Selling, general and administrative
expense............................... 41,828 21,182 25,339
Special charges........................ 24,971 8,554 8,403
-------- -------- --------
Operating income (loss)................ 24,162 4,870 (7,101)
Interest, net.......................... (24,895) (3,386) (4,105)
-------- -------- --------
Income (loss) from continuing
operations............................ (733) 1,484 (11,206)
(Provision) benefit for income taxes... (6,694) (4,316) 1,146
-------- -------- --------
Net loss............................... (7,427) (2,832) (10,060)
-------- -------- --------
Less preferred stock dividends......... (4,664) (4,609) (3,395)
-------- -------- --------
Net loss applicable to common stock.... $(12,091) $ (7,441) $(13,455)
======== ======== ========
Basic and diluted loss per common
share................................. $ (0.63) $ (0.76) $ (1.48)
======== ======== ========
</TABLE>
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. The Company's contracts are generally
completed within 2 years.
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 to settle the amounts in the ordinary course of
business, leading to some estimates of claim or scope change amounts being
included in revenues. When such amounts are finalized, any changes from the
estimates are reflected in earnings.
Included in accounts receivable, net at December 25, 1998 are billed
receivables, unbilled receivables and retention in the amounts of $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,
51
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$37.5 million and $2.2 million, respectively. At March 27, 1998, billed
receivables, unbilled receivables and retention were $172.7 million, $27.0
million and $10.9 million, respectively. Billed receivables, unbilled
receivables and retention from the U.S. Government as of March 27, 1998 were
$93.1 million, $9.9 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. 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 December 25, 1998 is approximately $31.6
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 "Notes to
Consolidated Financial Statements--Contingencies"). 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.
The Company performs periodic evaluations of its clients' financial
condition and generally does not require collateral. At December 25, 1998,
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--3 to 10 years including salvage value. Amortization of leasehold
improvements is provided using the straight-line method over the term of the
respective lease.
Interest
Interest incurred was $25.9 million, $10.7 million and $7.2 million for the
nine months ended December 25, 1998, the twelve months ended March 27, 1998 and
the twelve months ended March 28, 1997, respectively.
Interest income is principally earned on the Company's investments in cash
equivalents and was $1.0 million, $2.8 million and $1.9 million for the nine
months ended December 25, 1998, the twelve months ended March 27, 1998 and the
twelve months ended March 28, 1997, respectively.
Intangible assets
Cost in excess of net assets of acquired businesses is amortized over 20 to
40 years on a straight-line basis. At December 25, 1998 and March 27, 1998,
accumulated amortization is $16.6 million and $9.6 million, respectively. The
Company periodically evaluates the recoverability of intangibles resulting from
business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and prospects and market and economic
conditions. Other intangibles arising principally from acquisitions, are
amortized on a straight-line basis over periods not exceeding 20 years.
52
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
The Company grants stock options for a fixed number of shares to employees
and members of the Board of Directors with an exercise price equal to the fair
value of the shares at the date of grant. The Company accounts for its stock
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB No. 25) and the related interpretations. The pro forma
information regarding net income and earnings per share as required by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) is disclosed in the note Stock incentive
plans: Compensation cost.
Changes in Presentation of Comparative Financial Statements
Certain amounts in the March 27, 1998 financial statements were reclassified
to conform with the presentation in the current period.
Risks and uncertainties
The Company provides a broad range of environmental and hazardous waste
remediation services to its clients located primarily in the United States. The
assessment, remediation, analysis, handling and management of hazardous
substances necessarily involve significant risks, including the possibility of
damages or injuries caused by the escape of hazardous materials into the
environment, and the possibility of fines, penalties or other regulatory
action. These risks include potentially large civil and criminal liabilities
for violations of environmental laws and regulations, and liability to clients
and to third parties for damages arising from performing services for clients,
which could have a material adverse effect on the consolidated financial
condition, liquidity and results of operations of the Company. Although the
Company believes that it generally benefits from increased environmental
regulations and from enforcement of those regulations, increased regulation and
enforcement also create significant risks for the Company.
The Company does not believe there are currently any material environmental
liabilities related to continuing operations not already recorded or disclosed
in its financial statements. The Company anticipates that its compliance with
various laws and regulations relating to the protection of the environment will
not have a material effect on its capital expenditures, future earnings or
competitive position.
The Company's revenue from governmental agencies accounted for 74%, 63% and
67% of revenue for the nine months ended December 25, 1998, the twelve months
ended March 27, 1998 and the twelve months ended March 28, 1997, respectively.
Because of its dependence on government contracts, the Company also faces the
risks associated with such contracting, which could include civil and criminal
fines and penalties. As a result of its government contracting business, the
Company has been, is and may in the future be subject to audits and
investigations by government agencies. The fines and penalties which could
result from noncompliance with the Company's government contracts or
appropriate standards and regulations, or the Company's suspension or debarment
from future government contracting, could have a material adverse effect on the
consolidated financial condition, liquidity and results of operations of the
Company. The dependence on government contracts will also continue to subject
the Company to significant financial risk and an uncertain business environment
caused by any federal budget reductions.
In addition to the above, there are other risks and uncertainties that
involve the use of estimates in the preparation of the Company's consolidated
financial statements. (See "Business Acquisitions and Commitments and
contingencies").
53
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value of financial instruments (continuing operations)
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.
Long and short-term debt: The fair value of the 8% convertible subordinated
debentures was based on a quoted market price at December 25, 1998. The
carrying amount of the credit agreement and other debt approximates its fair
value.
The carrying amounts and estimated fair values of the Company's financial
instruments are:
<TABLE>
<CAPTION>
December 25, 1998 March 27, 1998
------------------- -------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 21,265 $ 21,265 $ 24,765 $ 24,765
Long and short-term debt:
Credit agreement debt:
Revolver borrowings outstanding--
pre-OHM Merger.................... -- -- 33,200 33,200
Revolver borrowings outstanding.... 143,000 143,000 126,293 126,293
Term Loan.......................... 225,750 225,750 80,000 80,000
8% Convertible Subordinated
Debentures--Due October 1, 2006..... 44,548 40,650 46,753 45,643
Other................................ 9,364 9,364 15,189 15,189
</TABLE>
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>
54
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $0.9 million has been paid through December 25,
1998. The balance will be paid primarily over the next twelve months.
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 primarily 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, 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 has been finalized during the nine months ended December 25, 1998 and
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 has commenced the process of closing specific overlapping facilities
and reducing consolidated employment. The acquired balance sheet includes an
accrual of $16.2 million for the estimated OHM severance, office closure costs
and lease termination costs of which $7.3 million has been paid through
December 25, 1998. The balance relating primarily to office lease costs is
anticipated to be paid over the next seven years.
Pro Forma Effects of Acquisitions
The following unaudited pro forma condensed statements of operations gives
effect to the GTI acquisition as if the acquisition occurred on March 28, 1997
and the effect of the OHM merger as if this merger occurred
55
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
on March 29, 1996. Basic and diluted loss per share has been calculated
utilizing the basic and diluted weighted average of IT shares outstanding
during the periods adjusted for approximately 12.9 million shares of common
stock issued June 11, 1998 for the OHM acquisition assuming the 12.9 million
shares were outstanding as of the beginning of the periods presented.
<TABLE>
<CAPTION>
Twelve Months Ended
Nine months ended -----------------------------
December 25, 1998 March 27, 1998 March 28, 1997
Pro Forma Pro Forma Pro Forma
----------------- -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues...................... $897,284 $1,119,115 $984,945
Loss from continuing
operations before
extraordinary item........... (3,680) (53,074) (12,280)
Net loss...................... (9,771) (48,602) (12,280)
Net loss applicable to common
stock........................ (14,435) (54,769) (17,196)
Loss per share:
Basic and diluted........... (0.64) (2.42) (0.78)
</TABLE>
The above amounts are based upon certain assumptions and estimates which the
Company believes are reasonable. The pro forma results do not reflect
anticipated cost savings and do not necessarily represent results which would
have occurred if the GTI and OHM mergers had taken place at the date and on the
basis assumed above.
Other Acquisitions
The Company acquired certain other businesses during the twelve months ended
March 27, 1998 and the twelve months ended March 28, 1997 for aggregate
consideration of $12.3 million and $1.5 million, respectively. These
acquisition agreements include potential contingent payments. The Company paid
$1.3 million in cash under two of these agreements through December 25, 1998.
Potential future contingent payments relating to these acquisitions as of
December 25, 1998 range from a low of $1.9 million to a maximum of
approximately $9.1 million. The Company paid $1.9 million in January 1999. In
accordance with Accounting Principles Board Opinion No. 16--Business
Combinations, these acquisitions were accounted for using the purchase method
and in the aggregate were not material to require disclosure of pro forma
financial information. In addition, in connection with the acquisition of OHM,
the Company assumed the potential future earnout payments relating to Beneco, a
company acquired by OHM in June 1997, which range from a low of zero to a
maximum of $10.0 million. See "Subsequent Events" also for acquisitions after
December 25, 1998.
Consolidated statements of cash flows supplemental disclosures:
Supplemental cash flow information is:
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended -------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Interest paid, net of amounts
capitalized............................ $ 24,634 $ 11,060 $6,713
Interest received....................... 1,008 2,652 1,730
Income taxes paid....................... 335 770 287
Income tax refunds received............. -- 3 1,178
Acquisition liabilities assumed......... 66,050 218,440 6,346
Stock issued in connection with
acquisitions........................... 103,810 -- --
</TABLE>
56
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Special Charges:
Asset Sales. On May 27, 1998, the Company's Board of Directors considered
and approved the divestiture of certain non-core assets. The non-core assets
primarily include the Company's 19% common stock ownership interest in
Quanterra, Inc., (an environmental laboratory business) and the assets
associated with the Company's Hybrid Thermal Treatment System (HTTS(R))
business (thermal transportable incineration equipment). As a result of these
actions, the Company recorded a non-cash charge of $25.0 million in the three
months ending June 26, 1998 including $10.6 million (net of cash proceeds of
$5.8 million) related to the sale of the Quanterra investment and $14.4
million, primarily related to assets associated with the HTTS(R) business.
Special charges of $14.2 million were recorded in the twelve months ended
March 27, 1998. The charges include $5.7 million for integration costs
associated with the acquisition of OHM, a $3.9 million non-cash charge related
to a project claim settlement, a $2.8 million charge associated with the
relocation of the Company's corporate headquarters, and a $1.8 million loss
from the sale of a small remediation services business.
OHM. 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 consolidating the
Company's offices with OHM offices. As part of the plan of integration, the
Company identified slightly more than 100 IT employees, primarily 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 December 25, 1998,
$1.3 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 seven
years.
Helen Kramer. In December 1997, the Company settled a contract claim which
has been outstanding in excess of five years with the US Army Corps of
Engineers, the U.S. Environmental Protection Agency (USEPA) and the Department
of Justice (jointly Government) arising out of work performed by the joint
venture of IT and Davy International at the Helen Kramer Superfund project. On
December 26, 1997, the joint venture received a $14.5 million payment from the
Government to resolve all outstanding project claims related to additional work
resulting from differing site conditions. In early January 1998, the joint
venture paid $4.3 million to the Government to resolve related civil claims by
the Government. IT's share of the joint venture results is 60%, accordingly, IT
received net cash of $6.0 million, its proportionate share of the settlement.
In December 1997, the Company recorded a non-cash pre-tax charge of $3.9
million as the cash received was less than the unbilled and billed receivables
related to this project which totaled approximately $9.2 million and $0.7
million, respectively.
Relocation. The special charges that occurred in the first quarter of the
twelve months ended March 27, 1998 resulted from the relocation of the
Company's corporate headquarters from Torrance, California to Monroeville
(Pittsburgh), Pennsylvania and the sale of its California based small project
remediation services business. The headquarters relocation consolidated the
corporate overhead functions with the Company's largest operations office and
moved it closer to its lenders and largest shareholders which are located in
the Eastern United States. As a result of this relocation, the Company incurred
a pre-tax charge of $2.8 million. The relocation charge included $0.8 million
of costs for severance, $0.9 million of costs for the relocation of IT
employees, $0.7 million of costs related to the closure of the offices in
Torrance, California and $0.4 million of other related costs. As part of this
relocation, 32 employees were laid off, primarily corporate management and
administrative support personnel. As of December 25, 1998, these amounts have
been paid. In May 1997, the
57
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company incurred a non-cash pre-tax charge of $1.8 million to sell its
California based small projects remediation services business.
Restructuring. In conjunction with the corporate restructuring which was
initiated in the second quarter of the twelve months ended March 28, 1997, the
Company incurred a pre-tax restructuring charge of $8.4 million. The
restructuring charge included $3.4 million of costs for severance, $4.1 million
of costs for closing and reducing the size of a number of the Company's
offices, and $0.9 million of costs for other related items. As part of the plan
of termination, the Company laid-off 133 employees and paid over $2.5 million
in termination benefits. In addition, the Company approved a plan to close five
leased facilities and reduce the size of eleven other leased facilities by
either sublease or abandonment. 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 approximately six years. At December 25, 1998, $0.9 million
of the charge remained to be paid.
Long-term debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 25, March 27,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
8% Convertible Subordinated Debentures--Due October 1,
2006................................................ $ 44,548 $ 46,753
Credit Agreement Debt:
Revolver borrowings outstanding...................... -- 33,200
Revolver borrowings outstanding...................... 143,000 126,293
Term Loan............................................ 225,750 80,000
Other.................................................. 9,364 15,189
-------- --------
422,662 301,435
Less current portion................................... 17,603 16,738
-------- --------
$405,059 $284,697
======== ========
</TABLE>
Aggregate maturity of long-term debt, including annual mandatory sinking
fund payments for the convertible subordinated debentures, for the five fiscal
years following December 25, 1998 is: 1999, $17.6 million; 2000, $9.4 million;
2001, $8.8 million; 2002, $8.8 million; 2003 and thereafter $378.0 million.
The convertible subordinated debentures are convertible into 45.04 shares of
common stock and $107.50 cash per $1,000 unit with interest payable
semiannually on April 1 and October 1, and are redeemable at the option of the
Company. The convertible subordinated debentures require annual mandatory
sinking fund payments of 7.5% of the principal amount which commenced in 1996,
and continue through October 1, 2005.
IT executed the OHM Tender Offer with a $240.0 million credit facility (the
credit facilities). The credit facilities were used to complete the Tender
Offer, to refinance IT's $65.0 million principal amount of senior notes and for
working capital purposes during the period from the Tender Offer closing date
of February 25, 1998 until the merger closing date of June 11, 1998. Loans made
under the credit facilities bore interest at a rate equal to LIBOR plus 2.50%
per annum (or the Bank's base rate plus 1.50% per annum) through June 10, 1998,
at the Company's option and required no amortization. The Company recorded an
extraordinary charge of $9.2 million, reduced by $3.5 million of deferred tax
benefit, as the result of the early extinguishment of existing debt necessary
to obtaining the credit facilities. On June 11, 1998, upon consummation of the
second step of the OHM acquisition (see "Business Acquisitions"), the Company's
credit facilities were refinanced. As such, the
58
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company classified applicable portions of the credit facilities outstanding as
of March 27, 1998 as long-term debt in accordance with the provisions of the
credit facilities.
After the refinancing in conjunction with the OHM Merger, the 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 2.50% per annum (or the lender's base rate plus 1.50%
per annum) and amortize on a semi-annual basis in aggregate annual installments
of $4.5 million for the first six years after the OHM Merger, with the
remainder payable in eight equal quarterly installments in the seventh and
eighth years after the OHM Merger. The revolving loans made under the credit
facilities bear interest at a rate equal to LIBOR plus 2.00% per annum (or the
lender's base rate plus 1.00% per annum). Six months after completion of the
merger, adjustments to the interest rates were made based on the ratio of IT's
consolidated total debt to consolidated earnings before interest, taxes,
depreciation and amortization. The credit facilities are secured by a security
interest in substantially all of the assets of the Company and its
subsidiaries. In addition, the facilities include representations, warranties
and covenants customary for facilities of this type that include various
financial covenants and limitations (subject to certain exceptions) on
indebtedness, lease obligations, mergers and acquisitions and other fundamental
changes prohibit the payment of cash dividends on common stock and limit
capital expenditures. The credit facilities also include customary events of
default. Events constituting default include a change of control of IT
including among other things, the disposition under certain circumstances of
the Company's 6% Cumulative Convertible Participating Preferred Stock and
warrants on or after the funding of the credit facilities on June 11, 1998 to a
person other than the Preferred Stock Group (see "Notes to Consolidated
Financial Statements--Preferred stock").
On September 14, 1998, the lenders under the credit facilities approved the
first amendment to the loan agreement covering the credit facilities to
increase the revolving credit facility from $150.0 million to $185.0 million.
This increase in revolver funding availability was based upon growth
projections of the Company's business, the increase in seasonality of revenue
streams related to OHM contracts and to create additional flexibility to
finance further strategic and diversifying acquisitions, particularly due to
turmoil in the long-term credit markets during the second half of 1998.
At October 26, 1998, the lenders under the credit facilities approved the
second amendment to the agreement. This second amendment provided for the
acquisition of GTI as a permitted acquisition under the credit facilities,
provided for the borrowing of up to $35.0 million under the revolving credit
facility to make the GTI acquisition and amended the financial covenants to
provide for the effects of the GTI acquisition. IT closed the acquisition of
GTI on December 3, 1998. The GTI acquisition was funded through the use of the
Company's cash on hand, borrowing of $35.0 million under the revolving facility
and use of $20.0 million of GTI's cash on hand, which was loaned to the Company
and is evidenced by an interest bearing promissory note payable on demand.
Letters of credit outstanding at December 25, 1998 were $20.4 million.
As required by the credit facilities, on August 11, 1998, the Company
executed a six year swap agreement with a large multi national banking
organization. The swap agreement is based upon a notional amount of $126.0
million wherein the Company, the fixed-rate payer, pays (receives) the
difference between 3-month LIBOR and a fixed rate of 5.58% with its swap
counter-party, the floating-rate payer. The LIBOR rate is adjusted quarterly
and amounts owing or due are settled at each quarterly reset date. The Company
charges (credits) amounts exchanged under the swap to interest expense. Net
credits to the Company in the nine months ended December 25, 1998 were not
material. The swap agreement contains a one time cancellation option for the
counter-party and an imbedded interest rate cap for the Company. At any
quarterly reset date beginning with February 11, 2000, the counter-party, at
its option, may cancel the swap agreement for the remaining term. If the
counter-party elects to exercise its cancellation option, the Company receives
the benefit of a 7% interest
59
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rate cap on the notional amount of $126.0 million. The terms of the interest
rate cap allow the Company to utilize the interest rate cap for any six
quarterly periods during the term of the swap agreement remaining after
exercise of the cancellation option by the counter-party. The election of the
six quarterly cap periods by the Company need not be consecutive quarters. The
mark to market value of the swap at December 24, 1998 represents a cost to the
Company of $3.3 million. This value is based on 1) the shape of the yield curve
at the valuation date, 2) the assumption that future rate changes are parallel
shifts along the yield curve at all points, 3) LIBOR futures prices at the
measurement date and 4) that option volatility remains unchanged from current
levels. The market value of the swap, assuming only a 50 basis point increase
in LIBOR rates, is a positive $1.2 million, reflecting the significant change
in market values associated with small interest rate changes.
The Company also has various miscellaneous outstanding notes payable and
capital lease obligations totaling $9.4 million. These notes payable mature at
various dates between January 1999 and November 2000, at interest rates ranging
from to 7.5% to 8.6%.
Income taxes:
Income tax provision (benefit), net of changes in the deferred tax valuation
allowance, consists of the following:
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended -------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Current:
Federal................................. $ 57 $ 54 $(764)
State................................... 450 559 215
------ ------- -----
507 613 (549)
------ ------- -----
Deferred:
Federal................................. 5,696 (2,801) 336
State................................... 491 (174) 57
Foreign................................. -- -- (23)
------ ------- -----
6,187 (2,975) 370
------ ------- -----
Total provision (benefit)............... $6,694 $(2,362) $(179)
====== ======= =====
</TABLE>
Income tax provision (benefit) is included in the statements of operations
as follows:
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended -------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Continuing operations before
extraordinary items.................... $6,694 $ 4,175 $(179)
Extraordinary item: early extinguishment
of debt................................ -- (3,497) --
------ ------- -----
6,694 678 (179)
Discontinued operations................. -- (3,040) --
------ ------- -----
Total provision (benefit)............. $6,694 $(2,362) $(179)
====== ======= =====
</TABLE>
60
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the provision (benefit) for income taxes on the total
provision (benefit) 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 the total provision (benefit) is as
follows:
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended -------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Income tax benefit computed at statutory
federal income tax rate................ $ (249) $ (743) $(3,045)
State income taxes, net of federal tax
benefit, if any........................ 335 504 179
Equity in income (loss) of foreign
subsidiaries........................... -- 121 --
Amortization of cost in excess of net
assets of acquired businesses.......... 2,557 287 100
Extraordinary item: early extinguishment
of debt................................ -- (3,129) --
Discontinued operations................. -- (2,720) --
Federal deferred tax asset valuation
allowance adjustment................... 6,059 1,906 2,597
Research and development tax credits.... (2,540) -- --
Other................................... 532 1,412 (10)
------- ------- -------
Total provision (benefit)............. $ 6,694 $(2,362) $ (179)
======= ======= =======
</TABLE>
At December 25, 1998 and March 27, 1998, the Company had deferred tax assets
and liabilities as follows:
<TABLE>
<CAPTION>
December 25, March 27,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Closure accruals--discontinued operations............. $ 11,229 $ 15,771
NOL carryforwards..................................... 64,490 72,319
Tax basis in excess of book basis in Quanterra........ -- 11,145
Capital loss carryover................................ 17,446 --
Alternative minimum tax credit carryforwards.......... 3,458 3,458
Investment and other tax credit carryforwards......... 12,750 10,474
Other accrued liabilities............................. 5,458 17,050
Asset basis difference--OHM and GTI................... 62,292 25,987
Other, net............................................ 23,253 7,933
-------- --------
Gross deferred tax asset............................ 200,376 164,137
Valuation allowance for deferred tax asset............ (50,267) (31,865)
-------- --------
Total deferred tax asset............................ 150,109 132,272
Deferred tax liabilities:
Tax depreciation in excess of book depreciation....... (17,120) (19,465)
Asset basis difference--discontinued operations....... (11,576) (13,012)
Other, net............................................ (11,775) (13,300)
-------- --------
Total deferred tax liabilities...................... (40,471) (45,777)
-------- --------
Net deferred tax asset.............................. $109,638 $ 86,495
======== ========
Net current asset....................................... $ 15,919 $ 12,750
Net noncurrent asset.................................. 93,719 73,745
-------- --------
Net deferred tax asset.............................. $109,638 $ 86,495
======== ========
</TABLE>
61
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Approximately $15.2 million and $3.9 million of the valuation allowance
relates to the OHM and GTI acquisitions, respectively. Tax benefits
subsequently recognized that are related to these amounts will reduce cost in
excess of net assets of acquired businesses.
At December 25, 1998, the Company had net operating losses (NOL's), tax
credit carryforwards and capital losses with expiration dates as follows:
<TABLE>
<CAPTION>
Research
Net and Capital
Operating Development Other Loss
Expiration Dates Losses Tax Credits Credits Carry Over
- ---------------- --------- ----------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C>
1998--2003............................. $ 72 $ 1,140 $2,225 $45,910
2004--2008............................. 18,700 3,393 -- --
2009--2013............................. 156,386 5,992 -- --
Indefinite............................. -- -- 3,458 --
-------- ------- ------ -------
Total................................ $175,158 $10,525 $5,683 $45,910
======== ======= ====== =======
</TABLE>
During the nine months ended December 25, 1998, the Company increased its
deferred tax asset valuation allowance from $31.9 million to $50.2 million. The
increase was principally related to the acquisition of OHM and GTI
corporations, respectively, and based on the Company's assessment of the
uncertainty as to when it will generate a sufficient level of future earnings
of applicable character to realize a portion of the deferred tax asset created
by the special charges. Because of the Company's position in the industry,
recent restructuring and acquisitions, and existing backlog, management expects
that its future taxable income 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 twelve months ended March 27, 1998, the Company increased its
deferred tax asset valuation allowance from $9.5 million to $31.9 million. The
increase was principally related to the acquisition of OHM corporation and the
Company's assessment of its ability to fully utilize the deferred tax asset.
During 1998, prior to the acquisition of OHM, the Company increased its
valuation allowance to offset increases in the deferred tax asset balance.
During the fourth quarter, the Company acquired OHM (see "Business
Acquisitions--OHM Acquisition") which substantially increased projected taxable
income.
During the twelve months ended March 28, 1997, the Company increased its
deferred tax asset valuation allowance from $4.9 million to $9.5 million. 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 special charges (see "Special Charges").
62
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings per share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended --------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Loss from continuing operations and
before extraordinary items............ $ (7,427) $ (6,360) $ (8,777)
Preferred stock dividends.............. (4,664) (6,167) (4,916)
-------- -------- --------
Numerator for basic and dilutive
earnings per share--income available
to common stockholders................ (12,091) (12,527) (13,693)
Discontinued operations--closure costs
(net of income tax benefit)........... -- (4,960) --
-------- -------- --------
(12,091) (17,487) (13,693)
Extraordinary charge for early
retirement of debt (net of income tax
benefit).............................. -- (5,706) --
-------- -------- --------
Net income (loss) applicable to common
stock................................... $(12,091) $(23,193) $(13,693)
======== ======== ========
Denominator:
Weighted-average number of common
shares outstanding for basic and
dilutive earnings per share........... 19,149 9,737 9,227
======== ======== ========
Net loss per share:
Earnings from continuing operations
(net of preferred stock dividends).... $ (0.63) $ (1.28) $ (1.48)
Earnings from discontinued operations.. -- (0.51) --
Extraordinary item--early
extinguishment of debt................ -- (0.59) --
-------- -------- --------
Net loss per share....................... $ (0.63) $ (2.38) $ (1.48)
======== ======== ========
</TABLE>
In June 1998, approximately 12.9 million shares were issued in connection
with the second step of the OHM Merger. (See Business Acquisitions.)
Commitments and contingencies:
Lease commitments
The Company's operating lease obligations are principally for buildings and
equipment. Most leases contain renewal options at varying terms. Generally, the
Company is responsible for property taxes and insurance on its leased property.
At December 25, 1998, future minimum rental commitments under noncancelable
leases with terms longer than one year aggregate $125.1 million and require
payments in the five succeeding years and thereafter of $36.8 million, $31.1
million, $22.5 million, $14.6 million, $8.6 million, and $11.5 million,
respectively. A portion of these leased assets represent duplicative facilities
and equipment resulting from the OHM and GTI acquisitions. The Company is
currently and actively involved in attempting to sublease these assets.
Rental expense related to continuing operations was $29.4 million for the
nine months ended December 25, 1998, $12.9 million (including $1.2 million of
the special charges) for the twelve months ended
63
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 27, 1998, and $12.6 million (including $2.2 million of the special
charges) for the twelve months ended March 28, 1997.
Contingencies
Coakley Landfill Action
On March 9, 1998, the Coakley Landfill PRP Steering Committee terminated,
allegedly for cause, IT Corporation's contract to perform design and
remediation services at the Coakley Landfill and sued IT for damages for delay,
redesign, regrading, repair costs, as well as for possible exposure to
penalties by the USEPA. (The Coakley Landfill Group v. IT Corporation v. Gary
W. Blake, Inc., et al., U.S.D.C., D.N.H., Case No. 98-167-JD) IT disputes that
the Steering Committee is entitled to terminate the agreement for cause and
believes the termination action arose from IT's pending change order request of
approximately $6.3 million (which has now grown to $7.2 million). IT has
answered and counterclaimed for damages for wrongful termination, issuing
defective plans and specifications, breach of contract and unfair trade
practices. Discovery of the case is ongoing, and no trial date has been set and
the ultimate outcome of this matter cannot yet be predicted.
Occidental Chemical Litigation
OHM is in litigation in the U.S. District Court for the Western District of
New York with Occidental Chemical Corporation (Occidental) relating to the
Durez Inlet Project performed in 1993 and 1994 for Occidental in North
Tonawanda, New York. (Occidental Chemical Corporation v. OHM Remediation
Services Corporation, U.S.D.C., W.D.N.Y, Case No 94-0955(H)) OHM's account
receivables at December 25, 1998 include a claim receivable of $8.7 million
related to this matter. OHM's work was substantially delayed and its costs of
performance were substantially increased as a result of conditions at the site
that OHM believes were materially different than as represented by Occidental.
Occidental's amended complaint seeks $8.8 million in damages primarily for
alleged costs incurred as a result of project delays and added volumes of
incinerated waste. OHM's counterclaim seeks an amount in excess of $9.2 million
(inclusive of $8.7 million of claim receivable) for damages arising from
Occidental's breach of contract, misrepresentation and failure to pay
outstanding contract amounts. The Company has established additional reserves
for a portion of the receivables related to this matter. Management believes
that it has established adequate reserves should the resolution of the above
matter be lower than the amounts recorded. The parties have completed discovery
in the case and filed motions for summary judgement against each other.
Although the court may rule on the matter at any time, its ultimate outcome
cannot be predicted.
GM--Hughes Massena Litigation
These two matters (General Motors Corporation v. OHM Remediation Services
Corporation, U.S.D.C., N.D.N.Y., Case No. 7:96-CV-1214TJMDS) and (OHM
Remediation Services Corporation v. Hughes Environmental Systems, Inc. And ERM
Northeast, Inc., U.S.D.C., N.D.N.Y., Case No. 7:96-CV-0110TJMDS) have now been
fully settled.
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. In the course of the Company's business, there is always
64
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
risk and uncertainty in pursuing and defending claims and litigation and, not
withstanding the reserves currently established, adverse future results in
litigation or other proceedings could have a material adverse effect upon the
Company's consolidated financial condition, liquidity and results of
operations.
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 a material adverse effect on the consolidated
financial conditional, liquidity and results of operations of the Company.
Preferred stock:
Carlyle Investment
At the November 20, 1996 Annual Meeting of Stockholders, IT's shareholders
voted to approve a $45.0 million 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 detachable warrants to purchase 1,250,000 shares of IT common stock,
par value $.01 per share (Carlyle Warrants). The net proceeds to IT (after
related offering costs of $4.4 million) from the Carlyle Investment were $40.6
million.
Carlyle holds approximately 21% (approximately 24% assuming exercise of the
Carlyle Warrants) of the voting power of IT. Until November 20, 2001, the
holders of the Convertible Preferred Stock have the right to elect a majority
of the IT Board of Directors, provided that such holders continue to hold at
least 20% of the voting power of IT. The terms of the Convertible Preferred
Stock provide that, until November 20, 2001, the holders of the Convertible
Preferred Stock have the right to elect a majority of the Board of Directors of
the Company, provided that Carlyle continues to own at least 20% of the voting
power of the Company.
The 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 were payable in the first year;
dividends were payable quarterly in kind for the second year at the rate of 3%
per annum and, through November 1998, Carlyle was paid dividends of an
additional 1,095 shares of Convertible Preferred Stock. Commencing November 21,
1998, dividends are payable 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 detachable warrants may at any time, at
the option of Carlyle, be converted into IT common shares. At December 25,
1998, 7,323,015 and 1,250,000 common shares are issuable upon conversion of the
Convertible Preferred stock and Carlyle Warrants, respectively. 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 were imputed during this period at a rate of
approximately 6% per annum. Imputed dividends were $0.9 million, $2.1 million
and $0.9 million in the nine months ended December 25, 1998, the twelve months
ended
65
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 27, 1998 and the twelve months ended March 28, 1997, respectively. 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. At December 25, 1998,
2,199,903 shares of common stock are issuable upon conversion of the 7%
Preferred stock. 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.
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 December 25, 1998, the maximum number of shares of the
Company's common stock that may be issued pursuant to awards granted under the
1996 Plan is 242,819. At January 1 of each year, the maximum number of shares
available for award under the 1996 Plan may be increased by Board approval by
an amount which represents up to 2% of the number of the Company's common stock
which are issued and outstanding at that
66
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
date. During the nine months ended December 25, 1998, 331,500 stock options
were granted under the 1996 Plan, which expire in fiscal year 2008.
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 December 25, 1998 will
expire at various dates through January 20, 2008.
Changes in the number of shares represented by outstanding options under the
1996 Plan, the 1991 Plan and the 1983 Plan during the nine months ended
December 25, 1998, the twelve months ended March 27, 1998 and the twelve months
ended March 28, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended --------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
<S> <C> <C> <C>
Outstanding at beginning of year......... 770,457 747,679 744,847
Options converted........................ 262,125 -- --
Options granted
(Nine months ended December 25, 1998,
$6.44--$10.13 per share; 1998, $7.00--
$8.50 per share; 1997, $8.63 per
share)................................ 331,000 132,921 171,000
Options exercised
(Nine months ended December 25, 1998,
$10.24 per share 1997, $11.50 per
share)................................ (750) -- (3,629)
Options expired and forfeited............ (51,156) (110,143) (164,539)
--------- -------- --------
Outstanding at end of year ($7.00--$32.50
per share).............................. 1,311,676 770,457 747,679
========= ======== ========
Vested options........................... 776,500 486,520 473,257
========= ======== ========
Common stock reserved for future
issuance................................ 1,554,495
</TABLE>
Additional information regarding stock options granted to employees is
outline below:
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended -------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
<S> <C> <C> <C>
Weighted average fair value of options
at grant date.......................... $ 6.19 $ 4.79 $ 5.34
Weighted average exercise price of all
outstanding options.................... $11.11 $13.99 $15.96
Weighted average exercise price of
vested options......................... $12.39 $16.95 $19.04
Weighted average exercise price of
options exercised...................... $10.24 $11.50 $ --
Weighted average exercise price for
expired and forfeited options.......... $22.73 $19.69 $18.53
Weighted average remaining contractual
life of options outstanding............ 7.4 6.7 6.8
</TABLE>
Approximately 188,000 OHM stock options converted into approximately 262,000
IT stock options on June 11, 1998. As of December 25, 1998, these options
remain outstanding.
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
67
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
because, as discussed below, the alternative fair value accounting provided for
under Financial Accounting Standards Board 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, 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:
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended -------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate based upon zero-
coupon U.S. Treasury Notes............. 6.0% 6.0% 6.38%
Dividend yield.......................... None None None
Volatility factor of expected market
price of the Company's common stock.... 0.443 0.395 0.395
Weighted average expected life of each
option................................. 7.4 6.7 6.8
</TABLE>
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 SFAS No. 123, the
Company's net loss applicable to common stock and net loss per common share
would have increased to the following pro forma amounts:
<TABLE>
<CAPTION>
Twelve Months Ended
Nine Months Ended --------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Net loss applicable to common stock
As reported.......................... $(12,091) $(23,193) $(13,693)
======== ======== ========
Pro forma............................ $(12,367) $(23,386) $(13,735)
======== ======== ========
Net loss per common share
As reported.......................... $ (0.63) $ (2.38) $ (1.48)
======== ======== ========
Pro forma............................ $ (0.65) $ (2.40) $ (1.49)
======== ======== ========
</TABLE>
Additionally, under the 1991 Plan, the Company awarded shares of nonvested
restricted stock to officers and key employees which amounted to 266,019 in the
twelve months ended March 29, 1996. Vesting of awards is dependent upon
continued employment and, in the case of certain performance-related awards,
the sustained level of a target market price for the Company's common stock
that exceeds the related market price on the date of grant. On December 25,
1998, the total number of shares of restricted stock outstanding was 105,900.
68
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The cost of restricted stock awards is generally expensed over the vesting
period, which ranges from two to five years, and amounted to $0.2 million, $0.5
million and $0.6 million for the nine months ended December 25, 1998, the
twelve months ended March 27, 1998 and the twelve months ended March 28, 1997,
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 amended the Plan, effective December 25, 1998, to
discontinue the minimum annual contribution of 3% of participants' eligible
compensation. Additionally, beginning January 1, 1999, the Company amended its
voluntary 401(k) savings plan. The Company now contributes up to 4% of
participants' eligible compensation by matching 100% of each participants'
contribution (up to 4% of eligible compensation). Prior to January 1, 1999, the
Company contributed 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 15% of participants' eligible compensation up to
$10,000 annually. The Company funds current costs as accrued, and there are no
unfunded vested benefits.
Pension and profit sharing expense was $3.5 million, $3.6 million and $3.6
million for the nine months ended December 25, 1998, the twelve months ended
March 27, 1998 and the twelve months ended March 28, 1997, respectively.
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 Platform 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 Outsourced Services Platform provides
full service capabilities for operations, maintenance, management and
construction at federal, state and local government facilities and in the
private sector. The C & V Platform 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 Company's International Platform
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. Current International operations consist of a 50.1%
investment in a Taiwan-based wastewater treatment design/build firm and with
the acquisition of GTI in December 1998, the Company expanded its international
presence and provides environmental services through offices located in Europe
and Australia.
69
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment Information
<TABLE>
<CAPTION>
Outsourced
E & C Services C & V International Total
-------- ---------- ------- ------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Nine months ended December
25, 1998
Revenues................. $597,897 $70,400 $79,353 $ 9,785 $757,435
Segment profit (loss).... 63,817 7,896 10,617 (418) 81,912
Depreciation expense..... 6,044 162 1,607 69 7,882
Segment assets........... 218,940 11,697 56,896 8,539 296,072
Twelve Months Ended March
27, 1998
Revenues................. $346,143 $ 6,819 $79,643 $ 9,611 $442,216
Segment profit (loss).... 37,045 948 7,272 (1,419) 43,846
Depreciation expense..... 4,387 22 1,605 113 6,127
Segment assets........... 188,342 6,226 22,395 4,118 221,081
Twelve Months Ended March
28, 1997
Revenues................. $308,635 $ -- $48,832 $ 4,664 $362,131
Segment profit........... 25,909 -- 694 177 26,780
Depreciation expense..... 8,704 -- 758 56 9,518
Segment assets........... 73,650 -- 19,828 7,087 100,565
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended
Nine months ended --------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
<S> <C> <C> <C>
Profit or Loss
Total profit for reportable
segments............................ $ 81,912 $ 43,846 $ 26,780
Unallocated amounts:
Corporate selling, general and
administrative expense............ (32,779) (23,814) (22,073)
Special charges (a)................ (24,971) (14,248) (8,403)
Interest expense, net.............. (24,895) (7,969) (5,260)
-------- -------- --------
Loss before income taxes,
extraordinary
item and discontinued operations.. $ (733) $ (2,185) $ (8,956)
======== ======== ========
Assets (b)
Assets for reportable segments....... $296,072 $221,081 $100,565
Other assets......................... 652,534 488,136 241,966
-------- -------- --------
Total consolidated assets.......... $948,606 $709,217 $342,531
======== ======== ========
Depreciation Expense
Depreciation for reportable
segments............................ $ 7,882 $ 6,127 $ 9,518
Depreciation on corporate assets
(c)................................. 2,059 2,606 2,842
-------- -------- --------
Total depreciation expense......... $ 9,941 $ 8,733 $ 12,360
======== ======== ========
</TABLE>
- --------
(a) See "Notes to Consolidated Financial Statements--Special Charges". These
special charges are excluded from segment profit (loss) because most of
these items can not be identified with a particular segment and because
management does not include special charges when analyzing the Company's
business segments.
(b) Segment assets include primarily accounts receivable of each business
segment. Other assets are principally long-term assets including property
and equipment, cost in excess of net assets of acquired businesses, income
tax assets and assets of discontinued operations.
(c) Depreciation on corporate assets includes corporate facilities, furniture
and equipment and the Company's mainframe computer hardware and software
which have not been allocated to the operating segments.
70
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographic Information
<TABLE>
<CAPTION>
Twelve Months Ended
Nine months ended -----------------------------------------------
December 25, 1998 March 27, 1998 March 28, 1997
----------------------- ----------------------- -----------------------
Long-Lived Long-Lived Long-Lived
Revenues (a) Assets (b) Revenues (a) Assets (b) Revenues (a) Assets (b)
------------ ---------- ------------ ---------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
United States........... $746,992 $458,233 $431,599 $358,973 $351,152 $117,386
Other foreign
countries.............. 10,443 3,573 10,617 2,831 10,979 1,848
-------- -------- -------- -------- -------- --------
$757,435 $461,806 $442,216 $361,804 $362,131 $119,234
======== ======== ======== ======== ======== ========
</TABLE>
- --------
(a) Revenues are attributed to countries based on the location of clients.
(b) Long-lived assets include non-current assets of the Company, excluding
deferred income taxes.
Major Clients
The Company's revenues attributable to the U.S. federal government were
$525.0 million, $255.9 million and $215.1 million for the nine months ended
December 25, 1998, the twelve months ended March 27, 1998 and the twelve months
ended March 28, 1997, respectively. All four of the Company's operating
segments report revenues from the U.S. government. No other customer accounted
for 10% or more of the Company's consolidated revenues in any fiscal period.
Revenues by Products and Services
<TABLE>
<CAPTION>
Twelve Months Ended
Nine months ended -------------------
December 25, March 27, March 28,
1998 1998 1997
----------------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Site remedial action projects........... $607,682 $355,754 $313,299
Project, program and construction
management............................. 70,400 6,819 --
Consulting and engineering services..... 79,353 79,643 48,832
-------- -------- --------
$757,435 $442,216 $362,131
======== ======== ========
</TABLE>
Quarterly results of operations (unaudited):
<TABLE>
<CAPTION>
First Second Third
quarter quarter quarter
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Nine months ended December 25, 1998:
Revenues............................. $ 225,188 $ 260,187 $ 272,060
Gross margin......................... 27,058 30,553 33,350
Income (loss) from continuing
operations.......................... (19,291) 5,468 6,396
Net income (loss) applicable to
common stock........................ (20,860) 3,899 4,870
Net income (loss) per share:
Basic.............................. $ (1.76) $ 0.17 $ 0.22
============ ============ ============
Diluted............................ $ (1.76) $ 0.16 $ 0.19
============ ============ ============
</TABLE>
71
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Twelve Months Ended March 27, 1998:
Revenues........................... $ 98,181 $ 102,840 $ 105,157 $ 136,038
Gross margin....................... 11,424 11,412 11,770 17,200
Income (loss) from continuing
operations before extraordinary
item.............................. (2,914) 1,922 (1,840) (3,528)
Discontinued operations--closure
costs............................. -- -- -- (4,960)
Extraordinary item--early
extinguishment of debt............ -- -- -- (5,706)
Net income (loss) applicable to
common stock...................... (4,447) 385 (3,379) (15,752)
Net income (loss) per share:
Basic and diluted:
Earnings from continuing
operations
(net of preferred stock
dividends)...................... (0.46) 0.04 (0.35) (0.52)
Discontinued operations.......... -- -- -- (0.51)
Extraordinary item--early
extinguishment of debt.......... -- -- -- (0.59)
-------- --------- --------- ---------
Net income (loss) per share........ $ (0.46) $ 0.04 $ (0.35) $ (1.62)
======== ========= ========= =========
</TABLE>
See "Notes to Consolidated Financial Statements--Special Charges".
Discontinued operations:
Overview
Prior to December 1987 the Company was a major provider of hazardous waste
transportation, treatment, and disposal operations in California. 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. Subsequent to this date, the Company ceased obtaining new
business for these operations. During the quarter ended March 27, 1998, the
Company recorded an increase in the provision for loss on disposition of $8.0
million or $5.0 million, net of income tax benefit of $3.0 million, primarily
for additional closure costs related to the approval of the closure plan by the
DTSC for the Panoche disposal site. Prior to the twelve months ended March 27,
1998, the Company cumulatively recorded a provision for loss on disposition
(including the initial provision and three subsequent adjustments) in the
amount of $168.2 million, net of income tax benefit of $32.9 million. During
each of the three fiscal years ended December 25, 1998, the Company funded
previously accrued costs of $11.1 million, $14.9 million and $15.7 million
relating to the closure plans and construction and PRP matters. The Company
expects to incur costs over the next several years; however, the nature of the
costs will change from closure design and construction to post-closure
monitoring. At December 25, 1998, the Company's consolidated balance sheet
included accrued liabilities of approximately $7.9 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 to closure and post-
closure use. The trust funds are invested in high quality common stock and AAA
rated corporate and government bonds which are recognized at fair market value
and annuity investments which pay periodic payments into the trust fund.
The annuities and trust fund assets are held in a legally binding trust
agreement by a third party trustee naming the California EPA, Department of
Toxic Substances control (DTSC) as the beneficiary of the trust. As closure and
post closure obligations are met by the Company, DTSC is obligated to release
funds from the trusts to reflect reduced estimates of remaining costs.
72
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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. 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. 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
As a part of the Company's discontinued 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. Closure
construction has been completed at three of these facilities (Montezuma Hills,
Benson Ridge, and Vine Hill).
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.
The carrying value of the long-term assets of discontinued operations of
$40.0 million at December 25, 1998 is principally comprised of unused residual
land at the inactive disposal facilities and assumes that land sales will occur
at market prices estimated by the Company based on certain assumptions
(entitlements, development agreements, etc.). A portion of the residual land is
the subject of a local community review of its strategy which will be the
subject of public hearings and city council deliberation through the second
quarter of 1999. There is no assurance as to the timing of development or sales
of any of the Company's residual land, or the Company's ability to ultimately
liquidate the land for the estimated sale prices. 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.
The Company maintains Environmental Impairment Liability coverage for the
Northern California facilities through the Company's captive insurance company.
The limits of the policy are $32.0 million which meet the current requirements
of both federal and state law.
Operating Industries, Inc. Superfund Site
In June 1986, USEPA notified a number of entities, including the Company,
that they were PRPs with respect to the Operating Industries, Inc. (OII)
Superfund site in Monterey Park, California. Between October 1995 and April
1996, the Company, the USEPA and the Steering Committee agreed to settlements
of the Company's alleged liability for certain prior response costs incurred by
the USEPA. While resolving the Company's alleged liability for these response
costs, the settlement did not include a release of liability for
73
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
future or final OII remedies. The USEPA has requested, and the Steering
Committee and the Company have submitted, proposals to work cooperatively with
interested parties on the final remedy. While the USEPA has estimated response
costs for the final remedy to approximate $161.8 million, and the USEPA has
alleged the Company generated 2% by volume of the manifested hazardous wastes
disposed of at the site, the Company believes that USEPA's final remedy cost
estimates are substantially overstated. Should the costs of the final remedy be
greater than the amounts recognized or should the Company be forced to assume a
disproportionate share of the costs of the final remedy, the cost to the
Company of concluding this matter could materially increase.
GBF Pittsburg Site
In September 1987, the Company and 17 others were served with a Remedial
Action Order (RAO) issued by the DTSC, concerning the GBF Pittsburg landfill
site near Antioch, California. From the 1960's through 1974, a predecessor to
IT Corporation operated a portion of one of the two parcels as a liquid
hazardous waste site.
In June 1997, the DTSC completed and released a final Remedial Action Plan
(RAP) selecting DTSC's preferred pump-and-treat remedial alternative, which the
Company now estimates to cost up to $18.0 million based on DTSC's prior
estimates. As part of the RAP, the DTSC also advised the PRP group of its
position that all PRPs, including the Company, are responsible for paying the
future closure and postclosure costs of the overlying municipal landfill, which
have been estimated at approximately $4.0 million. (The DTSC also seeks
approximately $1.0 million in oversight costs from all PRPs.) The PRP group
continues to believe that its preferred alternative of continued limited site
monitoring, which was estimated to cost approximately $4.0 million, is
appropriate and has filed an application with the appropriate Regional Water
Quality Control Board (RWQCB) for designation of the site as a containment zone
which, if approved, would facilitate the PRP group's preferred remedial
alternative.
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 PRP group
and the DTSC have agreed to stay this litigation and implementation of major
RAP elements pending the RWQCB's review of the containment zone application.
The PRP group continues to work with the RWQCB and the DTSC to determine the
scope of the studies necessary for consideration of the application.
In the final RAP the DTSC assigned the Company and the other members of the
PRP group collective responsibility (on a non-binding basis) for 50% of the
site's response costs. The PRP group continues to believe that the DTSC
allocation is inappropriate and current owner/operators should pay a larger
portion of the site's response costs and 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.D.C., N.D. CA, Case No. C96-
03147SI) against the owner/operators of the site and other non-cooperating PRPs
to cause them to bear their proportionate share of site remedial costs. The
owner/operators are vigorously defending the PRP group's litigation, and the
outcome of the litigation cannot be determined at this time. Mediation of this
litigation has been postponed until late September 1999. IT Corporation has
paid approximately 50% of the PRP group's costs to-date on an interim basis.
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.
74
<PAGE>
THE IT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Subsequent events:
On February 5, 1999, the Company signed an agreement to acquire all of the
stock of Roche Limited Consulting Group (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 has approximately 700 employees and
had revenue of $28.0 million in its most recent year ended December 31, 1998.
The acquisition is expected to close in April 1999.
On March 8, 1999, the Company signed an agreement to acquire specified
assets of the Environment and Facilities Management Group (EFM Group) of ICF
Kaiser International, Inc. for $82.0 million in cash reduced by $8.0 million
representing working capital retained by Kaiser. The EFM Group provides
environmental remediation, program management and technical support for United
States Government agencies including the DOD, National Aeronautics and Space
Administration (NASA) and the DOE as well as private sector environmental
clients. The EFM Group has approximately 500 employees and had revenue of
approximately $106.0 million for the calendar year ended December 31, 1998. The
acquisition is expected to close in April 1999.
The Company has begun a private placement of $200 million of subordinated
notes (Notes). If the offering of the Notes is completed, the Notes will have a
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 will be general
unsecured obligations of the Company, subordinated to the Company's credit
facilities (see Notes to Consolidated Financial Statements--Long-term debt) 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, assuming the offering is completed, will be used to
fund the Roche and EFM acquisitions and to refinance existing indebtedness.
On March 5, 1999, the lenders under the Company's credit facilities approved
the third amendment to the loan agreement. The third amendment provides for the
Company to issue up to $250 million in subordinated notes for the acquisitions
(discussed above) and to pay down outstanding borrowings under the revolving
credit facility portion of the credit facilities.
75
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were none.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
At the 1996 Annual Meeting of Stockholders, stockholders approved a cash
investment (the Investment) of $45,000,000 in the Company by certain investors
affiliated with The Carlyle Group (collectively, Carlyle), a private merchant
bank headquartered in Washington, D.C. In consideration of its investment,
Carlyle received 45,000 shares of newly issued Cumulative Convertible
Participating Preferred Stock, par value $100 per share (the Convertible
Preferred Stock), and warrants (the Warrants) to purchase up to 1,250,000
shares of our Common Stock (at the current exercise price of $11.39 per share).
Carlyle's purchase of the Convertible Preferred Stock and Warrants was financed
through the private sale of interests in limited partnerships affiliated with
Carlyle or through other entities. These partnerships and other entities then
purchased the Convertible Preferred Stock and Warrants.
Pursuant to the terms of the Investment, Carlyle is entitled to elect a
majority of our Board of Directors, until November 20, 2001, which date is five
years from the consummation of the Investment (the Five-Year Period), provided
that Carlyle continues to own at least 20% of the voting power of the Company.
Also pursuant to the terms of the Investment, the number of directors
comprising our Board will be an odd number. A majority of the directors (the
Preferred Stock Directors) will be elected by the holders of the Convertible
Preferred Stock acting by written consent and without a meeting of the Common
Stock holders, and the remaining directors (the Common Stock Directors) will be
elected by the Common Stock holders. The Preferred Stock Directors serve for
annual terms. The Investment agreements also provide that at least two of the
directors elected by the holders of the Common Stock will have no employment or
other relationship with us or Carlyle, other than their positions as directors
of the Company. During the Five-Year Period, holders of the Convertible
Preferred Stock will not participate in elections of the Common Stock Directors
and the Preferred Stock Directors will not have the right to vote on the
election of any director to fill a vacancy among the Common Stock Directors. At
the end of the Five-Year Period, provided that Carlyle continues to own at
least 20% of the voting power of the Company, holders of the Convertible
Preferred Stock will be entitled to elect the largest number of directors which
is a minority of the directors and to vote with the Common Stock holders (as a
single class) on the election of the remaining directors. Additionally, the
holders of the Convertible Preferred Stock, in the event they no longer have
the right to elect at least a minority of the directors, will have the right
(voting as a class with holders of our 7% Cumulative Convertible Exchangeable
Preferred Stock, par value $100 per share, and any other parity stock) to elect
two directors to the Board in the event we fail to make payment of dividends on
the Convertible Preferred Stock for six dividend periods.
Pursuant to an agreement of merger dated January 15, 1998 (the OHM Merger
Agreement), the Company acquired OHM Corporation (OHM) in a two-step
transaction, comprised of a tender offer for 13,933,000 shares of OHM common
stock, or 54% of the outstanding OHM stock, for $160,300,000 in cash, which was
consummated on February 25, 1998, and a merger (the OHM Merger) of an IT
subsidiary into OHM on June 11, 1998. In the OHM Merger, the former OHM
shareholders received IT common stock representing approximately 57% of the
outstanding IT common stock and 45% of the voting power of IT, as well as cash
in the aggregate amount of $30,800,000. Subsequent to the OHM Merger, holders
of the Convertible Preferred Stock own approximately 21% (approximately 24%
assuming exercise of the Carlyle Warrants) of the Company's voting power.
At the Special Meeting of Shareholders held on June 11, 1998 (the Special
Meeting), at which the OHM Merger was approved, the shareholders also voted to
eliminate our classified Board of Directors system.
76
<PAGE>
Under that system, the Common Stock Directors served for three year terms which
were staggered to provide for the election of approximately one-third of the
Board members each year. As a result of the shareholders' vote to eliminate our
classified Board of Directors system, the holders of the Common Stock are
entitled to vote each year on the election of all Common Stock Directors.
After the OHM Merger, pursuant to the OHM Merger Agreement, Richard W. Pogue
and Charles W. Schmidt were appointed to the Board of Directors as Common Stock
Directors. In connection with their appointment, the authorized number of
directors (both Common and Preferred Stock Directors) was increased to nine
(9), with the Board consisting of five Preferred Stock Directors and four
Common Stock Directors so that the Preferred Stock Directors continue to
represent a majority of the Board of Directors. To allow for this change, one
of the Common Stock Directors, E. Martin Gibson, resigned as such and was
reappointed as a Preferred Stock Director.
After giving effect to the changes approved in connection with the OHM
Merger, our Board of Directors is constituted as follows:
<TABLE>
<CAPTION>
Term to Director of the
Name Age Current Position Expire IT Group Since
- ---- --- ---------------- ------- ---------------
<S> <C> <C> <C> <C>
Common Stock Directors:
Anthony J. DeLuca (1)... 51 Director, Chief Executive Officer 1999 1996
and President
James C. McGill (3)..... 55 Director 1999 1990
Richard W. Pogue (3).... 70 Director 1999 1998
Charles W. Schmidt (2).. 71 Director 1999 1998
Preferred Stock
Directors:
Daniel A. D'Aniello (1)
(2).................... 52 Director and Chairman of the 1999 1996
Board (non-officer position)
Philip B. Dolan (1)
(2).................... 40 Director 1999 1996
E. Martin Gibson (3).... 60 Director 1999 1994
Robert F. Pugliese (3).. 66 Director 1999 1996
James David Watkins
(2).................... 72 Director 1999 1996
</TABLE>
- --------
(1) Member of Executive Committee
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
Background of the Directors:
Mr. D'Aniello has been a Managing Director for Carlyle since 1987. Mr.
D'Aniello was Vice President, Finance and Development for Marriott Corporation,
a hospitality company, from 1981 to 1987. He currently serves on the Board of
Directors for GTS Duratek, Inc., an environmental services company, Baker &
Taylor, Inc., a wholesale distributor of books, and PRA International, Inc. Mr.
D'Aniello is Chairman of GTS Duratek, Inc. and Vice Chairman of Baker & Taylor,
Inc.
Mr. DeLuca was named Chief Executive Officer and President on July 22, 1997
and President and Acting Chief Executive Officer and a Director as of July 1,
1996. Prior thereto, Mr. DeLuca had been Senior Vice President and Chief
Financial Officer of the IT Group since March 1990. Before joining us Mr.
DeLuca had been a senior partner at the public accounting firm Ernst & Young
LLP.
77
<PAGE>
Mr. Dolan has been a Principal for Carlyle since 1998. Prior thereto, he was
a Vice President for Carlyle from 1989. He also serves on the Board of
Directors of Baker & Taylor, Inc. Prior to joining Carlyle, Mr. Dolan was an
investment analyst and fund manager with the Trust Division of the Mercantile-
Safe Deposit and Trust Company and was engaged in management consulting and
practiced public accounting with Seidman & Seidman. Mr. Dolan is a Certified
Public Accountant.
Mr. Gibson served as Chairman of the Board of Directors, a non-officer, non-
employee position, from April 6, 1995 until his resignation as Chairman upon
completion of the Investment. From 1990 until December 1994, Mr. Gibson served
as Chairman of Corning Life Sciences, Inc., a subsidiary of Corning
Incorporated. Mr. Gibson served in various other senior management capacities
with Corning Incorporated during his 32 year career there, including as a
Senior Vice President and General Manager of Corning Medical and Scientific
Division from 1980 until 1983, and as Group President of Corning Consumer
Products and Laboratory Sciences from 1983 until 1990. From 1983 to 1994, Mr.
Gibson served on the Board of Directors of Corning Incorporated. Mr. Gibson
also serves on the Boards of Directors of Hardinge, Inc., NovaCare, Inc. and
Primerica, Inc.
Mr. McGill is currently, and has been for at least five years, a private
investor. He served as Chairman of McGill Environmental Systems, Inc. from 1970
to 1987. Mr. McGill serves on the Board of Trustees of the University of Tulsa
and on the Boards of Directors of two private corporations that are engaged in
venture capital and health exercise equipment businesses.
Mr. Pogue is a consultant with Dix & Eaton, a public relations firm.
Effective June 30, 1994, Mr. Pogue retired as Senior Partner of the law firm of
Jones, Day, Reavis & Pogue, Cleveland, Ohio, of which he had been a partner
since 1961. Mr. Pogue is also a Director of Continental Airlines, Inc., Derlan
Industries Limited, M.A. Hanna Company, KeyCorp, LAI Worldwide, Inc., Rotek
Incorporated and TRW Inc. Mr. Pogue was a Director of OHM for 12 years prior to
the OHM Merger.
Mr. Pugliese has been Special Counsel to Eckert Seamans Cherin & Mellott
since 1993. Mr. Pugliese was Executive Vice President, Legal and Corporate
Affairs for Westinghouse Electric Corporation and served as General Counsel
from 1976 to 1992. Mr. Pugliese is a member of the Association of General
Counsel. Mr. Pugliese has served as Secretary to the Board of Directors of
Westinghouse Electric Corporation and Chairman of the Board of Trustees at the
University of Scranton, and served as a Director of OCWEN Asset Investment
Corporation and St. Clair Memorial Hospital.
Mr. Schmidt retired in January 1991 as Senior Vice President, External
Affairs of Raytheon Company, a broadly diversified manufacturer of industrial
and consumer products, and was formerly President and Chief Executive Officer
of SCA Services, Inc., a company that provided waste management-related
services and previously was President and Chief Executive Officer of S.D.
Warren Company, a division of Scott Paper Company. Mr. Schmidt also serves as a
trustee of the Massachusetts Financial Services Family of Mutual Funds and is a
Director of Mohawk Paper Company. Mr. Schmidt was a Director of OHM for 12
years prior to the OHM Merger.
Admiral Watkins has been the President of the Joint Oceanographic
Institutions, Inc. since 1993 and President of Consortium Oceanographic
Research and Education since 1994. Admiral Watkins was Secretary of Energy of
the United States from 1989 to 1993. Prior to his appointment as Secretary of
Energy, the Admiral served as Director of Philadelphia Electric Company and
VESTAR, Inc. (a pharmaceutical company), and was a consultant to the Carnegie
Corporation of New York. From 1982 to 1986, he served as the Chief of Naval
Operations, capping a career spanning nearly four decades. Admiral Watkins was
also appointed to chair the Presidential Commission on AIDS from 1987 to 1988.
He was a Trustee of the Carnegie Corporation of New York from 1993 to 1998.
Admiral Watkins currently serves as a Director of Edison International and
GTS-Duratek and as Chairman of Eurotech, Ltd.
78
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the Exchange Act)
requires directors, certain officers of the Company and persons holding more
than 10% of the Company's Common Stock to file reports concerning their
ownership of Common Stock by dates established under the Exchange Act and also
requires that the Company disclose any noncompliance with those requirements
during fiscal year 1998. Based solely upon a review of reports delivered to the
Company, the Company believes all Section 16(a) filing requirements were
satisfied.
ITEM 11. EXECUTIVE COMPENSATION.
The "Executive Compensation" section of Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission for the nine
months ended December 25, 1998 is incorporated herein by reference.
79
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Principal Stockholders
The following table sets forth information as of March 5, 1999 with respect
to beneficial ownership of (a) Common Stock, (b) Depositary Shares, each
representing 1/100 of a share of 7% Preferred Stock (the Depositary Shares),
(c) Convertible Preferred Stock and (d) the Warrants, by (w) each person known
by the Company to be the beneficial owner of 5% or more of the outstanding
Common Stock (based solely on information contained in Schedules 13D, -G, or -F
filed by such persons and delivered to the Company), Depositary Shares,
Convertible Preferred Stock or Warrants, (x) each director of the Company, (y)
the executive officers of the Company and (z) all directors and persons serving
as executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Amount and Amount and Percent of
Nature of Percent of Nature of Percent of Nature of Convertible
Beneficial Common Beneficial Depositary Beneficial Preferred
Ownership of Stock Ownership of Shares Ownership of Stock
Common Beneficially Depositary Beneficially Convertible Beneficially
Name Stock (1)(2) Owned (2) Shares Owned Preferred Stock Owned
---- ------------ ------------ ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
TCG Holdings, L.L.C..... 6,556,061(3) 22.49% 41,263 89.52%
Carlyle Investment
Management, L.L.C...... 766,954(4) 3.28% 4,832 10.48%
Brahman Capital Corp. et
al..................... 2,939,492(5) 13.01%
T. Rowe Price
Associates, Inc.(6).... 1,493,311 6.60%
Dimension Fund Advisors
(7).................... 1,239,915 5.49%
Baron Capital Group,
Inc. (8)............... 1,200,000 5.31%
Daniel A. D'Aniello
(9).................... 0 --
Philip B. Dolan (11).... 0 --
E. Martin Gibson........ 12,226 * 5,000 *
James C. McGill (10).... 20,713 * 1,000 *
Robert F. Pugliese...... 2,966 *
James D. Watkins........ 2,966 *
Anthony J. DeLuca....... 188,485 *
David L. Backus......... 0 *
James G. Kirk........... 2,624 *
James R. Mahoney........ 85,730 *
Richard W. Pogue........ 69,841(11) *
Raymond J. Pompe........ 74,725 *
Charles W. Schmidt...... 15,940 *
Philip O. Strawbridge... 173,195 *
All directors and
executive officers as a
group (14 persons)
(12)................... 649,411 2.83%
</TABLE>
- --------
*Less than 1%
(1) The number of shares of Common Stock beneficially owned includes shares of
Common Stock in which the persons set forth in the table have either
investment or voting power. Unless otherwise indicated, all of such
interests are owned directly, and the indicated person or entity has sole
voting and investment power, subject to community property laws where
applicable. The number of shares beneficially owned also includes shares
that the following individuals have the right to acquire within 60 days of
March 5, 1999 upon exercise of stock options (and conversion of Depositary
Shares in the case of Messrs. Gibson and
McGill) in the following amounts: (i) 6,875 shares upon exercise of options
and 5,351 shares upon conversion of the Depositary Shares as to Mr. Gibson,
(ii) 1,875 shares upon exercise of options and 1,070 shares upon conversion
of the Depositary Shares as to Mr. McGill, (iii) 55,760 shares as to Mr.
Pogue, (iv) 13,940 shares as to Mr. Schmidt, (v) 38,834 shares as to Mr.
DeLuca, (vi) 31,834 shares as to Mr. Mahoney, (vii) 20,355 shares as to Mr.
Pompe, (viii) 2,624 shares as to Mr. Kirk, and (ix) 136,565 shares as to Mr.
Strawbridge.
80
<PAGE>
(2) For the purposes of determining the number of shares of Common Stock
beneficially owned, as well as the percentage of outstanding Common Stock
held, by each person or group set forth in the table, the number of such
shares is divided by the sum of the number of outstanding shares of Common
Stock on March 5, 1999 plus (i) the number of shares of Common Stock
subject to options exercisable currently or within 60 days of March 5,
1999 by such person or group, (ii) shares of Common Stock into which
persons who hold Depositary Shares or Convertible Preferred Stock may
convert such security (or otherwise obtain Common Stock), and/or receive
Common Stock upon exercise of Warrants, in accordance with Rule
13d-3(d)(1) under the Securities Exchange Act of 1934, as amended (Rule
13d-3(d)(1)). Depositary Shares may be converted at any time into Common
Stock at the ratio of 1.0702 shares of Common Stock for each Depositary
Share. The Convertible Preferred Stock may be converted at any time into
Common Stock at the ratio of 131.75 shares of Common Stock for each share
of Convertible Preferred Stock (reflecting a conversion price of $7.59 per
share of Convertible Preferred Stock).
(3) Represents shares of Common Stock issuable upon conversion of all shares
of Convertible Preferred Stock and exercise of all Carlyle Warrants held
by certain limited partnerships controlled by TCG Holdings, L.L.C., a
Delaware limited liability company (TCG Holdings), as set forth in more
detail in the following sentence. The cumulative TCG Holdings ownership
figure represents (i) 1,826,339 shares beneficially owned by Carlyle
Partners II, L.P., a Delaware limited partnership (CPII), (ii) 82,936
shares beneficially owned by Carlyle Partners III, L.P., a Delaware
limited partnership (CPIII), (iii) 1,530,275 shares beneficially owned by
Carlyle International Partners II, L.P., a Cayman Islands limited
partnership (CIPII), (iv) 82,095 shares beneficially owned by Carlyle
International Partners III, L.P., a Cayman Islands limited partnership
(CIPIII), (v) 344,474 shares beneficially owned by C/S International
Partners, a Cayman Islands partnership (C/SIP), (vi) 1,907 shares
beneficially owned by Carlyle Investment Group, L.P., a Delaware limited
partnership (CIG), (vii) 2,407,370 shares beneficially owned by Carlyle-IT
International Partners, L.P., a Cayman Islands limited partnership
(CITIP), (viii) 80,818 shares beneficially owned by Carlyle-IT
International Partners II, L.P., a Cayman Islands limited partnership
(CITIPII), and (ix) 199,847 shares beneficially owned by Carlyle-IT
Partners, L.P., a Delaware limited partnership (CITP). TC Group, L.L.C., a
Delaware limited liability company (TC Group), may be deemed to be the
beneficial owner of 6,556,061 shares of ITC Common Stock as the general
partner of CPII, CPIII, CIG, and CITP, and as the managing general partner
of CIPII, CIPIII, C/SIP, CITIP and CITIPII. TCG Holdings, as a member
holding a controlling interest in TC Group, may be deemed to share all
rights herein described belonging to TC Group. Furthermore, because
certain managing members of TCG Holdings are also managing members of
Carlyle Investment Management, L.L.C., a Delaware limited liability
company (CIM), TCG Holdings may be deemed the beneficial owner of the
shares of Common Stock controlled by CIM (see footnote 4 below). The
principal business address of TC Group and TCG Holdings is c/o The Carlyle
Group, 1001 Pennsylvania Avenue, N.W., Suite 220 South, Washington DC
20004. The principal business address of CPII, CPIII, CIG, CITP and CIM is
Delaware Trust Building, 900 Market Street, Suite 200, Wilmington,
Delaware 19801. The principal business address of CIPII, CIPIII, C/SIP,
CITIP and CITIPII is Coutts & Co., P.O. Box 707, Cayman Islands, British
West Indies.
(4) Represents shares of Common Stock issuable upon conversion of all shares
of Convertible Preferred Stock and exercise of all Carlyle Warrants held
by the State Board of Administration of the State of Florida over which
CIM holds sole voting and disposition power. Because certain managing
members of TCG Holdings are also managing members of CIM, CIM may be
deemed to be the beneficial owner of the shares of Common Stock controlled
by TCG Holdings (see footnote 3 above).
(5) Such information is derived solely from a Schedule 13G filed by the
Brahman Stockholders, which is comprised of the entities listed in the
following sentence (filing as joint filers), with the SEC dated February
12, 1999. The Brahman Stockholders' cumulative ownership represents (i)
469,042 shares with respect to which Brahman Partners II, L.P. has shared
power to vote or direct the vote and shared power to dispose or direct the
disposition, (ii) 1,052,641 shares with respect to which Brahman
Institutional Partners, L.P. has shared power to vote or direct the vote
and shared power to dispose or direct the
81
<PAGE>
disposition, (iii) 1,214,219 shares with respect to which BY Partners, L.P.
has shared power to vote or direct the vote and shared power to dispose or
direct the disposition, (iv) 2,735,902 shares with respect to which Brahman
Management, L.L.C. has shared power to vote or direct the vote and shared
power to dispose or direct the disposition, (v) 1,273,509 shares with
respect to which Brahman Capital Corp. has shared power to vote or direct
the vote and shared power to dispose or direct the disposition (which
position includes shares owned by Brahman Partners II Offshore, Ltd), and
(vi) 2,795,192 shares with respect to which each of Peter A. Hochfelder,
Robert J. Sobel, and Mitchell A. Kuflik have shared power to vote or direct
the vote and shared power to dispose or direct the disposition. The Brahman
Stockholders further report in such Schedule 13G that (i) none of the above
named entities individually has the sole power to vote or direct the vote
or to dispose or direct the disposition of the shares it beneficially owns,
(ii) but that Brahman Management, as the sole general partner of Brahman
Partners II, L.P., BY Partners, L.P. and Brahman Institutional Partners,
L.P., has the power to vote and dispose of the shares owned by each of
Brahman Partners II, L.P., BY Partners, L.P. and Brahman Institutional
Partners, L.P., and (iii) further that Brahman Capital Corp., pursuant to
investment advisory contracts and arrangements, has the power to vote and
dispose of the shares owned by BY Partners, L.P. and Brahman Partners II
Offshore, Ltd., a Cayman Islands exempted company. The address of Brahman
Capital Corp and the affiliated reporting persons is 277 Park Avenue, 26th
Floor, New York, New York 10172 except in the case of Brahman Partners II
Offshore, Ltd., the address of which is c/o Citco, N.V. Kaya Flamboyan 9,
Willemstad, Curacao, Netherlands Antilles.
(6) Such information is based solely from a Schedule 13G filed by T. Rowe
Price Associates (Price) with the SEC dated February 12, 1999. Price's
ownership represents (i) 1,328,000 shares which Price owns directly and
(ii) 165,911 shares deemed outstanding and owned directly subject to
warrants and conversion privileges. Further, of the 1,493,911 share Price
holds, it has sole power to vote or direct the vote of 271,300 shares.
These securities are owned by various individual and institutional
investors which Price serves as investment adviser with power to direct
investments and/or sole power to vote the securities. For purposes of the
reporting requirements of the Securities Exchange Act of 1934, Price is
deemed to be a beneficial owner of such securities; however, Price
expressly disclaims that it is, in fact, the beneficial owner of such
securities. Price's address is 100 E. Pratt Street, Baltimore, Maryland
21202.
(7) Such information is derived solely from a Schedule 13G filed by Dimension
Fund Advisors, Inc. (Dimension) with the SEC dated February 11, 1999.
Dimension reports that it is an investment advisor registered under
Section 203 of the Investment Advisors Act of 1940, and furnishes
investment advice to four investment companies registered under the
Investment Company Act of 1940, and serves as investment manager to
certain other investment vehicles, including commingled group trusts.
(These investment companies and investment vehicles are the Portfolios.)
In its role as investment advisor and investment manager, Dimension
possesses both voting and investment power over the securities of the
Company described that are owned by the Portfolios. All securities
reported in this schedule are owned by the portfolios, and Dimension
disclaims beneficial ownership of such securities. Dimension further
reports that none of its advisory clients, to its knowledge, owns more
than 5% of the class. Dimension disclaims beneficial ownership of all
such securities. Dimension's address is 1299 Ocean Avenue, 11th Floor,
Santa Monica, CA 90401.
(8) Such information is derived solely from a Schedule 13G filed by the Baron
Shareholders, which is composed of the entities listed in the following
sentence (filing as joint filers), with the SEC dated June 4, 1998. The
Baron Stockholders is comprised of Baron Capital Group, Inc. (BCG),
Bamco, Inc. (BAMCO), Baron Small Cap Fund (BSC), Baron Asset Fund (BAF),
and Ronald Baron. The Baron Stockholders report in such Schedule 13G that
(i) BCG, BAMCO, BSC and Ronald Baron have the shared power to vote or
direct the vote of 1,200,000 shares of Common Stock; (ii) BCG, BAMCO, BAF
and Ronald Baron have shared power to dispose of or direct the
disposition of 1,200,000 shares of Common Stock, but that none of BCG,
BAMCO, BSC, or Ronald Baron have the sole power to vote or direct the
vote of or the sole power to dispose or to direct the disposition of, any
Common Stock. BAMCO is a subsidiary of BCG.
82
<PAGE>
BSC is an investment advisory client of BAMCO. Ronald Baron owns a
controlling interest in BCG. BCG and Ronald Baron disclaim beneficial
ownership of shares held by their controlled entities (or the investment
advisory client thereof) to the extent such shares are held by persons other
than BCG and Ronald Baron. BAMCO disclaims beneficial ownership of shares
held by its investment advisory clients to the extent such shares are held
by persons other than BAMCO and its affiliates. The address of Baron Capital
Group, Inc. and the affiliated reporting persons is 767 Fifth Avenue, 24th
Floor, New York, New York 10153.
(9) Mr. D'Aniello is a Managing Member of TCG Holdings. Mr. D'Aniello's
interest in TCG Holdings is not controlling and thus Mr. D'Aniello
expressly disclaims any beneficial ownership in the shares of Company
Common Stock beneficially owned by TCG Holdings. Mr. Dolan is an employee
of The Carlyle Group and holds no economic interest in either TC Group or
TCG Holdings, and as such expressly disclaims any beneficial ownership in
the shares of Company Common Stock beneficially owned by any of such
entities.
(10) Includes 1,000 shares of Common Stock and 1,000 Depositary Shares
(convertible into 1,070 shares of Common Stock) owned by Mr. McGill's
wife, as to which Mr. McGill has no voting or dispositive power, and
1,250 shares owned by a revocable living trust maintained by Mr. McGill.
Mr. McGill disclaims beneficial ownership of all such shares. Also
includes 1,875 shares that may be purchased upon the exercise of options
that are currently exercisable or that will become exercisable within 60
days of March 5, 1999.
(11) Includes 1,081 shares of Common Stock owned by a revocable trust for Mr.
Pogue's wife with respect to which Mr. Pogue is a trustee. Mr. Pogue
disclaims beneficial ownership of all such shares.
(12) Includes 308,662 shares of Common Stock that may be purchased upon the
exercise of options that are currently exercisable or that will become
exercisable within 60 days of March 5, 1999 and 6,000 Depositary Shares
(convertible into 6,421 shares of Common Stock).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Employment Agreements. The Company and each of Anthony J. DeLuca, James R.
Mahoney and Raymond J. Pompe have entered into employment agreements with terms
through November 1999. The employment agreements provide for initial base
salaries at the rates in effect at the time of the closing of the Investment,
subject to annual upward adjustment at the discretion of the Compensation
Committee of the Board of Directors (the "Compensation Committee"). Salaries
are subject to reduction only in connection with action taken by the Board of
Directors for all management employees. Each of the employment agreements
provides for a short-term incentive compensation plan to be administered by the
Compensation Committee. The target short-term incentive compensation level is
40%, and the maximum level is 60%, of base salary, except in the case of Mr.
DeLuca, for whom the target level is 50%, and the maximum level is 75%, of base
salary. The Company also is required to maintain long-term incentive plans to
be administered by the Compensation Committee, which will make awards,
primarily of stock options, based on appropriate performance criteria. The
annual awards are at the discretion of the Compensation Committee and will
generally target long-term incentive opportunities.
The agreements provide for severance payments under certain circumstances.
Under the agreements, the Company will have "good reason" to terminate Messrs.
DeLuca, Mahoney or Pompe because of the Company's performance if such persons
fail to meet certain management forecasts for two consecutive fiscal years. If
the executive is terminated because of the Company's performance (under the
circumstances permitted in the agreements) within 24 months after a change in
control, is terminated without reason, or resigns for cause, he is entitled to
receive his base salary as adjusted from time to time (presently $400,000 in
the case of Mr. DeLuca, $260,000 in the case of Mr. Mahoney and $280,000 in the
case of Mr. Pompe) for 12 months following the termination (24 months in the
case of Mr. DeLuca), or, if he is terminated because of the Company's
performance (under the circumstances permitted in the agreements) but not
within 24 months after a change in control, he is entitled to receive his base
salary for six months following the termination (12 months in the case of Mr.
DeLuca). In addition, under certain circumstances, the executive's short-term
83
<PAGE>
incentive compensation will be paid on a pro-rated basis, and he will be
entitled to Company employee benefits for a specified period.
The Company has provided loans to Messrs. DeLuca, Mahoney and Pompe to allow
them to make substantial purchases of the Company's Common Stock in the open
market. The agreements each required that within three months of the closing of
the Investment, Mr. DeLuca purchase between $100,000 and $125,000 worth of
Common Stock and Messrs. Mahoney and Pompe each purchase between $75,000 and
$100,000 worth of Common Stock. All of the executives have purchased the
required amounts of Common Stock, and Messrs. DeLuca, Mahoney, and Pompe have
received loans in the principal amounts of $125,000, $100,000, and $100,000,
respectively, to purchase the stock. In connection with the short-term
compensation plan described above, the Company may provide for forgiveness of a
certain portion of the loan principal and interest if previously agreed to
targets are met or exceeded. The loans bear interest at the rate of 8.25% per
year and are repayable at upon the earlier of the executive's termination of
employment or November 19, 1999. The employment agreements also provide for
reimbursement for business expenses and vacation and other benefits consistent
with existing Company policies and practices.
Additionally, as part of their employment agreements, each of Messrs.
DeLuca, Mahoney and Pompe are bound by non-compete provisions with the Company
if they terminate their employment by resignation.
The Company has also agreed to enter into employment agreements with David
L. Backus and Philip O. Strawbridge with terms similar to those of the
employment agreements for Messrs. Mahoney and Pompe. The Company has also
agreed to enter into severance agreements with certain other key executives of
the Company. Such agreements generally will provide for the payment of 12
months of base salary in the event the executive is involuntarily terminated
for other than cause.
Mr. Strawbridge, as well as other senior executives at OHM, entered into
employment agreements with OHM prior to the execution of the Merger Agreement,
and the tender offer for OHM resulted in a change in control of OHM for
purposes of those employment agreements. As a result of the change in control,
under his employment agreement, Mr. Strawbridge was entitled to continue his
employment with OHM in his position at the time of the tender offer for a
period of approximately three years following the date of the change in
control. During his term of employment, Mr. Strawbridge would have been
entitled to receive a base salary and to continue to participate in incentive
and employee benefit plans at levels no less favorable to him than existed
prior to the change in control. In the event of a termination by OHM or by Mr.
Strawbridge of his employment during the employment term under circumstances
amounting to good reason under his employment agreement, Mr. Strawbridge would
have been entitled to receive a lump sum payment, subject to an overall
limitation to assure that payments will not constitute "excess parachute
payments" under federal income tax law. Mr. Strawbridge has agreed to remain
employed but the Company has agreed to pay to Mr. Strawbridge the amount he
would have received under his employment agreement if his employment had been
terminated, and pursuant to that agreement Mr. Strawbridge has received
$1,400,000.
Backus Arrangements. David L. Backus, a Senior Vice President has agreed to
be employed by the Company following the acquisition of GTI. While employed at
GTI, Mr. Backus was on loan from his previous employer. The Company paid Mr.
Backus $200,000 as full consideration for the value of foregone benefits and
compensation that he would have been entitled to if he had returned to his
previous employer.
Coffman Agreement. In connection with his resignation from the Company,
Franklin E. Coffman, a Senior Vice President, entered into an agreement dated
as of April 17, 1998 superceding his employment agreement. See "Certain
Transactions--Employment Agreements." Pursuant to that agreement Mr. Coffman
resigned as an officer of the Company and received a one-time payment of
$275,000, less payroll deductibles representing one year's salary and the cash
value of certain benefits. Mr. Coffman's eligibility to participate in Company
benefits ceased as of the date of the agreement. The Company and Mr. Coffman
also agreed that he would have the right to exercise vested options during a
two year period after the agreement and that all unvested options will expire
on the earlier of their scheduled expiration or April 7, 2000. The Company also
84
<PAGE>
agreed to lift vesting restrictions on 8,971 shares of previously awarded
restricted stock. The terms of the agreement were consistent with terms that he
would have received if he had retired from the Company.
Retention of Eckert Seamans Cherin & Mellott. The Company has retained the
law firm of Eckert Seamans Cherin & Mellott, to which Robert F. Pugliese, a
director of the Company, is Special Counsel, to perform certain limited
services in connection with the Company's credit agreement and the merger of
OHM Corporation.
Relocation Loans. In certain circumstances, the Company has granted and may
in the future grant interest-free loans to executive officers, officers and
certain other employees principally for real estate purchases in connection
with company-initiated transfers to a new location. All loans are approved by
the Compensation Committee and are to be secured by the principal residence of
the individual. Mr. James R. Mahoney, Senior Vice President, entered into a
relocation loan arrangement with the Company with an original principal amount
of $200,000 and secured by a deed of trust on his personal residence in
California. The loan was interest free so long as Mr. Mahoney remained an
employee. Beginning December 31, 1991 and on each December 31st thereafter
until the due date of the loan, 5% of the original principal amount (to a
maximum of 50% of the original principal amount) was forgiven by the Company.
Additionally, Mr. Mahoney agreed to repay the remaining 50% of the original
principal amount in installments related to the issuance of awards under the
Company's incentive compensation plan. In April 1997, $122,451 remained
outstanding on this loan. In May 1998, Mr. Mahoney repaid in full the $102,451
then remaining outstanding on his loan in connection with the sale of his
California residence.
In connection with the relocation and consolidation of the Company's
corporate headquarters from Torrance, California to Pittsburgh, Pennsylvania in
June 1997, and other relocations occurring at approximately the same time, the
Company offered relocation assistance to a limited number of officers and key
employees. Relocation assistance packages offered to these individuals involve
three elements: 1) reimbursement of out-of-pocket relocation expenses,
including travel, real estate brokerage commissions (up to a 6% maximum), and
loan origination fees (up to a maximum of two points), 2) a loan to be used for
the purchase of a new residence, and 3) a mobility allowance of between 15% and
30% of salary (Mr. Mahoney received an allowance of 30% of salary in connection
with his relocation and Mr. DeLuca received a 30% allowance in connection with
his relocation). Amounts paid to reimburse out-of-pocket expenses were
"grossed-up" for tax purposes. The loans to relocating associates have ten year
terms, are to be secured by the residence purchased, and do not bear interest
as long as the associate stays with the Company. Five percent of the loan
principal is required to be repaid annually by the associate and 5% will be
forgiven annually by the Company for each year the associate remains with the
Company. The loans are also due upon the sale of the residence purchased.
Mr. DeLuca and Mr. Mahoney each were offered and accepted relocation loans on
such terms in the original principal amounts of up to $100,000. Mr. DeLuca
accepted a loan of $70,000 in May 1997 and the balance of $30,000 in August
1998. During the fiscal year ended December 25, 1998, (i) Mr. DeLuca repaid
$3,500 of the loan, and (ii) the maximum amount owed by Mr. DeLuca to the
Company under the loan was $91,500. As of March 5, 1999, the principal amount
outstanding for Mr. DeLuca's loan was $86,500. Mr. Mahoney accepted a loan of
$100,000 in April 1998. During the fiscal year ended December 25, 1998, the
maximum amount owed by Mr. Mahoney to the Company under the loan was $100,000.
As of March 5, 1999, the principal amount outstanding for Mr. Mahoney's loan
was $90,000. Total relocation costs for all relocating employees was
approximately $953,000.
Executive Stock Ownership. The Company has adopted an Executive Stock
Ownership Program which requires that within three years certain key executives
own an amount of the Company's Common Stock equal to a multiple of their salary
ranging from one times salary for vice presidents to three times salary for
Mr. DeLuca. To assist these executives in meeting the ownership guidelines, the
Company has provided loans to Messrs. DeLuca, Mahoney, Pompe, and Strawbridge
in the amounts of $939,100, $152,600, $164,300 and $233,300 respectively, to
purchase the Company's Common Stock. The Company also provided similar loans
totaling $510,700 to four other key executives. All of the executives used the
loans solely to purchase the Company's Common Stock at current market prices.
The loans bear interest at the rate of 4.46% per year and
85
<PAGE>
are repayable upon the earlier of the executives' termination of employment or
November 23, 2001. It is expected that the executives will be able to repay the
loans from incentive compensation payments earned throughout the three-year
loan period.
Carlyle Financial Advisory Fees. In connection with the Investment, the
Company agreed to pay Carlyle (i) an annual financial advisory fee of $100,000,
payable quarterly; and (ii) investment banking fees (equal to 1% of transaction
value) and reimbursement of reasonable out-of-pocket expenses for investment
banking services rendered to the Company. The Company has paid $2,500,000 in
investment banking fees to Carlyle (and reimburse reasonable out-of-pocket
expenses) for services rendered in connection with the Merger transactions,
which is less than the 1% fee to which Carlyle would otherwise have been
entitled pursuant to the terms of its existing agreement with the Company.
Indemnification. The General Corporation Law of the State of Delaware, the
state of incorporation of the Company, and the Bylaws of the Company provide
for indemnification of directors and officers. Section 145 of the Delaware
General Corporation Law provides generally that a person sued as a director,
officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if, in cases
other than actions brought by or in the right of the corporation, he or she has
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation (and in the case of a
criminal proceeding, had no reasonable cause to believe that his or her conduct
was unlawful). Section 145 provides that no indemnification for any claim or
matter may be made, in the case of an action brought by or in the right of the
corporation, if the person has been adjudged to be liable, unless the Court of
Chancery or other court determines that indemnity is fair and reasonable
despite the adjudication of liability. Indemnification is mandatory in the case
of a director, officer, employee or agent who has been successful on the
merits, or otherwise, in defense of a suit against him or her. The
determination of whether a director, officer, employee or agent should be
indemnified must be made by a majority of disinterested directors, independent
legal counsel or the stockholders.
Directors and officers of the Company are covered under policies of
directors' and officers' liability insurance. The directors and all officers
serving the Company as Senior Vice President or in a higher position and
certain other officers are parties to Indemnity Agreements (the Indemnity
Agreements). The Indemnity Agreements provide indemnification for the directors
and covered officers in the event the directors' and officers' liability
insurance does not cover a particular claim for indemnification or if such a
claim or claims exceed the limits of such coverage. The Indemnity Agreements
are generally intended to provide indemnification for any amounts a director or
covered officer is legally obligated to pay because of claims arising out of
the director's or officer's service to the Company.
Additionally, the Company's Certificate of Incorporation provides that its
directors are not to be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty to the fullest extent permitted by law.
This provision is intended to allow the Company's directors the benefit of the
Delaware General Corporation Law which provides that directors of Delaware
corporations may be relieved of monetary liabilities for breach of their
fiduciary duty of care, except under certain circumstances, including breach of
the director's duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law or any
transaction from which the director derived an improper personal benefit.
The Investment agreements also contain additional provisions for the
indemnification of Company directors and officers in certain circumstances. The
Investment Agreement provides that the Company will indemnify, defend and hold
harmless Carlyle, and its affiliates, directors, officers, advisors, employees
and agents to the fullest extent lawful from and against all demands, losses,
damages, penalties, claims, liabilities, obligations, actions, causes of action
and reasonable expenses (Losses) arising out of the Investment Agreement or the
related transactions or arising by reason of or resulting from the breach of
any representation, warranty, covenant or agreement of the Company contained in
the Investment Agreement for the period for which such representation or
warranty survives; provided, however, that the Company shall not have any
liability to indemnify Carlyle with respect to Losses arising from the bad
faith or gross negligence of the Carlyle indemnified party.
86
<PAGE>
The Investment agreements also provide that Carlyle will indemnify, defend
and hold harmless the Company, its affiliates, directors, officers, advisors,
employees and agents from and against all Losses arising out of the breach of
any representation, warranty, covenant or agreement of Carlyle contained in the
Investment Agreement for the period for which such representation or warranty
survives; provided, however, that Carlyle shall not have any liability to
indemnify the Company with respect to Losses arising from the bad faith or
gross negligence of the Company indemnified party.
The Investment agreements provide that no claim may be made against an
indemnifying party for indemnification until the aggregate dollar amount of all
Losses exceeds $1,500,000 and the indemnification obligations of the respective
parties shall be effective only until the dollar amount paid in respect of the
Losses indemnified against aggregates to an amount equal to $45,000,000.
Further, pursuant to the Merger Agreement with OHM, the Company will, from
and after the effective time of the OHM Merger, indemnify and hold harmless, to
the fullest extent permitted under applicable law (and the Company will also
advance expenses as incurred to the fullest extent permitted under applicable
law, provided the person to whom expenses are advanced provides an undertaking
to repay such advances if it is ultimately determined that such person is not
entitled to indemnification), each present and former director and officer of
OHM and its subsidiaries against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to matters existing or occurring at or prior to
the effective time of the OHM Merger, including the transactions contemplated
by the OHM Merger Agreement, which is based or arises out of the fact that such
person is or was a director or officer of OHM or any of its subsidiaries. In
addition, for not less than six years after the effective time, the Company and
OHM will maintain OHM's and its subsidiaries' existing directors' and officers'
liability insurance ("D&O Insurance"), subject to certain maximum premium
payments, provided that the Company may substitute therefor policies having at
least the same coverage and containing terms which are no less advantageous to
the intended beneficiaries thereof than the existing D&O Insurance with respect
to matters existing or occurring at or prior to the effective time or may
purchase a six-year extended reporting endorsement under OHM's existing D&O
Insurance.
The Company has substantially similar indemnification obligations with
respect to persons who are or were directors, officers, employees or agents of
GTI before or after the effective time of the merger with GTI, pursuant to the
agreement for the acquisition of GTI.
87
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
Exhibits
These Exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <C> <S>
2 Omitted--Inapplicable.
3(i) Certificate of Incorporation of the Registrant as amended by the
Amendment to Certificate of Incorporation filed September 17, 1987,
with the Delaware Secretary of State(1), and by the Certificate of
Amendment to Certificate of Incorporation filed June 19, 1998(2), with
the Delaware Secretary of State(2) and by the Certificate of Amendment
of Certification of Incorporation of International Technology
Corporation, dated as of December 21, 1998, as filed with the Delaware
Secretary of State on December 23, 1998.(3)
3(ii) Amended and Restated Bylaws of the Registrant as amended through June
12, 1998.(2)
4(i) 1. Certificate of Designations with respect to the Registrant's 7%
Cumulative Convertible Exchangeable Preferred Stock, $100 par
value.(4)
2. Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions Thereof of
Cumulative, Convertible Participating Preferred Stock of The IT
Group, Inc., issued November 20, 1996.(5)
4(ii) 1. Indenture for the Registrant's 7% Convertible Subordinated
Debentures Due 2008.(4)
2. Indenture dated as of October 1, 1986 between OHM Corporation and
United States Trust Company of New York, Trustee, relating to OHM
Corporation's 8% Convertible Subordinated Debentures due October
1, 2006.(6)
3. Specimen Debenture Certificate.(7)
4. First Supplemental Indenture dated as of May 20, 1994 by and among
OHM Corporation and United States Trust Company of New York.(8)
5. Second Supplemental Indenture dated as of June 11, 1998 among OHM
Corporation, The IT Group, Inc., a guarantor, and United States
Trust Company of New York.(2)
9 Omitted--Inapplicable.
10(ii) 1. Amended and Restated Credit Agreement, dated as of June 11, 1998,
among the Registrant, IT Corporation, OHM Corporation, the
institutions from time to time party thereto as lenders, the
institutions from time to time party thereto as issuing banks,
Citicorp USA Inc., in its capacity as administrative agent, and
BankBoston, M.A., in its capacity as documentation agent.(9)
2. First Amendment dated September 16, 1998 to the Amended and
Restated Credit Agreement, dated as of June 11, 1998, among the
Registrant, IT Corporation, OHM Corporation, the institutions from
time to time party thereto as lenders, the institutions from time
to time party thereto as issuing banks, Citicorp USA Inc., in its
capacity as administrative agent, and BankBoston, N.A., in its
capacity as documentation agent.(10)
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <C> <S>
3. Second Amendment dated October 26, 1998 to the Amended and
Restated Credit Agreement, dated as of June 11, 1998, among the
Registrant, IT Corporation, OHM Corporation, the institutions from
time to time party thereto as lenders, the institutions from time
to time party thereto as issuing banks, Citicorp USA Inc., in its
capacity as administrative agent, and BankBoston, N.A., in its
capacity as documentation agent.(10)
4. Third Amendment dated March 5, 1999 to the Amended and Restated
Credit Agreement, dated as of June 11, 1998, among the Registrant,
IT Corporation, OHM Corporation, the institutions from time to
time party thereto as lenders, the institutions from time to time
party thereto as issuing banks, Citicorp USA Inc., in its capacity
as administrative agent, and BankBoston, N.A., in its capacity as
documentation agent.
5. Agreement and Plan of Merger, dated as of January 15, 1998, among
OHM Corporation, Registrant and IT-Ohio, Inc.(11)
6. Parent Voting Agreement dated January 15, 1998 among OHM
Corporation, Registrant and the stockholders of Registrant named
therein.(11)
7. Company Voting Agreement dated January 15, 1998 among OHM
Corporation, Registrant and the shareholders of OHM Corporation
named therein.(11)
8. Option Termination Agreement dated January 15, 1998 between James
L. Kirk and OHM Corporation.(11)
9. Share Repurchase Agreement dated January 15, 1998 among OHM
Corporation, Registrant, Rust International, Inc. and Waste
Management, Inc.(11)
10. Second Amended and Restated Share Repurchase Agreement, dated as
of February 17, 1998, among OHM Corporation, WMX, Rust, Rust
Remedial Services Holding Company Inc. and Registrant.(12)
11. Stock Purchase Agreement dated as of June 17, 1997 by and among
OHM Corporation, Beneco Enterprises, Inc., Bennie Smith, Jr.,
Robert Newberry and Scott Doxey.(13)
12. Agreement and Plan of Merger, dated as of October 27, 1998, among
Fluor Daniel GTI, Inc., Tiger Acquisition Corporation and the
Registrant.(10)
13. Amended and Restated Marketing Agreement dated as of October 27,
1998 between Fluor Daniel GTI, Inc. and Fluor Daniel, Inc.(10)
14. Intercompany Services Agreement dated October 27, 1998 between the
Registrant, Fluor Daniel, Inc. and Fluor Daniel GTI, Inc.(10)
15. Share Purchase Agreement dated February 5, 1999 by and between the
shareholders of Roche Limited, Consulting Group and IT Holdings
Canada, Inc. and The IT Group, Inc.
16. Asset Purchase Agreement, dated as of March 8, 1999, between IT
and ICF Kaiser International, Inc.(14)
17. Stock Redemption Agreement dated as of June 26, 1998, between
Quanterra Incorporated, the registrant and IT Corporation.(15)
18. Securities Purchase Agreement dated as of August 28, 1996 between
the Registrant and certain Purchasers identified therein
affiliated with The Carlyle Group(5), including agreement by and
between The Carlyle Group and the Registrant re financial advisory
and investment banking fees.(16)
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <C> <S>
19. Amendment No. 1, dated November 20, 1996, to Securities Purchase
Agreement dated August 28, 1996, by and among the Registrant and
certain Purchasers identified therein affiliated with The Carlyle
Group.(17)
20. Form of Warrant Agreement by and among the Registrant and certain
Warrant Holders defined herein affiliated with The Carlyle Group,
dated as of November 20, 1996.(5)
21. Form of Registration Rights Agreement by and among the Registrant
and certain Investors affiliated with The Carlyle Group, dated
November 20, 1996.(5)
22. Master Loan and Security Agreement dated May 11, 1993, between OHM
Remediation Services Corp. and BOT Financial Corporation.(18)
23. Amendment No. 1 to Master Loan and Security Agreement dated as of
January 19, 1995 between BOT Financial Corporation and OHM
Remediation Services Corp.(19)
24. Promissory Note dated December 23, 1993 executed by OHM
Remediation Services Corp. in favor of BOT Financial
Corporation.(20)
25. Promissory Note dated December 28, 1994 executed by OHM
Remediation Services Corp. in favor of BOT Financial
Corporation.(8)
26. Loan and Security Agreement dated as of August 1, 1994 by and
between OHM Remediation Services Corp. and Internationale
Nederlanden Lease Structured Finance B.V.(21)
27. Promissory Note dated August 31, 1994 executed by OHM Remediation
Services Corp. in favor of Internationale Nederlanden Lease
Structured Finance B.V.(21)
28. Continuing Corporate Guaranty dated as of August 1, 1994 executed
by OHM Corporation in favor of Internationale Nederlanden Lease
Structured Finance B.V.(21)
10(iii) 1. Non-Employee Directors' Retirement Plan, as amended and restated
June 2, 1994(22)(23), as amended by the Amended and Restated Non-
Employee Directors Retirement Plan, Amendment No. 5, dated
November 20, 1996.(22)(16)
2. Description of the Special Turn-a-Round Plan (Fiscal Year 1995
Management Incentive Plan) of the Registrant.(22)(24)
3. 1983 Stock Incentive Plan, as amended.(22)(25)
4. 1991 Stock Incentive Plan(22)(26) as modified by waiver dated
November 20, 1996, by certain former Non-Employee Directors, in
favor of the Registrant.(16)(22)
5. Form of Amendment dated October 23, 1998, to the Restricted Stock
and Escrow Agreement under the Registrant's 1991 Stock Incentive
Plan.(22)(27)
6. 1996 Stock Incentive Plan, as amended and restated effective June
11, 1998.(22)(28)
7. OHM Corporation 1986 Stock Option Plan, as amended and restated as
of May 10, 1994.(22)(29)
8. OHM Corporation Nonqualified Stock Option Plan for
Directors.(22)(30)
9. OHM Corporation Directors' Deferred Fee Plan.(8)(22)
10. Amendment No. 1 to OHM Corporation Directors' Deferred Fee
Plan.(19)(22)
11. OHM Corporation Retirement Savings Plan, as amended and restated
as of January 1, 1994.(8)(22)
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <C> <S>
12. Amendment No. 1 to OHM Corporation Retirement Savings Plan, as
amended and restated as of January 1, 1994.(19)(22)
13. Amendment No. 2 to OHM Corporation Retirement Savings Plan, as
amended and restated as of January 1, 1994.(22)(31)
14. OHM Corporation Retirement Savings Plan Trust Agreement between
OHM Corporation and National City Bank, as Trustee, as amended and
restated effective July 1, 1994.(8)(22).
15. Fiscal Year 1997 Management Incentive Plan.(16)(22)
16. Fiscal Year 1998 Management Incentive Plan.(16)(22)
17. Retirement Agreement dated March 3, 1994 between Murray H.
Hutchison and the Registrant.(24)(22) as amended by First
Amendment dated January 6, 1995 to the Retirement Agreement dated
March 3, 1994 between Murray H. Hutchison and the
Registrant.(22)(32)
18. Retirement Plan of IT, 1993 Restatement.(22)(24)
19. Amendment Number One to IT Corporation Retirement Plan, dated as
of July 1, 1995.(22)(33)
20. Amendment Number Two to IT Corporation Retirement Plan, dated as
of October 1, 1995.(22)(33)
21. Amendment Number Three to IT Corporation Retirement Plan, dated as
of July 15, 1996.(22)(34)
22. Amendment Number Four to IT Corporation Retirement Plan, dated as
of February 1, 1997.(16)(22)
23. Amendment Number Five to IT Corporation Retirement Plan, dated as
of May 13, 1997.(16)(22)
24. Amendment Number Six to IT Corporation Retirement Plan dated as of
May 27, 1998.(2)(22)
25. Amendment Number Seven to IT Corporation Retirement plan dated as
of December 31, 1998.(22)
26. Executive Stock Purchase Interest Reimbursement Plan, approved
September 6, 1995.(22)(26)
27. Executive/Directors Deferred Compensation Plan, effective January
1, 1996.(22)(26)
28. Executive Restoration Plan, effective July 1, 1995 as amended
through May 13, 1997.(22)(26)
29. IT Corporation Deferred Compensation Plan (amended and restated
effective January 1, 1998).(2)(22)
30. IT Corporation Restoration Plan amended and restated effective
January 1, 1998.(2)(22)
31. 1997 The IT Group, Inc. Non-Employee Directors Stock Plan--
Director Fees, dated as of February 26, 1997.(22)(34)
32. Employment Agreement, dated as of November 20, 1996, by and
between the Registrant, IT Corporation, and Anthony J.
DeLuca.(16)(22)
33. Separation Agreement, dated as of April 10, 1998, by and between
the Registrant, its subsidiaries and affiliates, and Franklin E.
Coffman.(2)(22)
34. Employment Agreement, dated as of November 20, 1996, by and
between the Registrant, IT Corporation, and James R.
Mahoney.(16)(22)
35. Employment Agreement, dated as of November 20, 1996, by and
between the Registrant, IT Corporation, and Raymond J.
Pompe.(16)(22)
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <C> <S>
36. Employment Continuation, Non-competition and Confidentiality
Agreement dated the 17th day of June, 1997, by and between Beneco
Enterprises, Inc., a Utah corporation, OHM Corporation, an Ohio
corporation, and Scott Doxey.(2)(22)
37. Employment Continuation, Non-competition and Confidentiality
Agreement dated the 17th day of June, 1997, by and between Beneco
Enterprises, Inc., a Utah corporation, OHM Corporation, an Ohio
corporation, and Robert Newberry.(2)(22)
38. Employment Continuation, Non-competition and Confidentiality
Agreement dated the 17th day of June, 1997, by and between Beneco
Enterprises, Inc., a Utah corporation, OHM Corporation, an Ohio
corporation, and Bennie Smith, Jr.(2)(22)
39. Form of Employment Agreement by and between OHM Corporation, and
each of Pamela K.M. Beall, Robert J. Blackwell, Kris E. Hansel,
Steven E. Harbour, James L. Kirk, Philip V. Petrocelli, Philip O.
Strawbridge, and Michael A. Szomjassy, as amended by Amendment No.
1 in the case of each of Ms. Beall and Messrs. Blackwell, Hansel,
Harbour, Strawbridge and Szomjassy, and as amended by Amendment
No. 2 in the case of each of Ms. Beall and Messrs. Blackwell,
Hansel, and Harbour.(2)(22)
40. The IT Group, Inc. Severance and Retention Bonus Plan dated March
5, 1998.(2)(22)
41. Executive Stock Ownership Program by and between the Registrant
and certain executive officers of the Registrant.(22)
42. The IT Group, Inc. Executive Bonus Plan effective November 17,
1998 (22)
11 Omitted--Inapplicable.
12 Omitted--Inapplicable.
13 Omitted--Inapplicable.
16 Omitted--Inapplicable.
18 Omitted--Inapplicable.
20 Omitted--Inapplicable.
21 List of the Registrant's subsidiaries.
22 Omitted--Inapplicable.
23 1. Consent of Ernst & Young LLP, Independent Auditors.
24 Omitted--Inapplicable.
27 Financial Data Schedule for the year ended December 25, 1998.
28 Omitted--Inapplicable.
99 Omitted--Inapplicable.
</TABLE>
- --------
Footnotes
(1) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 10-K for the year ended March
31, 1988 (No. 1-9037) and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an Exhibit
to Registrant's Report on Form 10-K for the year ended March 27, 1998 and
incorporated herein by reference.
92
<PAGE>
(3) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Report on Form 8-K dated December 23, 1998 and
incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Registration Statement on Form S-3 (No. 33-65988) and
incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Form 8-K dated September 20, 1996 and incorporated
herein by reference.
(6) Previously filed with the Securities and Exchange Commission as an Exhibit
to OHM Corporation's Annual Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as an Exhibit
to OHM Corporation's Amendment No. 1 to Registration Statement of Form S-
1, No. 33-8296 and incorporated by reference.
(8) Previously filed with the Securities and Exchange Commission as an Exhibit
to OHM Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
(9) Previously filed with the Securities and Exchange Commission as an Exhibit
to Registrant's Report on Form 8-K dated June 11, 1998 and incorporated
herein by reference.
(10) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Schedule 14D-1 dated November 3, 1998 and incorporated
herein by reference.
(11) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Report on Form 8-K dated January 15, 1998.
(12) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Schedule 14D-1 (Amendment No. 5) dated February 18,
1998 and incorporated herein by reference.
(13) Previously filed with the Securities and Exchange Commission as an Exhibit
to OHM Corporation's Report on Form 8-K filed on July 2, 1997 and
incorporated herein by reference.
(14) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 8-K dated March 12, 1999 and
incorporated herein by reference.
(15) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 26, 1998 and incorporated herein by reference.
(16) Previously filed with the Securities and Exchange Commission as an Exhibit
to Registrant's Report on Form 10-K for the year ended March 28, 1997.
(17) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 27, 1996 and incorporated herein by reference.
(18) Previously filed with the Securities and Exchange Commission as an Exhibit
to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993 and incorporated herein by reference.
(19) Previously filed with the Securities and Exchange Commission as an Exhibit
to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995 and incorporated herein by reference.
(20) Previously filed with the Securities and Exchange Commission as an Exhibit
to OHM Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
(21) Previously filed with the Securities and Exchange Commission as an Exhibit
to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994 and incorporated herein by reference.
(22) Filed as a management compensation plan or arrangement per Item 14(a)(3)
of the Securities Exchange Act.
93
<PAGE>
(23) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 10-K for the year ended March
31, 1995 and incorporated herein by reference.
(24) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 10-K for the year ended March
31, 1994 and incorporated herein by reference.
(25) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 10-K for the year ended March
31, 1993 and incorporated herein by reference.
(26) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 10-K for the year ended March
29, 1996 and incorporated herein by reference.
(27) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 25, 1998 and incorporated herein by reference.
(28) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Proxy Statement dated May 11, 1998 and incorporated
herein by reference.
(29) Previously filed with the Securities and Exchange Commission as an
Appendix to OHM Corporation's Proxy Statement for its Annual Meeting held
May 10, 1994 and incorporated herein by reference.
(30) Previously filed with the Securities and Exchange Commission as an Exhibit
to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992 and incorporated herein by reference.
(31) Previously filed with the Securities and Exchange Commission as an Exhibit
to the OHM Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference.
(32) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994 and incorporated herein by reference.
(33) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Form S-8 (No. 333-00651) and incorporated herein by
reference.
(34) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Registration Statement on Form S-8 (No. 333-26143) and
incorporated herein by reference.
(35) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Form 8-K, dated January 17, 1997 and incorporated
herein by reference.
Reports on Form 8-K
1. Current report on Form 8-K, dated November 3, 1998, reporting under Item 5
relating to the announcement of the Agreement and Plan of Merger entered
into among the registrant, Tiger Acquisition Corporation (a newly formed
wholly owned subsidiary of the registrant), Flour Daniel GTI, Inc. and Fluor
Daniel, Inc.
2. Current report on Form 8-K, dated November 19, 1998, reporting under Item 5
relating to the announcement of the early termination of the 15-day waiting
period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 in
connection with the registrant's previously announced acquisition of Fluor
Daniel GTI, Inc.
3. Current report on Form 8-K, dated December 3, 1998, reporting under Item 2
relating to the merger of Tiger Acquisition Corporation, a wholly owned
subsidiary of the registrant, with and into Fluor Daniel GTI, Inc., pursuant
to the previously announced Agreement and Plan of Merger, dated as of
October 27, 1998 and Item 7 the Financial Statements of Businesses acquired
and Pro Forma Financial Information.
4. Current report on Form 8-K, dated December 23, 1998, reporting under Item 5
the completion of all steps necessary to change its name from International
Technology Corporation to The IT Group, Inc. and Item 7 Financial Statements
of Businesses Acquired in connection with the previously announced
acquisition of Fluor Daniel GTI, Inc.
5. Current report on Form 8-K, dated March 8, 1999, reporting under Item 5 the
announcement of the Asset Purchase Agreement entered into by the registrant
and ICF Kaiser International, Inc.
94
<PAGE>
THE IT GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Provision Accounts Balance
beginning charged written at end
of period to income off Other of period
---------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Nine months ended December
25, 1998:
Allowance for doubtful
accounts................ $19,026 $1,203 $(3,101) $ 1,830(1) $18,958
Valuation allowance for
deferred tax asset...... $31,865 $6,059 $ -- $12,343(5) $50,267
Year ended March 27, 1998:
Allowance for doubtful
accounts................ $ 2,055 $ 206 $(1,147) $17,912(2) $19,026
Valuation allowance for
deferred tax asset...... $ 9,471 $2,252 $ -- $20,142(4) $31,865
Year ended March 28, 1997:
Allowance for doubtful
accounts................ $ 2,943 $ 304 $(1,208) $ 16(3) $ 2,055
Valuation allowance for
deferred tax asset...... $ 4,869 $4,602 $ -- $ -- $ 9,471
</TABLE>
- --------
(1) Represents allowance for doubtful accounts recorded on the books of GTI at
acquisition.
(2) Represents allowance for doubtful accounts at the date of acquisition for
business acquired during the twelve months ended March 27, 1998 totaling
$18,020 less the allowance for doubtful accounts of $108 relating to the
sale of IT's remediation services business.
(3) Represents allowance for doubtful accounts at November 1996 for receivables
acquired in the purchase of Chi Mei.
(4) Represents valuation allowance adjustment relating to the acquisition of
OHM Corporation.
(5) Represents valuation allowance adjustment relating to the acquisitions of
OHM and GTI corporations.
95
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Monroeville,
Pennsylvania on the 22nd day of March, 1999.
THE IT GROUP, INC.
/s/ Anthony J. Deluca
By: _________________________________
Anthony J. DeLuca
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Daniel A. D'Aniello Chairman of the Board of March 22, 1999
______________________________________ Directors
Daniel A. D'Aniello
/s/ Anthony J. Deluca Director, President and March 22, 1999
______________________________________ Chief Executive Officer
Anthony J. DeLuca and Duly Authorized
Officer
/s/ Philip B. Dolan Director March 22, 1999
______________________________________
Philip B. Dolan
/s/ E. Martin Gibson Director March 22, 1999
______________________________________
E. Martin Gibson
/s/ James C. McGill Director March 22, 1999
______________________________________
James C. McGill
/s/ Richard W. Pogue Director March 22, 1999
______________________________________
Richard W. Pogue
/s/ Robert F. Pugliese Director March 22, 1999
______________________________________
Robert F. Pugliese
/s/ Charles W. Schmidt Director March 22, 1999
______________________________________
Charles W. Schmidt
/s/ James David Watkins Director March 22, 1999
______________________________________
James David Watkins
/s/ Philip O. Strawbridge Senior Vice President, March 22, 1999
______________________________________ Chief Administrative
Philip O. Strawbridge Officer and Principal
Financial Officer
/s/ Harry J. Soose Vice President, Finance March 22, 1999
______________________________________ and Principal Accounting
Harry J. Soose Officer
</TABLE>
96
<PAGE>
Exhibit 10(ii)(4)
EXECUTION COPY
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment to Credit Agreement dated as of March 5, 1999
(this "Amendment"), is entered into among The IT Group, Inc. (f/k/a
International Technology Corporation) (the "Company"), IT Corporation ("ITC"),
OHM Corporation ("OHM"), OHM Remediation Services Corp. ("OHM Remediation") and
Beneco Enterprises, Inc. ("Beneco"; together with the Company, ITC, OHM and OHM
Remediation, the "Borrowers") and the Lenders (as defined below) party hereto,
and amends the Credit Agreement dated as of February 25, 1998, as amended and
restated as of June 11, 1998 and as further amended pursuant to the First
Amendment to Credit Agreement dated as of September 16, 1998 and the Second
Amendment to Credit Agreement dated as of October 26, 1998 (as amended hereby
and as the same may be further amended, supplemented or otherwise modified from
time to time, the "Credit Agreement") entered into among the Borrowers, the
institutions from time to time party thereto as lenders (the "Lenders"), the
institutions from time to time party thereto as issuing banks (the "Issuing
Banks"), Citicorp USA, Inc., in its capacity as administrative agent for the
Lenders and the Issuing Banks (in such capacity, the "Administrative Agent"),
BankBoston, N.A., in its capacity as documentation agent for the Lenders and the
Issuing Banks, and Royal Bank of Canada and Credit Lyonnais New York Branch, in
their respective capacities as co-agents. Capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to them in the Credit
Agreement.
W I T N E S S E T H:
--------------------
WHEREAS, the Company has informed the Administrative Agent that the
Company intends (i) to acquire (the "EFM Acquisition") certain assets of the
Environmental & Facilities Management operations ("EFM") of ICF Kaiser
International, Inc. ("ICF") for a purchase price of (x) approximately
$82,000,000, for all assets of EFM other than its interest in the Kaiser-Hill
Company, LLC joint venture ("Kaiser Hill"), payable on the date of the
consummation of the EFM Acquisition (the "Closing EFM Purchase Price"), (y)
approximately $20,000,000 for ICF's interest in Kaiser Hill, which would be
payable on (or within 10 days after) the date of the consummation of the EFM
Acquisition in the event that CH2M Hill Federal Group, Ltd. does not exercise
its right of first refusal to acquire such interest (the "Closing Kaiser Hill
Purchase Price"), and (z) a deferred payment of approximately $25,000,000 (the
"Deferred Kaiser Hill Purchase Price"; together with the Closing EFM Purchase
Price and the Closing Kaiser Hill Purchase Price, the "EFM Purchase Price"),
which would be payable in the event certain government contracts of Kaiser Hill
were extended or were awarded to Kaiser after a successful rebidding of such
contracts and (ii) to acquire (the "Roche Acquisition"; together with the EFM
Acquisition, the "Acquisitions") the outstanding capital stock of Roche Ltee
Groupe Counseil ("Roche") for a purchase price of approximately
<PAGE>
$10,000,000 (the "Roche Purchase Price") plus an earn-out of up to an additional
$9,200,000 based on certain performance criteria;
WHEREAS, the terms of each of the Acquisitions would satisfy the
conditions of a Permitted Acquisition (except as otherwise provided herein);
WHEREAS, the Company intends to finance the Acquisitions and the fees
and expenses to be incurred by the Company in connection therewith and with the
financing thereof (the "Transaction Costs") with proceeds from the issuance of
senior subordinated notes issued by the Company (the "Subordinated Notes"), the
gross proceeds of which are at least $175,000,000 (or, if the Company does not
purchase ICF's interest in Kaiser Hill, $150,000,000) but not greater than
$250,000,000;
WHEREAS, the terms of the Subordinated Notes shall be substantially
consistent with the terms thereof set forth on Exhibit B attached hereto and
made a part hereof (the "Subordinated Note Term Sheet");
WHEREAS, the Transaction Costs associated with the Acquisitions and
the financing provided by the Subordinated Notes are approximately $13,000,000;
WHEREAS, with respect to the Acquisitions and the transactions
contemplated thereby the Company has, among other things, requested the
Requisite Lenders, by amending the Credit Agreement or by otherwise providing
their consent, (i) to waive compliance with clause (c) of the definition of
Permitted Acquisition in respect of each Acquisition and clause (e) of the
definition of Permitted Acquisition in respect of the EFM Acquisition, (ii) to
increase the amount of Subordinated Notes that would otherwise be permitted
under the terms of the Credit Agreement from $150,000,000 to $250,000,000 and to
approve of the terms of such notes, (iii) to permit certain Indebtedness not in
excess of Cn.$2,000,000 assumed in connection with the Roche Acquisition to be
secured, (iv) to amend certain financial covenants contained in Article X of the
Credit Agreement and (v) to amend the definition of Change of Control to permit
certain sales by the Carlyle Investors of the 6% Preferred Stock (or Company
Common Stock into which such preferred stock may be converted in accordance with
its terms);
WHEREAS, pursuant to Section 13.07(b) of the Credit Agreement, the
consent of the Requisite Lenders is required to modify the Credit Agreement as
requested by the Company;
NOW, THEREFORE, in consideration of the above premises, the Borrowers
and the Lenders party hereto agree as follows:
SECTION 1. Amendment to the Credit Agreement. The Credit Agreement
---------------------------------
is, effective as of the Amendment Effective Date (as defined below), hereby
amended as follows:
(a) The definition of "Change of Control" is amended by adding the
following proviso immediately prior to the comma at the end of clause (i)
thereof:
2
<PAGE>
; provided, however, nothing in this clause (i) shall prohibit the Carlyle
-------- -------
Investors from selling 6% Preferred Stock or Company Common Stock (into
which the 6% Preferred Stock has been converted in accordance with its
terms) from and after any sale by the Company of newly issued shares of
Company Common Stock in a public offering or private placement of such
shares or in connection with a Permitted Acquisition for which such shares
are being issued as part of the purchase price, as long as the number of
shares of 6% Preferred Stock (multiplied by the applicable conversion
factor of such shares into Company Common Stock) and Company Common Stock
sold by the Carlyle Investors at any time thereafter does not exceed the
aggregate number of shares of Company Common Stock issued by the Company in
such public offering or private placement or in connection with such
Permitted Acquisition
(b) The definition of "Permitted Subordinated Indebtedness" is amended
by replacing the amount "$150,000,000" in clause (i) thereof with the amount
"$250,000,000".
(c) Section 7.01(a) of the Credit Agreement is amended by inserting
the following parenthetical immediately following the phrase "Within thirty (30)
days after the end of each fiscal month in each Fiscal Year" at the beginning of
such section:
(or forty-five (45) days in the case of each such month ending on the last
day of a fiscal quarter)
(d) Section 9.03 of the Credit Agreement is amended by deleting the
"and" at the end of clause (d) thereof, replacing the period at the end of
clause (e) thereof with "; and" and adding the following new clause (f) at the
end thereof:
(f) Liens on the assets of Roche Ltee Groupe Counseil securing
Indebtedness permitted under Section 9.01(j)(ii), provided that such
------------------- --------
Indebtedness does not exceed a principal amount of Cn.$2,000,000 at
any time.
(e) Sections 10.01, 10.02, 10.03 and 10.04 of the Credit Agreement are
amended in their entirety to read as follows:
10.01 Minimum Consolidated Net Worth. The Company and its
------------------------------
Subsidiaries shall maintain a Consolidated Net Worth at all times
during each period set forth below (commencing on the beginning of the
first day of such period through the end of the penultimate day of
such period) in an amount not less than the minimum amount set forth
opposite such period below; provided, however, in the event the
-------- -------
Company or any of its Subsidiaries sells any of the discontinued
properties located in northern California, the after-tax equivalent of
any loss incurred by the Company and its Subsidiaries in connection
with any such sale shall thereafter be excluded in determining
Consolidated Net Worth:
3
<PAGE>
<TABLE>
<CAPTION>
Period Minimum
- ------------------------------------------------------------- -------
<S> <C>
The Merger Funding Date to the last day of the First Fiscal $210,000,000
Quarter of Fiscal Year 1999
The last day of the First Fiscal Quarter of Fiscal Year 1999 $214,000,000
to the last day of the Second Fiscal Quarter of Fiscal Year
1999
The last day of the Second Fiscal Quarter of Fiscal Year $217,000,000
1999 to the last day of the Third Fiscal Quarter of Fiscal
Year 1999
The last day of the Third Fiscal Quarter of Fiscal Year 1999 $223,000,000
to the last day of the Fourth Fiscal Quarter of Fiscal Year
1999
The last day of the Fourth Fiscal Quarter of Fiscal Year $228,000,000
1999 to the last day of the First Fiscal Quarter of Fiscal
Year 2000
The last day of the First Fiscal Quarter of Fiscal Year 2000 $232,000,000
to the last day of the Second Fiscal Quarter of Fiscal Year
2000
The last day of the Second Fiscal Quarter of the Fiscal Year $236,000,000
2000 to the last day of the Third Fiscal Quarter of Fiscal
Year 2000
The last day of the Third Fiscal Quarter of the Fiscal Year $243,000,000
2000 to the last day of the Fourth Fiscal Quarter of Fiscal
Year 2000
The last day of the Fourth Fiscal Quarter of Fiscal Year $249,000,000
2000 to the last day of the First Fiscal Quarter of Fiscal
Year 2001
The last day of the First Fiscal Quarter of Fiscal Year 2001 $254,000,000
to the last day of the Second Fiscal Quarter of Fiscal Year
2001
The last day of the Second Fiscal Quarter of the Fiscal Year $259,000,000
2001 to the last day of the Third Fiscal Quarter of Fiscal
Year 2001
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Period Minimum
- ------------------------------------------------------------- -------
<S> <C>
The last day of the Third Fiscal Quarter of the Fiscal Year $267,000,000
2001 to the last day of the Fourth Fiscal Quarter of Fiscal
Year 2001
The last day of the Fourth Fiscal Quarter of Fiscal Year $274,000,000
2001 to the last day of the First Fiscal Quarter of Fiscal
Year 2002
The last day of the First Fiscal Quarter of Fiscal Year 2002 $281,000,000
to the last day of the Second Fiscal Quarter of Fiscal Year
2002
The last day of the Second Fiscal Quarter of the Fiscal Year $287,000,000
2002 to the last day of the Third Fiscal Quarter of Fiscal
Year 2002
The last day of the Third Fiscal Quarter of the Fiscal Year $296,000,000
2002 to the last day of the Fourth Fiscal Quarter of Fiscal
Year 2002
The last day of the Fourth Fiscal Quarter of Fiscal Year $306,000,000
2002 to the last day of the First Fiscal Quarter of Fiscal
Year 2003
The last day of the First Fiscal Quarter of Fiscal Year 2003 $314,000,000
to the last day of the Second Fiscal Quarter of Fiscal Year
2003
The last day of the Second Fiscal Quarter of Fiscal Year $321,000,000
2003 to the last day of the Third Fiscal Quarter of Fiscal
Year 2003
The last day of the Third Fiscal Quarter of Fiscal Year 2003 $333,000,000
to the last day of the Fourth Fiscal Quarter of Fiscal Year
2003
The last day of the Fourth Fiscal Quarter of Fiscal Year $344,000,000
2003 to the last day of the First Quarter of Fiscal Year
2004
The last day of the First Fiscal Quarter of Fiscal Year 2004 $353,000,000
to the last day of the Second Fiscal Quarter of Fiscal Year
2004
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Period Minimum
- ------------------------------------------------------------- -------
<S> <C>
The last day of the Second Fiscal Quarter of the Fiscal Year $361,000,000
2004 to the last day of the Third Fiscal Quarter of Fiscal
Year 2004
The last day of the Third Fiscal Quarter of Fiscal Year 2004 $373,000,000
to the last day of the Fourth Fiscal Quarter of Fiscal Year
2004
The last day of the Fourth Fiscal Quarter of Fiscal Year $386,000,000
2004 to the last day of the First Fiscal Quarter of Fiscal
Year 2005
The last day of the First Fiscal Quarter of Fiscal Year 2005 $396,000,000
to the last day of the Second Fiscal Quarter of Fiscal Year
2005
The last day of the Second Fiscal Quarter of Fiscal Year $406,000,000
2005 to the last day of the Third Fiscal Quarter of Fiscal
Year 2005
The last day of the Third Fiscal Quarter of the Fiscal Year $420,000,000
2005 to the last day of the Fourth Fiscal Quarter of Fiscal
Year 2005
The last day of the Fourth Fiscal Quarter of Fiscal Year $435,000,000
2005 to the last day of the First Fiscal Quarter of Fiscal
Year 2006
From and after the last day of the First Fiscal Quarter of $438,000,000
Fiscal Year 2006
</TABLE>
10.02 Minimum Fixed Charge Coverage Ratio. The Company and its
-----------------------------------
Subsidiaries shall maintain a Fixed Charge Coverage Ratio on a
consolidated basis, as determined as of the end of the last day of each
fiscal quarter occurring after the Merger Funding Date set forth below,
for the four fiscal quarter period (or, if the period from July 1, 1998
to such day is less than four full fiscal quarters, such two or three
quarter period, as applicable) ending on such day, of at least the
minimum ratio set forth opposite such period:
<TABLE>
<CAPTION>
Fiscal Quarter Minimum Ratio
- -------------- -------------
<S> <C>
Fourth Fiscal Quarter of Fiscal Year 1998 1.05 to 1.0
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarter Minimum Ratio
- -------------- -------------
<S> <C>
First Fiscal Quarter of Fiscal Year 1999 1.10 to 1.0
Second Fiscal Quarter of Fiscal Year 1999 1.20 to 1.0
Third Fiscal Quarter of Fiscal Year 1999 1.30 to 1.0
Fourth Fiscal Quarter of Fiscal Year 1999 1.30 to 1.0
First Fiscal Quarter of Fiscal Year 2000 1.30 to 1.0
Second Fiscal Quarter of Fiscal Year 2000 1.40 to 1.0
Third Fiscal Quarter of Fiscal Year 2000 1.40 to 1.0
Fourth Fiscal Quarter of Fiscal Year 2000 1.50 to 1.0
First Fiscal Quarter of Fiscal Year 2001 1.50 to 1.0
Second Fiscal Quarter of Fiscal Year 2001 1.50 to 1.0
Third Fiscal Quarter of Fiscal Year 2001 1.50 to 1.0
Fourth Fiscal Quarter of Fiscal Year 2001 1.60 to 1.0
First Fiscal Quarter of Fiscal Year 2002 1.60 to 1.0
Second Fiscal Quarter of Fiscal Year 2002 1.70 to 1.0
Third Fiscal Quarter of Fiscal Year 2002 1.80 to 1.0
Fourth Fiscal Quarter of Fiscal Year 2002 1.90 to 1.0
First Fiscal Quarter of Fiscal Year 2003 through 1.90 to 1.0
the Fourth Fiscal Quarter of Fiscal Year 2003
First Fiscal Quarter of Fiscal Year 2004 2.00 to 1.0
Second Fiscal Quarter of Fiscal Year 2004 2.00 to 1.0
Third Fiscal Quarter of Fiscal Year 2004 and each
Fiscal Quarter thereafter 1.00 to 1.0
</TABLE>
10.03 Minimum Interest Coverage Ratio. The Company and its
-------------------------------
Subsidiaries shall maintain an Interest Coverage Ratio on a consolidated
basis, as determined as of the end of the last day of each fiscal quarter
set forth below for the four fiscal quarter period (or, if the period
from July 1, 1998 to such day is less than four full fiscal quarters,
such two or three quarter period, as applicable) ending on such day, of
at least the minimum ratio set forth opposite such period:
7
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarter Minimum Ratio
- -------------- -------------
<S> <C>
Fourth Fiscal Quarter of Fiscal Year 1998 2.00 to 1.0
First Fiscal Quarter of Fiscal Year 1999 2.00 to 1.0
Second Fiscal Quarter of Fiscal Year 1999 2.20 to 1.0
Third Fiscal Quarter of Fiscal Year 1999 2.20 to 1.0
Fourth Fiscal Quarter of Fiscal Year 1999 2.20 to 1.0
First Fiscal Quarter of Fiscal Year 2000 2.30 to 1.0
Second Fiscal Quarter of Fiscal Year 2000 2.50 to 1.0
Third Fiscal Quarter of Fiscal Year 2000 2.60 to 1.0
Fourth Fiscal Quarter of Fiscal Year 2000 2.70 to 1.0
First Fiscal Quarter of Fiscal Year 2001 2.80 to 1.0
Second Fiscal Quarter of Fiscal Year 2001 2.90 to 1.0
Third Fiscal Quarter of Fiscal Year 2001 3.00 to 1.0
Fourth Fiscal Quarter of Fiscal Year 2001 3.10 to 1.0
First Fiscal Quarter of Fiscal Year 2002 3.20 to 1.0
Second Fiscal Quarter of Fiscal Year 2002 3.30 to 1.0
Third Fiscal Quarter of Fiscal Year 2002 and
each Fiscal Quarter thereafter 3.50 to 1.0
</TABLE>
10.04 Maximum Leverage Ratio. The Company and its Subsidiaries
----------------------
shall maintain a Leverage Ratio on a consolidated basis, as determined
as of the end of the last day of each fiscal quarter set forth below
for the four fiscal quarter period (or, if the period from July 1,
1998 to such day is less than four fiscal quarters, such two or three
quarter period, as applicable) ending on such day (commencing on the
beginning of the first day of such period through the end of the last
day of such period) of not more than the maximum ratio set forth
opposite such period:
<TABLE>
<CAPTION>
Fiscal Quarter Minimum Ratio
- -------------- -------------
<S> <C>
Fourth Fiscal Quarter of Fiscal Year 1998 5.20 to 1.0
First Fiscal Quarter of Fiscal Year 1999 5.80 to 1.0
Second Fiscal Quarter of Fiscal Year 1999 5.30 to 1.0
Third Fiscal Quarter of Fiscal Year 1999 4.90 to 1.0
Fourth Fiscal Quarter of Fiscal Year 1999 4.50 to 1.0
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarter Minimum Ratio
- -------------- -------------
<S> <C>
First Fiscal Quarter of Fiscal Year 2000 4.20 to 1.0
Second Fiscal Quarter of Fiscal Year 2000 3.90 to 1.0
Third Fiscal Quarter of Fiscal Year 2000 3.70 to 1.0
Fourth Fiscal Quarter of Fiscal Year 2000 3.50 to 1.0
First Fiscal Quarter of Fiscal Year 2001 3.40 to 1.0
Second Fiscal Quarter of Fiscal Year 2001 3.30 to 1.0
Third Fiscal Quarter of Fiscal Year 2001 3.20 to 1.0
Fourth Fiscal Quarter of Fiscal Year 2001 3.00 to 1.0
First Fiscal Quarter of Fiscal Year 2002 2.90 to 1.0
Second Fiscal Quarter of Fiscal Year 2002 2.80 to 1.0
Third Fiscal Quarter of Fiscal Year 2002 2.60 to 1.0
Fourth Fiscal Quarter of Fiscal Year 2002 and
each Fiscal Quarter thereafter 2.50 to 1.0
</TABLE>
provided, however, that in the event a Permitted Acquisition shall have
-------- -------
been consummated during any above-referenced two, three or four fiscal
quarter periods, the Leverage Ratio shall be calculated including, on an
historical, pro forma consolidated basis giving effect to the subject
--- -----
Permitted Acquisition for such fiscal quarter period.
(f) Section 10.07 of the Credit Agreement is amended in its entirety
to read as follows:
10.07 Maximum Capital Expenditures. The Company shall not, and
----------------------------
shall not permit any of its Subsidiaries to, make or incur Capital
Expenditures during any Fiscal Year set forth below in excess of the
maximum amount set forth below opposite such Fiscal Year:
<TABLE>
<S> <C>
Fiscal Year 1998 $20,000,000
Fiscal Year 1999 $26,000,000
Fiscal Year 2000 $29,000,000
Fiscal Year 2001 $31,000,000
Fiscal Year 2002 $32,000,000
Fiscal Year 2003 $33,000,000
Fiscal Year 2004 $35,000,000
Fiscal Year 2005 $36,000,000
Fiscal Year 2006 $38,000,000
</TABLE>
9
<PAGE>
provided, however, if the maximum amount set forth above opposite any
-------- -------
Fiscal Year exceeds the amount of Capital Expenditures made or incurred by
the Company and its Subsidiaries on a consolidated basis for such Fiscal
Year, then Capital Expenditures made or incurred by the Company and its
Subsidiaries on a consolidated basis for the next Fiscal Year may exceed
the maximum amount set forth above opposite such next Fiscal Year (but not
subsequent Fiscal Years) by the Dollar amount of such excess from the
immediately preceding Fiscal Year.
SECTION 2. Consents.
--------
(a) The Lenders party hereto, constituting the Requisite Lenders,
hereby:
(i) waive compliance with clause (c) of the definition of
Permitted Acquisition in respect of the Acquisitions and clause (e) of the
definition of Permitted Acquisition in respect of the EFM Acquisition (it
being understood and agreed that, with respect to each Acquisition, the
Borrowers shall otherwise comply with all other requirements for a
Permitted Acquisition on or prior to the consummation of such Acquisition);
and
(ii) acknowledge and agree that the Subordinated Notes constitute
Permitted Subordinated Indebtedness pursuant to clause (i) of the
definition thereof and consent to the terms of the Subordinated Notes as
required pursuant to such clause; provided that (A) the terms of the
--------
Subordinated Notes are substantially similar to those set forth on the
Subordinated Note Term Sheet; (B) the documentation evidencing the
Subordinated Notes, including the indenture governing the terms thereof, is
satisfactory to the Agents; (C) the proceeds of the Subordinated Notes are
used to pay the Roche Purchase Price, the EFM Purchase Price (to the extent
payable at the time of the issuance thereof) and the Transaction Costs; (D)
the gross proceeds received from the issuance of the Subordinated Notes are
not greater than $250,000,000; and (E) the proceeds of the Subordinated
Notes in excess of those used to fund payment of the Roche Purchase Price,
the EFM Purchase Price (to the extent payable at the time of the issuance
thereof) and the Transaction Costs shall be applied to the repayment of
Revolving Loans (without effecting any corresponding decrease in the
Revolving Credit Commitments).
(b) Subject to the following sentence, the Lenders party hereto,
constituting the Requisite Lenders, hereby consent to the amendment to the
Certificate of Incorporation of the Company changing the name of the Company
from "International Technology Corporation" to "The IT Group, Inc." and waive
any Event of Default that may have arisen as a result of the failure of the
Company to comply with the terms of Section 4(a) of the Borrower Security
Agreement to which the Company is a party in connection with such name change.
SECTION 3. Conditions Precedent to the Effectiveness of this
-------------------------------------------------
Amendment.
- ---------
10
<PAGE>
(a) This Amendment shall become effective as of the date hereof on
the date (the "Amendment Effective Date") when the following conditions
precedent have been satisfied:
(i) Certain Documents. The Administrative Agent shall have
-----------------
received on or before the Amendment Effective Date all of the
following, all of which shall be in form and substance satisfactory to
the Agents, in sufficient originally executed copies for each of the
Lenders:
(A) this Amendment executed by the Borrowers and Lenders
constituting the Requisite Lenders;
(B) an Acknowledgment substantially in the form of Exhibit A
attached hereto executed by each Subsidiary Guarantor;
(C) an execution copy of the acquisition agreements for each
Acquisition (the "Acquisition Agreements");
(D) such additional documentation as the Agents or the Requisite
Lenders may reasonably require.
(ii) Representations and Warranties. Each of the
------------------------------
representations and warranties made by the Borrowers or the Subsidiary
Guarantors in or pursuant to the Credit Agreement, as amended by this
Amendment, and the other Loan Documents to which the Borrowers or any
of the Guarantors is a party or by which the Borrowers or any of the
Subsidiary Guarantors is bound, shall be true and correct in all
material respects on and as of the Amendment Effective Date (other
than representations and warranties in any such Loan Document which
expressly speak as of a different date).
(iii) Corporate and Other Proceedings. All corporate and other
-------------------------------
proceedings, and all documents, instruments and other legal matters in
connection with the transactions contemplated by this Amendment shall
be satisfactory in all respects in form and substance to the
Administrative Agent and the Revolving Credit Lenders.
(iv) No Events of Default. After giving effect to the waiver in
--------------------
Section 2(b) hereof, no Event of Default or Default shall have
occurred and be continuing on the Amendment Effective Date.
(v) Fees Paid. On the Amendment Effective Date the Borrowers
---------
shall have paid (A) to each Lender that has executed this Amendment
prior to the close of business on March 5, 1999, an amendment fee
equal to fifteen basis points (0.15%) of such Lender's outstanding
Term Loans and Revolving Credit Commitments, and (B) to the
Administrative Agent the fees set forth in that certain fee letter of
even date herewith.
11
<PAGE>
(b) Notwithstanding anything herein to the contrary, this Amendment
shall cease to be effective if any of the following conditions shall not have
been satisfied on or prior to the date of the consummation of any Acquisition,
or in the case of the EFM Acquisition, the date of the consummation of any
portion of such Acquisition on which a portion of the EFM Purchase Price is due
and payable (each a "Consummation Date"):
(i) Certain Documents. The Administrative Agent shall have
-----------------
received on or before the Consummation Date all of the following, all
of which shall be in form and substance satisfactory to the Agents, in
sufficient originally executed copies for each of the Lenders:
(A) the Officer's Certificate required pursuant to clause (C) of
the proviso to the definition of "Permitted Acquisition" relating to
the such Acquisition, together with such other documentation required
pursuant to such definition, including, without limitation, any
collateral documentation required to be executed in connection with
clause (g) thereof;
(B) an execution copy of the indenture governing the terms of the
Subordinated Notes (except in connection with the Roche Acquisition,
but only if such Acquisition is subject to the proviso set forth in
-------
clause (b)(ii) below); and
(C) such additional documentation as the Agents or the Requisite
Lenders may reasonably require.
(ii) Funding for the Acquisitions. The Company shall have
----------------------------
received gross proceeds from the issuance of the Subordinated Notes in
an amount of at least $175,000,000 (or, if the Company does not
purchase ICF's interest in Kaiser Hill, $150,000,000); provided,
--------
however, solely in the case of the Roche Acquisition, if the Company
-------
has not received proceeds from the issuance of the Subordinated Notes
by March 31, 1999, then this condition shall be satisfied in the
event, after giving effect to the consummation of the Roche
Acquisition, the Revolving Credit Availability on the Consummation
Date plus unrestricted cash that is not subject to a Lien in favor of
any other Person (other than the Administrative Agent) held by the
Borrowers on the Consummation Date is greater than $15,000,000.
(iii) Purchase Price; Transaction Costs. The purchase price paid
---------------------------------
or to be paid in connection with the assets of EFM (other than ICF's
interest in Kaiser Hill) shall not exceed the Closing EFM Purchase
Price and the purchase price paid or to be paid for ICF's interest in
Kaiser Hill shall not exceed the Closing Kaiser Hill Purchase Price
and the Deferred Kaiser Hill Purchase Price. The purchase price paid
in connection with the Roche Acquisition shall not exceed the Roche
Purchase Price (plus an
12
<PAGE>
earn-out of up to an additional $9,200,000 based on certain
performance criteria). The Transaction Costs shall not exceed
$13,000,000 in the aggregate.
(vi) Permitted Acquisition Requirements. All documentation and
----------------------------------
other requirements set forth in the definition of "Permitted
Acquisition" (to the extent not waived in this Amendment) shall have
been satisfied with respect to the consummation of such Acquisition.
(vii) No Event of Default. No Event of Default or Default shall
-------------------
have occurred and be continuing on the Consummation Date or would
result from the consummation of such Acquisition or the funding of the
Subordinated Notes on such date.
SECTION 4. Covenants.
---------
(a) The Company agrees that it will not amend, supplement or otherwise
modify the Acquisition Agreements, except for amendments, waivers or
modifications of such terms that do not change the substance of such agreement
in any material respect and do not, in the aggregate, materially and adversely
affect the interests of the Agents and the Lenders in the Loans, the Loan
Documents or the Collateral.
(b) The Borrowers agree to deliver to the Administrative Agent within
30 days after the date hereof (i) all UCC filings reflecting the new name of the
Company (both new UCC-1s and amendments to each UCC-1 of the Company filed in
connection with the Credit Agreement) which are appropriate to preserve the
perfection of the security interests granted by the Company to the
Administrative under the Borrower Security Agreement to which it is a party and
(ii) an Officer's Certificate stating that all such filings have been made.
SECTION 5. Representations and Warranties. Each Borrower hereby
------------------------------
represents and warrants to the Lenders that (a) as of the date hereof and after
giving effect to the terms of this Amendment, no Event of Default or Default
under the Credit Agreement shall have occurred and be continuing and (b) all of
the representations and warranties of such Borrower contained in Section 6.01 of
the Credit Agreement and in any other Loan Document continue to be true and
correct as of the date of execution hereof in all material respects, as though
made on and as of such date (other than representations and warranties in any
such Loan Document which expressly speak as of a different date). In addition,
the Company hereby represents, warrants and covenants to the Lenders that, after
giving effect to this Amendment, consummation of each Acquisition will
constitute a Permitted Acquisition.
SECTION 6. Reference to and Effect on the Loan Documents.
---------------------------------------------
(a) Upon the effectiveness of this Amendment, on and after the date
hereof, each reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof" or words of like import, and each reference in the other Loan Documents
to the
13
<PAGE>
Credit Agreement, shall mean and be a reference to the Credit Agreement as
amended hereby.
(b) Except as specifically amended above, all of the terms of the
Credit Agreement and all other Loan Documents shall remain unchanged and in full
force and effect.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender, any Issuing Bank or the Administrative Agent
under the Credit Agreement or any of the Loan Documents, nor constitute a waiver
of any provision of the Credit Agreement or any of the Loan Documents.
SECTION 7. Fees, Costs and Expenses.
------------------------
(a) The Borrowers agree to pay on demand in accordance with the terms
of Section 13.02 of the Credit Agreement all costs and expenses of the
Administrative Agent in connection with the preparation, reproduction, execution
and delivery of this Amendment and all other Loan Documents entered into in
connection herewith, including the reasonable fees and out-of-pocket expenses of
counsel for the Administrative Agent with respect thereto.
(b) On the Amendment Effective Date the Borrowers agree to pay the
fees set forth in Section 3(a)(v) of this Amendment.
SECTION 8. Execution in Counterparts. This Amendment may be executed
-------------------------
and delivered in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original and all of which taken together shall constitute one and the
same original agreement.
SECTION 9. Affirmation of Borrower Guaranties. Each of the Borrowers
----------------------------------
hereby consents to the terms of this Amendment in its capacity as a guarantor
under the Borrower Guaranty to which it is a party and agrees that the terms of
this Amendment shall not affect in any way its obligations and liabilities under
its Borrower Guaranty or any other Loan Document to which it is a party, all of
which obligations and liabilities shall remain in full force and effect and each
of which is hereby reaffirmed.
SECTION 10. Governing Law. This Amendment shall be interpreted, and
-------------
the rights and liabilities of the parties determined, in accordance with the
internal law of the State of New York.
IN WITNESS WHEREOF, this Amendment has been duly executed on the date
set forth above.
THE IT GROUP, INC. (f/k/a
INTERNATIONAL TECHNOLOGY
CORPORATION)
14
<PAGE>
By /s/ Richard R. Conte
-----------------------------------
Name: Richard R. Conte
Title: Vice President
IT CORPORATION
By /s/ Richard R. Conte
-----------------------------------
Name: Richard R. Conte
Title: Vice President
OHM CORPORATION
By /s/ Richard R. Conte
-----------------------------------
Name: Richard R. Conte
Title: Vice President
OHM REMEDIATION SERVICES CORP.
By /s/ Richard R. Conte
-----------------------------------
Name: Richard R. Conte
Title: Vice President
BENECO ENTERPRISES, INC.
By /s/ Richard R. Conte
-----------------------------------
Name: Richard R. Conte
Title: Vice President
15
<PAGE>
[SIGNATURE BLOCKS FOR THE LENDERS]
CITICORP USA, INC. COMERCIA BANK
By /s/ Timothy L. Freeman By /s/ David W. Shirey
------------------------------ ------------------------------
Name: Timothy L. Freeman Name: David W. Shirey
Title: Managing Director Title: Assistant Vice President
BANKBOSTON, N.A. CYPRESSTREE INVESTMENT PARTNERS II, Ltd.
By: CypressTree Investment Management
Company, Inc., as Portfolio Manager
By /s/ Paul F. Hardiman By /s/ Jeffrey W. Heuer
------------------------------ ------------------------------
Name: Paul F. Hardiman Name: Jeffrey W. Heuer
Title: Division Executive Title: Principal
CREDIT LYONNAIS FLEET BANK, N.A.
NEW YORK BRANCH
By /s/ Attila Koc By /s/ Christopher Mayruse
------------------------------ ------------------------------
Name: Attila Koc Name: Christopher Mayruse
Title: Senior Vice President Title: Vice President
ROYAL BANK OF CANADA FLEET BUSINESS CREDIT CORPORATION
By /s/ John J. D'Angelo By /s/ Wesley Manus
------------------------------ ------------------------------
Name: John J. D'Angelo Name: Wesley Manus
Title: Manager Title: Assistant Vice President
AG CAPITAL FUNDING PARTNERS, L.P. THE INDUSTRIAL BANK OF JAPAN,
By Angelo, Gordon & Co., L.P. as LIMITED
Investment Advisor
By /s/ Jeffrey H. A By /s/ Takuya Honjo
------------------------------ ------------------------------
Name: Jeffrey H. A Name: Takuya Honjo
Title: Managing Director Title: Senior Vice President
ALLSTATE LIFE INSURANCE COMPANY KEYBANK NATIONAL ASSOCIATION
By /s/ Robert B. Bodett By /s/ David J. Janus
------------------------------ ------------------------------
Name: Robert B. Bodett Name: David J. Janus
Title: Authorized Signatory Title: SVP
By /s/ Patricia W. Wilson KISLAK NATIONAL BANK
------------------------------ By: ING CAPITAL ADVISORS, INC.,
Name: Patricia W. Wilson as Investment Advisor
Title: Authorized Signatory
By /s/ Michael J. Campbell
------------------------------
ALLIANCE CAPITAL MANAGEMENT L.P. Name: Michael J. Campbell
as Manager on behalf of ALLIANCE Title: Senior Vice President &
CAPITAL FUNDING, L.L.C. by: Portfolio Manager
ALLIANCE CAPITAL MANAGEMENT L.P.
CORPORATION, General Partner of KZH CRESCENT-2 LLC
Alliance Capital Management L.P.
By /s/ Virginia Conway
By /s/ Kenneth G. Ostmann ------------------------------
------------------------------ Name: Virginia Conway
Name: Kenneth G. Ostmann Title: Authorized Agent
Title: Vice President
KZH CYPRESSTREE-1 LLC
ARCHIMEDES FUNDING LLC
By: ING CAPITAL ADVISORS, INC., By /s/ Virginia Conway
as Collateral Manager ------------------------------
Name: Virginia Conway
By /s/ Michael J. Campbell Title: Authorized Agent
------------------------------
Name: Michael J. Campbell
Title: Senior Vice President & KZH HIGHLAND-2 LLC
Portfolio Manager
By /s/ Virginia Conway
ARCHIMEDES FUNDING II, LTD. ------------------------------
By: ING CAPITAL ADVISORS, INC., Name: Virginia Conway
as Collateral Manager Title: Authorized Agent
By /s/ Michael J. Campbell
------------------------------ KZH SOLEIL LLC
Name: Michael J. Campbell
Title: Senior Vice President & By /s/ Virginia Conway
Portfolio Manager ------------------------------
Name: Virginia Conway
Title: Authorized Agent
BANCO ESPIRITO SANTO E COMERCIAL
DE LISBOA, NASSAU BRANCH
KZH SOLEIL-2 LLC
By /s/ Terry R. Hull
------------------------------ By /s/ Virginia Conway
Name: Terry R. Hull ------------------------------
Title: Senior Vice President Name: Virginia Conway
Title: Authorized Agent
By /s/ Andrew M. Orsen
------------------------------
Name: Andrew M. Orsen
Title: Vice President
ML CLO XX PILGRAM AMERICA
(CAYMAN) LTD.
BHF BANK AKTIENGESELLSCHAFT By: Pilgram Investments, Inc.
as its Investment Manager
By /s/ Dan D By /s/ Robert L. Wilson
------------------------------ ------------------------------
Name: Dan D Name: Robert L. Wilson
Title: AVP Title: Vice President
By /s/ Robert Nowak
------------------------------ THE MITSUBISHI TRUST AND BANKING
Name: Robert Nowak CORPORATION
Title: AT
By /s/ Beatrice E. Kossodo
BALANCED HIGH YIELD FUND I LIMITED ------------------------------
as a Lender Name: Beatrice E. Kossodo
By: BHF-BANK AKTIENGESELLSCHAFT Title: Senior Vice President
acting through its New York Branch,
as attorney-in-fact
MOUNTAIN CLO TRUST
By /s/ Dan D
------------------------------ By /s/ Kazoyoki Nishimura
Name: Dan D ------------------------------
Title: AVP Name: Kazoyoki Nishimura
Title: Authorized Signatory
By /s/ Robert Nowak
------------------------------ PAMCO CAYMON LTD.
Name: Robert Nowak By: Highland Capital Management, L.P.
Title: AT as Collateral Manager
By /s/ Mark K. Okada CFA
THE BANK OF NOVA SCOTIA ------------------------------
Name: Mark K. Okada
By /s/ F.C.B. Ashby Title: Executive Vice President
------------------------------
Name: F.C.B. Ashby
Title: Senior Manager
Loan Operations OCTAGON LOAN TRUST
by Octagon Credit Investos,
as Manager
BANK POLSKA KASA OPIEKI S.A.
PEKAO S.A. GROUP, By /s/ Joyce C. DeLucca
NEW YORK BRANCH ------------------------------
Name: Joyce C. DeLucca
By /s/ Harvey Winter Title: Managing Director
------------------------------
Name: Harvey Winter
Title: Vice President PNC BANK, NATIONAL ASSOCIATION
By /s/ William V. Armitage
------------------------------
Name: William V. Armitage
Title: Vice President
SENIOR DEBT PORTFOLIO
BY BOSTON MANAGEMENT AND RESEARCH
AS INVESTMENT ADVISOR
By /s/ Payson F. Swaffield
------------------------------
Name: Payson F. Swaffield
Title: Vice President
SOCIETE GENERALE
By /s/ Salvatore Galatioto
------------------------------
Name: Salvatore Galatioto
Title: Managing Director
UNION BANK OF CALIFORNIA
By /s/ A. Pasha Moghaddam
------------------------------
Name: A. Pasha Moghaddam
Title: Vice President
16
<PAGE>
EXHIBIT A
ACKNOWLEDGMENT
--------------
Reference is hereby made to the Subsidiary Guaranties (as defined in
the Credit Agreement) to which each of the undersigned is a party. Each of the
undersigned hereby consents to the terms of the foregoing Third Amendment to
Credit Agreement and agrees that the terms thereof shall not affect in any way
its obligations and liabilities under the undersigned's Subsidiary Guaranty or
any other Loan Document, all of which obligations and liabilities shall remain
in full force and effect and each of which is hereby reaffirmed.
GRADIENT CORPORATION
By /s/ Richard R. Conte
-----------------------------------
Title: Treasurer
IT-TULSA HOLDINGS, INC.
By /s/ Richard R. Conte
-----------------------------------
Title: Treasurer
IT E&C OPERATIONS, INC.
By /s/ Richard R. Conte
-----------------------------------
Title: Treasurer
PACIFIC ENVIRONMENTAL GROUP, INC.
By /s/ Richard R. Conte
-----------------------------------
Title: Treasurer
UNIVERSAL PROFESSIONAL INSURANCE COMPANY
By /s/ Richard R. Conte
-----------------------------------
Title: Treasurer
17
<PAGE>
Exhibit 10(ii)(15)
SHARE PURCHASE AGREEMENT
------------------------
MEMORANDUM OF AGREEMENT made on the 5th day of February, 1999,
BY AND BETWEEN: The persons listed in Exhibit "A" hereto, each of
-----------
whom herein represented by Mr. Michel Labbe, its,
his or her lawful mandatary, duly authorized for
all of the purposes hereof, other than Mr. Michel
Labbe who is also herein acting on his own behalf
(each, a "Vendor");
AND: IT Holdings Canada, Inc., a corporation
incorporated under the Laws of the Province of New
Brunswick, with its registered office at 44
Chipman Hill, 10th Floor, St. John, New Brunswick,
E2L 4S6, herein acting and represented by Mr.
James M. Redwine, Assistant-Secretary (the
"Purchaser");
AND INTERVENED TO BY: The IT Group, Inc., a corporation incorporated
under the Laws of the State of Delaware, herein
acting and represented by Mr. James M. Redwine,
Senior Corporate Counsel and Assistant-Secretary,
Corporate Development ("ITX").
WHEREAS, prior to the Reorganization, Vendors and certain other Persons own
all of the issued and outstanding shares of Corporoche Canada Inc. (the
"Corporation") and the Corporation owns all of the issued and outstanding shares
of Roche Ltee, Groupe Conseil/Roche Ltd., Consulting Group ("Roche");
WHEREAS, pursuant to the Reorganization, Roche will amalgamate with 3559076
Canada Inc. ("NewCo 1") to form Roche Ltee, Groupe Conseil / Roche Ltd.,
Consulting Group ("New Roche"), all of the issued and outstanding shares of
which to be owned by Vendors;
AND WHEREAS Purchaser, a wholly-owned subsidiary of ITX, wishes to
purchase, and Vendors wish to sell, all of the issued and outstanding shares of
New Roche.
NOW, THEREFORE, THIS AGREEMENT WITNESSETH THAT, in consideration of the
mutual covenants herein contained, it is agreed by and between the Parties as
follows:
<PAGE>
-2-
ARTICLE I
INTERPRETATION
--------------
1.1 Definitions. Where used herein or in any amendments hereto or in any
-----------
communication required or permitted to be given hereunder, the following terms
shall have the following meanings, respectively, unless the context otherwise
requires:
1.1.1 "Accounts Receivable" shall mean all accounts receivable, trade accounts,
notes receivable, book debts, holdbacks receivable, deposits and other
debts due or accruing due to Roche or any Subsidiary.
1.1.2 "Affiliate" shall have the meaning ascribed thereto in the Canada Business
Corporations Act.
1.1.3 "Agreement" shall mean this Share Purchase Agreement and all instruments
supplemental hereto or in amendment or confirmation hereof; "herein",
"hereof", "hereto", "hereunder" and similar expressions mean and refer to
this Agreement and not to any particular Article, Section or other
subdivision; "Article", "Section or other subdivision of this Agreement
means and refers to the specified Article, Section or other subdivision of
this Agreement.
1.1.4 "Ancillary Agreements" shall mean the Non-Competition Agreements and any
other agreements executed by the Parties in connection with the
transactions contemplated herein.
1.1.5 "Associated Companies" shall mean the corporations, companies,
partnerships, joint ventures and other Persons in which the Corporation
owns, directly or indirectly, fifty percent (50%) or less of the shares,
voting interests, partnership interests or economic interests and which do
not form part of the Excluded Assets, which Persons are listed in
Schedule 1.1.5.
--------------
1.1.6 "Assumed Debt" shall mean the US dollar equivalent of the bank debt of
Roche relating to its continuing operations based on the reciprocal of the
exchange rate outstanding on January 31, 1999 as published in the Wall
Street Journal on February 1, 1999 (being the reciprocal of Cdn $1.5110,
or US $0.6618), the whole net of actual cash deposits provided they are
fully owned by Roche and unrestricted (cash collateral to guarantee
letters of credit not being considered restricted).
1.1.7 "Benefit Plans" shall mean all pension, retirement, bonus, profit sharing,
compensation, incentive, stock purchase, stock option, stock appreciation,
severance, change-of-control, savings, thrift, insurance, medical,
hospitalization, disability, death or other similar plan, program,
arrangement or practice of the Corporation, Roche or any Subsidiary
providing directors, officers, shareholders or employee benefits.
1.1.8 "Bid" shall mean any quotation, bid, tender or proposal which, if accepted
or awarded, would lead to a contract with a Governmental Body, including a
prime
<PAGE>
-3-
contractor or a higher tier subcontractor to a Governmental Body, for the
design, manufacture or sale of products or the provision of services.
1.1.9 "Books and Records" shall mean all books, records, files and documentation
(in whatever medium and wherever situated) of the Corporation, Roche
(including NewCo 1), the Subsidiaries other than those which deal
exclusively with the Excluded Assets; for greater certainty, the phrase
"Books and Records" shall include, without limitation, all statements,
books, ledgers, records, financial records, accounting records, consents,
approvals, authorizations, written Contracts, Tax returns, Employee files,
retiree files, insurance policies, Benefit Plans, documentation, evidence
or indication of ownership of the Corporation, Roche or the Subsidiaries
in and to any assets (other than those which deal exclusively with the
Excluded Assets, other than the Management Pension Plan Surplus) and the
properties of the Corporation, Roche or the Subsidiaries and all records
and correspondence which pertain to the Licenses.
1.1.10 "Business" shall mean the business of Roche or any of the Subsidiaries
as conducted by Roche or any of the Subsidiaries including, without
limitation, the fields of engineering, construction and construction
management, information management, health care consulting and operation
and maintenance services, environmental and infrastructure engineering
and management, wood processing and forestry, transportation, water
management, municipal finances, real estate appraisals, and consulting
with respect to the foregoing.
1.1.11 "Capital Contributions" shall mean the capital contributions made by
Purchaser pursuant to Section 2.3.
1.1.12 "Closing" shall mean the delivery to Purchaser of the certificates for
the Purchased Shares duly endorsed for transfer and the payment to or on
behalf of Vendors of the Purchase Price required to be paid on the
Closing Date pursuant to Section 2.2 and the payment of the Capital
Contributions required to be made pursuant to Section 2.3.
1.1.13 "Contamination" means the presence of any Hazardous Substance in the
environment, including the degradation of water, air or soil quality.
1.1.14 "Contracts" shall mean all written or oral contracts, agreements,
indentures, instruments, commitments and orders made by or in favour of
the Corporation, Roche, any Subsidiary or any Associated Company, as the
case may be, including Government Contracts; and "Contract" shall mean
any one of them.
1.1.15 "Dealing" means using, generating, manufacturing, refining, treating,
transporting, storing, handling, labeling, documenting, recycling,
disposing of, releasing, discharging, depositing, transferring,
producing or processing of any Hazardous Substance.
1.1.16 "Employees" shall mean all of the employees of Roche and of the
Subsidiaries, in each case immediately prior to the Closing Date; for
greater certainty, the word "Employees" shall include part-time
employees and employees on short-term or
<PAGE>
-4-
long-term disability, workmen's compensation, sick leave, maternity
leave, or leave of absence or laid-off employees prior to Closing Date.
1.1.17 "Environmental Laws" means all applicable Laws in existence on or before
the date hereof relating to Hazardous Substances, pollution or
protection of the environment, human health or safety, including Laws
relating to (a) on-site or off-site Contamination, (b) Releases of any
Hazardous Substance into the environment and (c) Dealing in any
Hazardous Substance.
1.1.18 "Environmental Permits" means, with respect to a Person, all Licenses
and any other approvals required for the operation of the business,
operations and assets of the Person pursuant to Environmental Laws.
1.1.19 "Equipment" shall mean (a) all machinery, spare parts, equipment, tools,
computers, furniture, fixtures, furnishings, office equipment
(including, without limitation, word processing, accounting,
communication and reproduction equipment) of Roche or any Subsidiary
wherever located, and (b) all assignable warranties of any Person
covering all or any part of the aforesaid Equipment.
1.1.20 "Excluded Assets" shall mean Metroplan, 2758-3525 Quebec Inc., 174878
Canada Ltd., the Management Pension Plan Surplus and Solutions
Technologiques Internationales STI Inc.
1.1.21 "Financial Statements" shall mean (a) the audited financial statements
for Roche as at December 31, 1997 consisting of the consolidated balance
sheet (on a non-proportional basis) as at such date and the consolidated
statement of earnings, the consolidated statement of retained earnings
and the consolidated statement of changes in financial position for the
period then ended and notes to the financial statements together with
the auditors' report thereon, and (b) the unaudited financial statements
of Roche for the eleven (11) months ended November 30, 1998 consisting
of a consolidated balance sheet (on a non-proportional basis) as at such
date, the consolidated statement of earnings, the consolidated statement
of retained earnings and the consolidated statement of changes in
financial position for the period then ended, copies of which financial
statements are annexed hereto as Schedule 1.1.21. When the financial
---------------
statements for the (11) eleven-month period ended November 30, 1998 are
referenced in this Agreement, it is understood that such statements do
not have all of the normal year-end adjustments of audited statements.
1.1.22 "GAAP" shall mean generally accepted accounting principles from time to
time approved by the Canadian Institute of Chartered Accountants
applicable as at the date on which the relevant calculation has been
made, is made or is required to be made, consistently applied in
accordance with the past practice of the Person with reference to whom
such term is used.
1.1.23 "Government Contract" means any prime contract, subcontracts, teaming
agreement or arrangement, joint venture, basic ordering agreement,
letter contract, purchase order, delivery order, Bid, change order,
arrangement or other commitment of any kind with (a) any Governmental
Body, (b) any prime contractor
<PAGE>
-5-
to a Governmental Body or (c) any subcontractor with respect to any
contract described in paragraph (a) or (b) of this definition.
1.1.24 "Governmental Body" means any (a) multinational, federal, provincial,
state, regional, municipal, local or other government, governmental or
public department, central bank, court, tribunal, professional body such
as the Ordre des ingenieurs du Quebec, arbitral body, commission, board,
bureau, agency, domestic or foreign, (b) any subdivision, agent,
commission, board or authority of any of the foregoing or (c) any quasi-
governmental or private body exercising any regulatory, expropriation or
taxing authority under or for the account of any of the foregoing.
1.1.25 "Hazardous Substance" means any substance or material which is or is
deemed to be, alone or in any combination, hazardous, hazardous waste,
toxic, a pollutant, a deleterious substance, a contaminant, a waste, a
source of pollution or contamination or likely to adversely affect the
environment or affect human health and safety in any way under any
Environmental Laws.
1.1.26 "Initial Payment" shall mean the Canadian dollar equivalent of Ten
Million US dollars (US $10,000,000) less the Capital Contributions
(based on the reciprocal of the exchange rate published in the Wall
Street Journal on February 1, 1999 such reciprocal being Cdn $1.5110).
1.1.27 "Intellectual Property Rights" shall mean (a) all domestic and foreign
patents, trademarks, trade names, service marks, copyrights, industrial
designs, trade secrets, processes, inventions, know-how, recipes,
manuals, technology, customer and supplier lists, formulas, franchises,
licenses, rights-to-use, drawings, specifications for products,
materials and equipment, process development, manufacturing information,
quality control information, performance data, plant service
information, computer software, operating systems and other intellectual
property, in each case whether registered or unregistered and (b) all
registrations and applications for registration of the aforesaid
Intellectual Property Rights.
1.1.28 "Inventory" shall mean all inventories, finished goods, work-in-
progress, raw materials, operating supplies, shipping supplies,
maintenance items and advertising materials, in each case on hand, in
transit, ordered but not delivered, warehoused or wherever situated, of
Roche, the Subsidiaries and the Associated Companies.
1.1.29 "Laws" shall mean (a) all laws, statutes, codes, ordinances, orders,
decrees, rules, regulations, and municipal by-laws, whether domestic,
foreign or international, (b) all judgments, orders, writs, injunctions,
rulings, decrees and awards of any Governmental Body, and (c) all
policies, practices and guidelines of any Governmental Body having the
force of law or which are considered by such Governmental Body as
requiring compliance as if having the force of law, which, in each of
the above cases, binds or affects the Party or Person referred to in the
context in which such word is used.
1.1.30 "Licenses" shall mean permits, licenses, certificates of compliance,
consents, approvals and authorizations of, or registrations with, any
Governmental Body.
<PAGE>
-6-
1.1.31 "Liens" shall mean all hypothecs, mortgages, pledges, privileges, prior
claims, liens, security interests, transfers of property in stock,
security granted under the Bank Act (Canada), charges, deposits,
servitudes, easements, reserves, conditional sale contracts, ownership
or title retention agreements, capital leases, occupation rights,
encroachments, homologated lines, restrictive covenants, title defects
and other encumbrances or rights of any nature whatsoever or however
arising.
1.1.32 "Management Pension Plan" means the Regime complementaire de retraite
des employes de la direction de Roche Ltee, Groupe-Conseil.
1.1.33 "Management Pension Plan Surplus" shall mean the amount by which the
assets of the Management Pension Plan exceed the liabilities of the
Management Pension Plan as of the date of its termination, the whole as
determined by the plan actuary and approved by the relevant authorities.
1.1.34 "Maximum First EBIT Payment" shall equal one half (1/2) of the amount by
which Twenty Million Seven Hundred Thousand US dollars (US $20,700,000)
exceeds (a) the Assumed Debt and (b) Ten Million US dollars (US
$10,000,000).
1.1.35 "Maximum Second EBIT Payment" shall be an amount equal to the Maximum
First EBIT Payment.
1.1.36 "Metroplan" shall mean Societe Metroplan, Societe en commandite, a
limited partnership formed under the Laws of the Province of Quebec.
1.1.37 "Non-Competition Agreements" shall mean the non-competition agreements
to be entered into by Purchaser, ITX and certain Vendors, which
agreements shall be substantially in the forms of Exhibit "C".
-----------
1.1.38 "Parties" shall mean Vendors and Purchaser; and "Party" shall mean
either one of them.
1.1.39 "Pembroke Project" shall mean the engineering, procurement and
construction of a medium density fiberboard plant by RBW Group (a joint
venture of Roche and Bennett & Wright Inc.) pursuant to a Lump Sum
Engineering, Procurement and Construction contract between MacMillan
Bloedel Pembroke Limited Partnership and RBW Group entered into as of
the 29th day of May, 1995, as the same may have been amended from time
to time.
1.1.40 "Permitted Encumbrances" means:
(a) unregistered Liens for Taxes, assessments or governmental charges
not yet due and payable, unregistered Liens for workman's
compensation assessments and similar obligations not delinquent;
(b) any unregistered Lien vested in any lessor or licensor for rent to
become due or for other obligations or acts, the performance of
which is required under leases, subleases or licenses, so long as
the payment of such rent or the performance of such other
obligation or act is not delinquent;
<PAGE>
-7-
(c) unregistered Liens of any employees for salaries or wages earned
but not yet payable; and
(d) unregistered Liens of unpaid vendors of moveable or personal
property, or other similar Liens, in each case arising in the
ordinary course of business for charges which are not delinquent.
1.1.41 "Person" shall mean an individual, corporation, company, partnership,
joint venture, trust, authority or body or similar organization, and
pronouns which refer to a Person shall have a similarly extended
meaning.
1.1.42 "Purchase Price" shall mean the sum of the Initial Payment, the First
EBIT Payment and the Second EBIT Payment, as the same may be adjusted
pursuant to Section 2.4, Section 2.8, Article VI, Article VII or Article
XII.
1.1.43 "Purchased Shares" shall mean all of the issued and outstanding shares
of New Roche which will remain issued and outstanding on the Closing
Date after the Reorganization, which shares will be issued and
outstanding in the manner set forth on Exhibit "A".
-----------
1.1.44 "Real Property Leases" shall mean the leases for immoveable and real
property made in favour of Roche or any Subsidiary, as lessee or tenant
(including the current lease between Roche and Metroplan for the
premises located at 3075, chemin des Quatre-Bourgeois, Suite 300, Ste-
Foy, Quebec), and all leasehold improvements on, in, over or under such
leased immoveables and real property, all of which leases are listed in
Schedule 1.1.44.
---------------
1.1.45 "Release", when used as a verb, includes release, pump, pour, empty,
eject, issue, seep, exhaust, abandon, bury, incinerate, spill, leak,
emit, deposit, discharge, disseminate, leach, migrate, dispose, inject,
dump or place into the environment.
1.1.46 "Reorganization" shall mean the transfer of the Excluded Assets (other
than with respect to the Management Pension Plan Surplus which shall be
dealt with in the manner set forth in Article VII) and the other
transactions of Vendors, the other shareholders of the Corporation, the
Corporation, Roche, NewCo 1, certain subsidiaries and the Excluded
Assets to occur on or prior to the Closing Date, the whole as set forth
on Schedule 1.1.46.
---------------
1.1.47 "Subsidiaries" shall mean the corporations, companies, partnerships,
joint ventures and other Persons in which Roche owns, directly or
indirectly, more than fifty percent (50%) of the shares, voting
interests, partnership interests or economic interests and which do not
form part of the Excluded Assets, which Persons are listed in
Schedule 1.1.47.
---------------
1.1.48 "Tax" and "Taxes" shall mean all taxes, including, without limitation,
income tax, provincial health insurance plan premiums, Canada and Quebec
pension plan contributions, employment insurance premiums, workman's
compensation and other payroll taxes, deductions at source, non-resident
withholding, immoveable or real property, municipal, corporation,
capital, sales, retail, excise, profits, gross
<PAGE>
-8-
receipts, customs duties, transfer, business, provincial sales and goods
and services taxes, including any related penalties, interest and fines.
1.2 Other Defined Terms. In addition to the defined terms in Section 1.1,
-------------------
each of the following capitalized terms shall have the meaning ascribed
thereto in the corresponding Section:
Term Section
---- -------
1998 Year............................ 6.1
Audit Date........................... 2.7.1
Auditors............................. 2.7
Closing Date......................... 13.1
Closing Balance Sheet................ 2.7.1
Collection Account................... 2.2
Contracted Backlog................... 3.1.38
Corporation.......................... Preamble
EBIT................................. 2.5
EBIT Statement....................... 2.7.2
Excess First EBIT.................... 2.6
Excess Second EBIT................... 2.6
First EBIT Payment................... 2.5
Immoveables.......................... 3.1.15
Income Taxes......................... 6.1
Indemnified Party.................... 12.3
Indemnifying Party................... 12.3
ITX.................................. Preamble
Laframboise.......................... 2.3.1
Losses............................... 12.1
NBV Target........................... 2.4
Net Uncollected Receivables.......... 2.8
New Roche............................ Preamble
NewCo 1.............................. Preamble
Notice of Dispute.................... 2.7
Offer................................ 8.2
Offer Period......................... 8.2
Offeror.............................. 8.2
Optioned Assets...................... 8.2
Original Offer....................... 8.2
Pembroke Losses...................... 6.1
Prior Year Offset.................... 6.5
Purchase Price Increase.............. 2.4
Purchase Price Reduction............. 2.4
Purchaser............................ Preamble
Roche................................ Preamble
Second EBIT Payment.................. 2.6
Statements........................... 2.7
Third-Party Auditors................. 2.7
Third-Party Claim.................... 12.5
<PAGE>
-9-
Term Section
---- -------
Uncollected Receivables.............. 2.8
VendorCo............................. 8.2
Vendors.............................. Preamble
1.3 Schedules and Exhibits. The following is a list of the Schedules and
----------------------
Exhibits attached hereto and incorporated herein by reference:
Schedule 1.1.5 ........... Associated Companies
Schedule 1.1.21 ........... Financial Statements
Schedule 1.1.44 ........... Real Property Leases
Schedule 1.1.46 ........... Reorganization
Schedule 1.1.47 ........... Subsidiaries
Schedule 2.4 .............. Principles used to Prepare Closing
Balance Sheet for NBV Target
Schedule 2.5 .............. Principles used to Calculate EBIT
Schedule 3.1.6 ............ Defaults
Schedule 3.1.7 ............ Authorized and Issued Capital and Title
Schedule 3.1.9 ............ Shareholders' and Other Agreements
Schedule 3.1.13 ........... Operations of the Corporation
Schedule 3.1.14 ........... Liens
Schedule 3.1.15 ........... Immoveables
Schedule 3.1.17 ........... Places of Business
Schedule 3.1.18 ........... Intellectual Property Rights
Schedule 3.1.20 ........... Material Contracts
Schedule 3.1.22 ........... Guarantees
Schedule 3.1.23 ........... Government Contract Exceptions
Schedule 3.1.24 ........... Insurance
Schedule 3.1.25 ........... Bank Accounts; Powers of Attorney
Schedule 3.1.26 ........... Litigation
Schedule 3.1.27 ........... Tax Matters
Schedule 3.1.28 ........... Licenses; Environmental Permits
Schedule 3.1.29 ........... Employment Agreements
Schedule 3.1.31 ........... Benefit Plans
Schedule 3.1.35 ........... Unusual Transactions
Schedule 3.1.38 ........... Contracted Backlog of the Business
Schedule 3.1.41 ........... Stand Alone
Schedule 4.4.12 ........... Liens on Purchased Shares
Exhibit "A" ............... Vendors, Purchased Shares, Share of
Purchase Price and Indemnification Cap
Exhibit "B" ............... Forms of Non-Competition Agreements
Exhibit "C" ............... Form of Opinion of Heenan Blaikie Aubut
Exhibit "D" ............... Form of Opinion of Stikeman, Elliott
1.4 Knowledge. Whenever any fact or matter is stated to be to the knowledge
---------
of Vendors, or any similar reference, such reference shall mean (a) the actual
knowledge of any of Vendors without the obligation of enquiry or investigation,
(b) the knowledge that any of the directors of the Corporation or directors of
Roche can be expected to have
<PAGE>
-10-
acquired in the normal course of their duties as directors, officers or
employees, such directors being Pierre Lacroix, Michel Labbe, Andre Vachon,
Pierre Brulotte, Christian Berube, Yves Lortie, Sam Hammad, France Michaud, Jean
Beaudoin, Marc-Yvan Cote, Serge Dussault, Jean-Guy Lajoie and Pierre Bertrand,
and (c) when used in reference to the Associated Companies, shall mean the
actual knowledge only of any Vendor. For purposes of this Agreement, each of the
directors shall be deemed to have made enquiry of M. Martel, D. Plante, D.
Lortie and P. Croteau with respect to the matters referred to in Article III.
1.5 References to "Roche", etc. Unless otherwise specifically set forth or
---------------------------
required by the context, references to "Roche" herein shall refer to Roche
prior to the Reorganization and "New Roche" subsequent to the Reorganization.
ARTICLE II
PURCHASE AND SALE; CAPITAL CONTRIBUTIONS
----------------------------------------
2.1 Purchase and Sale; Capital Contributions. Upon and subject to the terms
----------------------------------------
and conditions hereof, (a) Vendors shall sell, transfer and assign to Purchaser
on the Closing Date, and Purchaser shall purchase from Vendors on the Closing
Date, the Purchased Shares held by each such Vendor as set forth in Exhibit "A",
-----------
in consideration of the payment by Purchaser of the Purchase Price and (b)
and (b) Purchaser shall subscribe for Twelve Million Eight Hundred Twenty-Three
Thousand Three Hundred Thirty-Five (12,823,335) Class 1 preferred shares of New
Roche, and Vendors shall cause New Roche to issue such shares to Purchaser, in
consideration of the payment by Purchaser of the amount of the Capital
Contributions to, or to the order of, New Roche as set forth in Section 2.3.
2.2 Payment of the Initial Payment. Purchaser shall satisfy the Initial
------------------------------
Payment by payment of the amount thereof on the Closing Date to Vendors by
certified cheque, bank draft or wire transfer made to the order of Michel Labbe
in trust and deposited to a collection account to be designated by Vendors (the
"Collection Account") for the purpose of distribution to Vendors as agreed among
themselves. Purchaser shall not set off or compensate the Initial Payment
against any amount owed to it but may set off or compensate the Initial Payment
against any amounts paid to Michel Labbe in trust pursuant to the promissory
notes of even date issued to him to secure the Initial Payment.
2.3 Payment of Capital Contributions. Purchaser shall satisfy the Capital
--------------------------------
Contributions by subscribing for Twelve Million Eight Hundred Twenty-Three
Thousand Three Hundred Thirty-Five (12,823,335) Class 1 preferred shares of New
Roche at a subscription price of One dollar (Cdn $1.00) per share, for an
aggregate subscription price of Twelve Million Eight Hundred Twenty-Three
Thousand Three Hundred Thirty-Five dollars (Cdn $12,823,335), of which aggregate
subscription price:
2.3.1 an amount of Three Million Five Hundred Thousand dollars (Cdn $3,500,000)
being directed by New Roche to be paid to London Guarantee Insurance
Company and Four Million dollars (Cdn $4,000,000) being directed by New
Roche to be paid to Axa Boreal Insurance Inc. as reimbursements of
amounts paid by such bonding companies on behalf of Roche to settle
litigation instituted by Robert Laframboise Mechanical Limited and
related parties (collectively, "Laframboise") related to the
<PAGE>
-11-
Pembroke Project, in exchange for releases given by such bonding
companies to New Roche; and
2.3.2 an amount of Five Million Three Hundred and Twenty-Three Thousand Three
Hundred and Thirty-Five Million dollars (Cdn $5,323,335) being directed
by New Roche to be paid to Michel Labbe in trust for the purposes of
payment of promissory notes given as consideration for the repurchase for
cancellation of various classes of shares of the Corporation and New
Roche as set forth in steps 3, 4, 12, 17 and 19 of the memorandum of Le
Group Mallette Maheu set forth in Schedule 1.1.46, in exchange for full
---------------
and final releases from each such shareholder.
Purchaser shall not set off or compensate the subscription price for the
Capital Contributions against any amounts owed to it but may set off or
compensate the Capital Contributions against any amounts paid to the Persons
identified in Section 2.3 pursuant to the promissory notes of even date issued
to such Persons.
2.4 Purchase Price Adjustment. The Purchase Price shall be reduced, on a
-------------------------
dollar-for-dollar basis, (the "Purchase Price Reduction") by the amount, if
any, by which the net book value of Roche as shown on the Closing Balance Sheet
is less than Nine Million Nine Hundred Twenty-Five Thousand US dollars (US
$9,925,000) ("NBV Target"). The Purchase Price shall be increased, on a dollar-
for-dollar basis, (the "Purchase Price Increase") by the amount, if any, by
which the net book value of Roche as shown on the Closing Balance Sheet is more
than the NBV Target. For the purposes hereof, the net book value of Roche shall
be converted to US dollars based on the daily noon spot rate of the Bank of
Canada on December 31, 1998, being Cdn $1.5305, or US $0.6534.
Any Purchase Price Reduction shall be payable by Vendors to Purchaser
solely by compensation (deduction and set off) against (a) any First EBIT
Payment payable to Vendors, and (b) if the First EBIT Payment is insufficient to
cover all or any of the Purchase Price Reduction, then against any Second EBIT
Payment payable to Vendors. For greater certainty, if no First EBIT Payment and
Second EBIT Payment are payable hereunder, any Purchase Price Reduction shall
not be payable by Vendors.
Any Purchase Price Increase shall be payable by Purchaser to Vendors by
certified cheque, bank draft or wire transfer to the Collection Account on the
date the First EBIT Payment is required to be made or, if no First EBIT Payment
is made, on the date the First EBIT Payment would have been paid had it been
payable.
For the purposes hereof and the Closing Balance Sheet, net book value
shall (a) exclude the Management Pension Plan Surplus, any assets associated
with the Pembroke Project and any associated liabilities to the extent assumed
and paid by Vendors up to the date hereof, and any current and deferred income
Taxes associated with the Pembroke Project, (b) exclude the effects of the
Reorganization, (c) include the reserve for disputed Pembroke-related claims
referred to in Section 3.1.36 (if still outstanding on the date of the Closing
Balance Sheet), and an equivalent credit in recognition of Vendors' assumption
of such claims, (d) include the litigation reserves set forth in Schedule
--------
3.1.26, and (e) incorporate the principles set forth in Schedule 2.4.
- ------ ------------
<PAGE>
-12-
2.5 First EBIT Payment. Purchaser shall pay to Vendors, within three (3)
------------------
months after the closing of the 1999 financial year, the Maximum First EBIT
Payment based on New Roche achieving an earnings before interest and taxes
("EBIT") level of at least Two Million Seven Hundred Thousand US dollars (US
$2,700,000) during the twelve (12) month period ending December 1999 (the "First
EBIT Payment"). The First EBIT Payment will be reduced proportionally for any
1999 EBIT performance level less than Two Million Seven Hundred Thousand US
dollars (US $2,700,000) with fifty-six percent (56%) of the Maximum First EBIT
Payment paid if 1999 EBIT equals One Million Five Hundred Thousand US dollars
(US $1,500,000) and zero paid if 1999 EBIT is less than One Million Five Hundred
Thousand US dollars (US $1,500,000). The 1999 EBIT performance will be
determined from the EBIT Statement for the year ending December 1999.
The First EBIT Payment shall be payable by Purchaser (a) by compensation
against any Purchase Price Reduction, then, as to any balance, (b) by certified
cheque, bank draft or wire transfer in the amount of such balance to the
Collection Account, for the purpose of distribution to Vendors as agreed among
themselves, within ten (10) calendar days of the date on which the EBIT
Statement for the twelve (12) month period to end December 1999 becomes final
and binding on the Parties.
For the purposes hereof, EBIT shall (a) exclude any effect on earnings of
the Pembroke Project to the extent the same are for the benefit of or actually
assumed and paid for by Vendors pursuant to this Agreement, (b) be net of any
sums paid or accrued pursuant to any New Roche incentive compensation plan, (c)
exclude any debt, liability, expense, write-off or reserve to the extent the
same constituted Losses for which Purchaser has actually been indemnified
pursuant to Article XII (including as a result of a breach of Section 3.1.35),
or to the extent there has been any other Purchase Price reduction hereunder,
(d) include any reversal during the applicable period of reserves taken on the
Closing Balance Sheet in accordance with Section 2.9, (e) be converted to US
dollars by using the average daily noon spot rate as published by the Bank of
Canada for the calendar year in which the earnings were generated, and (f)
incorporate the principles set forth in Schedule 2.5.
------------
2.6 Second EBIT Payment. Purchaser shall pay to Vendors, within three (3)
-------------------
months after the closing of the 2000 financial year, the Maximum Second EBIT
Payment based on New Roche achieving an EBIT performance level of at least Three
Million Six Hundred Thousand US dollars (US $3,600,000) during the twelve (12)
month period ending December 2000 (the "Second EBIT Payment"). The Second EBIT
Payment will be reduced proportionally for any 2000 EBIT performance level less
than Three Million Six Hundred Thousand US dollars (US $3,600,000) with fifty-
six percent (56%) of the Maximum Second EBIT Payment paid if 2000 EBIT equals
Two Million US dollars (US $2,000,000) and zero paid if 2000 EBIT is less than
Two Million US dollars (US $2,000,000).
If, after giving effect to the preceding paragraph, (a) Vendors are
entitled to be paid less than the Maximum Second EBIT, and (b) New Roche's EBIT
for the 1999 financial year was greater than Two Million Seven Hundred Thousand
US dollars (US $2,700,000) (such difference being the "Excess First EBIT"), then
the Second EBIT Payment shall be increased by an amount, if any, equal to the
difference between (i) the amount the Second EBIT Payment would have been had
the Excess First EBIT been earned by New Roche in
<PAGE>
-13-
the 2000 year in addition to the EBIT actually earned in the 2000 year, and (ii)
the actual amount of the Second EBIT Payment otherwise earned.
If (a) Vendors were paid less than the Maximum First EBIT Payment, and (b)
New Roche's EBIT for the 2000 financial year is greater than Three Million Six
Hundred Thousand US dollars (US $3,600,000) (such difference being the "Excess
Second EBIT"), then the Second EBIT Payment shall be increased by an amount, if
any, equal to the difference between (i) the amount the First EBIT Payment would
have been had the Excess Second EBIT been earned by New Roche in the 1999 year
in addition to the EBIT actually earned in the 1999 year, and (ii) the actual
amount of the First EBIT Payment otherwise earned.
Any Second EBIT Payment shall be payable by Purchaser first by
compensation against any Purchase Price Reduction not previously satisfied,
then: (a) by certified cheque, bank draft or wire transfer to the Collection
Account, for the purpose of distribution to Vendors as agreed between
themselves, within ten (10) calendar days of the date on which the EBIT
Statement for the twelve (12) month period to end December 2000 becomes final
and binding on the Parties; or (b) in registered, unrestricted and freely
tradable shares of common stock, One cent US (US $0.01) par value of ITX; or a
combination of both, as Purchaser may elect.
Any payment by Purchaser of the Second EBIT Payment by way of shares of
common stock of ITX shall be made no later than sixty (60) days after the EBIT
Statement for the twelve (12) month period to end December 2000 becomes final
and binding on the Parties, shall be subject to obtaining any required approvals
under applicable securities Laws and shall not exceed Four Million Six Hundred
Thousand US dollars (US $4,600,000) (with any balance payable in cash). Each
Vendor shall receive on any such payment a number of shares equal to the
quotient obtained by dividing:
(a) the amount of such payment which is composed of shares of common
stock of ITX payable to such Vendor as agreed among Vendors, by
(b) the arithmetic average of the closing price of shares of common stock
of ITX on the New York Stock Exchange for the five (5) trading days
prior to the date of payment of the Second EBIT Payment,
rounded down to the nearest whole share, plus an amount in cash equal to such
arithmetic average multiplied by any fraction of a share which was eliminated
due to rounding. For greater certainty, if Purchaser is unable to obtain all
required approvals under applicable securities Laws, all of such Second EBIT
Payment shall be paid in cash within sixty (60) days of the date on which the
EBIT Statement for the twelve (12) month period to end December 2000 becomes
final and binding on the Parties.
2.7 Closing Balance Sheet and EBIT Statements. Purchaser and Vendors shall
-----------------------------------------
jointly instruct Messrs. Mallette Maheu (the "Auditors") to produce and deliver
to the Parties:
2.7.1 no later than sixty (60) days after the Closing Date, a consolidated
balance sheet showing the assets and liabilities of Roche as at December
31, 1998 (the "Audit Date") based on the audited balance sheet of Roche
for the year ended
<PAGE>
-14-
December 31, 1998, adjusted to incorporate the principles set forth in
Section 2.4 and any other adjustments specifically set forth in this
Agreement (the "Closing Balance Sheet"); and
2.7.2 by February 28 after the applicable financial year, audited consolidated
statements of earnings of New Roche for the twelve (12) month periods
ending December 1999 (notwithstanding that the 1999 taxation year will be
less than twelve (12) months) and December 2000 showing the earnings of
New Roche for such periods, including the EBIT of New Roche calculated
using the definition thereof set forth in Section 2.5 (each, an "EBIT
Statement"). For greater certainty, the 1999 year of Roche used in the
preparation of the first EBIT Statement shall be comprised of the year of
Roche from January 1, 1999 to the Closing Date and the year of New Roche
from the Closing Date to the Tax year end of New Roche in December 1999,
notwithstanding the change of control hereunder or the amalgamation to
form New Roche or any subsequent amalgamation of New Roche and Purchaser.
Such Closing Balance Sheet and EBIT Statements (collectively, the
"Statements") shall be prepared in accordance with GAAP, applied on a basis
consistent with prior periods and consistent throughout the periods involved.
The Closing Balance Sheet shall, either in the Closing Balance Sheet or in the
working papers used to prepare it, indicate the amount of all reserves taken,
including reserves for accounts receivable, for warranty or project work and
each litigation or other claim, the amount of Pembroke Losses (as a separate
item) and the amount of Assumed Debt had Assumed Debt been calculated as of such
date. The EBIT Statements shall not include charges from Purchaser or ITX for
support or other related services unless agreed to by Mr. Anthony J. DeLuca and
Mr. Michel Labbe or their respective successors. Purchaser shall be permitted to
have its independent auditors and in-house accounting personnel of ITX, review
each of the Statements and working papers (which shall be made available in
English) used in the preparation thereof, and ask questions to personnel of
Vendors and the Auditors with respect to the preparation thereof.
Either Party may dispute any matter in a Statement by notice ("Notice of
Dispute") to the other Party given within thirty (30) calendar days of the
delivery of such Statement to the Parties. Mr. Anthony J. DeLuca or another
senior officer of ITX on behalf of Purchaser and Mr. Michel Labbe or another
senior representative of Vendors on behalf of Vendors, shall promptly meet
within ten (10) calendar days of the date of the Notice of Dispute to use their
best efforts to amicably resolve any matters identified in a Notice of Dispute.
If any such dispute shall not have been resolved by such individuals within
thirty (30) calendar days following the date on which the Notice of Dispute is
given, then such unresolved matter shall be referred to Messrs. Deloitte &
Touche (Montreal) (the "Third-Party Auditors"). The Parties shall use their
reasonable efforts to ensure that the determination of the Third-Party Auditors
shall be made within thirty (30) calendar days after the matter has been
referred to them.
If no Notice of Dispute is given within the thirty (30) day delay
prescribed above, upon the expiry of such delay the Statement shall be final and
binding on the Parties. If a Notice of Dispute is given in accordance with this
Section 2.7, then the Statement, as amended by agreement of the Parties or
decision of the Third-Party Auditors, shall be final
<PAGE>
-15-
and binding on the Parties as of and from the date of the agreement of the
Parties or the decision of the Third-Party Auditors, as the case may be.
The fees and disbursements of the Auditors shall be paid by New Roche. The
fees and disbursements of any Third-Party Auditors will be shared equally by
Purchaser, on the one hand, and Vendors, on the other hand.
2.8 Accounts Receivable. Purchaser shall cause New Roche and each Subsidiary
-------------------
to use its reasonable efforts to collect all Accounts Receivable reflected on
the Closing Balance Sheet. Contemporaneously with the delivery of the Closing
Balance Sheet, Vendors shall deliver to Purchaser a list of all such Accounts
Receivable reflected on the Closing Balance Sheet, and details related thereto
including reserves reflected on the Closing Balance Sheet. Any amounts collected
by New Roche or any Subsidiary from any debtor of such Accounts Receivable shall
be imputed firstly to the oldest Accounts Receivable from such debtor; provided
that if a payment of any of the Accounts Receivable is contested, in whole or in
part, by the debtor thereof, then any amounts collected by New Roche or the
Subsidiary from such debtor shall be imputed to the next oldest uncontested
Account Receivable from such debtor. Purchaser shall have no obligation to cause
New Roche or any Subsidiary to institute suit to collect any such Accounts
Receivable. Purchaser shall use its reasonable efforts to ensure that New Roche
and the Subsidiaries do not compromise any Accounts Receivable without Vendors'
consent. Purchaser and Vendors may agree to compromise Accounts Receivable if
each of Mr. Anthony J. DeLuca and Mr. Michel Labbe, or their respective
successors, agree that it is in the best interests of New Roche or any
Subsidiary to do so and agree on to how such compromise will require amendments
to the application of this Section or any other provision of this Agreement.
If any Accounts Receivable remain uncollected on (i) the date the First
EBIT Payment, if any, is required to be made and such Accounts Receivable are
required to be written-off under GAAP on or before such date or, in any case,
(ii) the date the Second EBIT Payment, if any, is required to be made (the
"Uncollected Receivables"), then the amount of such Uncollected Receivables,
less
(a) the amount of any unused reserves provided for Accounts Receivable on
the Closing Balance Sheet;
(b) the actual income Tax reduction available, if any, to New Roche or
the applicable Subsidiary in the year of the write-off of such
Uncollected Receivable as a result of such write-off; and
(c) the actual amount of GST, QST or other sales Tax reimbursements or
credits actually received by New Roche or the Subsidiary as a result
of the write off of such Uncollected Receivables,
(the net amount of such Uncollected Receivables being the "Net Uncollected
Receivables") shall be payable by Vendors to Purchaser solely by compensation
(deduction and set off) against the First EBIT Payment, if any, and, if the
First EBIT Payment is insufficient, the balance against the Second EBIT Payment,
if any. For greater certainty, if no First EBIT Payment and Second EBIT Payment
are payable hereunder, no Net Uncollected Receivables shall be payable by
Vendors. If, at the time of the payment of such Net Uncollected
<PAGE>
-16-
Receivables, the amount of the actual income Tax benefit is not determinable
because the Tax position of New Roche or the applicable Subsidiary has not been
finalized, then the Parties shall in good faith estimate such benefit and, upon
finalization of such Tax position, the Parties shall settle any outstanding
balance promptly. Upon payment by Vendors to Purchaser of the full amount of the
Net Uncollected Receivables, Purchaser shall cause New Roche or the
Subsidiaries, as the case may be, to assign to such Vendors the Uncollected
Receivables for One dollar (Cdn $1.00). If, after assignment of such Uncollected
Receivables, New Roche or any Subsidiary receives any payment on account of any
such Uncollected Receivables, then Purchaser shall cause New Roche or the
Subsidiaries, as the case may be, to forthwith pay over the amount of such
payment to such Vendors into the Collection Account.
Any such Net Uncollected Receivables which are written off by New Roche or
any Subsidiary during either of the periods covered by the EBIT Statements,
shall not be deducted from the earnings of New Roche for the purposes of
calculating EBIT during such periods, notwithstanding GAAP or Section 2.7.
2.9 Reversal of Reserves. An amount equal to all reserves taken on the
--------------------
Closing Balance Sheet which are not used and which are reversed in accordance
with GAAP shall, for the purpose of calculating EBIT on the EBIT Statements, be
deemed to be added to earnings of New Roche or the appropriate Subsidiary to the
extent such reserves are reversed in accordance with GAAP in either of the 1999
year or the 2000 year. Purchaser may request an opinion from the auditors of New
Roche to the effect that such reversal was taken at the proper time and for the
proper amounts.
2.10 Breakdown of Payments. All cash amounts payable to Vendors pursuant to
---------------------
this Agreement shall be paid into the Collection Account for distribution
among Vendors as agreed among themselves.
2.11 Assumed Debt. No later than the date on which the Closing Balance Sheet
------------
is delivered to the Parties by the Auditors, Vendors shall have caused the Vice
President, Finance of New Roche to deliver to the Parties the calculation of the
Assumed Debt as of January 31, 1999. Purchaser may, within thirty (30) days of
the delivery of such calculation, require that such calculation be audited by
the Auditors. Such calculation, as revised by the Auditors, shall be final and
binding on the Parties. The Auditors' fees and disbursements incurred in the
course of such work will be paid by Purchaser.
2.12 Allocation of Purchase Price. For purposes of allocation of the Purchase
----------------------------
Price among the Purchased Shares, the US dollar equivalents of the Canadian
dollar amounts set forth in Exhibit "A" under "Purchase Price: Preferred"
----------
shall be allocated to the preferred shares, and a percentage of any balance of
the Purchase Price shall be allocated to the common shares of each Vendor in the
percentage set forth opposite such Vendor's name in the column entitled "% of
Share of Purchase Price: Common" in Exhibit "A".
-----------
<PAGE>
-17-
ARTICLE III
REPRESENTATIONS AND WARRANTIES
------------------------------
3.1 Representations and Warranties of Vendors. Vendors solidarily, without
-----------------------------------------
the benefit of division and discussion (except as set forth in Section 3.3),
represent and warrant to Purchaser as follows and acknowledge that Purchaser is
relying upon such representations and warranties in connection with the purchase
by Purchaser of the Purchased Shares and that Purchaser would not have entered
into this Agreement without such representations and warranties:
3.1.1 Due Incorporation--Each of the Corporation, Roche, the Subsidiaries,
-----------------
NewCo1 (prior to the Reorganization) and Vendors which are bodies
corporate:
(a) is duly incorporated (or amalgamated, as the case may be) or formed,
validly existing and up-to-date in its annual filings under the Laws
of its jurisdiction of incorporation; and
(b) has all necessary corporate or other power and authority to own,
lease and operate its properties and to conduct its business as and
in the places where such properties are now owned, leased or operated
or such business is now conducted.
3.1.2 Due Incorporation of the Associated Companies--Each of the Associated
---------------------------------------------
Companies:
(a) is duly incorporated or formed and validly existing under the Laws of
its jurisdiction of incorporation or formation; and
(b) to the knowledge of Vendors, has all necessary corporate or other
power and authority to own, lease and operate its properties and to
conduct its business as and in the places where such properties are
now owned, leased or operated or such business is now conducted.
3.1.3 Due Authorization--Each Vendor has the capacity to execute this Agreement
-----------------
and the Ancillary Agreements required to be executed by such Vendor and to
perform his, her or its obligations hereunder and thereunder. The
execution of this Agreement and the Ancillary Agreements by Vendors and
the performance by Vendors of their obligations hereunder and thereunder
have been duly authorized by all necessary action on their part. Such
execution and performance by Vendors do not require any action or consent
of, any registration with, or notification to, any Person on behalf of, by
or with respect to Vendors, the Corporation, Roche, any Subsidiary or, to
the knowledge of Vendors, any Associated Company other than those which
will be obtained by the Closing Date.
3.1.4 Enforceability--This Agreement constitutes, and each of the Ancillary
--------------
Agreements will constitute upon execution, a legal, valid and binding
obligation of Vendors who are parties thereto enforceable against them in
accordance with their terms, subject to applicable bankruptcy, insolvency,
reorganization and similar Laws
<PAGE>
-18-
affecting the enforcement of creditors rights generally and to general
equitable principles.
3.1.5 Mandate--The mandate given by each Vendor to Mr. Michel Labbe to execute
-------
this Agreement, instruments in connection with this Agreement and the
Ancillary Agreements on its, his or her behalf is valid and enforceable
and, upon the execution of this Agreement, instruments and the Ancillary
Agreements by Mr. Michel Labbe, such agreements and instruments will
constitute a legal, binding and enforceable agreement of each Vendor party
thereto enforceable in accordance with their terms, subject to applicable
bankruptcy, insolvency, reorganization and similar Laws affecting the
enforcement of creditors rights generally and to general equitable
principles.
3.1.6 No Conflict--Other than as set forth in Schedule 3.1.6, the execution of
----------- --------------
this Agreement and the Ancillary Agreements, the consummation of the
transactions contemplated herein and therein, the performance and
compliance by Vendors of their obligations hereunder and thereunder do not
and will not:
(a) violate, contravene or breach, or constitute a default under, the
constating instruments or by-laws of Vendors which are bodies
corporate, the Corporation, Roche, any Subsidiary or any Associated
Company;
(b) violate, contravene or breach, or constitute a default under any
Contract, whether by reason of change of control or otherwise, to
which any of the Corporation, Roche, any Subsidiary or, to the
knowledge of Vendors, any Associated Company, may be a party, or
their properties may be subject, or by which any of them is bound or
affected, other than violations, contraventions, breaches or defaults
listed in Schedule 3.1.6 and for which appropriate consents or
--------------
waivers will have been received on or before the Closing Date;
(c) result in, or give any Person the right to seek, or to cause (i) the
termination, cancellation, modification, amendment, variation or
renegotiation of any Contract (including credit agreements and
financial assistance from Governmental Bodies) to which the
Corporation, Roche, the Subsidiaries or, to the knowledge of Vendors,
the Associated Companies, or any of their properties may be a party
or subject or by which they are bound or affected other than benefits
offered only to Canadian controlled corporations under Law, or (ii)
the acceleration or forfeiture of any term of payment required to be
made by the Corporation, Roche, the Subsidiaries or, to the knowledge
of Vendors, the Associated Companies, or (iii) the loss in whole or
in part of any benefit which would otherwise accrue to the
Corporation, Roche, the Subsidiaries or, to the knowledge of Vendors,
the Associated Companies other than benefits offered only to Canadian
controlled corporations under Law;
(d) result in, or require the creation of any Lien upon any of the
Purchased Shares or any assets or property of the Corporation, Roche,
the Subsidiaries or, to the knowledge of Vendors, the Associated
Companies; or
<PAGE>
-19-
(e) violate, contravene or breach any Laws, Licenses, permits, privileges
or entitlements.
3.1.7 Authorized and Issued Capital--Upon consummation of the Reorganization,
-----------------------------
the authorized capital of New Roche will consist of such classes of shares
described in schedule 1 to the memorandum of Le Groupe Mallette Maheu
which forms Schedule 1.1.46.
---------------
Upon consummation of the Reorganization, the Purchased Shares will
represent, prior to the issuance of the Twelve Million Eight Hundred
Twenty-Three Thousand Three Hundred Thirty-Five (12,823,335) Class 1
preferred shares pursuant to the Capital Contributions, all of the issued
and outstanding shares in the share capital of New Roche and will be
registered and beneficially owned by Vendors in the manner set forth in
Exhibit "A", and Vendors will transfer good and valid title thereto to
-----------
Purchaser, free and clear of all Liens (including the Liens set forth in
Schedule 4.4.12), other than any Liens created by or consented to by
---------------
Purchaser. The Twelve Million Eight Hundred Twenty-Three Thousand Three
Hundred Thirty-Five (12,823,335) Class 1 preferred shares of New Roche to
be issued to Purchaser pursuant to the Capital Contributions in Section
2.3 shall, upon payment of the Capital Contributions to the bonding
companies identified in Section 2.3.1 and to Mr. Michel Labbe in trust
pursuant to Section 2.3.2, be duly authorized, validly issued in the name
of Purchaser and fully paid and non-assessable.
The authorized capital of Roche consists of six (6) classes of shares
designated categories "A" to "F", inclusively, each with no par value, of
which nine thousand two hundred ninety (9,290) categories "A" shares (and
no more) have been validly subscribed and are issued and outstanding as
fully paid and non-assessable and are registered and beneficially owned by
the Corporation, free and clear of all Liens.
The authorized capital or other ownership interests of the Subsidiaries
and Associated Companies consists of the classes of shares or other
interests set forth in Schedule 3.1.7, each authorized to be issued up to
--------------
the number and with the par value (if any) set forth in Schedule 3.1.7, of
--------------
which the number and classes of shares or other ownership interests (and
no more) set out therein have been validly subscribed and are issued and
outstanding as fully paid and non-assessable and are registered and
beneficially owned, free and clear of all Liens by Roche, a Subsidiary or
an Associated Company as set forth in Schedule 3.1.7 or, to the knowledge
--------------
of Vendors, are registered, free and clear of all Liens and beneficially
owned by the other Persons as set forth therein.
3.1.8 Subsidiaries and Associated Companies--The Corporation and Roche do not
-------------------------------------
own, directly or indirectly, more than fifty percent (50%) of the shares,
voting interests, partnership interests or economic interests in any
Person other than the Subsidiaries and, prior to the Reorganization,
2758-3525 Quebec Inc., 174878 Canada Ltd. and Solutions Technologiques
Internationales STI Inc.
The Corporation and Roche do not own, directly or indirectly, fifty
percent (50%) or less of the shares, voting interests, partnership
interests or economic interests
<PAGE>
-20-
in any Person other than the Associated Companies and, prior to the
Reorganization, Metroplan.
3.1.9 No Options--Except as set forth in Schedule 3.1.9, there is no:
---------- --------------
(a) outstanding security of the Corporation, Roche, any Subsidiary or, to
the knowledge of Vendors, any Associated Company, convertible or
exchangeable into any share or shares in the capital of, or other
ownership interest in, the Corporation, Roche, any Subsidiary or any
Associated Company;
(b) outstanding subscription, option, warrant, call, commitment or
agreement obligating the Corporation, Roche, any Subsidiary or, to
the knowledge of Vendors, any Associated Company, to issue any share
or shares of their capital, any security or securities of any class
or kind or any other ownership interests which in any way relate to
the authorized or issued capital of, or other ownership interests in,
the Corporation, Roche, any Subsidiary or any Associated Company;
(c) agreement (other than this Agreement) which grants to any Person the
right to purchase or otherwise acquire any Purchased Shares, any of
the assets or properties of the Corporation, Roche, the Subsidiaries
or, to the knowledge of Vendors, any of the Associated Companies,
other than rights of first refusal, piggy-back rights and put and
call options for shares, voting interests, partnership interests or
economic interests in the capital of the Subsidiaries and the
Associated Companies pursuant to the agreements described in
Schedule 3.1.9, none of which rights will become enforceable as a
--------------
result of the execution of this Agreement or the consummation of the
transactions herein; or
(d) shareholders agreement, partnership agreement, joint venture
agreement, voting trust, voting agreement, pooling agreement or proxy
with respect to any shares in the capital of, or other ownership
interests in, the Corporation, Roche, the Subsidiaries or, to the
knowledge of Vendors, the Associated Companies, other than the
agreements set forth in Schedule 3.1.9.
--------------
3.1.10 Books and Records--All of the minute books of the Corporation, Roche and
-----------------
the Subsidiaries have been made available to legal counsel to Purchaser.
All of such minute books and, to the knowledge of Vendors, all of the
minute books and books of partners' proceedings of the Associated
Companies, are complete and accurate in all material respects, and
contain copies of all by-laws and resolutions passed by the
shareholders, directors, partners or joint ventures since the date of
their respective incorporations or formations, all of which by-laws and
resolutions have been duly passed.
The share certificate books, registers of shareholders, registers of
partners, registers of transfers and registers of directors of the
Corporation, Roche, the Subsidiaries and, to the knowledge of Vendors,
the Associated Companies, are complete and accurate.
<PAGE>
-21-
The Books and Records of the Corporation, Roche and the Subsidiaries
have been maintained in accordance with sound business practices and
fairly, accurately and completely present and disclose in accordance
with GAAP, the financial position and all material transactions of the
Corporation, Roche and the Subsidiaries.
3.1.11 Financial Statements--The Financial Statements fairly, accurately and
--------------------
completely present and disclose in all material respects and in
accordance with GAAP, (a) the assets, liabilities and obligations
(whether accrued, contingent, absolute or otherwise), income, losses,
retained earnings, reserves and financial position of Roche and the
Subsidiaries, and (b) the results of operations of Roche and the
Subsidiaries, all as at the dates and for the periods therein specified.
The Closing Balance Sheet shall fairly, accurately and completely
present and disclose in all material respects and in accordance with
GAAP, the assets, liabilities and obligations (whether accrued,
contingent, absolute or otherwise) of Roche and the Subsidiaries as of
the Audit Date.
3.1.12 Liabilities--None of the Corporation, Roche or the Subsidiaries has any
-----------
liabilities or obligations of any nature whatsoever, whether direct,
indirect, absolute, contingent or otherwise which relate to the period
ending on or before the date hereof, regardless of when manifested or
asserted, ("Liabilities") except for:
(a) those Liabilities to be reflected on the Closing Balance Sheet and
which had a net impact on the calculation of net book value,
(b) those Liabilities incurred during the period between the Audit Date
and the date hereof in the usual and ordinary course, and
(c) ongoing contractual obligations (other than for breaches or events
of default) in the ordinary course.
None of the Corporation, Roche or any Subsidiary has any Liabilities of
any nature whatsoever whether direct, indirect, absolute, contingent or
otherwise, regardless of when manifested or asserted, to or on behalf of
any Vendor, or any Person not dealing at arm's length with any Vendors
within the meaning of the Income Tax Act (Canada) (including in
connection with the Excluded Assets), other than the lease between Roche
and Metroplan for the premises located at 3075 chemin des Quatre-
Bourgeois, Suite 300, Ste-Foy, Quebec, G1W 4Y4.
3.1.13 Corporation; NewCo 1--Except as set forth in Schedule 3.1.13, the
-------------------- ---------------
Corporation (a) has no assets and has never had any assets other than
shares of Roche, (b) is not, and has never been, bound by any Contracts
or guarantees, and does not have, and has never had, any employees, and
(c) does not have, and has never had, any operations other than the
holding of shares of Roche.
NewCo 1 (a) has no assets and never had any assets other than as
specifically identified in Schedule 1.1.46, (b) has never been bound by
---------------
any Contracts or guarantees, and never had any employees, and (c) never
had any operations.
<PAGE>
-22-
3.1.14 Property--Roche and each of the Subsidiaries, as the case may be, is the
--------
sole and unconditional owner of, and has a good and marketable title to,
all of the assets reflected on the Financial Statements for the period
ended November 30, 1998 (including the Immoveables described in
Schedule 3.1.15), or which have been acquired after November 30, 1998
---------------
(other than the Excluded Assets and such assets consumed or disposed of
on or after November 30, 1998 in the ordinary course of business and in
a manner consistent with past practice), in each case free and clear of
all Liens, other than Permitted Encumbrances and other than the Liens
set forth in Schedule 3.1.14.
---------------
3.1.15 Immoveables--Schedule 3.1.15 is a true and complete description of all
----------- ---------------
immoveable and real property owned by Roche or any Subsidiary (including
the immoveable for the centre commercial St-Nicolas owned through La
societe en commandite Place du Commerce St-Nicolas) and a brief
description of all principal structures thereon and uses thereof (the
"Immoveables").
Such Immoveables and all immoveable and real property used by or leased
to or from Roche or any Subsidiary and, to the knowledge of Vendors, the
immoveable and real property owned by, used by or leased to or from the
Associated Companies, does not violate, contravene or breach, and is
used in compliance with, any and all Laws. None of Roche, any Subsidiary
or, to the knowledge of Vendors, any Associated Company, has received
any notice that any of the Immoveables or any of the aforesaid
immoveable or real property (a) is not in compliance with any Laws, (b)
is not used in compliance with any Laws, and/or (c) requires work to be
done in connection therewith.
All real estate Taxes and assessments, and all mutation Taxes, which are
due in respect of all such Immoveables and all such immoveable and real
property have been paid by Roche, the Subsidiaries and, to the knowledge
of Vendors, the Associated Companies, to the extent required to be paid
by Roche, the Subsidiaries or the Associated Companies, without
subrogation or reserve unless contested pursuant to the procedures under
applicable Law.
No Immoveable is situated in an agricultural zone or zoned for uses
other than those carried out thereon.
3.1.16 Condition and Sufficiency of Assets; Inventory--All of the tangible
----------------------------------------------
assets (including the Equipment) of Roche (other than the Excluded
Assets), any Subsidiary and, to the knowledge of Vendors, the Associated
Companies, are (a) in good operating condition and repair, ordinary wear
and tear and aging excepted, (b) not in need of maintenance or repairs
(except ordinary or routine maintenance or repairs that are not material
in nature or costs, individually or collectively), and (c) adequate and
sufficient for the continuing conduct of the Business as now conducted.
All Inventory of Roche (other than the Excluded Assets), the
Subsidiaries and, to the knowledge of Vendors, the Associated Companies,
is of a quality and quantity usable in the ordinary course of business.
<PAGE>
-23-
3.1.17 Location; Place of Business--None of Roche or any Subsidiary holds,
---------------------------
directly or indirectly, any of their property (other than the Excluded
Assets prior to the Reorganization) anywhere other than in the locations
set forth in Schedule 3.1.17. Roche, the Subsidiaries and, to the
---------------
knowledge of Vendors, the Associated Companies, are validly registered
to do business in all locations where they are doing business in a
manner which requires them to be licensed and, in the case of Roche and
the Subsidiaries, all of such locations are listed in Schedule 3.1.17.
---------------
3.1.18 Intellectual Property Rights--Schedule 3.1.18 contains a true and
---------------------------- ---------------
complete list of (a) all registered Intellectual Property Rights used by
Roche and the Subsidiaries, and (b) all pending applications for
Intellectual Property Rights used by Roche (other than those used
exclusively in connection with the Excluded Assets) and the Subsidiaries
in connection with their business, none of which has been expunged,
opposed or held unenforceable. Each of the aforesaid Intellectual
Property Rights and, to the knowledge of Vendors, each of the
Intellectual Property Rights used by the Associated Companies, is valid,
subsisting and enforceable and each of the registrations and
applications included in such Intellectual Property Rights is duly
recorded in the name of Roche, the Subsidiaries or the Associated
Companies, as the case may be. Other than Intellectual Property Rights
licensed by way of the purchase of "off the shelf" standard products and
other than as disclosed in Schedule 3.1.18, each of Roche, each
---------------
Subsidiary and, to the knowledge of Vendors, each Associated Company is
the absolute owner and has the sole and exclusive right to hold and use
such Intellectual Property Rights, including the right to transfer the
same, without making any payment to others or granting rights to others
in exchange. None of the Intellectual Property Rights of Roche, any
Subsidiary or, to the knowledge of Vendors, any Associated Company, has
been licensed to a third Person except for those license arrangements
disclosed in Schedule 3.1.18. The title of Roche, each Subsidiary and,
---------------
to the knowledge of Vendors, each Associated Company, to such
Intellectual Property Rights is free and clear of any Lien and is not
the subject of any conditional sale agreement.
To the knowledge of Vendors, there are no assertions or claims
challenging the validity of the Intellectual Property Rights of Roche,
any Subsidiary or any Associated Company and no Person has requested
that any of the foregoing execute a license in favour of such third
Person to enable Roche, any Subsidiary or any Associated Company to use
such Intellectual Property Rights. To the knowledge of Vendors, no
Person is infringing the Intellectual Property Rights of Roche, any
Subsidiary or any Associated Company.
Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated
Companies, do not use or infringe the Intellectual Property Rights of
any third Person without such Person's consent.
Roche has the right to use the name "Roche" in connection with the
Business.
3.1.19 Year 2000 Compliance--Roche has established a policy to ensure that the
--------------------
information technology systems of Roche and each of the Subsidiaries,
including, without limitation, hardware, software and data used, in
whole or in part in, or required for, the carrying on of the business of
Roche and the Subsidiaries in the
<PAGE>
-24-
manner heretofore carried on, will be designed in a timely fashion to be
used prior to, during and after the calendar year 2000 A.D. and to
operate during each such time period without error relating to or
arising from date-related data. Personnel of Roche have already taken
measures under such policy in accordance with the terms of such policy.
3.1.20 Material Contracts--Schedule 3.1.20 contains a true and complete
------------------ ---------------
description of all of the following types of written and oral Contracts
currently in force to which the Corporation, Roche or any of the
Subsidiaries is a party or by which they are bound, other than those
described in other Schedules hereto:
(a) (i) projects arising in the ordinary course of business and
providing for the payment in any twelve (12) month period of Fifty
Thousand dollars (Cdn $50,000) or more in one instance or in the
aggregate after the Closing Date, or (ii) Contracts not arising in
the ordinary course of business;
(b) all leases to which Roche or any Subsidiary is a party or its
properties are subject which (a) involve immoveable or real
property or (b) involve the expenditure or receipt of rent in the
amount of Fifty Thousand dollars (Cdn $50,000) or more in any
twelve (12) month period after the Closing Date;
(c) loan and credit Contracts, hypothecs, mortgages and other
agreements evidencing any Lien, guarantees, notes, conditional
sales, leasing agreements, sale-lease back agreements or title
retention agreements;
(d) Licenses relating to Intellectual Property Rights;
(e) Government Contracts or Bids;
(f) Contracts of non-competition, non-disclosure and/or
confidentiality, other than those in the ordinary course of
business;
(g) Contracts with Persons not dealing at arm's length with the
Corporation, Roche, any Subsidiary or any Vendor within the meaning
of the Income Tax Act (Canada); and
(h) management or service Contracts.
3.1.21 No Default Under Contracts--Each of the Corporation, Roche, each
--------------------------
Subsidiary and, to the knowledge of Vendors, each Associated Company,
(a) is in good standing and entitled to all benefits under, (b) has
performed all obligations required to be performed under, and (c) is not
in default under, or in breach of, any Contract. To the actual knowledge
of Vendors, no other party to such Contracts is in default or breach
thereof and there exists no fact, condition or circumstance which, after
notice or lapse of time or both, would result in the default or breach
thereof by any such other party.
3.1.22 No Guarantees--None of the Corporation, Roche, any Subsidiary or, to the
-------------
knowledge of Vendors, any Associated Company, is a party to or bound
either
<PAGE>
-25-
absolutely or on a contingent basis by any comfort letter, understanding
or agreement of guarantee, warranty, indemnification, assumption,
endorsement, performance bond, letter of credit or any like commitment
with respect to the liabilities or obligations of any Person (whether
accrued, absolute or otherwise contingent) other than as set forth in
Schedule 3.1.22.
---------------
3.1.23 Government Contracts--Except as disclosed in Schedule 3.1.23, with
-------------------- ---------------
respect to each Government Contract or Bid to which Roche, any
Subsidiary or any Associated Company is a party:
(a) Roche, the Subsidiaries and, to the knowledge of Vendors, the
Associated Companies, obtained each Government Contract in
compliance with all Laws relating to procurement and ethical
business practices;
(b) Roche, the Subsidiaries and, to the knowledge of Vendors, the
Associated Companies, have fully complied with all material terms
and conditions and have complied in all material respects with all
applicable requirements of Law or agreement, whether incorporated
expressly, by reference or by operation of Law;
(c) all representations and certifications of Roche, the Subsidiaries
and, to the knowledge of Vendors, the Associated Companies, were
current, accurate and complete in all material respects when made,
and Roche, the Subsidiaries and, to the knowledge of Vendors, the
Associated Companies, have fully complied with all such
representations and certifications;
(d) no allegation has been made in writing that Roche, the Subsidiaries
or, to the knowledge of Vendors, the Associated Companies, are in
breach or violation of any statutory, regulatory or contractual
requirement or that such breach or violation will not be waived or
cannot be cured;
(e) no termination for convenience, termination for default, cure
notice or show cause notice has been issued with respect to Roche,
the Subsidiaries or, to the knowledge of Vendors, the Associated
Companies;
(f) no cost incurred by Roche, the Subsidiaries or, to the knowledge of
Vendors, the Associated Companies, or any of their subcontractors
has been questioned or disallowed; and
(g) no money in excess of Twenty-Five Thousand dollars (Cdn $25,000) in
the aggregate due to Roche, the Subsidiaries or, to the knowledge
of Vendors, the Associated Companies, has been withheld or set off
or is currently being threatened to be withheld or set off, other
than retentions held by a customer in the ordinary course of
business that will be ultimately paid.
None of Roche, the Subsidiaries or, to the knowledge of Vendors, the
Associated Companies, nor any of their directors or officers are (or for
the last two (2) years has been), nor has Roche, any Subsidiary or, to
the knowledge of Vendors, the Associated Companies, received written
notice that any employee of Roche, the
<PAGE>
-26-
Subsidiaries or the Associated Companies is (or for the last two (2)
years has been) (i) under administrative, civil or criminal
investigation, indictment or information, audit or internal
investigation with respect to any alleged irregularity, misstatement or
omission regarding a Government Contract or Bid; or (ii) suspended or
debarred from doing business with any Governmental Body or declared non-
responsible or ineligible for government contracting. None of Roche, the
Subsidiaries nor, to the knowledge of Vendors, any of the Associated
Companies, has made a voluntary disclosure to any Governmental Body with
respect to any alleged irregularity, misstatement or omission arising
under or relating to any Government Contract or Bid. To the knowledge of
Vendors, there are no circumstances that would warrant the institution
of suspension or debarment proceedings or the finding of non-
responsibility or ineligibility on the part of Roche, any Subsidiary or
any Associated Company for Government Contracts or Bids in the future.
Other than as set forth in Schedule 3.1.23, within the last two (2)
---------------
years, no Governmental Body or any prime contractor, subcontractor or
vendor has asserted any claim or initiated any dispute proceeding which
is currently outstanding against Roche, any Subsidiary or, to the
knowledge of Vendors, any Associated Company, nor has Roche, any
Subsidiary or, to the knowledge of Vendors, any Associated Company,
asserted in writing any claim or initiated any dispute proceeding,
directly or indirectly, against any such party, concerning any
Government Contract or Bid. To the knowledge of Vendors, there are no
facts upon which such a claim or dispute proceeding may be based in the
future that would result in a liability to Roche, any Subsidiary or any
Associated Company in excess of Ten Thousand dollars (Cdn $10,000).
3.1.24 Insurance--Roche, each Subsidiary and, to the knowledge of Vendors, each
---------
Associated Company, maintains insurance with responsible and reputable
insurers in such amounts and covering such risks and with such
deductibles as are generally maintained by like businesses.
Schedule 3.1.24 is a true and complete list of all insurance policies
---------------
currently maintained by or for Roche and the Subsidiaries. The coverage
under each such policy is in full force and effect and Roche and the
Subsidiaries are in good standing under such policies. To the knowledge
of Vendors, the coverage under each insurance policy maintained by or
for the Associated Companies is in full force and effect and the
Associated Companies are in good standing under such policies.
Except as set forth in Schedule 3.1.24, none of Roche, any Subsidiary
---------------
or, to the knowledge of Vendors, any Associated Company, has received
notice of, or has any knowledge of, any fact, condition or circumstance
which might reasonably form the basis of any claim against them which
(a) is not fully covered by insurance (subject to standard deductibles)
maintained by or for them, or (b) would result in any increase in
insurance premiums payable by them.
3.1.25 Bank Accounts; Powers of Attorney--Schedule 3.1.25 sets forth (a) the
--------------------------------- ---------------
name of each Person with whom Roche or any Subsidiary maintains an
account or safety deposit box and the names of all Persons authorized to
draw thereon or to have
<PAGE>
-27-
access thereto and (b) the name of each Person holding a general or
special power of attorney from Roche or any Subsidiary and a summary of
the terms thereof.
3.1.26 Litigation--Except as disclosed in Schedule 3.1.26 (and up to the
---------- ---------------
amounts set forth on such Schedule), there are (a) no actions, claims,
lien act type proceedings, investigations, arbitrations or other
proceedings pending, or to the knowledge of Vendors, threatened against,
with respect to, or affecting in any manner, the Corporation, Roche or
the Subsidiaries, their properties or the Purchased Shares, (b) to the
knowledge of Vendors, notices of deficiency with respect to, or in any
manner affecting any of the Corporation, Roche, the Subsidiaries or
their properties, and (c) no outstanding judgments, orders, decrees,
writs, injunctions, decisions, rulings or awards against, with respect
to, or in any manner affecting any of the Corporation, Roche, the
Subsidiaries, their properties or the Purchased Shares. The maximum
liability of the Corporation, Roche or any Subsidiary for each such
matter identified on Schedule 3.1.26, after deduction for any related
---------------
insurance coverage, shall not exceed the reserve, if any, specifically
indicated in such schedule for such matter or, in the case of the
insured litigations identified therein, the aggregate reserve set forth
in such schedule, which reserves shall be taken on the Closing Balance
Sheet.
Except as disclosed in Schedule 3.1.26 (and up to the amounts set forth
---------------
on such Schedule), to the knowledge of Vendors there are (a) no actions,
claims, lien act type proceedings, investigations, arbitrations or other
proceedings pending or threatened against, with respect to, or affecting
in any manner, the Associated Companies or their properties, (b) notices
of deficiency with respect to, or in any manner affecting any of the
Associated Companies or their properties, and (c) no outstanding
judgments, orders, decrees, writs, injunctions, decisions, rulings or
awards against, with respect to, or in any manner affecting any of the
Associated Companies or their properties. To the knowledge of Vendors,
the maximum liability of the Associated Companies, for each such matter
identified on Schedule 3.1.26, after deduction for any related insurance
---------------
coverage, shall not exceed the reserve, if any, specifically indicated
in such schedule for such matter or, in the case of the insured
litigations identified therein, the aggregate reserve set forth in such
schedule, a proportion (based on GAAP) of which reserves shall be taken
on the Closing Balance Sheet.
Schedule 3.1.26 identifies which of the actions, claims, lien act type
---------------
proceedings, investigations, arbitrations or other proceedings therein
are not covered by insurance and briefly summarizes the name of the
insurer, policy limit and deductible for those that are covered by
insurance. None of such actions, claims, lien act type proceedings,
investigations, arbitrations or other proceedings which are covered by
insurance (a) are subject to reservation of rights by the insurer, or
(b) will exhaust the policy limits.
3.1.27 Tax Matters. Other than as set forth in Schedule 3.1.27:
----------- ---------------
(a) Computation, Preparation and Payment Each of the Corporation,
Roche, each Subsidiary and, to the knowledge of Vendors, each
Associated Company, has correctly computed all Taxes, prepared and
duly and timely
<PAGE>
-28-
filed all Tax returns, reports, elections, designations and any
other related filings required to be filed by it, has timely paid
all Taxes which are due and payable and has made provision in the
Financial Statements for the period ended November 30, 1998 for the
payment of all Taxes, based on an estimated Tax rate of forty
percent (40%), which are or may become payable for any taxation
year ending on or prior to November 30, 1998, and the Closing
Balance Sheet shall have adequate provision made as of the Audit
Date for the payment of all Taxes which are or may become payable
for any taxation year ending on or prior to the Audit Date. Each of
the Corporation, Roche, each Subsidiary and, to the knowledge of
Vendors, each Associated Company, has made adequate and timely
installments of Taxes required to be made.
(b) Accrued Taxes--With respect to any periods for which Tax returns
have not yet been required to be filed or for which Taxes are not
yet due and payable (including the period between the Audit Date
and the date hereof), each of the Corporation, Roche, each
Subsidiary and, to the knowledge of Vendors, each Associated
Company, has only incurred liabilities for Taxes in the ordinary
course of its business and in a manner and at a level consistent
with prior periods (other than as set out in the Reorganization).
All such Taxes, including for the period between November 30, 1998
and the Audit Date, will be reflected as a current liability on the
Closing Balance Sheet.
(c) Status of Assessments--All Tax returns of each of the Corporation,
Roche and each Subsidiary have been assessed through and including
each of the dates set forth in Schedule 3.1.27, and there are no
---------------
outstanding waivers of any limitation periods or agreements
providing for an extension of time for the filing of any Tax return
or the payment of any Tax by any of the Corporation, Roche and each
Subsidiary or, to the knowledge of Vendors, any of the Associated
Companies or any outstanding objections to any assessment or
reassessment of Taxes. Any deficiencies of each of the Corporation,
Roche and each Subsidiary and, to the knowledge of Vendors, each
Associated Company, proposed as a result of such assessments or
reassessments of the Tax returns through and including the dates
set forth in Schedule 3.1.27 have been paid and settled. The
---------------
maximum liability of Roche for the proposed reassessment of Revenue
Canada for the taxation years 1995, 1996 and 1997 will not exceed
the reserve therefor in the Closing Balance Sheet.
(d) Contingent Tax Liabilities--There are no contingent Tax liabilities
or any grounds that could prompt an assessment or reassessment of
any of the Corporation, Roche and each Subsidiary or, to the
knowledge of Vendors, each Associated Company, including, but
without limitation, aggressive treatment of income, expenses,
deductions, credits or other amounts in the filing of earlier or
current Tax returns, reports, elections, designations or any other
related filings, nor has any of the Corporation, Roche and each
Subsidiary or, to the knowledge of Vendors, any Associated Company,
received any indication from any taxation authorities that an
assessment or reassessment of Tax is proposed.
<PAGE>
-29-
(e) Withholdings--Each of the Corporation, Roche and each Subsidiary
and, to the knowledge of Vendors, each Associated Company, has
withheld from each payment made to any of it past and present
shareholders, directors, officers, employees, agents or other
Persons whether or not resident in Canada rendering services to
them the amount of all Taxes and other deductions required to be
withheld and has paid such amounts when due, in the form required
under the appropriate legislation, or made adequate provision for
the payment of such amounts to the proper receiving authorities.
(f) Collection and Remittance--Each of the Corporation, Roche and each
Subsidiary and, to the knowledge of Vendors, each Associated
Company, has collected from each receipt from any of the past and
present customers (or other Persons paying amounts to them) the
amount of all Taxes required to be collected and has paid such
Taxes (including, for greater certainty, any amount to be collected
and remitted under the Excise Tax Act (Canada) and any sales Tax
under any applicable provincial legislation) when due, in the form
required under the appropriate legislation or made adequate
provision for the payment of such amounts to the proper receiving
authorities.
(g) Assessments--None of any of the Corporation, Roche and any
Subsidiary or, to the knowledge of Vendors, any Associated Company,
is or will be subject to any assessments, reassessments, levies,
penalties or interest with respect to Taxes which will result in
any liability on their part in respect of any matter arising on or
prior to the date hereof, in excess of the amount to be provided
for in the Closing Balance Sheet.
(h) Jurisdictions of Taxation--Other than as set forth in Schedule
--------
3.1.27, none of the Corporation, Roche, any Subsidiary or, to the
------
knowledge of Vendors, any Associated Company, has been and is not
currently required to file any returns, reports, elections,
designations or other filings with any taxation authority located
in any jurisdiction outside Canada or outside the province of
Quebec. There are no pending, proposed or, to the knowledge of
Vendors, threatened claim by any Governmental Body in any
jurisdiction in which the Corporation, Roche, any Subsidiary or, to
the knowledge of Vendors, any Associated Company, do not pay Taxes
or file Tax returns to the effect that any of them is required to
pay Taxes or file Tax returns in such jurisdiction.
(i) Related Party--Transactions None of the Corporation, Roche, any
Subsidiary or, to the knowledge of Vendors, any Associated Company,
has acquired or had the use of property for proceeds greater than
the fair market value thereof from, or disposed of property for
proceeds less than the fair market value thereof to, or received or
performed services for other than the fair market value from or to,
or paid or received interest or any other amount other than at a
fair market rate (including any distribution of an asset
constituting an Excluded Asset) to or from, any Person with whom it
does not deal at arm's length within the meaning of the Income Tax
Act (Canada).
(j) Research and Development--All research and development investment
tax credits ("ITCs") were claimed by each of the Corporation, Roche
and each
<PAGE>
-30-
Subsidiary and, to the knowledge of Vendors, each Associated
Company, in accordance with the Income Tax Act (Canada) and any
applicable provincial legislation and each of the Corporation,
Roche and each Subsidiary and, to the knowledge of Vendors, each
Associated Company, satisfied, at all times, the relevant criteria
and conditions entitling it to such ITCs. All expenses claimed as
research and development expenses by each of the Corporation, Roche
and each Subsidiary and, to the knowledge of Vendors, each
Associated Company, qualified as such. All refunds of ITCs received
or receivable by each of the Corporation, Roche and each Subsidiary
and, to the knowledge of Vendors, each Associated Company, in any
financial year were claimed in accordance with the Income Tax Act
(Canada) and any applicable provincial legislation and each of the
Corporation, Roche and each Subsidiary and, to the knowledge of
Vendors, each Associated Company, satisfied at all times the
relevant criteria and conditions entitling it to claim a refund of
such ITCs.
(k) CCPC Status--Since their dates of incorporation or formation, each
of the Corporation, Roche and each Subsidiary and, to the knowledge
of Vendors, each Associated Company, have been "Canadian controlled
private corporations" within the meaning of the Income Tax Act
(Canada) (other than Subsidiaries and Associated Companies which
are not bodies corporate).
(l) Debt Forgiveness--Each of the Corporation, Roche, each Subsidiary
and, to the knowledge of Vendors, each Associated Company, has not
at any time benefited from a forgiveness of debt or entered into
any transaction or arrangement (including conversion of debt into
shares) which would have resulted in the application of sections 80
to 80.04 of the Income Tax Act (Canada).
(m) Elections--Other than as set forth on Schedule 3.1.27, each of the
---------------
Corporation, Roche, each Subsidiary and, to the knowledge of
Vendors, each Associated Company, has not during any of the last
three (3) Tax years made any elections or designations for purposes
of the Income Tax Act (Canada) including, for greater certainty,
any election under section 83 or 85 of the Income Tax Act (Canada)
or any relevant provincial taxing statute, or for purposes of any
administrative ruling or notices or administrative practices
pursuant to the Income Tax Act (Canada) or any such statute.
(n) Residence--No Vendor or other shareholder whose shares are to be
redeemed or purchased pursuant to the Reorganization, other than
Louis Desjardins, is a non-resident of Canada within the meaning of
the Income Tax Act (Canada).
(o) GST and QST--Roche is a registrant within the meaning of Part IX of
the Excise Tax Act (Canada) and Chapter VIII of An Act Respecting
the Quebec Sales Tax and its registration numbers are as follows:
Federal -- R134915792
Provincial -- 1015403175
<PAGE>
-31-
(p) Reorganization--Other than as set forth in Schedule 1.1.46 and as
---------------
will be reflected on the Closing Balance Sheet, the Reorganization
will not result in any present or future Tax liability, reduction
of Tax losses or other Tax attributes to the Corporation, Roche,
any Subsidiary or Associated Company.
3.1.28 Licenses--Each of Roche, each Subsidiary and, to the knowledge of
--------
Vendors, each Associated Company, has, and is in full compliance with
and entitled to all of the benefits under, all Licenses necessary or
required to conduct its business as presently conducted, and each
License has been validly issued and is in full force and effect. Roche,
each Subsidiary and, to the knowledge of Vendors, each Associated
Company, has not received notice of any event inquiry, investigation or
proceeding threatening the validity of such Licenses. Other than as set
forth in Schedule 3.1.28, there are no Licenses required to conduct
---------------
the business of Roche and the Subsidiaries as presently conducted or
the ownership of their properties.
No fact, condition or circumstance has occurred to create, and the
execution of this Agreement and the transfer of the Purchased Shares
hereunder shall not create, any right to terminate, cancel, modify,
amend, revoke or expire any such License.
3.1.29 Employee Matters--Each of Roche, each Subsidiary and, to the knowledge
----------------
of Vendors, each Associated Company, has complied with all applicable
Laws relating to employment matters, including, without limitation, any
provisions thereof relating to wages, hours and collective bargaining.
Schedule 3.1.29 is a true and complete list of all written employment,
---------------
service, union, agency, consulting, termination and severance agreements
entered into by Roche and each Subsidiary with or for any or all of its
present directors, officers, Employees and agents. Except as set out in
the agreements therein referred to, there are no directors, officers,
Employees or agents of Roche or any Subsidiary who are entitled to a
specified notice of termination or fixed term of employment or who
cannot be dismissed upon such notice as is required by Law. No
directors, officers or Employees of Roche or any Subsidiary are entitled
to any payment as a result of the transactions contemplated by this
Agreement.
Except as set out in Schedule 3.1.29, none of Roche or any Subsidiary is
---------------
and has never been a party to any collective bargaining agreement. No
application for certification of a collective bargaining unit with
respect to employees of Roche or any Subsidiary has been instituted or
is pending or, to the knowledge of Vendors, threatened.
There has not been, in the two (2) prior years to the date hereof, and
there is not presently pending or existing any strike, slowdown,
picketing, work stoppage, labour arbitration or proceeding in respect of
the grievance of any Employee or any past employee or other labour
dispute against or affecting Roche or any Subsidiary, or to the
knowledge of Vendors, threatened against Roche or any Subsidiary. To the
knowledge of Vendors, no fact, condition or circumstance exists which
could provide the basis for any work stoppage or other labour dispute.
<PAGE>
-32-
There is no lock-out of any Employee by Roche or any Subsidiary, nor is
any such action contemplated by Roche or any Subsidiary.
3.1.30 Practice of the Engineering Profession--Except for non-material
--------------------------------------
breaches, no Employee or past employee of Roche or any of the
Subsidiaries has, in connection with his or her employment with Roche or
any of the Subsidiaries, carried on the practice of the engineering
profession in contravention of the Engineers Act, R.S.Q. Ch. I-9, the
Professional Code, R.S.Q. Ch. C-26 or any other Law of any jurisdiction.
All such Employees who perform any acts which would constitute the
practice of the engineering profession as defined in section 3 of the
Engineers Act, R.S.Q. Ch. I-9 hold a valid license, and are in good
standing, with the Quebec Ordre des ingenieurs du Quebec.
3.1.31 Benefit Plans--Except as set forth in Schedule 3.1.31, none of Roche or
------------- ---------------
any Subsidiary is a party to any Benefit Plans. True, complete and
up-to-date copies of all Benefit Plans of Roche and the Subsidiaries
have been provided to Purchaser.
There are no outstanding defaults or violations by Roche or any
Subsidiary of any obligation required to be performed by them in
connection with any Benefit Plan (which, for greater certainty, includes
the Management Pension Plan for the purposes of this Section). There are
no actions, claims, investigations, arbitrations, assessments or other
proceedings which, to the knowledge of Vendors, are pending or
threatened with respect to the Benefit Plans (other than routine claims
for benefits) against Roche or any Subsidiary, the funding agent or the
fund of such Benefit Plan. No proceeding has been initiated to terminate
any Benefit Plan.
All Benefit Plans which are required to be registered are duly
registered and in good standing with all applicable Governmental Bodies,
including Revenue Canada. All Benefit Plans which are funded plans
(including, for greater certainty, the Management Pension Plan) are
funded in accordance with their rules and all Laws and are fully funded
on both a going-concern and a termination basis in accordance with the
methods and assumptions utilized in the most recent actuarial report
therefor.
Except as set forth in Schedule 3.1.31, no Benefit Plan which is not a
---------------
pension plan provides post-retirement benefits.
3.1.32 Environmental Matters.
---------------------
(a) Compliance with Environmental Laws and Permits--Roche, the
Subsidiaries and, to the knowledge of Vendors, the Associated
Companies, and their respective business, operations and assets,
(i) are and have at all times been conducted and used in compliance
with all Environmental Laws (including any Environmental Permits)
in Quebec, Canada and in all other applicable jurisdictions with
environmental regulatory jurisdiction over them and (ii) have
obtained all Environmental Permits which are required in order to
carry on their respective businesses and operations as presently
conducted, and to own or use their respective assets, under all
Environmental Laws. No proceeding is pending or, to the knowledge
of Vendors, threatened which
<PAGE>
-33-
will review, make subject to limitations or conditions, suspend,
revoke, terminate or limit any Environmental Permits of Roche, the
Subsidiaries or, to the knowledge of Vendors, the Associated
Companies. All Environmental Permits of Roche, the Subsidiaries
and, to the knowledge of Vendors, the Associated Companies, are
listed in Schedule 3.1.28. None of Roche, the Subsidiaries or, to
---------------
the knowledge of Vendors, the Associated Companies, or any of their
directors or officers has ever (A) been convicted of an offense for
non-compliance with any Environmental Law, (B) been fined or
otherwise penalized for non-compliance with an Environmental Law,
or (C) settled any prosecution for non-compliance with an
Environmental Law short of conviction.
(b) Environmental Liabilities--None of Roche, any Subsidiary or, to the
knowledge of Vendors, any Associated Company, has incurred or is
incurring any liability pursuant to any Environmental Law,
including liability arising as a result of Dealing in Hazardous
Substances. There is no past or present fact, condition or
circumstance relating to Roche, the Subsidiaries or, to the
knowledge of Vendors, the Associated Companies, and their
respective business, operations and assets that could result in
any liability under any Environmental Law in force on the date
hereof.
(c) Disclosure Regarding Properties--None of the immoveable and real
property (including the Immoveables) currently or formerly owned
by, used by, leased to or from, or managed, controlled or occupied
by Roche, any Subsidiary or, to the knowledge of Vendors, any
Associated Company, (i) has ever been used by any Person as a
landfill site, a waste disposal site, or as a location for the
disposal or storage of Hazardous Substances or waste (ii) has ever
had any urea formaldehyde foam insulation, asbestos, PCB waste,
CFCs, radioactive substances or above ground or underground storage
tanks or vessels, active or abandoned, located thereon or
thereunder, or (iii) has ever been subject to the Release of a
Hazardous Substance. To the knowledge of Vendors, there have been
no Releases of Hazardous Substances on property adjacent to
immoveable and real property (including the Immoveables) currently
or formerly owned by, used by, leased to or from, or managed or
controlled by Roche, any Subsidiary or any Associated Company which
have migrated or may migrate to such properties. To the knowledge
of Vendors, none of such properties is identified by any
Governmental Body for investigation pursuant to any Environmental
Laws.
(d) Disclosure Regarding Waste Disposal--All Hazardous Substances
arising from the conduct or use of the business, operations and
assets sent off site for disposal, recycling, treatment or other
handling have been done in compliance with all Environmental Laws
and no such Hazardous Substances have been sent outside of Canada.
3.1.33 Compliance with Laws--Each of the Corporation, Roche, each Subsidiary
--------------------
and, to the knowledge of Vendors, each Associated Company, has complied
and continues to comply with all Laws.
<PAGE>
-34-
3.1.34 No Change--Since June 30, 1998, there has not been any material adverse
---------
change in the business, operations, properties, prospects or condition
of Roche, any Subsidiary or, to the knowledge of Vendors, any Associated
Company or any event, condition or contingency that is likely to result
in such a material adverse change.
3.1.35 No Unusual Transactions Except as set forth in this Agreement or in the
-----------------------
Schedules, including Schedule 3.1.35, since June 30, 1998 (except in
---------------
the case of paragraph (t) below), the Corporation, Roche, each
Subsidiary and, to the knowledge of Vendors, each Associated Company,
has conducted its business in the ordinary course and, without limiting
the generality of the foregoing, has not:
(a) made or assumed any commitment, obligation or liability which is
outside the usual and ordinary course of its business;
(b) ceased to operate its properties and to carry on its Business as
heretofore carried on or failed to maintain all of its properties,
rights and assets consistently with past practices or failed to do
any and all things reasonably necessary and within its power to
retain and preserve the goodwill of its business;
(c) sold or otherwise in any way alienated or disposed of its assets
other than in the ordinary course of business and in a manner
consistent with past practices;
(d) split, combined or reclassified any of its shares or ownership
interests, or redeemed, retired, repurchased or otherwise acquired
shares in its capital stock or other corporate security or
ownership interests, or reserved, declared, made or paid any
dividend on its shares or other ownership interests, or made any
other distributions or appropriations of profits or capital;
(e) issued, sold or otherwise disposed of any shares of its capital
stock or any warrants, rights, bonds, debentures, notes or other
corporate security;
(f) discharged any secured or unsecured obligation or liability
(whether accrued, absolute, contingent or otherwise), other than
obligations and liabilities discharged in the ordinary course of
business and in a manner consistent with past practices;
(g) waived or canceled any material claim, account receivable or right
outside the ordinary course of business, or made any gift;
(h) made any change in the rate or form of compensation or remuneration
payable or to become payable to any of the shareholders, directors,
officers, employees or agents of the Corporation, Roche or any
Subsidiary other in the ordinary course of business;
(i) made any change in its accounting principles and practices as
utilized in the preparation of
<PAGE>
-35-
the Financial Statements or to be utilized in the preparation of
the Closing Balance Sheet (except as agreed to by Purchaser), or
granted to any customer any special allowance or discount, or
changed its pricing, credit or payment policies, other than in the
ordinary course of business;
(j) made any capital expenditure other than minor expenditures in the
ordinary course of business;
(k) made any loan or advance, or assumed, guaranteed or otherwise
became liable with respect to the liabilities or obligations of any
Person;
(l) suffered any extraordinary losses whether or not covered by
insurance;
(m) modified its constating instruments, by-laws or capital structure;
(n) suffered any material shortage or any cessation or interruption of
inventory shipments, supplies or ordinary services;
(o) removed any director, auditor or accountant or terminated any
officer;
(p) purchased or otherwise acquired any corporate security or
proprietary, participatory or profit interest in any Person;
(q) incurred any indebtedness (including off-balance sheet) other than
to trade creditors in the ordinary course of business and in a
manner consistent with past practices;
(r) modified or changed its business organization or its relationship
with its suppliers, customers and others having business relations
with it;
(s) taken any accounting write-offs or reserves outside of its normal
accounting practices and consistent with past levels and practices;
(t) allowed the Assumed Debt to exceed the Canadian dollar equivalent
of Two Million US dollars (US $2,000,000) on the Audit Date or any
time since the Audit Date and up to the date hereof had the Assumed
Debt been calculated as of any date during such period; or
(u) authorized, agreed or otherwise committed to any of the foregoing.
Without limitation to the above, during the period between the Audit
Date and the date hereof, the operations of Roche, the Subsidiaries and,
to the knowledge of Vendors, the Associated Companies, have been
conducted only in the ordinary course and no extraordinary item,
material liability or reserve has arisen, been identified or taken
during such period which would have the effect of reducing the net book
value of Roche by more than Twenty Five Thousand US dollars (US $25,000)
other than non-material liabilities or operational losses during such
period in the ordinary course.
3.1.36 Pembroke Project--Without limitation to the obligation of
----------------
indemnification in Section 12.1.3, none of the Corporation, Roche, the
Subsidiaries or the
<PAGE>
-36-
Associated Companies have assets or liabilities associated with the
Pembroke Project, except disputed matters with Noront Steel (1981)
Limited, Crawford and Murray Limited and Groupe Sani-Mobile Inc., the
liablity for which shall not exceed Three Hundred and Eight Thousand
dollars (Cdn $308,000) and for which an appropriate reserve will be
taken on the Closing Balance Sheet to the extent not resolved by the
date thereof. Without limitation to the foregoing, all claims of
Laframboise against Roche and RBW Group have been fully settled and
released.
3.1.37 Budgets, Etc.--Vendors reasonably believe that the budgets and financial
-------------
projections delivered to Purchaser were based upon assumptions that
Vendors believed at the time such budgets and financial projections were
made, and continue to believe, to be reasonable in all material respects
including with respect to forecast earnings and backlog. There is no
fact as of the date hereof (other than matters of a general economic or
political nature which do not affect Roche or the Subsidiaries uniquely)
known to Vendors which materially adversely affects or in the future may
(so far as Vendors can foresee as of the date hereof) materially
adversely affect the business, operations, affairs, condition (financial
or otherwise), properties, assets of Roche and the Subsidiaries taken as
a whole which has not been set forth in the Schedules hereto.
3.1.38 Backlog Volume and Margins--Schedule 3.1.38 is a true and correct
-------------------------- ---------------
listing of the uncompleted portion of the contracted backlog of the
Business as of June 30, 1998 (the "Contracted Backlog"). As of June 30,
1998, to the actual knowledge of Vendors (without any deemed knowledge
of Vendors otherwise set forth in Section 1.4) there is no unrecognized
negative gross margin on any of the Contracted Backlog on those jobs
where no work has been performed by Roche or the Subsidiaries. Gross
margin will be calculated using Roche's job cost projections consistent
with Roche's past practices.
3.1.39 Reorganization--Had the Reorganization and the transactions contemplated
--------------
herein occurred on the date hereof, the redemptions and purchases for
cancellation, the amalgamation of Roche and NewCo 1 and the declaration
of dividends referred to in the Reorganization would have met all
"solvency" tests in the Companies Act (Quebec) and the Canada Business
Corporations Act applicable to such transactions. Assuming such solvency
tests continue to be met on the Closing Date, each of the steps in the
Reorganization prior to step 20 will be duly and validly carried out,
and in compliance with all constating documents of the corporations who
are parties thereto, all Laws and all shareholders' agreements
applicable thereto.
3.1.40 No Broker--None of Vendors, the Corporation, Roche, any Subsidiary, or
---------
any of their respective directors, officers, employees or agents has
employed or incurred any liability to any broker, finder or agent for
any brokerage fees, finder's fees, commissions or other amounts with
respect to this Agreement or any of the transactions contemplated
hereby.
3.1.41 Stand Alone--Except as set forth in Schedule 3.1.41, no part of the
----------- ---------------
Business of Roche, the Subsidiaries or, to the knowledge of Vendors, the
Associated Companies, is conducted through any Person other than Roche,
the Subsidiaries
<PAGE>
-37-
and the Associated Companies. Except as set forth in Schedule 3.1.41,
---------------
none of Vendors, the Corporation, Roche or Persons related thereto or
the directors, officers or managers thereof or, to the knowledge of
Vendors, any Associated Company, or Persons related thereto has any
interest in any property, immoveable or real, movable or personal,
tangible or intangible, used in or pertaining to the business of Roche,
the Subsidiaries and the Associated Companies except that Metroplan owns
the immoveable located at 3075, chemin des Quatre-Bourgeois, Ste-Foy,
Quebec.
3.1.42 Full Disclosure--No covenant, agreement, obligation, representation or
---------------
warranty given by Vendors contained in this Agreement, the Schedules
prepared by them, and any certificates or other documents referred to
herein or furnished by them to Purchaser pursuant hereto contains any
untrue statement of a material fact or omits to state a material fact
necessary to make such covenant, agreement, obligation, representation,
warranty, Schedule, certificate or other document not misleading.
3.2 Representations and Warranties of Purchaser. Purchaser represents and
-------------------------------------------
warrants to Vendors as follows and acknowledges that Vendors are relying
upon such representations and warranties in connection with the sale by
Vendors of the Purchased Shares and that Vendors would not have entered
into this Agreement without such representations and warranties:
3.2.1 Due Incorporation--Each of Purchaser and ITX is duly incorporated and
-----------------
validly existing under the Laws of its jurisdiction of incorporation.
3.2.2 Due Authorization--Each of Purchaser and ITX has the necessary corporate
-----------------
power and authority to execute this Agreement and the Ancillary
Agreements to be entered into by it and to perform its obligations
hereunder and thereunder. The execution of this Agreement and the
Ancillary Agreements by Purchaser and ITX, as the case may be, and the
performance by them of their obligations hereunder and thereunder have
been duly authorized by all necessary corporate action on their part.
Such execution and performance by them do not require any action or
consent of, any registration with, or notification to, any Person, or
any action or consent under any Laws to which Purchaser or ITX are
subject, other than the filing by ITX within thirty (30) days of the
Closing Date of a Notice of Investment under the Investment Canada Act.
3.2.3 Enforceability--This Agreement, and each of the Ancillary Agreements
--------------
will, upon execution thereof, constitute a legal, valid and binding
obligation of Purchaser and ITX, as the case may be, enforceable against
them in accordance with its terms subject to applicable bankruptcy,
insolvency, reorganization and similar Laws affecting the enforcement of
creditors rights generally and to general equitable principles.
3.2.4 No Conflict--The execution of this Agreement and the Ancillary
-----------
Agreements, the consummation of the transactions contemplated herein and
therein, the performance and compliance by Purchaser and ITX of its
obligations hereunder and thereunder, as the case may be, do not:
<PAGE>
-38-
(a) violate, contravene or breach, or constitute a default under, the
constating instruments or by-laws of Purchaser or ITX; or
(b) violate, contravene or breach any Laws.
3.2.5 No Broker--None of Purchaser, ITX or any of their directors, officers,
---------
employees or agents has employed or incurred any liability to any
broker, finder or agent for any brokerage fees, finder's fees,
commissions or other amounts with respect to this Agreement or any of
the transactions contemplated hereby.
3.2.6 Full Disclosure--No covenant, agreement, obligation, representation or
---------------
warranty given by Purchaser contained in this Agreement, the Schedules
prepared by it, and any certificates or other documents referred to
herein or furnished by it to Vendors pursuant hereto contains any untrue
statement of a material fact or omits to state a material fact necessary
to make such covenant, agreement, obligation, representation, warranty,
Schedule, certificate or other document not misleading.
3.3 Exceptions to Solidary Representations. Notwithstanding the introductory
--------------------------------------
paragraph of Section 3.1, the following representations and warranties are given
by each Vendor jointly and not solidarily, with respect to itself and not with
respect to any other Vendor: Section 3.1.1 with respect, only, to Vendors which
are bodies corporate; Section 3.1.3 (other than with respect to actions,
consents, registrations or notifications associated with the Corporation, Roche,
any Subsidiary or any Associated Company); Section 3.1.4; Section 3.1.6(a) with
respect to Vendors which are bodies corporate only; Section 3.1.7 with respect,
only, to the title of the Purchased Shares; and Section 3.1.27(n).
ARTICLE IV
COVENANTS OF VENDORS
--------------------
4.1 Conduct of Business. Vendors shall cause each of the Corporation,
-------------------
Roche and each of the Subsidiaries, from the date hereof up to the Closing Date
to conduct its business in the ordinary course and in a manner consistent with
past practices and, without limiting the generality of the foregoing, Vendors
shall cause the Corporation, Roche and each of the Subsidiaries, not to, without
the prior written consent of Purchaser (which consent will not be unreasonably
withheld) or unless part of the transactions in the Reorganization:
4.1.1 make, assume or discharge any commitment, obligation (capital or
otherwise) or liability which is outside the usual and ordinary course
of its business in excess of Two Hundred Fifty Thousand dollars (Cdn
$250,000) in the cumulative aggregate;
4.1.2 split, combine or reclassify any of its shares, or redeem, retire,
repurchase or otherwise acquire shares in its capital stock or other
corporate security, or reserve, declare, make or pay any dividend
(except as specifically contemplated in this Agreement), or make any
other distributions or appropriations of profits or capital;
4.1.3 issue, sell or otherwise dispose of any shares of its capital stock or
any warrants, rights, bonds, debentures, notes or other corporate
security;
<PAGE>
-39-
4.1.4 modify its constating instruments, by-laws or capital structure;
4.1.5 purchase or otherwise acquire any corporate security or proprietary,
participatory or profit interest in any Person (other than joint
ventures pursuant to projects) and other than as disclosed in the
Schedules hereto;
4.1.6 conduct any meeting of shareholders (other than meetings considering
this Agreement) or directors of the Corporation, Roche or any of the
Subsidiaries, or any committee of any of the foregoing Persons (or
solicit or take any action by written consent in lieu of any such
meeting) without giving at least seventy-two (72) hours prior notice of
and providing an agenda or copy of any proposed action (in English) with
respect to such meeting(s) or actions, to the Persons specified in
Section 14.5.2 hereof, and without allowing a representative of
Purchaser to attend (at least telephonically) such meeting(s) and to
participate fully in all discussions at such meeting(s); and
4.1.7 authorize, agree or otherwise commit to any of the foregoing.
Vendors shall ensure that Roche does not vote its interests in the
Associated Companies in a manner inconsistent with the items set forth in this
Section 4.1, it being understood, however, that as Roche does not control the
Associated Companies, Vendors cannot guarantee that the Associated Companies
will not take such actions.
4.2 [Intentionally left blank.]
4.3 [Intentionally left blank.]
4.4 Closing. If each condition set forth at Section 11.2 is (a) performed or
-------
complied with, or (b) waived by Vendors, and if this Agreement is not terminated
in accordance with Section 11.1, then Vendors shall on the Closing Date:
4.4.1 take, and shall cause New Roche to take, all actions as may be
reasonably required by legal counsel for Purchaser to duly and validly
transfer the Purchased Shares to Purchaser, including, without
limitation, to cause New Roche (a) to make the necessary inscriptions in
the registers of New Roche in order to record the transfer of the
Purchased Shares in favour of Purchaser, and (b) to deliver to
Purchaser, upon the cancellation of the share certificates representing
the Purchased Shares, a new certificate in its name representing the
Purchased Shares;
4.4.2 deliver to Purchaser at the place of Closing certificates for the
Purchased Shares, duly endorsed for transfer to Purchaser;
4.4.3 if required by Purchaser, cause all or any of the directors, officers
and auditors of the Corporation, Roche or any Subsidiary (a) to resign
from the Corporation, Roche or the Subsidiaries, as the case may be,
effective on the Closing Date, and (b) to deliver to the Corporation,
Roche or such Subsidiaries, as the case may be, at the place of Closing,
resignations and releases;
<PAGE>
-40-
4.4.4 deliver to Purchaser at the place of Closing certified copies of
resolutions of the shareholders and directors of the Corporation, Roche
and the Subsidiaries (in form and substance reasonably satisfactory to
Purchaser's legal counsel) (a) authorizing and approving the sale,
assignment and transfer of the Purchased Shares from Vendors to
Purchaser and their registration in the name of Purchaser, (b) accepting
the resignations effective on the Closing Date of the directors,
officers and auditors referred to in Section 4.4.3, and (c) appointing
such new directors, officers and auditors of the Corporation, Roche and
the Subsidiaries as may be nominated by Purchaser;
4.4.5 execute the Non-Competition Agreements substantially in the forms of
Exhibit "B", as applicable to each Vendor as the Parties have agreed;
-----------
4.4.6 deliver to Purchaser a favourable opinion of Heenan Blaikie Aubut
substantially in the form of Exhibit "C";
-----------
4.4.7 deliver releases of claims and radiations of Liens on assets of New
Roche and Subsidiaries identified in Schedule 3.1.14 under "Status" as
---------------
"Acquittance to be Obtained" or undertakings from the holders of such
Liens to release them promptly after Closing in form and substance
reasonably satisfactory to Purchaser;
4.4.8 deliver copies of full and final settlements between RBW and Laframboise
settling all matters at issue in their current litigation and with
respect to the work performed by Laframboise on the Pembroke Project;
4.4.9 deliver a copy of an unsigned release of Roche by each of London
Guarantee Insurance Company and Axa Boreal Insurance Inc. with respect
to the Pembroke Project other than with respect to the outstanding claim
of Noront Steel (1981) Limited, which release shall be satisfactory in
form and substance to Purchaser and ITX in their entire discretion and
which shall be executed by such bonding companies upon receipt of the
funds referred to in Section 2.3.1;
4.4.10 deliver a copy of a mutual full and final release of Bennett & Wright
and Roche with respect to the Pembroke Project;
4.4.11 [Intentionally left blank];
4.4.12 deliver (in trust or escrow) to Purchaser satisfactory evidence of all
releases of security on the Purchased Shares, a description of which
security being set forth in Schedule 4.4.12;
---------------
4.4.13 deliver to Purchaser a copy of the agreement between Vendors relating to
their rights and obligations between themselves after Closing and the
distribution of the Purchase Price in the form of the draft agreement
given to Purchaser on the date hereof; and
4.4.14 deliver to Purchaser an assignment and assumption agreement between
Vendors and Roche relating to the liabilities of Pembroke not reflected
on the Closing Balance Sheet.
<PAGE>
-41-
4.5 Year 2000 Cooperation. Vendors will, in their capacities as employees
---------------------
of Roche and the Subsidiaries, continue to use their best efforts after the
Closing Date (at no expense to Vendors), and will cooperate with ITX in its
similar efforts, to ensure that all information systems owned by or used by
Roche and the Subsidiaries will be year 2000 compliant in a timely fashion.
ARTICLE V
POST-CLOSING TAX MATTERS
------------------------
5.1 Tax Periods Ending on or Before the Closing Date. Vendors shall prepare,
------------------------------------------------
or cause to be prepared, and file, or cause to be filed, all Tax returns for the
Corporation, Roche and the Subsidiaries for all periods ending on or prior to
the Audit Date which are filed after the Audit Date. Vendors shall permit
Purchaser to review and comment on each such Tax return described in the
preceding sentence prior to filing. Vendors shall reimburse Purchaser for:
5.1.1 Taxes of the Corporation, Roche and the Subsidiaries with respect to
such periods within fifteen (15) days after payment by the Corporation,
Roche and the Subsidiaries of such Taxes, and
5.1.2 the loss of Tax losses (other than Pembroke Losses) as a result of
increased income or smaller Tax losses within fifteen (15) days of such
determination,
to the extent such are not reflected in the reserve for Taxes (excluding any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) shown on the face of the Closing Balance Sheet.
5.2 Cooperation on Tax Matters. Each Party shall cooperate fully, as and to
--------------------------
the extent reasonably requested by the other Party, in connection with the
filing of Tax returns pursuant to this Article and any audit, litigation or
other proceeding with respect to Taxes. Such cooperation shall include the
retention and (upon the other Party's request) the provision of Books and
Records and information which are reasonably relevant to any such audit,
litigation or other proceeding and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder. Purchaser shall:
5.2.1 retain all Books and Records with respect to Tax matters pertinent to
the Corporation, Roche and the Subsidiaries relating to any taxable
period beginning before the Closing Date until the expiration of the
statute of limitations (and, to the extent notified by either Party, any
extensions thereof) of the respective taxable periods, and to abide by
all record retention agreements entered into with any taxing authority;
and
5.2.2 to give Vendors reasonable written notice prior to transferring,
destroying or discarding any such books and records and, if Vendors so
request, Purchaser shall allow Vendors to take possession of such Books
and Records.
Upon request of a Party, the Parties shall use their best efforts to
obtain any certificate or other document from any Governmental Body or any other
Person as may be
<PAGE>
-42-
necessary to mitigate, reduce or eliminate any Tax that could be imposed
(including, but not limited to, with respect to the transactions contemplated
hereby).
5.3 Disputes. Any disputes associated with the matters referred to in this
--------
Article V shall be resolved in accordance with the procedures of the three (3)
last paragraphs of Section 2.7, mutatis mutandis.
ARTICLE VI
PEMBROKE
--------
6.1 Pembroke Carry Back Losses. Pursuant to steps 14 and 18 of the
--------------------------
Reorganization, immediately prior to the Closing, NewCo1 and New Roche will
repurchase preferred shares held by Vendors for an aggregate purchase price
equal to the amount of Federal and Provincial income taxes ("Income Taxes") to
be refunded to New Roche when the losses associated with the Pembroke Project
("Pembroke Losses") are carried-back by New Roche against Income Taxes paid by
Roche for its 1995 taxation year. For greater certainty, the Pembroke Losses
will be carried back first to the 1995 taxation year prior to the carry-back of
non-Pembroke Losses.
The promissory notes which constitute payment of such purchase prices
shall be payable within ten (10) days of the date such Income Tax refunds are
received by New Roche from the relevant Taxing authorities. In the event either
of the provincial or federal revenue authorities issues such Income Tax refund
prior to the other, the promissory notes shall be payable in part in the
aggregate amount of the refund so received, with the balance payable when the
other authority issues the refund.
In addition, if the operations of Roche in the Tax year ended December 31,
1998 (the "1998 Year") generated taxable income (excluding the effects of the
Pembroke Project), Purchaser shall pay Vendors, as an increase in the Purchase
Price, an amount equal to the amount of Income Taxes saved by Roche in the 1998
Year as a result of the application of the Pembroke Losses. Such payment shall
be made three (3) months after the Closing Date.
For the purposes hereof, the Pembroke Losses shall be calculated, and
segregated from the other losses of Roche, in accordance with GAAP. At the time
of the final delivery of the Closing Balance Sheet, Vendors shall deliver to
Purchaser a statement indicating how such Pembroke Losses were calculated.
For purposes of this Article VI, the expression "Pembroke Losses" shall
include available federal and provincial non-capital losses of BCPTA which
became available to Roche in its 1998 Year to be carried forward or backward as
a result of the wind-up of BCPTA during the taxation year of Roche ending
December 31, 1997 (the "BCPTA Losses"); provided, however, that the amount of
the Pembroke Losses available for purposes of Section 6.2 hereof including
Pembroke Losses available to reduce income generated by the Reorganization in
any taxation year shall be reduced by an amount equal to the BCPTA Losses
federally or provincially, as the case may be. Such Pembroke Losses equal to the
BCPTA Losses shall be available for the sole benefit of Purchaser and Roche.
Similarly, the expression "Pembroke Losses" shall include non-capital losses of
Roche not
<PAGE>
-43-
otherwise considered Pembroke Losses incurred in the period between January 1,
1999 and the Closing Date, provided, however, that an identical amount of
Pembroke Losses shall not be available in Section 6.2 and shall be for the full
benefit of Purchaser and Roche.
In the event of any inconsistency between the terms hereof and the terms
of the documents executed pursuant to the Reorganization, the terms hereof shall
prevail.
6.2 Pembroke Carry Forward Losses. Notwithstanding Article II, Purchaser
-----------------------------
shall pay to Vendors, as an increase to the Purchase Price, an amount equal to
the Income Taxes saved by Roche in taxation years ending after the 1998 Year as
a result of the reduction of taxable income for such subsequent years
attributable to the use of the Pembroke Losses. For greater certainty, no amount
shall be payable by Purchaser pursuant to this Section 6.2 where the Pembroke
Losses are applied in a taxation year subsequent to the 1998 Year to reduce
income generated by the Reorganization.
For the purposes of the application of this Section, unused losses of
Roche shall be carried forward commencing with the oldest years for which losses
are available. If any year's available losses are composed both of losses
associated with the Pembroke Project and losses associated with the other
operations of Roche, the Vendors shall receive under this Section an amount
equal to that proportion of the Income Taxes saved by Roche in the subsequent
taxation year that the unused Pembroke Losses for such year are to the aggregate
of all unused losses for such year. Such Purchase Price increase shall be
payable by Purchaser to Vendors sixty (60) days after the end of the taxation
year during which Roche benefited from a reduction in Income Taxes as a result
of using the Pembroke Losses.
6.3 Disputes. Any disputes associated with the calculations to be made
--------
pursuant to Sections 6.1 and 6.2 shall be resolved in accordance with the
procedures of the three (3) last paragraphs of Section 2.7, mutatis mutandis.
6.4 Adjustments for Reassessments. In the event any of the taxation years
-----------------------------
covered by Sections 6.1 and 6.2 are, after application of either of such
Sections, reassessed by the relevant taxation authorities and it is finally
determined that the taxable income or losses are different than that used to
calculate the amount owing to Vendors thereunder, either Vendors shall pay to
New Roche (in the case of the promissory notes referred to in Section 6.1) or
Purchaser (in the other cases), or New Roche (in the case of the promissory
notes referred to in Section 6.1) or Purchaser (in the other cases) shall pay to
Vendors the difference between the amount actually paid to Vendors with respect
to such taxation year and the amount, if any, that should have been paid to
Vendors for such year had the Parties originally calculated the entitlement
therefor using the results finally determined by the relevant taxation
authorities.
Unless Purchaser is otherwise indemnified therefore pursuant to Article
XII, Vendors shall also reimburse Roche for any interest and penalties
associated with such final reassessments for taxation years ending prior to the
Closing Date, and shall pay Purchaser any interest and penalties associated with
such final reassessment for taxation years ending after the Closing Date to the
extent that such reassessments involve the disallowance of any of the losses
associated with the Pembroke Project.
<PAGE>
-44-
6.5 Effect of Reassessment on Pembroke Losses. Notwithstanding any other
-----------------------------------------
provisions in this Agreement, no amount shall be payable to Vendors pursuant to
this Article VI or any other provision of this Agreement for the use of all or a
portion of the Pembroke Losses by Roche or any sucescessor corporation in
circumstances where, after the Closing Date, any portion of the Pembroke Losses
are carried back or otherwise utilized by Roche or any successor, to offset,
reduce or mitigate any Income Tax liability for taxation years ending on or
prior to the Closing Date resulting from a reassessment or proposed reassessment
of Income Taxes for said years (a "Prior Year Offset"). In such circumstances,
losses being carried back or otherwise utilized by Roche or any successor to
mitigate a liability for Income Taxes for a taxation year ending on or prior to
the Closing Date shall be deemed to be Pembroke Losses to the extent of the
amount of Pembroke Losses at that time and any excess shall be deemed to be
losses other than Pembroke Losses.
If Pembroke Losses are used for a Prior Year Offset, Purchaser shall not
have any right to claim indemnification from Vendors pursuant to this Agreement,
including pursuant to Article XII, for such Income Tax liability to the extent
the Pembroke Losses are used for the Prior Year Offset.
Nothing in this Section should be construed as reducing or mitigating the
amount that can be claimed by Purchaser under this Agreement for interest and
penalties, as the case may be, payable as a result of an assessment or
reassessment for Taxes or for Taxes which are not offset by a carry back of the
Pembroke Losses in the manner set out hereinabove.
6.6 Insurance Recoveries. Purchaser shall cause Roche to pay to Vendors, as
--------------------
and when received by Roche, the net after Tax amount of any recoveries from
insurance companies providing errors and omissions insurance coverage (but not
CGL or construction wrap-up insurance) to Roche as a result of damages suffered
by Roche from the Pembroke Project to the extent that such recoveries are not
booked on the Closing Balance Sheet. Vendors will consult with Purchaser prior
to finalizing their claim on Roche's errors and omissions policies with respect
to the Pembroke Project, and will allow Purchaser to review any such claim prior
to submittal within five (5) days of receipt thereof. Vendors will accept a
settlement of such claim only to the extent it does not require Roche to pay any
deductible, expense, or similar amount on account of such claim.
ARTICLE VII
MANAGEMENT PENSION PLAN SURPLUS
-------------------------------
7.1 Termination of Plan. As soon as practicable after the Closing Date,
-------------------
Purchaser shall cause New Roche to commence the total termination, to be
effective as of the Closing Date or such other date as required by regulatory
authorities having jurisdiction, of the Management Pension Plan. As soon as
practicable after the Closing Date, Purchaser shall cause New Roche to take such
actions, deliver such documents and seek such regulatory approvals as may be
required to effect a distribution of the assets of the Management Pension Plan,
including, without limiting the generality of the foregoing, a draft agreement
(within the meaning of section 230.2 of the Quebec Supplemental Pension Plans
Act) for the distribution of the Management Pension Plan Surplus in the
proportions stipulated by
<PAGE>
-45-
Vendors. Purchaser shall cause to be reported to Vendors all material
developments in relation to the determination and distribution of the Management
Pension Plan Surplus as soon as practicable after such developments occur and
Vendors shall be entitled to provide input with regard to all material decisions
concerning the Management Pension Plan Surplus. Following the distribution of
the Management Pension Plan Surplus, Purchaser shall pay, as an increase to the
Purchase Price, by certified cheque or wire transfer of immediately available
funds into the Collection Account, for the purpose of distribution to Vendors as
agreed among themselves, an amount equal to the net after-tax proceeds of any
such Management Pension Plan Surplus so distributed to New Roche (less any
expenses associated with the termination of the Management Pension Plan and the
distribution of assets therefrom which are borne by New Roche or Purchaser), the
whole subject to applicable Laws.
For the purposes hereof, the "net after-tax" proceeds of the Management
Pension Plan Surplus shall mean a percentage of such Surplus equal to the
percentage that New Roche would be allowed to keep after having paid Tax on the
Surplus at the federal and provincial Tax rates then applicable to New Roche,
regardless of whether New Roche was in a taxable position in the year of the
distribution.
ARTICLE VIII
COVENANTS OF PURCHASER
----------------------
8.1 Closing. If each condition set forth at Section 11.1 is (a) performed or
-------
complied with, or (b) waived by Purchaser, and if this Agreement is not
terminated in accordance with Section 11.2, then Purchaser shall on the Closing
Date:
8.1.1 deliver to Vendors' Collection Account a certified cheque, bank draft or
wire transfer in the amount determined pursuant to Section 2.2;
8.1.2 cause the Capital Contributions to be paid as set forth in Section 2.3;
8.1.3 execute, and cause ITX to execute, the Non-Competition Agreements
substantially in the forms of Exhibit "B"; and
-----------
8.1.4 deliver to Vendors a favourable opinion of Stikeman, Elliott substantially
in the form of Exhibit "D".
-----------
8.2 Right of First Refusal. If at any time after the Closing Date until the
----------------------
second anniversary of the latest date the Second EBIT Payment, if any, is to be
made, Roche or any one hundred percent (100%) owned Subsidiary (the "Offeror")
desires to sell, transfer or otherwise alienate:
(a) any assets (including all of the shares of a Subsidiary or an
Associated Company) which comprise a self-contained business segment,
or
(b) any assets with an aggregate value of One Hundred Thousand dollars
(Cdn $100,000) or more and which do not comprise a self-contained
business segment
<PAGE>
-46-
(the "Optioned Assets"), other than sales in the normal course of business and
inter-company transfers, to any third Person acting at arm's length to the
Offeror (whether the Offeror received an offer from the Person, made an offer to
the Person or proposes to make an offer to the Person in each case the
"Original Offer") in one (1) transaction or series of related transactions, then
Purchaser shall ensure that the Offeror will first offer to sell (the "Offer")
such Optioned Assets to all Vendors in accordance with the procedures set forth
in this Section 8.2.
The Offer shall be sent to Vendors and shall be open for acceptance by any
or all Vendors for thirty (30) days (the "Offer Period") from the receipt of the
Offer by Vendors. The Offer shall specify the essential terms of the Original
Offer, including a description of the Optioned Assets and the price.
Vendors shall be obliged by delivering notice to Purchaser within, but not
after the expiry of, the Offer Period at their sole option to either (a) accept
the Offer, or (b) reject the Offer, in which case the Offer Period shall expire
upon such rejection.
If any Vendors do not accept the Offer within the Offer Period, then such
Vendors shall be deemed to have rejected the Offer.
If any Vendors have accepted the Offer, then Purchaser shall cause the
Offeror to sell to one (1) corporate vehicle designated by such Vendors
("VendorCo"), and such Vendors shall cause VendorCo to purchase from the
Offeror, the Optioned Assets upon the same terms and conditions as specified in
the Offer, and the non-competition covenants of such Vendors who own, at the
time of such purchase, VendorCo set forth in their Non-Competition Agreements
shall not apply to them with respect to the part of the Business associated with
such Optioned Assets.
If Vendors have or are deemed to have rejected the Offer, then the Offeror
shall be free for a period of six (6) months from the end of the Offer Period to
sell all or part of the Optioned Assets to any Person on terms not more
favourable than as provided in the Offer. If no sale takes place within such six
(6) months period, then the Offeror shall not sell, transfer or otherwise
alienate the Optioned Assets without again following and being subject to this
Section 8.2.
For greater certainty, the right of first refusal herein does not apply to
sales of any of the Purchased Shares or of all or substantially all of the
assets of Roche. Upon the decision of management of Purchaser or ITX to sell any
of the Purchased Shares or all or substantially all of the assets of Roche any
time prior to the second anniversary of the date the Second EBIT Payment, if
any, is required to be made, Purchaser or ITX shall notify Vendors in writing of
such decision.
Notwithstanding the foregoing, any proposed sales of Optioned Assets shall
be subject to any pre-existing rights of third Persons with respect to such
Optioned Assets, including rights of first refusal under shareholders
agreements.
8.3 Warranty Claims. Following the Closing, Purchaser shall cause Roche and
---------------
the Subsidiaries, consistent with past practices of Roche and the Subsidiaries,
to perform all required warranty work with respect to services performed by them
on or prior to the
<PAGE>
-47-
Closing. Purchaser's agreement under this Section 8.3 to cause Roche and the
Subsidiaries to perform required warranty work may not be construed in any way
as an assumption of such liability by Purchaser or to create any claim against
Purchaser by any customer as a third-party beneficiary under this covenant.
Any warranty work so performed which is outside of normal and usual
warranty work levels and which involves aggregate expenditures of more than
Fifty Thousand dollars (Cdn $50,000) shall be (a) borne by Roche and the
Subsidiaries up to the value of the warrantee reserve reflected in the Closing
Balance Sheet, and (b) thereafter shall be at Vendors' sole cost and expense.
Vendors shall reimburse Roche or the Subsidiaries for all fully burdened costs
of such warranty work above the warranty reserve, which reimbursement shall be
made by Vendors to Roche (or the Subsidiary) within ten (10) calendar days of
receipt by Vendors of the invoice therefor by payment in cash by Vendors, by
certified cheque, bank draft or wire transfer.
ARTICLE IX
EMPLOYEES
---------
9.1 Continued Employment of the Salaried Employees. The terms and conditions
----------------------------------------------
of employment of all salaried and other non-unionized Employees employed by
Roche and the Subsidiaries on the Closing Date shall be substantially the same
as their terms and conditions of employment on the date hereof with the
exception, however, that the Management Pension Plan will be terminated in
accordance with Article VII. Nothing in this Article IX shall be construed as a
guarantee of employment.
ARTICLE X
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
------------------------------------------
10.1 Survival of Representations and Warranties of Vendors. The representations
-----------------------------------------------------
and warranties of Vendors contained in this Agreement, in the Schedules or in
any certificate or other document delivered or given pursuant to this Agreement
are given and are effective as of the date hereof notwithstanding that the
Closing Date occurs after such date and shall survive the completion of the
transactions contemplated by this Agreement, and notwithstanding such completion
or any investigation made by or on behalf of Purchaser or ITX or any knowledge
by Purchaser or ITX of any incorrectness in, or breach of, such representations
or warranties, shall continue in full force and effect for the benefit of
Purchaser for a period ending one (1) year after the date the Second EBIT
Payment is actually made or, if no Second EBIT Payment is required to be made or
the Second EBIT Payment is not being made because of an unresolved dispute among
the Parties, then one (1) year after the date the Second EBIT Payment last could
have been made had it been payable or had there been no dispute among the
Parties, (a) except for any representation and warranty relating to Tax matters
which shall survive until ninety (90) days after the last date on which the
relevant Tax authority is entitled to assess or reassess with respect to such
Tax matters, (b) except for any representation and warranty in respect of which
a claim based on fraud is made, and except for the representations and
warranties contained in Section 3.1.7 with respect to number and title to the
Purchased Shares and the other shares and interests therein, which in each such
case shall be unlimited as to duration.
<PAGE>
-48-
10.2 Survival of Representations and Warranties of Purchaser. The
-------------------------------------------------------
representations and warranties of Purchaser contained in this Agreement or in
any certificate or other document delivered or given pursuant to this Agreement
are given and are effective as of the date hereof notwithstanding that the
Closing Date occurs after such date and shall survive the completion of the
transactions contemplated by this Agreement, and notwithstanding such completion
or any investigation made by or on behalf of Vendors or any knowledge by Vendors
of any incorrectness in, or breach of, such representations or warranties, shall
continue in full force and effect for the benefit of Vendors for a period ending
one (1) year after the date the Second Payment is actually made or, if no Second
EBIT Payment is required to be made or the Second EBIT Payment is not being made
because of an unresolved dispute among the Parties, then one (1) year after the
date the Second EBIT Payment last could have been made had it been payable or
had there been no dispute among the Parties; except for any representation and
warranty in respect of which a claim based on fraud is made which shall be
unlimited as to duration.
ARTICLE XI
CONDITIONS OF CLOSING
---------------------
11.1 Conditions for the Benefit of Purchaser. The purchase and sale of the
---------------------------------------
Purchased Shares in accordance with the terms of this Agreement are subject
to the following conditions, each of which is hereby declared to be for the
exclusive benefit of Purchaser. Each condition is to be performed or complied
with in all respects at or prior to the Closing Date:
11.1.1 Truth of Representations and Warranties of Vendors--The representations
--------------------------------------------------
and warranties of Vendors contained in Sections 3.1.1 to 3.1.5, 3.1.6(a)
and 3.1.6(d), and 3.1.7 to 3.1.9 shall have been accurate in all
respects as of the date of this Agreement and shall be true and correct
in all respects as of the Closing Date as though made on such date.
11.1.2 Performance of Covenants by Vendors--All of the covenants, obligations
-----------------------------------
and agreements that Vendors are required to perform or to comply with
pursuant to Sections 4.1 and 4.4 at or prior to the Closing Date
(considered individually and collectively), shall have been performed or
complied with in all material respects in the case of Section 4.1 at or
prior to the Closing Date and in all respects in the case of Section
4.4.
11.1.3 Litigation--There shall be no actions, claims, investigations,
----------
arbitrations or other proceedings (whether or not on behalf of Vendors,
the Corporation, Roche or any Subsidiary) pending or threatened to
restrain, enjoin or invalidate any transaction contemplated by this
Agreement.
If any of the conditions of this Section 11.1 has not been satisfied as
of the Closing Date, or if Closing has not occurred by March 31, 1999 for
reasons other than Purchaser's failure to comply with its obligations under this
Agreement, Purchaser may, at its option, either (a) terminate this Agreement by
notice to Vendors at any time prior to the Closing without further formality, or
(b) proceed with the Closing, without prejudice, in either case, to Purchaser's
other rights, recourses and remedies.
<PAGE>
-49-
11.2 Conditions for the Benefit of Vendors. The purchase and sale of the
-------------------------------------
Purchased Shares in accordance with the terms of this Agreement are subject to
the following conditions, each of which is hereby declared to be for the
exclusive benefit of Vendors. Each condition is to be performed or complied with
in all respects at or prior to the Closing Date (or as otherwise specified):
11.2.1 Truth of representations and Warranties of Purchaser--The
----------------------------------------------------
representations and warranties of Purchaser contained in this Agreement
or in any certificate or other document delivered or given pursuant to
this Agreement (considered individually and collectively), shall have
been accurate in all aspects as of the date of this Agreement, and shall
be true and correct in all respects as of the Closing Date as though
made on such date.
11.2.2 Performance of Covenants by Purchaser--All of the covenants, obligations
-------------------------------------
and agreements that Purchaser is required to perform or to comply with
pursuant to this Agreement at or prior to the Closing Date (considered
individually and collectively), shall have been performed or complied
with in all respects at or prior to the Closing Date.
11.2.3 Litigation--There shall be no actions, claims, investigations,
----------
arbitrations or other proceedings (whether or not on behalf of Purchaser
or ITX) pending or threatened to restrain, enjoin or invalidate any
transaction contemplated by this Agreement.
11.2.4 Promissory Notes--On February 5, 1999, ITX shall issue promissory notes
----------------
to the Persons and in the amounts identified in Sections 2.2 and 2.3
hereof, together with interest thereon at the rates, and otherwise on
the terms, specified therein.
If any of the conditions of this Section 11.2 has not been satisfied as
of the Closing Date or if Closing has not occurred by March 31, 1999 for reasons
other than Vendors' failure to comply with its obligations under this Agreement,
Vendors may, at their option, either (a) terminate this Agreement by notice to
Purchaser at any time prior to Closing without further formality, or (b) proceed
with the Closing, without prejudice, in either case, to Vendors' other rights,
recourses and remedies.
ARTICLE XII
INDEMNIFICATION
---------------
12.1 Indemnification by Vendors. Vendors shall solidarily, without the
--------------------------
benefit of division and discussion, (except as set forth in Section 3.3)
indemnify and hold Purchaser harmless from and against any claims, demands,
actions, causes of action, judgments, damages, losses (which shall include any
diminution in value), liabilities, costs or expenses (including, without
limitation, interest, penalties and reasonable attorneys', and experts' fees and
disbursements) (collectively, the "Losses") which may be made against Purchaser,
the Corporation, Roche, the Subsidiaries or the Associated Companies or which
any of them may suffer or incur as a result of, arising out of or relating to:
12.1.1 any violation, contravention or breach of any covenant, agreement or
obligation of Vendors under or pursuant to this Agreement;
<PAGE>
-50-
12.1.2 any incorrectness in, or breach of, any representation or warranty made
by Vendors under or pursuant to this Agreement, the Schedules or in any
certificate or other document delivered or given pursuant to this
Agreement, whether or not Purchaser relied thereon or had knowledge
thereof;
12.1.3 any liabilities or obligations of any nature whatsoever associated with
the Pembroke Project, whether arising before, on or after the Closing
Date, to the extent not booked on the Closing Balance Sheet;
12.1.4 any liabilities or obligations of the Corporation, Roche or the
Subsidiaries as a result of the Reorganization, including for Taxes or
as a result of any transaction not being in compliance with Law,
shareholders' agreements or constating documents, and any undischarged
guarantees on behalf of the Excluded Assets (other than, in the case of
Metroplan, any liabilities or obligations solely related to Roche's
lease obligations to Metroplan);
12.1.5 the failure of the Corporation, Roche or any Subsidiary to obtain all
consents for the change of control of Roche and the Subsidiaries, or for
the consummation of the Reorganization, under the Contracts (other than
consents which could not be obtained by Law or by the terms of a
Contract as a result of the non-Canadian resident ownership of
Purchaser);
12.1.6 any amount required to be paid by Roche or Purchaser in connection with
the distribution of the Management Pension Plan Surplus pursuant to
Article VII or into the Management Pension Plan pursuant to sections
228-229 of the Quebec Supplemental Pension Plans Act; and
12.1.7 any withholding or other Taxes for which Roche, the Corporation or
Purchaser is liable as a result of redemptions or purchases of shares
from non-residents.
12.2 Indemnification by Purchaser. Purchaser shall indemnify and hold Vendors
----------------------------
harmless from and against any Losses which may be made against Vendors or which
Vendors may suffer or incur as a result of, arising out of or relating to:
12.2.1 any violation, contravention or breach of any covenant, agreement or
obligation of Purchaser under or pursuant to this Agreement; or
12.2.2 any incorrectness in, or breach of, any representation or warranty made
by Purchaser under or pursuant to this Agreement, the Schedules or in
any certificate or other document delivered or given pursuant to this
Agreement, whether or not Vendors relied thereon or had knowledge
thereof.
12.3 Obligation to Reimburse. Subject to the provisions of Section 12.4,
-----------------------
the Party providing indemnification hereunder (the "Indemnifying Party") shall
reimburse to the Party being indemnified hereunder (the "Indemnified Party") the
amount of any Losses suffered or incurred by the Indemnified Party, upon the
date the Indemnifying Party acknowledges its obligation to reimburse the
Indemnified Party the amount of such Losses or, if disputed, upon the date of
any final judgment with respect thereto of a court or arbitral body of final
jurisdiction for which no further appeal is available. For greater certainty,
nothing in this
<PAGE>
-51-
Section 12.3 shall be construed as creating a separate cause of action in
addition to those set forth in this Article XII.
12.4 Notification. Promptly upon obtaining knowledge thereof, the
------------
Indemnified Party shall notify the Indemnifying Party of any cause which the
Indemnified Party has determined has given or could give rise to indemnification
under this Article XII. The omission so to notify the Indemnifying Party shall
not relieve the Indemnifying Party from any duty to indemnify and hold harmless
which otherwise might exist with respect to such cause unless (and only to that
extent) the omission to notify materially prejudices the ability of the
Indemnifying Party to exercise its right to defend provided in this Article XII.
12.5 Defense of Third-Party Claim. If any legal proceeding shall be
----------------------------
instituted or any claim or demand shall be asserted by a third party against the
Indemnified Party including, if the Indemnified Party is Purchaser, any legal
proceeding, claim or demand against any of the Corporation, Roche or any
Subsidiary, with respect to a matter for which an Indemnified Party is seeking
indemnification hereunder (each a "Third-Party Claim"), then the Indemnifying
Party shall have the right, after receipt of the Indemnified Party's notice
under Section 12.4 and upon giving notice to the Indemnified Party within thirty
(30) calendar days of such receipt, to defend the Third-Party Claim at its own
cost and expense with counsel of its own selection, provided that:
12.5.1 the Indemnified Party shall at all times have the right to fully
participate in the defense at its own expense;
12.5.2 the Third-Party Claim seeks only monetary damages and does not seek any
injunctive or other relief against the Indemnified Party, the
Corporation, Roche or any Subsidiary;
12.5.3 the Indemnifying Party unconditionally acknowledges in writing its
obligation to indemnify and hold the Indemnified Party harmless with
respect to the Third-Party Claim; and
12.5.4 legal counsel chosen by the Indemnifying Party is satisfactory to the
Indemnified Party, acting reasonably.
Where the Indemnifying Party is Vendors, Purchaser shall cause the
Corporation, Roche and the Subsidiaries to make available to Vendors for their
inspection the Books and Records of the Corporation, Roche or any of the
Subsidiaries and to provide to Vendors such copies of documentation as may be
under the possession or control the Corporation, Roche and any of the
Subsidiaries which may reasonably be required by Vendors in order to contest the
Third Party Claim.
Amounts payable by the Indemnifying Party pursuant to a Third-Party
Claim shall be paid in accordance with the terms of the settlement or, the
judgment, as applicable, but in any event prior to the expiry of any delay for a
judgment to become executory.
Notwithstanding the foregoing, in the event of a Third-Party Claim by
any taxation authorities which challenges the Tax treatment of any aspect of the
Reorganization, Vendors shall have the obligation to defend such Third-Party
Claim. Purchaser may
<PAGE>
-52-
participate in the defense of such Third-Party Claim in collaboration with
Vendors and Vendors shall fully cooperate with Purchaser in respect of such
collaboration.
12.6 No Compromise. The Indemnifying Party shall not be permitted to
-------------
compromise and settle or to cause a compromise and settlement of any Third-Party
Claim, without the prior written consent of the Indemnified Party, unless:
12.6.1 the terms of the compromise and settlement require only the payment of
money and do not require the Indemnified Party, the Corporation, Roche
or any Subsidiary to admit any wrongdoing or take or refrain from taking
any action; and
12.6.2 the Indemnified Party receives, as part of the compromise and
settlement, a legally binding and enforceable unconditional satisfaction
or release, which is in form and substance satisfactory to the
Indemnified Party, acting reasonably, from any and all obligations or
liabilities it, the Corporation, Roche or any Subsidiary, as the case
may be, may have with respect to the Third-Party Claim.
12.7 Failure to Defend. If the Indemnifying Party fails:
-----------------
12.7.1 within thirty (30) calendar days from receipt of the notice of a Third-
Party Claim to give notice of its intention to defend the Third-Party
Claim in accordance with Section 12.5; or
12.7.2 to comply at any time with any of Sections 12.5.3 to 12.5.4,
then the Indemnifying Party shall be deemed to have waived its right to defend
the Third Party Claim and the Indemnified Party shall have the right (but not
the obligation) to undertake or, as the case may be, to cause the Corporation,
Roche or any Subsidiary, as the case may be, to undertake the defense of the
Third-Party Claim and compromise and settle the Third-Party Claim on behalf, for
the account and at the risk and expense of the Indemnifying Party.
12.8 Limitation on Indemnification. The obligations of indemnification set
-----------------------------
out in Sections 12.1 and 12.2 shall:
12.8.1 survive the Closing for the period prescribed by Law, except the
obligation of indemnification arising from any incorrectness in, or
breach of, any representation or warranty made by the Indemnifying Party
which shall be subject to the limitations regarding survival of
representations and warranties set forth in Section 10.1 or 10.2, as the
case may be;
12.8.2 survive the expiry of the periods for which indemnification is available
hereunder if the notification of a claim under Section 12.4 is given
prior to the expiry of the applicable period;
12.8.3 with respect to the obligation of indemnification in Sections 12.1.2 and
12.2.2, not be applicable for a single Loss unless such Loss exceeds
Five Thousand US dollars (US $5,000), except in cases of fraud or
willful misconduct, in which cases the Indemnifying Party shall be
responsible for the full amount of the Losses;
<PAGE>
-53-
12.8.4 with respect to the obligation of indemnification in Sections 12.1.2 and
12.2.2, not be applicable until the Losses in the aggregate, exceed Four
Hundred Thousand US dollars (US $400,000), except in cases of fraud or
willful misconduct, in which cases the Indemnifying Party shall be
responsible for the full amount of the Losses;
12.8.5 not apply to the extent that the Losses claimed have been reimbursed
through insurance to the Indemnified Party including, if the Indemnified
Party is Purchaser, to the Corporation, Roche or any Subsidiary;
12.8.6 with respect to each Vendor, not exceed the proportion of the aggregate
Purchase Price paid or credited plus the Capital Contributions which is
equal to the proportion set forth beside such Vendor's name in Exhibit
-------
"A" under "% of Indemnification Cap", except in cases of fraud or
---
willful misconduct, in which cases the Indemnifying Party shall be
responsible for the full amount of the Losses; and
12.8.7 not apply to the extent that the Indemnified Party has received an
adjustment of the Purchase Price in accordance with Article II as a
result of such Losses or a payment pursuant to Section 5.1.
12.9 Compensation. If either Party has made a demand upon the other pursuant
------------
to this Article XII or otherwise under this Agreement, the Party making the
demand shall be entitled to have such demand satisfied in whole or in part by
compensation (deduction and set off) against amounts otherwise payable by it to
the other Party pursuant to the transactions contemplated by this Agreement,
including, without limitation, against any Purchase Price Increase, Purchase
Price Reduction, First EBIT Payment or Second EBIT Payment; provided, however,
that any Purchase Price Reduction or payment by Vendors of Net Uncollected
Receivables under Section 2.8 may only be set off against any First EBIT Payment
or Second EBIT Payment, and provided further that no compensation may be made
against any amounts payable pursuant to Articles VI or VII. The Party against
whom such compensation has operated shall be entitled to continue to contest the
validity of such demand. The Party claiming to apply such compensation shall be
entitled to withhold payment otherwise required by it hereunder until the Losses
associated with such claim have been finally resolved by agreement among the
Parties or by a court or arbiter of final jurisdiction, for which no further
appeal is available.
12.10 No Indemnification if Adjustments. For greater certainty, Purchaser
---------------------------------
shall not be entitled to seek indemnification from Vendors under this Article
XII to the extent it has actually received payment or effected compensation
under the provisions of this Agreement for the full amount of the Losses with
respect to matters which are the subject of such indemnification, except that
any Purchase Price Reduction or payments of Net Uncollected Receivables pursuant
to Section 2.8 shall be effected exclusively by compensation against any First
EBIT Payment and Second EBIT Payment.
12.11 Purchase Price Adjustment. Any indemnification actually made by a
-------------------------
Party to the other under this Article XII or under the assignment and assumption
agreement referred to in Section 4.4.14 shall be considered a reduction or an
increase to the Purchase Price, as the case may be.
<PAGE>
-54-
12.12 Sole Remedies. The provisions of this Article XII and any other
-------------
recourses specifically referred to in this Agreement shall be the sole remedies
of the Parties with respect to the matters herein, subject, however, to the
right of any Party to seek specific performance or any other extraordinary
remedy in a court of competent jurisdiction for breaches which give rise to such
extraordinary remedies.
12.13 Absence of Bad Faith. The Indemnified Party shall not act in bad faith
--------------------
with respect to any Losses it is claiming against the Indemnifying Party such
that the amount of the Losses is greater than it would have been absent such bad
faith.
ARTICLE XIII
CLOSING
------------
13.1 Date, Time and Place of Closing. The Closing shall take place at the
-------------------------------
offices of Roche, three (3) business days after funding of ITX's proposed
bridge loan but in any event no later than March 31, 1999 (the "Closing Date"),
at 10:00 a.m., or at such place, on such other date and/or at such other time as
may be agreed between the Parties. Funding of such bridge financing is not a
condition to Closing.
ARTICLE XIV
MISCELLANEOUS
-------------
14.1 Purchaser Free to Organize Affairs. Subject to the other provisions of
----------------------------------
this Agreement (including restrictions on ITX charges during the earn-out
periods), Purchaser shall be permitted to organize the affairs of Roche and the
Subsidiaries as it deems best, including by changing the Tax year end thereof to
match the Tax year end of ITX. Purchaser shall act at all times until the expiry
of the period covered by the Second EBIT Payment in good faith in order to avoid
any adverse effects on EBIT levels until the expiry of such period which would
not have occurred except for the Purchaser's ownership of and direction over
Roche. Vendors shall have a period of twenty (20) calendar days from the date of
their knowledge of any action of Purchaser or ITX with respect to Roche or any
Subsidiary to object to the same on the basis that such actions will adversely
affect the EBIT levels, failing which they shall be deemed to have consented to
such actions. Subject to the foregoing, any Party may, at any time, refer any
approvals which could so effect EBIT to Mr. Anthony DeLuca and Mr. Michel Labbe,
or their respective successors, for their prior approval.
If such individuals are unable to agree on such matters within twenty
(20) calendar days after it has been referred to them, the matter shall be
referred to an independent business valuator (who is neither an accountant nor
an attorney by principal profession) agreed to by the Parties (or, if the
Parties are unable to agree on such Person within ten (10) days of the end of
such (20) twenty-day period, a business valuator in the Montreal office of
PricewaterhouseCoopers) who shall finally determine whether and how such matter
should be acted upon, balancing the interests of both Parties to maximize EBIT
and the maximization of long-term profitability of Roche and the Subsidiaries.
The fees and expenses of any such business valuator shall be shared equally by
the Parties.
<PAGE>
-55-
14.2 Announcements. Any press release, public announcement or publicity with
-------------
respect to the transactions contemplated in this Agreement shall be made only
with the prior written consent of Purchaser and Vendors. The Parties shall keep
the terms of this Agreement strictly confidential and make no disclosure thereof
to any Person except (a) the Parties' counsel and advisors, (b) as required in
connection with the consummation of the transactions contemplated hereby, (c) as
determined by a court of competent jurisdiction, (d) as required to prosecute or
defend an action, (e) as required by Law including by applicable securities
authorities such as the Securities and Exchange Commission or self regulatory
organization such as a stock exchange, or (f) with the prior agreement of all
Parties.
14.3 Further Assurances. Each Party upon the request of the other,
------------------
whether at or after the Closing, shall do, execute, acknowledge and deliver or
cause to be done, executed, acknowledged or delivered all such further acts,
deeds, documents, assignments, transfers, conveyances, powers of attorney and
assurances as may be reasonably necessary or desirable to effect complete
consummation of the transactions contemplated by this Agreement.
14.4 Successors in Interest. This Agreement and the provisions hereof
----------------------
shall enure to the benefit of and be binding upon the Parties and their
respective successors and assigns. Vendors may not assign this Agreement or any
of their rights and obligations hereunder without the prior written consent of
Purchaser. Purchaser may assign this Agreement and all of Purchaser's rights and
obligations hereunder to an Affiliate of Purchaser, provided however, that such
assignment shall not relieve Purchaser of its obligations hereunder.
14.5 Notices. Any notice, consent, authorization, direction or other
-------
communication required or permitted to be given hereunder shall be in writing
and shall be delivered either by personal delivery or by telecopier and
addressed as follows:
14.5.1 in the case of any of Vendors, to it, him or her at:
Roche Ltee, Groupe Conseil
3075 chemin des Quatre-Bourgeois
Sainte-Foy, Quebec
G1W 4Y4
Attention: Mr. Michel Labbe
---------------------------
Telecopier: (418) 654-9698
<PAGE>
-56-
with a copy to:
Heenan Blaikie Aubut
900, boulevard Rene-Levesque East
Bureau 600
Quebec, Quebec
G1R 4T4
Attention: Mr. Guy Plante
-------------------------
Telecopier: (418) 524-1717
14.5.2 in the case of Purchaser or ITX, to it at:
The IT Group, Inc.
3347 Michelson Drive
Suite 200
Irvine, California
92612-2692
Attention: Mr. Drew E. Park, Jr.
---------------------------------
Telecopier: (949) 474-8309 / (949) 859-8729
and to:
The IT Group, Inc.
2790 Mosside Boulevard
Monroeville, Pennsylvania
15146-2792
Attention: General Counsel
--------------------------
Telecopier: (412) 858-3997
with a copy to:
Stikeman, Elliott
1155 Rene-Levesque Blvd. West
Suite 4000
Montreal, Quebec
H3B 3V2
Attention: Mr. John W. Leopold
------------------------------
Telecopier: (514) 397-3222
Any notice, consent, authorization, direction or other communication
delivered as aforesaid shall be deemed to have been effectively delivered and
received, if sent by
<PAGE>
-57-
telecopier, on the calendar day next following receipt of such transmission or,
if delivered, to have been delivered and received on the date of such delivery,
provided, however, that if such date is not a business day in the jurisdiction
of receipt then it shall be deemed to have been delivered and received on the
business day next following such delivery. Any Party may change its address for
service by notice delivered as aforesaid.
14.6 Representative of Vendors. Without limitation to Section 14.5, Purchaser
-------------------------
and ITX shall be entitled to deal and communicate with Mr. Michel Labbe or his
replacement as the representative of all Vendors. Consents, directions to,
notices to or claims made by Purchaser or ITX to Mr. Michel Labbe or his
replacement on behalf of Vendors, unless expressly indicated otherwise, shall
constitute consents, directions to, notices to or claims made against all or any
of Vendors and vice versa.
Each of the Vendors hereby grants Mr. Michel Labbe, or his successor
appointed by Vendors who are holders of a majority of the Purchased Shares, his
or her respective, irrevocable power of attorney (coupled with an interest, but
limited in duration and scope as noted in this sentence) to act as each such
Vendor's attorney in fact (with full power of substitution) solely with respect
to all matters under this Agreement.
Mr. Michel Labbe shall act as agent for service with respect to legal
processes served on any or all of the Vendors pursuant to this Agreement and the
transactions contemplated hereby, without prejudice, however, to the right of
Purchaser to serve a Vendor directly. Vendors may collectively notify Purchaser
from time to time as to the replacement of Michel Labbe as agent for service
with another Person.
14.7 Expenses. Subject to Section 2.7, all costs, expenses and fees
--------
(including without limitation, legal counsel and accounting fees and
disbursements) in connection with the preparation, execution and consummation of
this Agreement and the transactions contemplated hereunder:
14.7.1 incurred by Vendors, the Corporation, Roche or the Subsidiaries, shall
be borne and paid by Vendors, and
14.7.2 incurred by Purchaser or ITX shall be borne and paid by Purchaser or
ITX.
14.8 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which when so executed shall be deemed an original, and
such counterparts together shall constitute one and the same instrument.
14.9 Severability. Any Article, Section or other subdivision of this
------------
Agreement or any other provision of this Agreement which is, or becomes,
illegal, invalid or unenforceable shall be severed herefrom and shall be
ineffective to the extent of such illegality, invalidity or unenforceability and
shall not affect or impair the remaining provisions hereof, which provisions
shall (a) be severed from any illegal, invalid or unenforceable Article, Section
or other subdivision of this Agreement or any other provision of this Agreement,
and (b) otherwise remain in full force and effect.
<PAGE>
-58-
14.10 Governing Law. This Agreement shall be governed by and interpreted and
-------------
construed in accordance with the internal Laws presently in force in the
Province of Quebec.
14.11 Arbitration. All disputes or differences arising out of or related
-----------
in any way to this Agreement except for those for which other dispute resolution
mechanisms have been specifically provided for shall be submitted to the
decision of three (3) arbitrators, one (1) each to be chosen by each Party (the
Purchaser and ITX being considered as one (1) Party for the purposes hereof),
and the third to be chosen by the two (2) previously selected arbitrators. The
arbitration proceedings shall commence by the issuance by a Party to the other
Party of a demand to arbitrate which shall include the nomination by the Party
issuing the demand of an arbitrator. The other Party shall have ten (10) days
from receipt of the demand to appoint an arbitrator, failing which such
arbitrator shall, at the request of Party issuing the demand, be appointed by
application to the courts of the Province of Ontario having competent
jurisdiction therefor.
The arbitration proceedings shall take place in Toronto, Ontario in
English. Other than as specified herein, the rules of the Arbitrations Act, 1991
of Ontario shall apply.
The applicant shall submit its case in writing within thirty (30) days
after the appointment of the arbitration panel, and the respondent shall submit
his reply in writing within thirty (30) days after receipt of such case. The
arbitrators shall apply the rules of evidence and Law applicable in courts
sitting in the Province of Ontario. The arbitration panel shall be empowered to
award provisional (including injunctive) relief upon proper application, but a
Party shall be entitled, pending the appointment of all such arbitrators and the
convening of such arbitration, to seek such relief from any court otherwise
having competent jurisdiction over such matter.
The arbitration panel shall have the discretion to order a pre-hearing
exchange of information by the Parties, including, without limitation,
production of requested documents, exchanging of summaries of testimony of
proposed witnesses and examination by deposition of Parties.
The arbitration panel shall render a written, reasoned decision on each
issue before it, in which decision it shall also state how each arbitrator
voted. Any decision by the arbitration panel shall be binding upon the Parties
and may be entered as a final judgment in any court having jurisdiction.
The cost of any arbitration proceeding shall be borne by the Parties as
the arbitration panel shall determine if the Parties have not otherwise agreed.
14.12 Entire Agreement. This Agreement, including the Schedules, constitutes
----------------
the entire Agreement between the Parties pertaining to the subject matter
hereof, and supersedes all prior agreements, understandings, negotiations and
discussions of the Parties pertaining to the subject matter hereof including,
without limitation, the Term Sheet executed by ITX and the Corporation on
September 2, 1998.
14.13 Inconsistency. This Agreement shall override the Schedules to the extent
-------------
of any inconsistency.
<PAGE>
-59-
14.14 Gender. Any reference in this Agreement to any gender shall include
------
both genders and the neutral, and words herein importing the singular number
only shall include the plural and vice versa.
14.15 Currency. All dollar amounts mentioned in this Agreement or in the
--------
Schedules shall be in Canadian funds except as otherwise expressly indicated.
14.16 Headings; Preamble. The headings in this Agreement and the preamble
------------------
to this Agreement are inserted for convenience of reference only and shall not
affect the interpretation hereof.
14.17 Amendment. No amendment shall be binding unless expressly provided
---------
in an instrument duly executed by the Parties.
14.18 Waiver. No waiver, whether by conduct or otherwise, of any of the
------
provisions of this Agreement shall be deemed to constitute a waiver of any other
provisions (whether or not similar) nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided in an instrument duly
executed by the Parties.
14.19 Language of Agreement. The parties acknowledge that it is their express
---------------------
wish that this Agreement and all related documents be prepared in English. Les
parties ont demande que cette convention et tous documents y afferents soient
rediges en langue anglaise.
14.20 No Third-Party Beneficiaries. This Agreement and any agreement entered
----------------------------
into pursuant to this Agreement shall not benefit or create any right or cause
of action in or on behalf of any Person (including, without limitation, any of
the Employees) other than the Parties or the parties to such other agreements,
and no Person (including, without limitation, any of the Employees), other than
the Parties or the parties to such other agreements, shall be entitled to rely
on the provisions hereof or any agreement entered into pursuant hereto in any
action, proceeding, hearing or other forum.
14.21 Waiver of Take-Over Bid Provisions. Each Party waives, and will not
----------------------------------
raise in any claim against any other Party, the application of Part XVII of the
Canada Business Corporations Act to the transactions contemplated herein.
Vendors will indemnify and hold Purchaser harmless against any claim by a third
Person based on the non-compliance by Purchaser of Part XVII of such act.
14.22 Additional Insurance. Each Party shall assume one half (1/2) of the
--------------------
premium payable for any additional E&O insurance coverage in excess of Ten
Million dollars (Cdn $10,000,000) up to Five Million dollars (Cdn $5,000,000)
additional coverage for up to three (3) years beginning with the commencement of
Roche's next policy year. Purchaser shall ensure that New Roche subsribes for
all such coverage. Such assumption of the premium by Vendors shall be made by
compensation against any First EBIT Payment or, if insufficient, against any
Second EBIT Payment. ITX shall include New Roche's directors and ofifcers in
ITX's standard D&O policies to the same extent as ITX's directors and officers
are covered thereby and ITX shall cause to be procured and paid for at its
expense a seven (7) year extended reporting period on Roche's pre-existing D&O
policies.
<PAGE>
-60-
14.23 Non-Ratification. Purchaser and, through its intervention, ITX
----------------
acknowledge that Roche, prior to the Closing Date was not generally subject to
various United States Laws, including the Foreign Corrupt Practices Act, the
Cuban Liberty and Democratic Solidarity Act and other anti-boycott and export
control Laws. Neither ITX nor Roche will take any action in furtherance of any
conduct undertaken by Roche prior to the Closing Date that would place either
Party in potential violation of such Laws. ITX does not, by this Agreement nor
by any future actions, intend to approve of any actions taken by Roche prior to
the acquisition that would constitute ratification of conduct potentially
violative of such Laws.
14.24 Releases. Vendors hereby fully and finally release Roche, Corporoche and
--------
NewCo 1 from any and all adjustments to the purchase prices payable pursuant to
the promissory notes related to the repurchase of shares of such companies
pursuant to the Reorganization (other than any downward adjustments related to
the purchase prices for shares based on the Pembroke Tax refund for the 1995 Tax
year pursuant to Section 6.1). Purchaser shall be released and discharged by
Vendors from and with respect to any further duty with respect to the sums
referenced in the Convention de partage upon payment of such sums to Michel
Labbe.
14.25 Inter-Company Agreements. ITX and New Roche shall promptly after the
------------------------
date hereof enter into an inter-company agreement on terms satisfactory to
the Parties governing certain aspects of the relationship between the companies.
New Roche and Roche Internationale shall enter into an inter-company agreement
promptly after Closing coverning the terms on which CIDA and related work will
be conducted by Roche International for the full economic benefit of New Roche.
14.26 Convention de partage. Vendors shall not amend Article 3 of the
---------------------
Convention de partage among them of even date without the prior written consent
of ITX. Vendors shall not amend the proportions allocated to them for receipt of
the Purchase Price as set forth in the Convention de partage without first
having notified ITX.
14.27 Interest. The payments in Sections 2.2 and 2.3 shall be made with all
--------
accrued interest at the rate referred to in the promissory notes referenced in
Section 11.2.4.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the date
first above mentioned.
IT Holdings Canada, Inc.
Per: /s/ James M. Redwine /s/ Jean Beaudoin
------------------------ -------------------------------------
James M. Redwine Jean Beaudoin
Assistant-Secretary
/s/ Paul-Emile Belanger
-------------------------------------
Paul-Emile Belanger
<PAGE>
-61-
/s/ Daniel Bergeron
-------------------------------------
Daniel Bergeron
/s/ Pierre Bertrand
-------------------------------------
Pierre Bertrand
/s/ Christian Berube
-------------------------------------
Christian Berube
/s/ Robert Boutet
-------------------------------------
Robert Boutet
/s/ Pierre Brulotte
-------------------------------------
Pierre Brulotte
/s/ Jean Bundock
-------------------------------------
Jean Bundock
/s/ Marc-Yvan Cote
-------------------------------------
Marc-Yvan Cote
/s/ Marc Drouin
-------------------------------------
Marc Drouin
/s/ Serge Dussault
-------------------------------------
Serge Dussault
/s/ Jean-Pierre Fau
-------------------------------------
Jean-Pierre Fau
/s/ Andre Giguere
-------------------------------------
Andre Giguere
/s/ Michel Gilbert
-------------------------------------
Michel Gilbert
/s/ Sam Hammad
-------------------------------------
Sam Hammad
/s/ Michel Labbe
-------------------------------------
Michel Labbe
/s/ Jean-Guy Lajoie
-------------------------------------
Jean-Guy Lajoie
/s/ Jean-Pierre Lambert
-------------------------------------
Jean-Pierre Lambert
/s/ Benoit Lapierre
-------------------------------------
Benoit Lapierre
<PAGE>
-62-
/s/ Andre Lemieux
-------------------------------------
Andre Lemieux
/s/ Yves Lortie
-------------------------------------
Yves Lortie
/s/ Dany McCarvill
-------------------------------------
Dany McCarvill
/s/ France Michaud
-------------------------------------
France Michaud
/s/ Marc Morais
-------------------------------------
Marc Morais
/s/ Alain Ostiguy
-------------------------------------
Alain Ostiguy
/s/ Yves Petitclerc
-------------------------------------
Yves Petitclerc
/s/ Paul Picard
-------------------------------------
Paul Picard
/s/ Michel Porlier
-------------------------------------
Michel Porlier
/s/ Denis Potvin
-------------------------------------
Denis Potvin
/s/ Pierre Rochefort
-------------------------------------
Pierre Rochefort
/s/ Denis St-Cyr
-------------------------------------
Denis St-Cyr
/s/ Claude Tessier
-------------------------------------
Claude Tessier
/s/ Robert Topping
-------------------------------------
Robert Topping
/s/ Michel Tremblay
-------------------------------------
Michel Tremblay
/s/ Andre Vachon
-------------------------------------
Andre Vachon
<PAGE>
-63-
/s/ Claude Vezina
-------------------------------------
Claude Vezina
Gestion Pilac inc.
By: /s/ Pierre Lacroix
-------------------------------
Duly authorized representative
Name: Pierre Lacroix
-------------------------------
Title: President
-------------------------------
<PAGE>
-64-
Intervention of
The IT Group, Inc.
------------------
For valuable consideration, the receipt and adequacy of which is hereby
acknowledged, The IT Group, Inc. hereby unconditionally and irrevocably
guarantees to and in favour of Vendors (i) the truth of the representations and
warranties of Purchaser contained in this Agreement, in any Schedule or in any
certificate or other document delivered or given pursuant to this Agreement, and
(ii) the timely performance and fulfillment by Purchaser of its obligations and
covenants under this Agreement. The IT Group, Inc. hereby acknowledges and
agrees that there is solidarity between the undersigned and Purchaser in respect
of this guarantee. The IT Group, Inc. hereby waives any benefit of division and
discussion.
The IT Group, Inc. acknowledges that Vendors are relying on this guarantee
in connection with the sale of the Purchased Shares under the Agreement and that
Vendors would not have entered into the Agreement without such guarantee.
DATED this 5th day of February, 1999.
The IT Group, Inc.
Per: /s/ James M. Redwine
-------------------------------
James M. Redwine
Senior Corporate Counsel and
Assistant Secretary
<PAGE>
Exhibit 10(iii)(25)
AMENDMENT NUMBER SEVEN
IT CORPORATION RETIREMENT PLAN
1993 RESTATEMENT
The IT Corporation Retirement Plan (1993 Restatement) shall be as set forth
herein:
A. Effective January 1, 1997, paragraph (c) of Section 2.11,
"Compensation," shall be amended in its entirety to reflect the
reference to the family aggregation rules and shall read as follows:
(c) "Compensation" of any Employee taken into account under the Plan
for any Plan Year shall not exceed $160,000, as that amount is
adjusted by the Secretary of the Treasury at the same time and in the
same manner as under Section 415(d) of the Code, except that the
dollar increase in effect on January 1 of any calendar year is
effective for Plan Years beginning in such calendar year.
B. Effective January 1, 1993, Section 2.20 shall be amended to read as
follows:
2.20 Eligible Employee. "Eligible Employee" shall mean any
-----------------
individual who is employed by the Company except: (a) any Employee
who is covered by a collective bargaining agreement to which the
Company is a party if there is evidence that retirement benefits were
the subject of good faith bargaining between the Company and the
collective bargaining representative, unless the collective bargaining
agreement provides for coverage under this Plan; (b) any Employee who
is employed in any job classification or Company division which by
action of the Board of Directors is excluded from coverage under this
Plan; (c) any hourly employee who is employed on a Project Hourly
Basis in accordance with the Company's payroll procedure; (d) any
Leased Employee. Notwithstanding the foregoing, for purposes of
applying the provisions of Article V, "Eligible Employee" shall have
the meaning set forth in Section 5.3(b)(iii); and (e) any individual
who is not treated by the Company or any Participating Company as a
common law employee without regard to the characterization or
recharacterization of such individual's status by any court or
governmental agency.
C. Effective January 1, 1997, paragraph (a) of Section 2.25, "Highly
Compensated Employee," shall be amended in its entirety to read as
follows:
(a) "Highly Compensated Employee" shall mean any Employee who
(i) was a Five Percent Owner during the Determination Year or
the Look Back Year, or
<PAGE>
(ii) during the Look Back Year, received Compensation from the
Company in excess of $80,000 (as adjusted from time to time
under such regulations as may be issued by the Secretary of
the Treasury) and was in the "top-paid group" of Employees.
D. Effective January 1, 1997, paragraph (b)(vi) of Section 2.25, relating
to the family aggregation rules and the definition of "Highly
Compensated Employee," shall be deleted in its entirety.
E. Effective December 12, 1994, Section 2.30, "Leave of Absence" shall be
amended by the addition of paragraph (d) to provide as follows:
(d) Effective as of December 12, 1994, notwithstanding any provision
of this Plan to the contrary, contributions, benefits and service
credit with respect to qualified military service will be provided in
accordance with Section 414(u) of the Code.
F. Effective February 1, 1997, Section 3.1(c) shall be amended in its
entirety to read as follows:
(c) Each Eligible Employee who is not eligible to participate in the
Plan as specified in Section 3.1(a) or (b), above, shall become
eligible to participate in the Plan (i) on the date he completes one
(1) Year of Service, or (ii) after January 31, 1997, in the case
making compensation deferrals under Article V hereof, his date of
hire, and shall commence participation pursuant to Section 3.2 hereof.
G. Effective January 1, 1999, the first sentence of Section 5.2(a) shall
be amended to read as follows:
(a) The amount of an individual's compensation that may be deferred
subject to the election provided in Section 5.1 shall be a whole
percentage of the individual's Compensation (while a Participant) not
to exceed 15 percent.
H. Effective January 1, 1997, paragraph (e) of Section 5.3, relating to
the family aggregation rules and the "Limitation on Compensation
Deferrals of Highly Compensated Employees," shall be deleted in its
entirety.
I. Effective January 1, 1997, paragraph (c) of Section 5.4, relating to
the family aggregation rules and the "Provisions for Disposition of
Excess Compensation Deferrals by Highly Compensated Employees," shall
be deleted in its entirety.
J. Effective for Plan Years beginning after December 31, 1998, Section
6.1(c) shall be eliminated.
K. Effective July 1, 1995, Section 6.1(d) shall be amended to read as
follows:
2
<PAGE>
(d) A matching contribution for each Participant equal to 50 percent,
or, after December 31, 1998, 100 percent of the contributions made by
the Participant under Section 5.1 hereof that does not exceed four
percent (4%) of such Participant's Compensation for a Plan Year (or
portion thereof following the Participant's Participation Commencement
Date) plus an additional amount to be determined by the Board in its
discretion based on such factor(s) as the Board deems appropriate; all
Participant matching contributions generally may be made monthly based
on the Participant's contributions and Compensation for such month and
to be allocated to Participants' respective Company Matching
Contribution Accounts.
L. Effective for Plan Years beginning after December 31, 1998, Section
6.1(e) shall be stricken:
M. Effective January 1, 1997, paragraphs (i) and (ii) of Section 6.5(e),
relating to the family aggregation rules and the "Limitation on
Matching Contributions Made on Behalf of Highly Compensated
Employees," shall be deleted in their entirety.
N. Effective January 1, 1997, paragraph (c) of Section 6.6, relating to
the family aggregation rules and the "Provisions for Reduction of
Excess Matching Contributions Made on Behalf of Highly Compensated
Employees," shall be deleted in its entirety.
O. Effective December 12, 1994, Section 6 shall be amended by the
addition of Section 6.7 to provide as follows:
Section 6.7 Special Rules for Military Service. If an employee is
----------------------------------
absent from employment due to his service in the uniformed services of
the United States and returns to employment within the time prescribed
by, and under circumstances satisfying the applicable federal law
(including the Uniformed Services Employment and Reemployment Rights
Act of 1994), such Employee's period of uniformed service will not
result in a Break in Service for all purposes under the Plan.
Further, such an employee to the extent he is an otherwise eligible
employee under the terms of the Plan, shall have the right to make up
any Compensation Deferrals missed while in uniformed service, and the
Employer shall credit said Employee's account with any Matching
Contributions the Employee would have received. No Matching
Contributions shall be credited to the Employee's account under this
section until the Employee's make-up contributions are actually made.
Further, all make-up contributions must be made within a period of
time after returning to employment which does not exceed the lesser of
(i) three times the period of uniformed service, or (ii) 5 years. The
provisions of this Section 6.7 shall apply to all periods of uniformed
service which occurred on or after December 12, 1994.
3
<PAGE>
P. Effective January 1, 1999, Section 7.3 shall be stricken and Section
7.2 shall be amended in its entirety to read as follows:
7.2 Allocation of Company Matching Contribution.
-------------------------------------------
The Company contribution under 6.1(d) hereof shall be allocated
to Participants based on their respective Compensation and
contribution during such Plan Year; provided that the additional
discretionary contribution referenced in Section 6.1(d) hereof shall
only be made to Eligible Participants based on their respective
Compensation and contribution during such Plan Year. For purposes of
this Section 7.2, "Eligible Participant" shall mean any Participant
who is employed by the Company on the last day of the Plan Year and
who has accrued at least 1000 Hours of Service during such Plan Year,
except for any Participant who is not then employed by the Company or
who has not accrued at least 1000 Hours of Service because of any of
the following events occurring during such Plan Year: (i) Death, (ii)
Disability; (iii) Normal or Early Retirement; (iv) Transfer to an
Affiliated Company not participating in the Plan; and (v) Transfer of
a Qualified Employee to a Joint Venture Employer that is not a
Participating Joint Venture Employer (as such terms are defined in
Article XX). "Eligible Participant" shall not include any individual
employed on the last day of the Plan Year on a Project Hourly Basis
(in accordance with the Company's payroll procedure).
Q. Effective January 1, 1999, a new Section 7.5(e) shall be added to read
as follows:
(e) Notwithstanding any other provision hereof, the Committee may in
its discretion direct that any or all Company Matching Contributions
made in respect of Plan Years beginning after 1998 be made in or
invested in the common stock of IT Group, Inc. or the Company.
R. Effective January 1, 1998, Section 7.10(c) shall be amended by the
addition of the following at the end thereof:
10. Gradient Employer contributions, subject to vesting.
11. Prior Plan Deferrals.
12. Prior Plan Matching Contributions, subject to vesting.
13. Prior Plan Employer Contributions, subject to vesting.
14. Prior Plan Qualified Non-Elective Contributions.
15. Prior Plan After-Tax Contributions.
16. Prior Plan Profit Sharing Contributions, subject to vesting.
S. Section 7.10, "Loans," shall be amended by the addition of paragraph
(f) to provide as follows:
(f) Effective as of December 12, 1994, loan repayments will be
suspended
4
<PAGE>
under this Plan as provided under Section 414(u)(4) of the Code.
T. Effective January 1, 1997, Section 9.6(b) shall be amended by the
addition of the following sentence at the end thereof:
Notwithstanding the provisions of this Section 9.6(b), a Participant
may elect (with spousal consent) to waive the minimum 30 day written notice
period prior to the Annuity Starting Date for the Qualified Joint and
Survivor Annuity if such Annuity Starting Date begins more than 7 business
days after the explanation is provided to the Participant.
U. Effective January 1, 1997, Section 9.7(a) shall be amended in its
entirety to read as follows:
(a) Notwithstanding any other provision of this Plan, distribution of
a Participant's benefit under the Plan shall be made no later than the
Participant's Required Beginning Date, or, if such distribution is to be
made over the life of such Participant or over the lives of such
Participant and a Beneficiary (or over a period not extending beyond the
life expectancy of such Participant and Beneficiary) then such distribution
shall commence no later than the Participant's Required Beginning Date.
Required Beginning Date shall mean April 1 of the calendar year following
the later of the calendar year in which the Participant (A) attains age
70-1/2, or (B) retires; provided, however, the foregoing clause (B) shall
not apply with respect to a Participant who is a Five Percent Owner (as
defined in Section 416(i) of the Code) at any time during the five Plan
Year period ending in the calendar year in which the Participant attains
age 70-1/2. If the Participant attains age 70-1/2 and becomes a Five
Percent Owner during any Plan Year subsequent to the five Plan Year period
referenced above, the Required Beginning Date under this Subparagraph
(i) shall be April 1 of the calendar year following the calendar year in
which such subsequent Plan Year ends. Notwithstanding the foregoing,
in-service distributions for Participants who are not Five Percent Owners
shall also be permitted upon attainment of age 70-1/2, to the extent
provided in this Section 5.6 for Five Percent Owners, but only for
Participants who attain age 70-1/2 in Plan Years beginning prior to
January 1, 1999, who voluntarily elect to receive such distributions. Once
distributions have begun to a Five Percent Owner under this Section 9.7,
they must continue to be distributed, even if the Participant ceases to be
a Five Percent Owner in a subsequent Plan Year.
V. Effective for Plan Years beginning on or after August 5, 1997, Section
9.8 shall be amended in its entirety to read as follows:
9.8 Mandatory Cash Out Rules and Consent Requirement.
------------------------------------------------
(a) Effective for Plan Years beginning after December 31, 1997,
notwithstanding any other provision of this Article IX, if the present
value of the
5
<PAGE>
Participant's distribution does not exceed five thousand dollars ($5,000),
the distribution shall be paid in a lump sum. However, no such lump sum
shall be paid after distribution commences, unless the Participant and his
Spouse (or where the Participant had died, the Surviving Spouse) consent in
writing to such distribution. Similarly, if an amount distributable to an
alternate payee (under Article XV hereof) is less than $5,000, such amount
shall be distributed as soon as practicable following (i) 60 days after
benefits are payable or (ii) receipt of a valid qualified domestic
relations order (within the meaning of Code Section 414(p)), whichever is
later.
(b) If the value of a Participant's Distributable Benefit exceeds
five thousand dollars ($5,000), no distribution of any portion of that
benefit may be made without the written consent of the Participant (and his
Spouse, if the Participant is married) prior to the date he attains Normal
Retirement Age. Consent of the Spouse to earlier distribution must be made
in the presence of a Plan representative or a notary public.
(c) Death benefits payable to a Beneficiary receiving lump sum
benefits shall be distributed no later than twelve months following the
Participant's death.
W. Effective January 1, 1999 Section 9.14 shall be amended in its
entirety to read as follows:
9.14 In Service Withdrawals.
----------------------
A Participant may once per Plan Year make a withdrawal from his
Accounts, other than his Compensation Deferral Accounts, as described in
Section 9.14(a) hereof. In addition, if a Participant has withdrawn the
maximum amount to be withdrawn under Section 9.14(a) hereof, he may also
make one withdrawal per calendar quarter, in accordance with Sections
9.14(b)-(e) hereof, of amounts held in his Compensation Deferral Accounts
(excluding any earnings on amounts in such accounts) upon incurring a
Hardship as determined by the Committee in accordance with rules of uniform
application which the Committee may from time to time prescribe.
(a) A Participant may withdraw from his Accounts as follows:
(i) A Participant may withdraw all or a part of his After-Tax
Contributions Account from the Plan at any time.
(ii) A Participant who has withdrawn all of his After-Tax
Contributions Account may withdraw all or a part of his Rollover
Contributions Account.
(iii) A Participant who has withdrawn all of his After-Tax and
Rollover Contributions Accounts and who has been a Participant
in the Plan for at least five (5) years may withdraw all or a
part of the vested portion of his Company Discretionary
Contributions Account (including any such amounts attributable
to prior or transferor plans).
6
<PAGE>
(iv) A Participant who has withdrawn all of his After-Tax, Rollover,
and the vested portion of his Company Discretionary
Contributions Accounts and who has been a Participant in the
Plan for at least five (5) years may withdraw all or a part of
the vested portion of his Company Matching Contributions Account
(including any such amounts attributable to prior or transferee
plans).
(v) A Participant who has withdrawn all his After-Tax, Rollover,
the vested portions of his Company Discretionary and Company
Matching Contributions Accounts and who has attained age 59 1/2
may withdraw all or a part of his Compensation Deferral Accounts
(including any qualified non-elective contributions).
(vi) A Participant who has withdrawn all of his After-Tax, Rollover,
the vested portions of his Company Discretionary and Company
Matching Contributions and Compensation Deferral Accounts and
who has attained age 59 1/2 may withdraw all or a part of the
vested portions of his Company Fixed Contributions Account,
Special Allocation, and Pension Contributions (including any
such amounts attributable to prior or transferee plans).
(b) Except as provided in Section 9.14(a) hereof, no Participant
may make a withdrawal prior to a determination by the Committee that
such Participant has a Hardship (as defined in Paragraph (c) below)
need and such withdrawal is necessary on account of such Hardship need
as provided in this Section 9.14. Any determination of Hardship shall
be in accordance with regulations promulgated under Section 401(k) of
the Code.
(c) "Hardship" shall mean a need created by an immediate and
heavy financial need of the Participant, which need cannot be met by
other sources reasonably available to the Participant, or the
Participant's Spouse, children or dependents; for
(i) expenses for medical care described in Section 213(d) of
the Code previously incurred by the Participant, the
Participant's Spouse, children, or dependents, or necessary for
such persons to obtain medical care described in Code Section
213(d);
(ii) costs directly related to the purchase (excluding
mortgage, payments) of a principal residence for the
Participant;
(iii) payment of tuition and related educational fees for the
next twelve (12) months of post-secondary education for the
Participant, or the Participant's Spouse, children or
dependents; or
7
<PAGE>
(iv) payments necessary to prevent the eviction of the
Participant from, or a foreclosure on the mortgage of, the
Participant's principal residence.
In addition to the above, a Hardship need may include any amounts
necessary to pay any federal, state, or local income taxes or
penalties anticipated to result from a Hardship distribution.
(d) The existence of a Participant's Hardship and the amount
required to meet the need created by the Hardship shall be determined
by the Committee on the basis of facts and circumstances, and in
accordance with the rules of uniform application which the Committee
may from time to time prescribe. A distribution shall not be treated
as necessary to satisfy a Hardship need of a participant to the extent
the amount of distribution in excess of the amount required to relieve
the Hardship need or to the extent that the Hardship need may be
satisfied from other resources reasonably available to the
Participant. A distribution generally may be treated as necessary on
account of a Hardship need of a participant if the Committee
reasonably relies on the Participant's written representations to the
Committee, unless the Committee has actual knowledge to the contrary,
that the Hardship need cannot be relieved:
(i) through reimbursement or compensation by insurance or
otherwise;
(ii) by reasonable liquidation of assets, if such liquidation
would not itself cause an immediate and heavy financial need;
(iii) by the cessation of the Participant's contributions to
the Plan; or
(iv) by other distributions or non-taxable loans from plans of
the Company or any other employer, or by borrowing from
commercial sources on reasonable commercial terms.
For purposes of determining a Hardship need, a participant's resources
shall be deemed to include those assets of his Spouse and minor
children that are reasonably available to the Participant.
(e) A Participant may request a withdrawal by submitting a
written request for such withdrawal in a form satisfactory to the
Committee, together with any supporting documentation which the
Committee in its sole discretion may require. The minimum amount that
may be withdrawn at any one time pursuant to the provisions of this
Section 9.14 is $1,000.00. The maximum amount subject to any
withdrawal under this Section shall be determined as of the Valuation
Date coinciding with or immediately preceding the Committee's
determination authorizing the withdrawal.
8
<PAGE>
X. Effective for Plan Years beginning on or after August 5, 1997, the
reference to "$3,500" in Section 9.16(d) shall be replaced with
"$5,000".
Y. Effective for Plan Years beginning after December 31, 1999, Section
14.4 shall be amended by the addition of new Section 4.14(c) to read
as follows:
(c) Effective for Plan Years beginning after December 31, 1999,
Section 4.14 shall be of no force or effect.
Z. Effective July 1, 1998, a new Article XXIII shall be added to read as
follows:
ARTICLE XXIII
SPECIAL PROVISIONS REGARDING EMPLOYEES TRANSFERRING FROM OHM
CORPORATION AND ACCOUNTS TRANSFERRED FROM THE OHM CORPORATION RETIREMENT
SAVINGS PLAN.
23.1 In General. The special provisions in this Article XXIII shall
----------
be effective as of July 1, 1998, and shall apply to any Eligible Employee
who, prior to August 4, 1998, was employed by OHM Corporation.
23.2 Participation. Notwithstanding any other provision hereof, any
-------------
Eligible Employee who on August 3, 1998, was employed by OHM Corporation
shall not commence participation in this Plan until January 1, 1999.
23.3 Computation of Service. Eligible Employees under this Section
----------------------
23.3 shall have Years of Service computed pursuant to Section 2.54 hereof.
However, each Eligible Employee shall automatically receive credit for One
Year of Service for the period beginning on his or her anniversary date
occurring during 1998 and ending on December 31, 1998; without regard to
actual Hours of Service performed.
23.4 Vesting. The nonforfeitable interest of any Eligible Employee
-------
in his or her OHM Plan accounts shall, as of January 1, 1999, not in any
manner be thereafter diminished. Further, any Eligible Employee with at
least three Years of Service as of December 31, 1998, shall at all times
have a fully vested and nonforfeitable interest in his or her interest in
this Plan without regard to actual Years of Service performed.
AA. Effective January 1, 1999, a new Article XXIV shall be added to read
as follows:
ARTICLE XXIV
SPECIAL PROVISIONS REGARDING EMPLOYEES TRANSFERRING FROM FLUOR DANIEL
GTI, INC. AND ACCOUNTS TRANSFERRED FROM THE FLUOR DANIEL GTI 401(k)
RETIREMENT SAVINGS PLAN
9
<PAGE>
24.1 In General. The special provisions on the Article XXIV shall be
----------
effective as of January 1, 1999, and shall apply to any Eligible Employee
who, prior to January 1, 1999, was employed by Fluor Daniel GTI, Inc.
24.2. Eligibility. Employees from Fluor Daniel GTI, Inc. shall
-----------
commence participation in this Plan on January 1, 1999, or, if later, the
date or dates they satisfy this Plan's applicable eligibility criteria.
24.3. Vesting. The nonforfeitable interest of any Eligible Employee
-------
in his or her GTI Plan accounts shall, as of January 1, 1999, not in any
manner be thereafter diminished. Further, any Eligible Employee with at
least three Years of Service as of December 31, 1998, shall at all times
have a vested interest hereunder based on the vesting schedule in effect
under the GTI Plan in effect as of December 31, 1998.
24.4. Separate Account Maintenance. For purposes of Code Section
----------------------------
411(d)(6), accounts under the GTI Plan as of December 31, 1998 shall be
separately maintained and be subject to all rights, features and options
that they enjoyed under the GTI Plan as of December 31, 1998.
With the exception of the aforementioned amendments and the renumbering of
certain sections to reflect such amendments, in all other respects, the IT
Corporation Retirement Plan shall remain unchanged.
IN WITNESS WHEREOF, this instrument of amendment is executed this 31
------
day of December, 1998.
By: /s/ Anthony J. DeLuca
----------------------------
Anthony J. DeLuca
10
<PAGE>
Exhibit 10(iii)(41)
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
Effective November 17, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 INTRODUCTION..................................................... 1
1.01 Purpose.......................................................... 1
1.02 Effective Date of the Program.................................... 1
1.03 Participation.................................................... 1
ARTICLE 2 DEFINITIONS...................................................... 1
2.01 Administrative Committee......................................... 1
2.02 Applicable Federal Rate.......................................... 2
2.03 Cause............................................................ 2
2.04 Change of Control................................................ 2
2.05 Common Stock..................................................... 2
2.06 Cumulative Convertible Participating Preferred Stock............. 2
2.07 Current Market Value............................................. 3
2.08 Disability Date.................................................. 3
2.09 Fair Market Value................................................ 3
2.10 Loan Period...................................................... 3
2.11 Participant...................................................... 3
2.12 Permanently Disabled............................................. 3
2.13 Preferred Stock.................................................. 4
2.14 Promissory Note.................................................. 4
2.15 Purchase Date.................................................... 4
2.16 Purchase Loan.................................................... 4
2.17 Required Shares.................................................. 4
2.18 Retirement Date.................................................. 4
2.19 Stock Incentive Plan............................................. 4
2.20 Termination Date................................................. 5
ARTICLE 3 STOCK OWNERSHIP GUIDELINES....................................... 5
3.01 Satisfaction of Ownership Guidelines............................. 5
3.02 Securities Counted for Ownership Guidelines...................... 5
ARTICLE 4 AVAILABILITY OF LOANS............................................ 5
ARTICLE 5 ELECTION TO PARTICIPATE IN THE PROGRAM; SHARES TO BE
PURCHASED UNDER THE PROGRAM.......................................... 6
5.01 Election to Participate in the Program........................... 6
5.02 Shares to be Purchased Under the Program......................... 6
i
<PAGE>
ARTICLE 6 CORRESPONDING STOCK GRANT........................................ 6
6.01 General.......................................................... 6
6.02 Expiration of Vested and Unvested Grants in Certain Instances.... 6
ARTICLE 7 LOAN PROVISIONS.................................................. 7
7.01 General.......................................................... 7
7.02 Interest Payments................................................ 8
7.03 Principal Payments............................................... 8
7.04 Term of Purchase Loan............................................ 8
7.05 Acceleration of Purchase Loan Maturity........................... 8
7.06 Prepayment of the Purchase Loan.................................. 9
7.07 Event of Default................................................. 9
ARTICLE 8 PROGRAM ADMINISTRATION........................................... 9
ARTICLE 9 CHANGES IN THE OWNERSHIP GUIDELINES OR THE PROGRAM............... 9
ARTICLE 10 MISCELLANEOUS PROVISIONS....................................... 10
10.01 Not an ERISA Plan.............................................. 10
10.02 Employment Not Guaranteed...................................... 10
10.03 Applicable Law................................................. 10
10.04 Notice......................................................... 10
10.05 Prohibition Against Assignment................................. 10
10.06 No Transfer of Interest........................................ 11
10.07 Amendment or Termination of the Program........................ 11
10.08 Titles and Headings; Gender of Terms........................... 11
10.09 Severability................................................... 11
ii
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
ARTICLE 1
INTRODUCTION
1.01 Purpose
The purpose of the Executive Stock Ownership Program (the "Program") is to
provide loans to certain officers of The IT Group, Inc. (the "Company") or its
affiliates, who are covered from time to time by and subject to the Stock
Ownership Guidelines (respectively, the "Covered Employees" and the "Ownership
Guidelines"), in order to assist the Covered Employees in complying with the
applicable stock ownership requirements set forth in the Ownership Guidelines
herein and to align senior executive and shareholder interests. All loans made
pursuant to the Program shall be used by Covered Employees for the purpose of
purchasing shares of Common Stock of the Company (the "IT Shares") to comply
with the Ownership Guidelines.
1.02 Effective Date of the Program.
Both the Ownership Guidelines and the Program are effective as of November
17, 1998 (the "Effective Date"). As of the Effective Date, no termination date
has been established for the Ownership Guidelines or the Program.
1.03 Participation.
Participation in this Program shall be limited to those Covered Employees
who are selected from time to time by the Compensation Committee of the Board of
Directors to participate in this Program. The participation in this Program by
any such Covered Employee, and the extension of any Purchase Loan to any Covered
Employee, shall be governed by the terms of this Program.
ARTICLE 2
DEFINITIONS
Capitalized terms used in this Program shall have the meanings ascribed to
them in this Article 2, except that in the case of any capitalized term not
specifically defined in this Article 2, such term shall have the meaning
assigned to it in the text of this Program where such term first appears.
2.01 Administrative Committee.
"Administrative Committee" shall mean those persons designated by the
Company to administer the Program.
1
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
2.02 Applicable Federal Rate.
"Applicable Federal Rate" has the meaning defined in Section 1274(d) of the
Internal Revenue Code of 1986, as amended.
2.03 Cause.
"Cause" shall mean (a) willful misconduct by Participant resulting in
material harm to the Company or an affiliate (including harm to the Company and
an affiliate's public reputation), (b) the breach by Participant of any of his
covenants contained in any agreement with the Company or an affiliate, (c)
Participant's conviction of, or Participant's entering of a guilty plea with
respect to, a felony or (d) Participant's misappropriation of corporate funds.
2.04 Change of Control.
"Change of Control" shall mean the first to occur of the following events:
(a) any date upon which the directors of the Company who were nominated by the
Board of Directors for election as directors and/or were elected by the holders
of the Cumulative Convertible Participating Preferred Stock, cease to constitute
a majority of the directors of the Company; (b) a reorganization, merger or
consolidation of the Company, the consummation of which results in the
outstanding securities of any class being exchanged for or converted into cash,
property and/or securities not issued by the Company; (c) the acquisition of
substantially all of the property and assets of the Company by any person or
entity; (d) the dissolution or liquidation of the Company; or (e) the date of
the first public announcement that any person or entity, together with all
Affiliates and Associates (as capitalized terms are defined in Rule 12b-2
promulgated under the Securities Exchange Act of 1934) of such person or entity,
shall have become the beneficial owner (as defined in Rule 13d-3 promulgated
under the Securities Exchange Act of 1934) of voting securities of the Company
representing 35% or more of the voting power of the Company; provided, however,
that the terms "person" and "entity," as used in this clause (e), shall not
include (x) the Company, any of its subsidiaries, The Carlyle Group and its
Affiliates (y) any employee benefit plan of the Company or any of its
subsidiaries, or (z) any entity holding voting securities of the Company for or
pursuant to the terms of any such plan.
2.05 Common Stock.
"Common Stock" shall mean the Company's common stock, $.01 par value per
share.
2.06 Cumulative Convertible Participating Preferred Stock.
"Cumulative Convertible Participating Preferred Stock" shall mean the
Company's 6% Cumulative Convertible Participating preferred stock, par value
$100 per share.
2
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
2.07 Current Market Value.
"Current Market Value" shall mean (i) if quotations are available, the
closing sale price of the IT Shares on the preceding business day, as appearing
in any regularly published reporting or quotation service; or (ii) if there is
no closing sale price, any reasonable estimate of the market value of the IT
Shares as of the close of business on the preceding business day; or (iii) the
total cost to the Participant of the purchase of IT Shares under this Program,
which may include commissions.
2.08 Disability Date.
"Disability Date" shall mean the date on which an employee would become
eligible for long-term disability benefits under the applicable employee long-
term disability plan sponsored by the Company or its affiliates.
2.09 Fair Market Value.
"Fair Market Value" for any given date (or in the event such date is not a
day on which IT Shares are traded, the last business day prior to such date)
shall mean the closing sale price of the IT Shares on such the preceding trading
date, as reported as the New York Stock Exchange Composite Transactions for such
day.
2.10 Loan Period.
"Loan Period" shall mean the time period specified in a Promissory Note (as
defined below) during which the principal may be outstanding on a Purchase Loan
subject to extension by the Company or an affiliate.
2.11 Participant.
"Participant" shall mean a Covered Employee who elects to participate in
the Program and is currently employed by the Company or an affiliate.
2.12 Permanently Disabled.
"Permanently Disabled" shall mean the inability to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less than twelve (12)
months. A Participant shall not be deemed to be Permanently Disabled until
proof of the existence thereof shall have been furnished to the Administrative
Committee in such form and manner, and at such times, as the Administrative
Committee may require. Any determination by the Administrative Committee that
the Participant is or is not Permanently Disabled shall be final and binding
upon the Company or an affiliate and Participant.
3
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
2.13 Preferred Stock.
"Preferred Stock" shall mean the 7% Cumulative Convertible Exchangeable
preferred stock, par value $100 per share of the Company and the Cumulative
Convertible Participating Preferred Stock.
2.14 Promissory Note.
"Promissory Note" shall mean a full recourse promissory note evidencing a
Purchase Loan, executed by a Participant for the benefit of the Company or an
affiliate, a form of which is attached and incorporated by reference.
2.15 Purchase Date.
"Purchase Date" shall mean the date on which IT Shares are purchased under
the Program.
2.16 Purchase Loan.
"Purchase Loan" shall mean the extension of credit by the Company or an
affiliate to a Participant for the purpose of financing the purchase of IT
Shares, if such purchase is for the purpose of compliance by the Participant, in
whole or in part, with the Ownership Guidelines. The Purchase Loan shall be
evidenced by the Loan Agreement (as defined below) and the Promissory Note.
2.17 Required Shares.
"Required Shares" mean the specified number of IT Shares that a Covered
Employee is required to own in order to comply with the stock ownership
requirements of the Ownership Guidelines.
2.18 Retirement Date.
"Retirement Date" shall mean the last day of a Participant's employment
with the Company or any affiliate which also constitutes his or her "Normal
Retirement Date" under the IT Corporation Retirement Plan.
2.19 Stock Incentive Plan.
"Stock Incentive Plan" shall mean the International Technology Corporation
1996 Stock Incentive Plan, adopted effective November 20, 1996.
4
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
2.20 Termination Date.
"Termination Date" shall mean the last day of a Participant's employment by
the Company or any affiliate, other than in the case of retirement on or after
his or her Retirement Date, death, or disability of the Participant.
ARTICLE 3
STOCK OWNERSHIP GUIDELINES
3.01 Satisfaction of Ownership Guidelines.
The Ownership Guidelines require designated employees of the Company or an
affiliate to own a specified number of securities of the Company. The level of
such Required Shares is calculated according to a schedule based on the base
salary of the Covered Employee. A Covered Employee is expected to comply with
the applicable stock ownership requirements as set forth by the Compensation
Committee of the Board of Directors.
3.02 Securities Counted for Ownership Guidelines.
For purposes of determining whether a Covered Employee has achieved the
Ownership Guidelines, the following will be counted as Company stock ownership:
(i) shares of Common Stock or Preferred Stock held in the name of the Covered
Employee, a family member or a broker's street account held for the benefit of
the Covered Employee; (ii) IT Shares owned by the Covered Employee through the
IT Employee Stock Purchase Program; (iii) IT shares held in the unitized IT
stock fund of the IT Retirement Plan; (iv) unvested restricted stock issued by
the Company or an affiliate; (v) shares of Common Stock or Preferred Stock held
in an individual retirement account or mutual fund for which the Covered
Employee has voting rights; or (vi) shares of Common Stock or Preferred Stock
for which the Covered Employee can demonstrate beneficial ownership and voting
rights. Notwithstanding the foregoing, unexercised stock options, whether or
not vested, shall not count toward the satisfaction of the Ownership Guidelines.
ARTICLE 4
AVAILABILITY OF LOANS
Purchase Loans shall be made available under the Program for the entire
period of time during which the Ownership Guidelines are in effect, subject to
the Company's or an affiliate's right to interpret, change, amend, modify or
terminate the Ownership Guidelines and Program as provided in Article 9 herein.
Subject to the approval of the Company or an affiliate, a Participant may obtain
more than one Purchase Loan during the term of the Program. Notwithstanding any
other provision of this Program, the Company or any affiliate shall not be
required to make a Purchase Loan to a Covered Employee if making such Purchase
Loan would cause the Company or an affiliate to violate any covenant or other
similar provision in any indenture, loan agreement,
5
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
or other agreement, or cause the Company or an affiliate to violate any
applicable federal, state or local law.
ARTICLE 5
ELECTION TO PARTICIPATE IN THE PROGRAM; SHARES TO BE
PURCHASED UNDER THE PROGRAM
5.01 Election to Participate in the Program.
All Covered Employees are eligible to become Participants, but they are not
obligated, as a condition of employment or for any other purposes, to
participate in the Program. A Covered Employee may elect to participate in the
Program in order to finance all or a portion of the purchase of IT Shares
required to be purchased by the Covered Employee to comply with the Ownership
Guidelines. Each Covered Employee who so elects shall notify the Administrative
Committee of his or her intention to participate in the Program and to be
subject to the terms and provisions of the Program.
5.02 Shares to be Purchased Under the Program.
Shares purchased under the Program may be purchased on behalf of the
Participant on the open market by a broker selected by the Company or an
affiliate. As a condition to receipt of a Purchase Loan and to effectuate the
purchase of IT Shares under the Program, each Participant shall be required to
execute and deliver to the Administrative Committee a Promissory Note and any
other necessary document or form as may be required by law or as prescribed by
the Administrative Committee.
ARTICLE 6
CORRESPONDING STOCK GRANT
6.01 General
For IT Shares purchased under the Program on behalf of a Participant, a
grant shall be awarded under the Stock Incentive Plan to such Participant
("Grants"). Grants awarded in the form of an option will have an exercise price
at the Fair Market Value on the date of such award. The Grant shall be subject
to the performance-based vesting requirements set forth in the grant document or
agreement. Grants which do not vest under these performance-based vesting
requirements shall fully vest as of a date specified in the grant document or
agreement and shall remain exercisable through a date specified in the grant
document or agreement.
6.02 Expiration of Vested and Unvested Grants in Certain Instances
Notwithstanding the foregoing, upon the occurrence of certain identified
events, the vested and unvested Grants shall expire as follows:
6
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
(i) Termination of Employment of a Participant. In the event a
------------------------------------------
Participant's employment is terminated for Cause, all vested and
unvested Grants shall expire immediately on the Termination Date. In
the event a Participant terminates his or her employment with the
Company and all affiliates voluntarily, all vested and unvested Grants
shall expire immediately on the Termination Date. In the event a
Participant's employment is terminated by the Company or an affiliate
involuntarily (other than for Cause), all vested Grants shall expire
six (6) months following the Termination Date and any unvested Grants
shall be eligible for vesting for six (6) months following the
Termination Date. Any Grant which has not vested during such six (6)
months following the Termination Date shall expire.
(ii) Retirement of a Participant. In the event a Participant's employment
---------------------------
with the Company and all affiliates terminates on or after his or her
Retirement Date, all vested Grants shall expire on the second
anniversary of the Retirement Date. Any unvested Grants shall be
eligible for vesting for twelve (12) months following the Retirement
Date. Any Grant which has not vested during such twelve (12) months
following the Retirement Date shall expire.
(iii) Death or Disability of a Participant. In the event a Participant
------------------------------------
dies or becomes Permanently Disabled, all vested Grants shall expire
at the end of the original term and any unvested Grant shall be
eligible for vesting until the end of the original term.
(iv) Change of Control. In the event of a Change of Control, all vested
-----------------
Grants shall expire at the end of their original term and any unvested
Grant shall become immediately vested on the date of such Change of
Control and then expire at the end of the original term.
ARTICLE 7
LOAN PROVISIONS
7.01 General
Subject to approval by the Administrative Committee, the Company or an
affiliate shall make available to each Participant a Purchase Loan, with full
recourse, and the terms of which shall be governed by a loan agreement ("Loan
Agreement") except as set forth herein. The Purchase Loan shall be in an amount
of up to one hundred percent (100%) of the Current Market Value of the IT Shares
purchased in order to comply with the requirements of the Ownership Guidelines.
In the event that a Participant receives more than one Purchase Loan, all
payments of interest and principal shall be applied to the first Purchase Loan
received and, upon full
7
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
repayment of such Purchase Loan, applied to each additional Purchase Loan in
order of receipt by the Participant.
7.02 Interest Payments
The Purchase Loan shall bear interest at the Applicable Federal Rate on the
commencement of the Loan Period compounded semiannually during the Loan Period
and such interest payments shall be due at the end of the Loan Period of such
Purchase Loan.
7.03 Principal Payments
The principal amount of the Purchase Loan as specified in the Promissory
Note shall be due at the end of the Loan Period of such Purchase Loan.
7.04 Term of Purchase Loan
The Loan Period shall be for a term set forth in the applicable Loan
Agreement.
The obligations of each Participant under the Promissory Note shall be
unconditional and absolute and, notwithstanding the generality of the foregoing,
shall not be released, discharged or otherwise affected by any change in the
existence, or structure of the Company or an affiliate, or a Change of Control,
or any insolvency, bankruptcy, reorganization or other similar proceeding
affecting the Company or an affiliate, or the assets thereof, or the market
value of the IT Shares, or any resulting release or discharge of any obligation
of the Company or an affiliate, or the existence of any claim, set-off or other
rights which any Participant may have at any time against the Company or an
affiliate, or any other person, whether in connection with the Program or with
any unrelated matter.
7.05 Acceleration of Purchase Loan Maturity
(i) Termination of Employment of a Participant. In the event a
------------------------------------------
Participant's employment is terminated for Cause during the Loan
Period, the outstanding interest and principal payments under the
Purchase Loan shall become immediately due and payable on the
Termination Date. In the event a Participant terminates his or her
employment with the Company and all affiliates voluntarily during the
Loan Period, any outstanding interest and principal payments under the
Purchase Loan shall become immediately due and payable on the
Termination Date. In the event a Participant's employment is
terminated involuntarily (other than for Cause) by the Company or an
affiliate during the Loan Period, any outstanding interest and
principal payments under the Purchase Loan shall become due and
payable no later than seven (7) months following the Termination Date.
8
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
(ii) Retirement of a Participant. In the event a Participant's employment
---------------------------
terminates on or after his or her Retirement Date during the Loan
Period, any outstanding balance (including accrued and unpaid
interest) on the Purchase Loan shall become due and payable no later
than thirteen (13) months following the Retirement Date.
(iii) Death or Disability of a Participant. In the event a Participant
------------------------------------
dies or becomes Permanently Disabled during the Loan Period, any
outstanding balance (including accrued and unpaid interest) on the
Purchase Loan shall become due and payable no later than thirteen (13)
months following the date of death or the Disability Date.
7.06 Prepayment of the Purchase Loan
At the election of the Participant, he or she shall have the right to
voluntarily prepay, without penalty, all or any portion of the amount due under
the Promissory Note, at any time during the Loan Period. All prepayments shall
first be applied to accrued interest on the Purchase Loan and then to the
principal balance due on the Purchase Loan.
7.07 Event of Default
The Participant's failure to pay when due any payment of interest or
principal shall be deemed to be an event of default under the Promissory Note.
Upon the occurrence of a default, the Participant shall pay all costs of
collection, including but not limited to, reasonable attorney's fees, incurred
by the Company or an affiliate, on account of any such collection, whether or
not suit is filed hereon or on any instrument granting a security interest.
ARTICLE 8
PROGRAM ADMINISTRATION
An Administrative Committee consisting of one or more persons shall be
designated by the Company. The Administrative Committee shall be responsible
for overall administration of the Program, including recordkeeping and
preparation of Purchase Loan documentation.
ARTICLE 9
CHANGES IN THE OWNERSHIP GUIDELINES OR THE PROGRAM
Subject to any required shareholder approval, the Company or an affiliate
shall have the right to interpret, change, amend, modify or terminate the
Ownership Guidelines or the Program at any time, except that the Company or an
affiliate may not without the consent of the Participants, take any action that
would adversely affect the rights or the obligations of the Participants under
the Program in any material respect.
9
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.01 Not an ERISA Plan
This Program is restricted to key management employees selected by the
Board of Directors and is not intended to constitute a "qualified plan" for
federal income tax purposes and is not subject to the Employee Retirement Income
Security Act of 1974, as amended.
10.02 Employment Not Guaranteed
This Program is voluntary on the part of the Company or any affiliate, and
the Program shall not be deemed to constitute an employment contract between the
Company or any affiliate and any Participant, nor shall the adoption or
existence of the Program or any provision contained in the Program be deemed to
be a required condition of the employment of any Participant. Nothing contained
in this Program shall be deemed to give any Participant the right to continued
employment with the Company or any affiliate, and the Company or an affiliate
may terminate any Participant at any time, in which case the Participant's
rights arising under this Program shall be only those expressly provided under
the terms of this Program.
10.03 Applicable Law
The Program and related documents including, without limitation, the Loan
Agreement and Promissory Note, shall be governed by and construed and enforced
in accordance and with the laws of the State of Delaware, without regard to the
application of the conflicts of law provisions thereof.
10.04 Notice
All notices and other communications required or permitted to be given
under the Program shall be in writing and shall be deemed to have been duly
given if delivered personally or by inter-office mail as follows: (i) if to the
Company, The IT Group, Inc., Mosside Boulevard, Monroeville, PA 15146-2792;
(ii) if to a Participant, to the last home or business address of the
Participant known to the sender.
10.05 Prohibition Against Assignment
Except as otherwise expressly provided in this Program, the rights,
interests and benefits of a Participant under this Program (a) may not be sold,
assigned, transferred, pledged, hypothecated, gifted, bequeathed or otherwise
disposed of to any other party by such Participant or any beneficiary, executor,
administrator, heir, distributee or other person claiming under such
Participant, and (b) shall not be subject to execution, attachment or similar
process. Any attempted sale, assignment, transfer, pledge, hypothecation, gift,
bequest or other disposition of
10
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
such rights, interests or benefits contrary to the foregoing provisions of this
Section shall be null and void and without effect.
10.06 No Transfer of Interest.
No provision of this Program shall be interpreted or construed (a) as
transferring to any Participant or any other person or entity any direct or
indirect ownership or other proprietary interest whatsoever in the Company or
any affiliate or its stock or securities, or (b) as creating any partnership,
joint venture or other joint business enterprise between any such person and the
Company or any affiliate. The Company and each affiliate shall have and possess
all title to and beneficial interest in, any and all funds or other property
received by the Company or any affiliate in connection with the sale or other
disposition of all or any portion of the Company's or any affiliate's assets
and/or any funds or reserves maintained or held by the Company or any affiliate
on account of any obligation as required under this Program, whether or not
earmarked by the Company or any affiliate as a fund or reserve for such purpose;
any such funds, other property or reserves shall be subject to the claims of the
creditors of the Company or any affiliate, and the provisions of this Program
are not intended to create, and shall not be interpreted as vesting in any
Participant or other person, any right to or beneficial interest in any such
funds, other property or reserves.
10.07 Amendment or Termination of the Program.
The Compensation Committee of the Board of Directors may amend this Program
from time to time in any respect that it deems appropriate or desirable, and the
Committee may terminate this Program at any time; provided, however, that any
such amendment or termination may not, without the written consent of a
Participant, eliminate, reduce or otherwise adversely affect the rights of such
Participant with respect to Purchase Loans and Grants made prior to the act of
such amendment or termination, or, if earlier, the effective date of such
amendment or termination.
10.08 Titles and Headings; Gender of Terms.
Article and Section headings herein are for reference purposes only and
shall not be deemed to be part of the substance of this Program or in any way to
enlarge or limit the meaning or interpretation of any provision in this Program.
Use in this Program of the masculine, feminine or neuter gender shall be deemed
to include each of the omitted genders if the context so requires.
10.09 Severability.
In the event that any provision of this Program is found to be invalid or
otherwise unenforceable by a court or other tribunal of competent jurisdiction,
such invalidity or unenforceability shall not be construed as rendering any
other provision contained herein invalid
11
<PAGE>
THE IT GROUP, INC.
EXECUTIVE STOCK OWNERSHIP PROGRAM
================================================================================
or unenforceable, and all such other provisions shall be given full force and
effect to the same extent as though the invalid and unenforceable provision was
not contained herein.
IN WITNESS WHEREOF, the Company has caused this Program to be executed by
its duly authorized officer, effective as provided in Section 1.02 hereof.
THE IT GROUP, INC.,
a Delaware corporation
By: /s/ Anthony J. DeLuca
--------------------------------
Title: President
-----------------------------
12
<PAGE>
Exhibit 10(iii)(42)
THE IT GROUP, INC.
EXECUTIVE BONUS PLAN
================================================================================
Effective November 17, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 INTRODUCTION....................................................1
1.01 Purpose................................................1
1.02 Effective Date and Term................................1
1.03 Participation..........................................1
ARTICLE 2 DEFINITIONS.....................................................1
2.01 Beneficiary............................................1
2.02 Board; Board of Directors..............................2
2.03 Bonus Payment..........................................2
2.04 Cause..................................................2
2.05 Change of Control......................................2
2.06 Change of Control Bonus................................2
2.07 Committee; Compensation Committee......................3
2.08 Common Stock...........................................3
2.09 Continued Service Bonus................................3
2.10 FICA...................................................3
2.11 Fiscal Year............................................3
2.12 Full-Time Employee.....................................3
2.13 Participant............................................3
2.14 Performance Bonus......................................3
2.15 Permanently Disabled...................................3
2.16 Retirement Date........................................4
2.17 Termination Date.......................................4
ARTICLE 3 ADMINISTRATION OF THE PLAN......................................4
ARTICLE 4 CONTINUED SERVICE BONUS.........................................4
4.01 Continued Service Bonus................................4
4.02 Separation from Service and Change of Control..........5
ARTICLE 5 PERFORMANCE BONUS...............................................6
5.01 Performance Bonus......................................6
5.02 Separation from Service................................6
ARTICLE 6 CHANGE OF CONTROL BONUS.........................................6
i
<PAGE>
ARTICLE 7 GROSS-UP PAYMENT................................................7
ARTICLE 8 GENERAL PROVISIONS..............................................7
8.01 Not an ERISA Plan......................................7
8.02 Employment Not Guaranteed..............................7
8.03 Applicable Law.........................................7
8.04 Notices................................................7
8.05 Prohibition Against Assignment.........................8
8.06 No Transfer of Interest................................8
8.07 Amendment or Termination of the Plan...................8
8.08 Titles and Headings; Gender of Terms...................8
8.09 Severability...........................................9
8.10 Violation of any Covenant or Law.......................9
8.11 Payments to Incapacitated Participant..................9
8.12 Designation of Beneficiary.............................9
ii
<PAGE>
THE IT GROUP, INC.
EXECUTIVE BONUS PLAN
================================================================================
ARTICLE 1
INTRODUCTION
1.01 Purpose.
The IT Group, Inc. Executive Bonus Plan (the "Plan"), is hereby established
by the Compensation Committee of the Board of Directors of The IT Group, Inc.
(the "Company") and its affiliates, to provide an additional incentive to
certain key executives of the Company or its affiliates (any such executive
shall be referred to hereinafter as a "Key Individual") to improve the Company's
overall profitability and value on a sustainable long term basis. The Plan
provides for a cash bonus based on years of service by a Key Individual, the
future appreciation in the value of the Company as reflected in the value of the
common stock of the Company ("Common Stock"), and any Change of Control, as
specifically provided herein.
1.02 Effective Date and Term.
This Plan is adopted effective as of November 17, 1998 (the "Effective
Date"), and shall continue in effect until terminated by the Board of Directors
(the "Plan Termination Date"). As of the Effective Date, no termination date
has been established for this Plan.
1.03 Participation.
Participation in this Plan shall be limited to those Key Individuals who
are selected from time to time by the Committee to participate in this Plan.
The participation in this Plan by any such Key Individual, and the payment of
any Bonus Payments under this Plan to any such Key Individual, shall be governed
by the terms of this Plan.
ARTICLE 2
DEFINITIONS
Capitalized terms used in this Plan shall have the meanings ascribed to
them in this Article 2, except that in the case of any capitalized term not
specifically defined in this Article 2, such term shall have the meaning
assigned to it in the text of this Plan where such term first appears.
2.01 Beneficiary.
"Beneficiary" shall mean, with respect to any Participant, the one or more
persons and/or entities designated as such Participant's Beneficiary pursuant to
Section 8.11 hereof.
<PAGE>
THE IT GROUP, INC.
EXECUTIVE BONUS PLAN
================================================================================
2.02 Board; Board of Directors.
"Board" and "Board of Directors" each shall mean the Board of Directors of
the Company.
2.03 Bonus Payment.
"Bonus Payment" shall mean the amount payable as a Continued Service Bonus,
a Performance Bonus, or a Change of Control Bonus, as defined herein.
2.04 Cause.
"Cause" shall mean (a) willful misconduct by Participant resulting in
material harm to the Company or an affiliate (including harm to the Company or
an affiliate's public reputation), (b) the breach by Participant of any of his
covenants contained in any agreement with the Company or an affiliate, (c)
Participant's conviction of, or Participant's entering of a guilty plea with
respect to, a felony or (d) Participant's misappropriation of corporate funds.
2.05 Change of Control.
"Change of Control" shall mean the first to occur of the following events:
(a) any date upon which the directors of the Company who were nominated by the
Board of Directors for election as directors and/or were elected by the holders
of the Cumulative Convertible Participating Preferred Stock cease to constitute
a majority of the directors of the Company; (b) a reorganization, merger or
consolidation of the Company, the consummation of which results in the
outstanding securities of any class being exchanged for or converted into cash,
property and/or securities not issued by the Company; (c) the acquisition of
substantially all of the property and assets of the Company by any person or
entity; (d) the dissolution or liquidation of the Company; or (e) the date of
the first public announcement that any person or entity, together with all
Affiliates and Associates (as capitalized terms are defined in Rule 12b-2
promulgated under the Securities Exchange Act of 1934) of such person or entity,
shall have become the beneficial owner (as defined in Rule 13d-3 promulgated
under the Securities Exchange Act of 1934) of voting securities of the Company
representing 35% or more of the voting power of the Company; provided, however,
that the terms "person" and "entity," as used in this clause (e), shall not
include (x) the Company, any of its subsidiaries, The Carlyle Group and its
Affiliates, (y) any employee benefit plan of the Company or any of its
subsidiaries, or (z) any entity holding voting securities of the Company for or
pursuant to the terms of any such plan.
2.06 Change of Control Bonus.
"Change of Control Bonus" shall mean the cash bonus payment to which a
Participant may become entitled pursuant to Article 6 and the terms of this
Plan.
2
<PAGE>
THE IT GROUP, INC.
EXECUTIVE BONUS PLAN
================================================================================
2.07 Committee; Compensation Committee.
"Committee" and "Compensation Committee" each shall mean the Compensation
Committee of the Board of Directors of the Company.
2.08 Common Stock.
"Common Stock" shall mean the Company's common stock, $.01 par value per
share.
2.09 Continued Service Bonus.
"Continued Service Bonus" shall mean the cash bonus payment to which a
Participant may become entitled pursuant to Article 4 and the terms of this
Plan.
2.10 FICA.
"FICA" shall mean the Federal Income Contributions Act.
2.11 Fiscal Year.
"Fiscal Year" shall mean the Company's annual accounting period for tax and
financial accounting purposes, which annual accounting period ends on the last
Friday of each December.
2.12 Full-Time Employee.
"Full-Time Employee" shall mean a person who is currently employed by the
Company or an affiliate and completes at least 30 hours of employment each week.
2.13 Participant.
"Participant" shall mean any Key Individual who is selected from time to
time by the Board to participate in this Plan pursuant to Section 1.03 hereof
and is currently employed by the Company or an affiliate.
2.14 Performance Bonus.
"Performance Bonus" shall mean the cash bonus payment to which a
Participant may become entitled pursuant to Article 5 and the terms of this
Plan.
2.15 Permanently Disabled.
"Permanently Disabled" shall mean the inability to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or which has lasted
or can be expected to last for a continuous period
3
<PAGE>
THE IT GROUP, INC.
EXECUTIVE BONUS PLAN
================================================================================
of not less than twelve (12) months. A Participant shall not be deemed to be
Permanently Disabled until proof of the existence thereof shall have been
furnished to the Administrative Committee in such form and manner, and at such
times, as the Administrative Committee may require. Any determination by the
Company or an affiliate that Participant is or is not Permanently Disabled shall
be final and binding upon the Company or an affiliate and Participant.
2.16 Retirement Date.
"Retirement Date" shall mean the last day of a Participant's employment
with the Company or any affiliate which also constitutes his or her "Normal
Retirement Date" under the IT Corporation Retirement Plan.
2.17 Termination Date.
"Termination Date" shall mean the last day of a Participant's employment by
the Company or an affiliate.
ARTICLE 3
ADMINISTRATION OF THE PLAN
This Plan shall be administered by the Compensation Committee. The
Committee shall have full authority and power, to be exercised in its sole
discretion, to make all determinations and/or decisions concerning the
administration, application or interpretation of any provision of this Plan, and
the Committee may adopt such rules and regulations as it may deem necessary,
appropriate or helpful to carry out the purposes of this Plan. All
determinations, decisions, interpretations, rules, regulations and other actions
of the Committee concerning this Plan shall be final and shall be binding on all
individuals and entities interested in this Plan (and any Beneficiary or other
successor-in-interest to any such person or any such entity).
ARTICLE 4
CONTINUED SERVICE BONUS
4.01 Continued Service Bonus.
A Participant shall receive a Continued Service Bonus in an amount
determined by the Committee and as set forth on a bonus agreement between the
Participant and Company ("Bonus Agreement") for each anniversary of the
Effective Date during the term of the Plan provided that such Participant is a
Full-Time Employee on such anniversary date.
4
<PAGE>
THE IT GROUP, INC.
EXECUTIVE BONUS PLAN
================================================================================
4.02 Separation from Service and Change of Control.
Notwithstanding the foregoing, the occurrence of the following events will
affect the participant's eligibility for a Continued Service Bonus as follows:
(a) Termination of Employment for Cause; Voluntary Termination. A
----------------------------------------------------------
Participant shall not be eligible for any Continued Service Bonus under
this Plan following a separation from service if such separation was due to
termination by the Company or an affiliate for Cause or a voluntary
termination by the Participant.
(b) Termination Without Cause. In the event that a Participant's
-------------------------
employment with the Company or an affiliate is terminated by either without
Cause during the consecutive twelve-month period prior to an anniversary of
the Effective Date (or such other date specified in the Participant's Bonus
Agreement), the Termination Date for purposes of determining the
Participant's eligibility for a Continued Service Bonus shall be deemed to
have occurred six (6) months following the Participant's actual Termination
Date.
(c) Retirement of a Participant. In the event a Participant's
---------------------------
employment terminates on or after his or her Retirement Date during the
consecutive twelve-month period prior to an anniversary of the Effective
Date (or such other date specified in the Participant's Bonus Agreement),
such Participant shall be immediately eligible to receive any Continued
Service Bonus for any outstanding anniversary or anniversaries of the
Effective Date as if he or she had remained a Full-Time Employee through
the last anniversary date on which a Continued Service Bonus is to be
awarded.
(d) Death or Disability of a Participant. In the event a Participant
------------------------------------
dies or becomes Permanently Disabled while employed by the Company or an
affiliate during the consecutive twelve-month period prior to an
anniversary of the Effective Date (or such other date specified in the
Participant's Bonus Agreement), such Participant shall be immediately
eligible to receive any Continued Service Bonus for any outstanding
anniversary or anniversaries of the Effective Date (or such other date
specified in the Participant's Bonus Agreement) as if he or she had
remained a Full-Time Employee through the last anniversary date on which a
Continued Service Bonus is to be awarded.
(e) Change of Control. In the event a Change of Control occurs during
-----------------
the term of this Plan and while the Participant is employed by the Company
or an affiliate, a Participant shall be eligible for the balance of the
total targeted Continued Service Bonus under the Plan as set forth in the
Participant's Bonus Agreement.
5
<PAGE>
THE IT GROUP, INC.
EXECUTIVE BONUS PLAN
================================================================================
ARTICLE 5
PERFORMANCE BONUS
5.01 Performance Bonus.
A Participant shall receive a Performance Bonus in an amount determined by
the Committee and as set forth in the Participant's Bonus Agreement.
5.02 Separation from Service.
Notwithstanding the foregoing, the occurrence of the following events will
affect a Participant's eligibility for a Performance Bonus:
(a) Termination of Employment for Cause; Voluntary Termination. A
----------------------------------------------------------
Participant shall not be eligible for any further Performance Bonus under
this Plan if the Participant's separation from service was due to
termination for Cause or voluntary termination.
(b) Termination Without Cause. In the event that a Participant's
-------------------------
employment with the Company or an affiliate is terminated without Cause,
the Termination Date for the purposes of determining the Participant's
eligibility for a Performance Bonus shall be deemed to have occurred six
(6) months following the Participant's actual Termination Date.
(c) Retirement of a Participant. In the event a Participant's
---------------------------
employment terminates on or after his or her Retirement Date, the
Termination Date for the purposes of determining the Participant's
eligibility for a Performance Bonus shall be deemed to have occurred twelve
(12) months following the Participant's actual Termination Date.
(d) Death or Disability of a Participant. In the event a Participant
------------------------------------
dies or becomes Permanently Disabled, the Termination Date for the purposes
of determining the Participant's eligibility for a Performance Bonus shall
be deemed to have occurred twelve (12) months following the Participant's
actual Termination Date.
ARTICLE 6
CHANGE OF CONTROL BONUS
In the event a Change of Control occurs during the term of this Plan, a
Participant shall receive a Change of Control Bonus as set forth in his Bonus
Agreement less any Continued Service Bonuses and Performance Bonuses actually
received by the Participant prior to the Change of Control.
6
<PAGE>
THE IT GROUP, INC.
EXECUTIVE BONUS PLAN
================================================================================
ARTICLE 7
GROSS-UP PAYMENT
A Participant who receives a Bonus Payment shall also receive a gross-up
payment to offset his or her federal, state, and local income tax and FICA tax
liability. The gross-up payment shall be equal to a Bonus Payment multiplied by
a fraction, x/(1-x), where x equals the highest marginal combined effective
federal, state, and local income tax rates imposed on a Bonus Payment, and
reduced by any tax benefit associated with any interest expense deduction
claimed by the Participant in the year of the receipt of such Bonus Payment.
ARTICLE 8
GENERAL PROVISIONS
8.01 Not an ERISA Plan.
This Plan is restricted to key management employees selected by the Board
of Directors and is not intended to constitute a "qualified plan" for federal
income tax purposes and is not subject to the Employee Retirement Income
Security Act of 1974, as amended.
8.02 Employment Not Guaranteed.
This Plan is voluntary on the part of the Company or any affiliate, and the
Plan shall not be deemed to constitute an employment contract between the
Company or any affiliate and any Participant, nor shall the adoption or
existence of the Plan or any provision contained in the Plan be deemed to be a
required condition of the employment of any Participant. Nothing contained in
this Plan shall be deemed to give any Participant the right to continued
employment with the Company or any affiliate, and the Company or an affiliate
may terminate any Participant at any time, in which case the Participant's
rights arising under this Plan shall be only those expressly provided under the
terms of this Plan.
8.03 Applicable Law.
This Plan shall be governed by and construed and enforced in accordance and
with the laws of the State of Delaware, without regard to the application of the
conflicts of law provisions thereof.
8.04 Notices.
All notices and other communications required or permitted to be given
under the Plan shall be in writing and shall be deemed to have been duly given
if delivered personally or by inter-office mail as follows: (i) if to the
Company, The IT Group, Inc., Mosside Boulevard, Monroeville, PA 15146-2792; (ii)
if to a Participant, to the last home or business address of the Participant
known to the sender.
7
<PAGE>
THE IT GROUP, INC.
EXECUTIVE BONUS PLAN
================================================================================
8.05 Prohibition Against Assignment.
Except as otherwise expressly provided in this Plan, the rights, interests
and benefits of a Participant under this Plan (a) may not be sold, assigned,
transferred, pledged, hypothecated, gifted, bequeathed or otherwise disposed of
to any other party by such Participant or any Beneficiary, executor,
administrator, heir, distributee or other person claiming under such
Participant, and (b) shall not be subject to execution, attachment or similar
process. Any attempted sale, assignment, transfer, pledge, hypothecation, gift,
bequest or other disposition of such rights, interests or benefits contrary to
the foregoing provisions of this Section shall be null and void and without
effect.
8.06 No Transfer of Interest.
No provision of this Plan shall be interpreted or construed (a) as
transferring to any Participant or any other person or entity any direct or
indirect ownership or other proprietary interest whatsoever in the Company or
any affiliate or its stock or securities, or (b) as creating any partnership,
joint venture or other joint business enterprise between any such person and the
Company or any affiliate. The Company and each affiliate shall have and possess
all title to, and beneficial interest in, any and all funds or other property
received by the Company or any affiliate in connection with the sale or other
disposition of all or any portion of the Company's or any affiliate's assets
and/or any funds or reserves maintained or held by the Company or any affiliate
on account of any obligation to pay the Bonus Payments as required under this
Plan, whether or not earmarked by the Company or any affiliate as a fund or
reserve for such purpose; any such funds, other property or reserves shall be
subject to the claims of the creditors of the Company or any affiliate, and the
provisions of this Plan are not intended to create, and shall not be interpreted
as vesting, in any Participant, Beneficiary or other person, any right to or
beneficial interest in any such funds, other properly or reserves.
8.07 Amendment or Termination of the Plan.
The Compensation Committee may amend this Plan from time to time in any
respect that it deems appropriate or desirable, and the Committee may terminate
this Plan at any time; provided, however, that any such amendment or termination
may not, without the written consent of a Participant, eliminate, reduce or
otherwise adversely affect the rights of such Participant to receive payments
under this Plan pursuant to Bonus Agreements entered into prior to the act of
such amendment or termination, or, if earlier, the effective date of such
amendment or termination.
8.08 Titles and Headings; Gender of Terms.
Article and Section headings herein are for reference purposes only and
shall not be deemed to be part of the substance of this Plan or in any way to
enlarge or limit the meaning or
8
<PAGE>
THE IT GROUP, INC.
EXECUTIVE BONUS PLAN
================================================================================
interpretation of any provision in this Plan. Use in this Plan of the masculine,
feminine or neuter gender shall be deemed to include each of the omitted genders
if the context so requires.
8.09 Severability.
In the event that any provision of this Plan is found to be invalid or
otherwise unenforceable by a court or other tribunal of competent jurisdiction,
such invalidity or unenforceability shall not be construed as rendering any
other provision contained herein invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though the
invalid and unenforceable provision was not contained herein.
8.10 Violation of any Covenant or Law.
Notwithstanding any other provision of this Plan, the Company or any
affiliate shall not be required to make a Bonus Payment to a Participant if
making such Bonus Payment would cause the Company or an affiliate to violate any
covenant or other similar provision in any indenture, loan agreement, or other
agreement, or cause the Company or an affiliate to violate any applicable
federal, state or local law.
8.11 Payments to Incapacitated Participant.
In the event a Participant is under mental or physical incapacity at the
time of any payment to be made to such Participant pursuant to this Plan, any
such payment may be made to the conservator or other legally appointed personal
representative having authority over and responsibility for the person or estate
of such Participant, as the case may be, and for purposes of such payment
references in this Plan to the Participant shall mean and refer to such
conservator or other personal representative, whichever is applicable. In the
absence of any lawfully appointed conservator or other personal representative
of the person or estate of the Participant, any such payment may be made to any
person or institution that has apparent responsibility for the person and/or
estate of the Participant as determined by the Board. Any payment made in
accordance with the provisions of this Section to a person or institution other
than the Participant shall be deemed for all purposes of this Plan as the
equivalent of a payment to such Participant, and the Company and its affiliates
shall have no further obligation or responsibility with respect to such payment.
8.12 Designation of Beneficiary.
A Participant shall be entitled to designate one or more persons or
entities, in any combination, as his "Beneficiary" to receive any Plan payments
to which such Participant is entitled in the event of the Participant's death
during the term of this Plan. Any such designation shall be made in a written
instrument filed with the Board. In the event that either (a) a Beneficiary
designation is not on file at the date of a Participant's death, (b) no
Beneficiary survives the Participant, or (c) the Beneficiary designated by a
deceased Participant is not living
9
<PAGE>
at the time any payment becomes payable under this Plan, then, for purposes of
making any further payment of any unpaid Participation Payment (or any unpaid
installment thereof), such Participant's Beneficiary shall be deemed to be the
person or persons surviving him in the first of the following classes in which
there is a survivor, share and share alike:
(i) The Participant's surviving spouse.
(ii) The Participant's children, except that if any of the children
predecease the Participant but leave issue surviving, then such issue shall
take by right of representation the share their parent would have taken if
living.
(iii) The Participant's estate.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its
duly authorized officer, effective as provided in Section 1.02 hereof
THE IT GROUP, INC.
a Delaware corporation
By: /s/ Anthony J. DeLuca
----------------------------------
Title: President
-------------------------------
10
<PAGE>
Exhibit 21.1
INTERNATIONAL TECHNOLOGY CORPORATION
LIST OF SUBSIDIARY COMPANIES
Beneco Enterprises, Inc.
Chi Mei Entech Co., Ltd.
Chi Mei International Technology Co. (Scientech), Ltd.
GCAP Services, Inc.
Gradient Corporation
Groundwater Technology, Inc.
GTI Investment Company
Groundwater Technology Government Services, Inc.
Groundwater Technology Overseas Corp.
Fluor Daniel Environmental Services, Inc.
IT International Investments, Inc.
GTI Limited
IT Environmental (Australia) PTY, Ltd.
GTI Italia, S.R.I.
International Technology Europe Ltd.
IT Brownfields Services Corporation
IT Corporation
IT Corporation de Mexico, S.A. de C.V.
IT Corporation Limited (formerly IT-McGill Limited)
IT Corporation of North Carolina
IT C&V Operations, Inc.
IT E&C Operations, Inc.
IT Environmental Programs, Inc. (formerly PEI Associates, Inc.)
IT Europe Pollution Control Engineering, Ltd. (formerly IT-McGill Pollution
Control Systems, Ltd.)
IT Hanford, Inc.
IT International Holdings, Inc.
IT International Operations, Inc.
IT Investment Holdings, Inc.
IT Japan Services, Inc.
IT Korea Services, Inc.
IT Tulsa Holdings, Inc. (formerly IT-McGill Pollution Control Systems, Inc.)
Jellinek, Schwartz & Connolly, Inc. (and its subsidiaries)
Sielken, Inc.
JSC International, Inc.
JSC International, Ltd.
KOHAP-IT, Ltd.
LandBank, Inc. (and its subsidiaries and affiliates)
LandBank Environmental Properties LLC
Restoration Venture LLC
Remediation Enterprises LLC
Kato Road LLC
LandBank Remediation Corp.
Hercules LLC
Northeast Restoration Company, LLC
Empire State I, LLC
Empire State II, LLC
<PAGE>
The Dorchester Group
37-02 College Point Boulevard, LLC
OHM Corporation (Ohio)
Environmental Financial Services Corp.
OHM Environmental Resource Management Corp.
OHM International, Inc.
OHM Corporation (Nevada)
Environmental Treatment & Technologies Corp.
OHM Remediation Services Corp.
OHM Savannah River Corp.
OHM Energy Services Corp.
OHM Remediation Services of Canada, Ltd.
Alaska Remediation Services Corp.
OH Mound Inc.
Pacific Environmental Group, Inc.
PHR Environmental Consultants, Inc.
Universal Professional Insurance Company
<PAGE>
Exhibit 23.1
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 IT Group, Inc. 1983 Stock Incentive Plan, in the Registration
Statement (Form S-8; No. 33-52974) and in the related Prospectus pertaining to
The IT Group, Inc. 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. 333-27821) and in the related Prospectus pertaining to
the 1996 Stock Incentive Plan, and in the Registration Statements (Form S-8;
No. 333-26143 and No. 333-57065), and in the related Prospectus pertaining to
the 1997 The IT Group, Inc. Non-Employee Director Stock Plan Director Fees, of
our report dated February 15, 1999 with respect to the consolidated financial
statements of The IT Group, Inc. included in this Annual Report (Form 10-K) for
the nine months ended December 25, 1998.
Ernst & Young LLP
Pittsburgh, Pennsylvania
March 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 25, 1998, ITS CONSOLIDATED
STATEMENT OF OPERATION FOR THE NINE MONTHS ENDED DECEMBER 25, 1998 AND
SCHEDULE II AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-25-1998
<PERIOD-START> MAR-28-1998
<PERIOD-END> DEC-25-1998
<CASH> 21,265
<SECURITIES> 0
<RECEIVABLES> 357,547
<ALLOWANCES> 18,958
<INVENTORY> 0
<CURRENT-ASSETS> 393,081
<PP&E> 99,001
<DEPRECIATION> 51,331
<TOTAL-ASSETS> 948,606
<CURRENT-LIABILITIES> 272,821
<BONDS> 405,059
0
6,665
<COMMON> 227
<OTHER-SE> 231,276
<TOTAL-LIABILITY-AND-EQUITY> 948,606
<SALES> 0
<TOTAL-REVENUES> 757,435
<CGS> 0
<TOTAL-COSTS> 666,474
<OTHER-EXPENSES> 24,971
<LOSS-PROVISION> 1,203
<INTEREST-EXPENSE> 24,895
<INCOME-PRETAX> (733)
<INCOME-TAX> 6,694
<INCOME-CONTINUING> (7,427)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,427)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
