<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarter ended June 25, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 1-9037
------
The IT Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 33-0001212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2790 Mosside Boulevard, Monroeville,Pennsylvania 15146-2792
(Address of principal executivec offices) (Zip Code)
Registrant's telephone number, including area code: (412) 372-7701
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_________
-----
At July 31, 1999 the registrant had issued and outstanding an aggregate of
22,761,690 shares of its common stock.
<PAGE>
THE IT GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 25, 1999
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
as of June 25, 1999 (unaudited) and
December 25, 1998................................... 3
Condensed Consolidated Statements of Operations
for the Fiscal Quarters and Two Fiscal Quarters ended
June 25, 1999 and June 26, 1998 (unaudited)......... 4
Condensed Consolidated Statements of Cash Flows
for the Two Fiscal Quarters ended June 25, 1999
and June 26, 1998 (unaudited)....................... 5
Notes to Condensed Consolidated Financial
Statements (unaudited).............................. 6-15
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition....... 13-26
Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 28
Item 6. Exhibits and Reports on Form 8-K.................... 29
Signatures.......................................... 30
</TABLE>
2
<PAGE>
PART I
Item 1. Financial Statements
THE IT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 25, December 25,
1999 1998
----------- -------------
(Unaudited)
ASSETS (In thousands)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 21,254 $ 21,265
Receivables, net................................................. 403,138 338,589
Prepaid expenses and other current assets........................ 27,507 17,308
Deferred income taxes............................................ 19,361 15,919
---------- ---------
Total current assets........................................... 471,260 393,081
Property, plant and equipment, at cost:
Land and land improvements....................................... 596 2,166
Buildings and leasehold improvements............................. 15,397 15,072
Machinery and equipment.......................................... 96,571 81,763
---------- ---------
112,564 99,001
Less accumulated depreciation and amortization................. 54,846 51,331
---------- ---------
Net property, plant and equipment........................... 57,718 47,670
Cost in excess of net assets of acquired businesses................. 488,682 356,619
Other assets........................................................ 44,725 17,469
Deferred income taxes............................................... 94,891 93,719
Long-term assets of discontinued operations......................... 40,048 40,048
---------- ---------
Total assets.............................................. $1,197,324 $ 948,606
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................................. $ 140,016 $ 150,912
Accrued liabilities.............................................. 108,965 96,087
Billings in excess of revenues................................... 16,704 8,219
Short-term debt, including current portion of long-term debt..... 19,061 17,603
---------- ---------
Total current liabilities...................................... 284,746 272,821
Long-term debt...................................................... 592,179 364,824
8% convertible subordinated debentures.............................. 40,235 40,235
Other long-term accrued liabilities................................. 28,436 31,979
Minority interest................................................... 924 579
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized;
22,769,927 and 22,675,917 shares issued........................ 227 227
Preferred stock, $100 par value; 180,000 shared authorized:
7% cumulative convertible exchangeable, 20,556 shares issued
and outstanding, 24,000 shares authorized................... 2,056 2,056
6% cumulative convertible participating, 46,095 shares issued
and outstanding............................................. 4,609 4,609
Additional paid-in capital....................................... 349,884 348,794
Deficit.......................................................... (105,593) (116,984)
---------- ---------
251,183 238,702
Treasury stock at cost, 32,662 and 47,484 shares................. (23) (74)
Accumulated other comprehensive income........................... (356) (460)
---------- ---------
Total stockholders' equity..................................... 250,804 238,168
---------- ---------
Total liabilities and stockholders' equity..................... $1,197,324 $ 948,606
========== =========
</TABLE>
See accompanying notes
3
<PAGE>
THE IT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
----------------------- ----------------------------
June 25, June 26, June 25, June 26,
1999 1998 1999 1998
----------- ---------- -------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues.............................................................. $301,290 $225,188 $559,264 $361,226
Cost and expenses:
Cost of revenues.................................................... 256,683 197,941 481,360 316,779
Selling, general and administrative expenses........................ 16,078 13,878 30,904 24,470
Special charges....................................................... - 24,971 - 30,665
-------- -------- -------- --------
Operating income...................................................... 28,529 (11,602) 47,000 (10,688)
Interest expense, net................................................. 13,882 8,902 22,715 13,485
-------- -------- -------- --------
Income (loss) before income taxes..................................... 14,647 (20,504) 24,285 (24,173)
Provision (benefit) for income taxes.................................. 5,859 (1,213) 9,714 (1,354)
-------- -------- -------- --------
Net income (loss) from continuing operations.......................... 8,788 (19,291) 14,571 (22,819)
Discontinued operations - closure costs
(net of $3,040 income tax benefit).................................. - - - 4,960
-------- -------- -------- --------
Income (loss) before extraordinary item............................... 8,788 (19,291) 14,571 (27,779)
Extraordinary item - loss on early extinguishment of debt
(net of $3,497 income tax benefit).................................. - - - 5,706
-------- -------- -------- --------
Net income (loss)..................................................... 8,788 (19,291) 14,571 (33,485)
Preferred stock dividends............................................. (1,590) (1,569) (3,180) (3,127)
-------- -------- -------- --------
Net income (loss) applicable to common stock.......................... $ 7,198 $(20,860) $ 11,391 $(36,612)
======== ======== ======== ========
Net income (loss) per share basic:
Earnings (loss) from continuing operations (net of preferred
stock dividends)................................................. $ 0.32 $ (1.76) $ 0.50 (2.37)
Loss from discontinued operations................................... - - - (0.45)
Extraordinary item - early extinguishment of debt................... - - - (0.52)
-------- -------- -------- --------
$ 0.32 $ (1.76) $ 0.50 $ (3.34)
======== ======== ======== ========
Net income (loss) per common share diluted............................ $ 0.27 $ (1.76) $ 0.44 $ (3.34)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic................................................................. 22,710 11,881 22,674 10,961
======== ======== ======== ========
Diluted............................................................... 29,437 11,881 29,355 10,961
======== ======== ======== ========
</TABLE>
See accompanying notes
4
<PAGE>
THE IT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Two fiscal quarters ended
-------------------------
June 25, June 26,
1999 1998
--------- ----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ 14,571 $ (33,485)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 13,805 14,186
Deferred income taxes..................................... 8,361 (4,773)
Special charges........................................... - 24,971
Net loss from disposition of discontinued operations...... - 4,960
Extraordinary charge for early retirement of debt......... - 3,640
Other..................................................... 883 (985)
Changes in assets and liabilities, net of effects
from acquisitions:
Changes in assets and liabilities......................... (53,950) (42,195)
Decrease in site closure costs of discontinued operation.. (2,110) (4,529)
--------- ---------
Net cash used for operating activities....................... (18,440) (38,210)
Cash flows from investing activities:
Capital expenditures......................................... (7,536) (3,692)
Acquisition of businesses.................................... (177,278) (208,721)
Proceeds from sale of assets................................. 980 5,750
Other, net................................................... (2,315) (1,491)
--------- ---------
Net cash used for investing activities....................... (186,149) (208,154)
Cash flows from financing activities:
Financing costs.............................................. (8,052) (9,307)
Net borrowing of long-term debt.............................. 215,184 225,311
Net issuance of common stock................................. 626 -
Dividends paid on preferred stock............................ (3,180) (1,810)
--------- ---------
Net cash provided by financing activities.................... 204,578 214,194
--------- ---------
Net increase (decrease) in cash and cash equivalents.......... (11) (32,170)
Cash and cash equivalents at beginning of period.............. 21,265 54,128
--------- ---------
Cash and cash equivalents at end of period.................... $ 21,254 $ 21,958
========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of significant account policies:
The condensed consolidated financial statements included herein have been
prepared by The IT Group, Inc. (IT or the Company), without audit, and
include all adjustments of a normal, recurring nature that are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the fiscal quarter and year to date period ended June 25,
1999, pursuant to the rules of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations although the Company believes that the disclosures in such
financial statements are adequate to make the information presented not
misleading.
As previously reported, during the nine-month transition period ended
December 25, 1998 the Company changed its fiscal year-end from the last
Friday in March to the last Friday in December. Consequently, unaudited
financial statements for the six months ended June 25, 1998 have not been
previously reported.
Certain items previously reported in specific financial statement captions
have been reclassified to conform to the current year's presentation. The
reclassifications had no impact on income or total assets.
These condensed consolidated financial statements should be read in
conjunction with the Company's transition report on Form 10-K for the nine
months ended December 25, 1998. The results of operations for the fiscal
period ended June 25, 1999 are not necessarily indicative of the results
for the full fiscal year. The December 25, 1998 balance sheet amounts were
derived from audited financial statements.
2. Business acquisitions:
EMCON
On June 15, 1999, the Company acquired all of the outstanding capital stock
of EMCON Inc. (EMCON) for approximately $61.9 million plus the assumption
of approximately $13.3 million in debt. EMCON, based in San Mateo,
California, is a fully integrated environmental consulting, engineering,
design, construction and related outsourced services firm serving primarily
the private sector with a focus on the solid waste service market. For the
twelve months ended December 31, 1998, EMCON had revenues of $151.3 million
and net income of $1.6 million.
The transaction was accounted for as a purchase in accordance with
Accounting Principles Board (APB) Opinion No. 16, "Business Combinations".
The excess of the purchase price over the fair value of assets acquired and
liabilities assumed of $29.3 million is classified as cost in excess of net
assets of acquired businesses.
The estimated fair value of the assets acquired and liabilities assumed of
EMCON, as adjusted, are as follows:
<TABLE>
<CAPTION>
Description Amount
----------- --------------
(In thousands)
<S> <C>
Current assets........................................... $ 46,640
Property and equipment................................... 11,576
Cost in excess of net assets of acquired businesses...... 29,333
Other long term assets................................... 13,173
Current liabilities...................................... 27,432
Long term liabilities, primarily debt.................... 10,378
</TABLE>
As a result of the acquisition of EMCON, 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 $6.6
6
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
million for the estimated EMCON severance, office closure and lease
termination costs which will be paid over the next four years.
EFM Group
On April 9, 1999, the Company acquired specified assets of EFM Group (EFM)
from ICF Kaiser International, Inc. (Kaiser) for $74.0 million in cash
net of $8.0 million representing working capital retained by Kaiser.
EFM provides environmental remediation, program management and technical
support for United States Government agencies including the DOD, NASA and
the DOE as well as private sector environmental clients. EFM had revenue of
approximately $106.0 million for the calendar year ended December 31, 1998.
The transaction was accounted for as a purchase in accordance with APB
Opinion No. 16. The excess of the purchase price over the fair value of
assets acquired and liabilities assumed of $77.7 million is classified as
cost in excess of net assets of acquired businesses. The EFM net assets
acquired were $2.2 million consisting principally of an investment in a
joint venture.
As a result of the acquisition of EFM, 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 $4.5 million for the estimated EFM severance, office closure and
lease termination costs of which $1.9 million has been paid through June
25, 1999. The balance will be paid over the next two years.
Roche
On March 31, 1999, the Company acquired all of the outstanding capital
stock of Roche Limited Consulting Services (Roche) for $10.2 million plus
potential future earnout payments ranging from zero to $9.0 million. Roche
is based in Quebec City, Canada and provides engineering and construction
services to wastewater, paper, mining and transportation industries
worldwide. Roche had revenue of approximately $28.0 million for the year
ended December 31, 1998.
The transaction was accounted for as a purchase in accordance with APB
Opinion No. 16. The excess of the purchase price over the fair value of
assets acquired and liabilities assumed of $3.9 million is classified as
cost in excess of net assets of acquired businesses.
The estimated fair value of the assets acquired and liabilities assumed of
Roche as adjusted are as follows:
<TABLE>
<CAPTION>
Description Amount
----------- ---------------
(In thousands)
<S> <C>
Current assets............................................ $ 11,840
Property and equipment.................................... 1,711
Cost in excess of net assets of acquired businesses....... 3,868
Other long term assets.................................... 3,202
Current liabilities....................................... 9,408
Long term liabilities, primarily debt..................... 664
</TABLE>
7
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The purchase price allocations for the EMCON, Roche and EFM acquisitions
are 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.
The following unaudited pro forma condensed statement of operations gives
effect to the EFM, Roche and EMCON acquisitions as if the transactions had
occurred at the beginning of the six-month periods ended June 25, 1999 and
June 26, 1998.
<TABLE>
<CAPTION>
June 25, 1999 June 26, 1998
Pro Forma Pro Forma
------------------- ------------------
(In thousands, except per share data)
<S> <C> <C>
Revenues................................................... $ 649,937 $ 491,898
Income (loss) from continuing operations................... 15,607 (20,532)
Net income (loss) applicable to common stock............... 12,427 (34,325)
Income (loss) per share:
Basic................................................... 0.55 (3.14)
Diluted................................................. 0.47 (3.14)
</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 EFM, Roche and EMCON acquisitions had taken
place at the date and on the basis assumed above.
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
APB Opinion 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.
The estimated fair value of the assets acquired and liabilities assumed of
GTI are as follows:
<TABLE>
<CAPTION>
Description Amount
----------- -----------------
(In thousands)
<S> <C>
Current assets..................................................................................... $ 91,644
Property and equipment............................................................................. 3,587
Intangibles, primarily cost in excess of net assets of acquired businesses......................... 16,324
Other long term assets............................................................................. 5,972
Current liabilities................................................................................ 46,130
</TABLE>
As a result of the acquisition of 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 $7.0 million has been paid
through June 25, 1999. The balance, relating primarily to office lease
costs, will be paid over the next four years.
The purchase price allocation is preliminary and based upon information
currently available. Management is continuing to gather and evaluate
information regarding the valuation of assets and liabilities at the date
of the acquisition. Management does not anticipate material changes to the
preliminary allocation.
8
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OHM Acquisition
In January 1998, the Company entered into a merger agreement to acquire OHM
Corporation (OHM), an environmental and hazardous waste remediation company
servicing primarily industrial, federal government and local government
agencies located in the United States. The transaction was effected through
a two-step process for a total purchase price of $303.4 million consisting
of (a) the acquisition of 54% of the total outstanding shares through a
cash tender offer (Tender 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 $346.3 million is classified as cost in excess of net assets of
acquired businesses with amortization over forty years.
The estimated fair value of the assets acquired and liabilities assumed of
OHM as adjusted are as follows:
<TABLE>
<CAPTION>
Description Amount
----------- ---------------
(In thousands)
<S> <C>
Current assets........................................... $ 105,096
Property and equipment................................... 18,344
Cost in excess of net assets of acquired businesses...... 346,299
Other long term assets................................... 78,229
Current liabilities...................................... 136,558
Long term liabilities, primarily debt.................... 107,924
</TABLE>
As a result of the merger with OHM (the OHM Merger), the Company adopted a
plan and completed the process of closing specific overlapping facilities
and reducing consolidated employment. The acquired balance sheet includes
an accrual of $14.8 million for the estimated OHM severance, office closure
costs and lease termination costs of which $12.4 million has been paid
through June 25, 1999. The balance relating primarily to office lease costs
is anticipated to be paid over the next seven years.
9
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Earnings per share:
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the fiscal quarter ended For the two fiscal quarters ended
------------------------------ ----------------------------------
June 25, June 26, June 25, June 26,
1999 1998 1999 1998
-------------- -------------- ----------------- ---------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) from continuing operations................. $ 8,788 $(19,291) $14,571 $(22,819)
Preferred stock dividends................................... (1,590) (1,569) (3,180) (3,127)
------- -------- ------- --------
Numerator for basic earnings per share - net income (loss)
available to common stockholders........................... 7,198 (20,860) 11,391 (25,946)
Discontinued operations - closure costs (net of income
tax benefit)............................................... - - - (4,960)
Extraordinary charge for early retirement of debt (net of
income tax benefit)........................................ - - - (5,706)
------- -------- ------- --------
Net income (loss) applicable to common stock................. $ 7,198 $(20,860) $11,391 $(36,612)
======= ======== ======= ========
Effect of conversion of dilutive securities:
Preferred stock dividends.................................. 692 - 1,384 -
------- -------- ------- --------
Numerator for diluted earnings per share - net income
(loss) applicable to common stock.......................... $ 7,890 $(20,860) $12,775 $(36,612)
======= ======== ======= ========
Denominator:
Denominator for basic earnings per share-
weighted average shares.................................... 22,710 11,881 22,674 10,961
Effect of conversion of dilutive securities:
Common equivalent shares................................... 654 - 608 -
Convertible preferred stock................................ 6,073 - 6,073 -
------- -------- ------- --------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions.................................... 29,437 11,881 29,355 10,961
======= ======== ======= ========
Net income (loss) per share basic:
Earnings from continuing operations (net of preferred stock
dividends)................................................. $ 0.32 $ (1.76) $ 0.50 $ (2.37)
Earnings from discontinued operations........................ - - - (0.45)
Extraordinary item - early extinguishment of debt............ - - - (0.52)
------- -------- ------- --------
$ 0.32 $ (1.76) $ 0.50 $ (3.34)
======= ======== ======= ========
Net income (loss) per share diluted........................... $ 0.27 $ (1.76) $ 0.44 $ (3.34)
======= ======== ======= ========
</TABLE>
In June 1998, approximately 12.9 million shares were issued in connection with
the second step of the OHM Merger (see Item 1. Financial Statements -Notes to
Condensed Consolidated Financial Statements, Note 2).
10
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Recent accounting pronouncements:
In June of 1999, the Financial Accounting Standards Board (FASB) issued
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of Effective Date of FASB Statement No. 133" which
deferred for a one year period the required adoption of FASB Statement No.
133 to fiscal years beginning after June 15, 2000. As a result, the Company
intends to adopt FASB Statement No. 133 in the first fiscal quarter of the
year 2001 although earlier adoption is permitted. The Company is required
by its Credit Facilities to use swap agreements to manage the interest rate
risks associated with the variable nature of a portion of borrowings under
the Company's Credit Facilities. FASB Statement No. 133 requires these swap
agreements to be recorded at fair market value and reflected in earnings.
The Company has evaluated its existing interest rate contracts and
management does not believe that the impact of adopting this new standard
will be material to the Company's financial statements.
5. Discontinued operations:
In December 1987 the Company's Board of Directors adopted a strategic
restructuring program which included a formal plan to divest the
transportation, treatment and disposal operations through the sale of some
facilities and closure of certain other facilities. As of June 25, 1999,
three of the Company's inactive disposal sites have been formally closed
and the fourth is in the process of closure. At June 25, 1999, the
Company's condensed consolidated balance sheet included accrued liabilities
of $5.8 million to complete the closure and post-closure of its disposal
facilities and the PRP matters, net of certain trust fund and annuity
investments, restricted by trust agreements with the California EPA
Department of Toxic Substance Control to closure and post-closure use.
There were no significant developments with these discontinued operations
during the quarter.
The provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and
estimates. The adequacy of the provision for loss is periodically
reevaluated in light of the developments since the adoption of the
divestiture plan, and management believes that the provision as adjusted is
reasonable; however, the ultimate effect of the divestiture on the
consolidated financial condition, liquidity and results of operations of
the Company is dependent upon future events, the outcome of which cannot be
determined at this time. Outcomes significantly different from those used
to estimate the provision for loss could result in a material adverse
effect on the consolidated financial condition, liquidity and results of
operations of the Company.
6. Contingencies:
For information regarding legal proceedings of the Company's continuing
operations, please see the note "Commitments and contingencies" in the
Notes to Consolidated Financial Statements in the Company's Transition
Report on Form 10-K for the fiscal year ended December 25, 1998 (as amended
through Amendment No. 1); current developments regarding continuing
operations' legal proceedings are discussed in Part II of this filing. See
Management's Discussion and Analysis of Results of Operations and Financial
Condition -Financial Condition - Transportation, Treatment and Disposal
Discontinued Operations for information regarding the legal proceedings of
the discontinued operations of the Company.
7. Contract accounting and accounts receivable:
Included in accounts receivable, net at June 25, 1999 are billed
receivables, unbilled receivables and retention in the amounts of $326.8
million, $66.5 million and $9.8 million, respectively. Billed receivables,
unbilled receivables and retention from various agencies of the U.S.
Government as of June 25, 1999 were $146.8 million, $47.1 million and $2.3
million, respectively. At December 25, 1998, billed receivables, unbilled
receivables and retention were $269.0 million, $60.6 million and $9.0
million, respectively. Billed receivables, unbilled receivables and
retention from the U.S. Government as of December 25, 1998 were $145.6
million, $37.5 million and $2.2 million, respectively.
11
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 25, 1999 is approximately $33.4
million associated with claims and unapproved change orders, which are
believed by management to be probable of realization. Most of these claims
and change orders are being negotiated or are in arbitration and should be
settled within one year. This amount includes contract claims in litigation
(see Item 1. Financial Statements - Notes to Condensed Consolidated
Financial Statements, Note 6). While management believes no material loss
will be incurred related to these claims and change orders, the actual
amounts realized could be materially different than the amount recorded.
8. Special charges:
Special charges totaling $30.7 million were recorded for the two fiscal
quarters ended June 26, 1998.
A $10.6 million special charge (net of cash proceeds of $5.8 million)
related to the sale of the Company's investment in Quanterra, Incorporated.
A $14.4 million special charge related to the write down of assets
associated with the Company's Hybrid Thermal Treatment System (HTTS/(R)/)
business to estimated salvage value.
A special charge of $5.7 million was recorded in the fiscal quarter ended
March 27, 1998 for integration costs associated with the acquisition of
OHM, including $2.2 million of costs for severance and $3.5 million of
costs other related items for closing and consolidating the Company's
offices with OHM's offices. As part of the plan of integration, the Company
identified slightly more than 100 IT employees in the operating group and
administrative support functions to be laid off. In addition, the Company
approved a plan for restructuring IT offices in which it would close three
leased facilities, reduce the size of three more facilities and sublease a
portion of eight additional facilities. As of June 25, 1999, $0.6 million
of the integration charge remained to be paid. The remaining costs relate
to the facility closures and office consolidations and will be paid over
the remaining terms of the leases. Most of these lease commitments will be
paid within the next three years. One lease requires payments over the next
six years.
9. Income taxes:
For the two fiscal quarters ended June 25, 1999, the Company recorded an
income tax provision of $9.7 million, reflecting an income tax rate of 40%
on income of $24.3 million which is based upon the estimated tax rate for
the entire year.
For the two fiscal quarters ended June 26, 1998, the Company recorded an
income tax benefit of $1.4 million, reflecting an income tax rate of 40% on
income of $6.5 million excluding special charges of $30.7 million. The
income tax benefit related to the special charges was offset by an increase
in the deferred tax valuation allowance of $8.3 million.
Based on a net deferred tax asset of $113.8 million (net of a valuation
allowance of $51.3 million) at June 25, 1999 and assuming a net federal and
state effective tax rate of 40%, the level of future earnings necessary to
fully realize the net deferred tax asset would be approximately $285.0
million. The Company evaluates the adequacy of the valuation allowance and
the realizability of the net deferred tax asset on an ongoing basis.
Because of the Company's position in the industry, recent acquisitions,
restructuring and existing backlog, management expects that its future
taxable income will more likely than not allow the Company to fully realize
its net deferred tax asset.
12
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10 Long-term debt:
As amended to date, the Company's credit facilities consist of an eight-
year amortizing term loan (term loans) of $228.0 million and a six-year
revolving credit facility (revolving loans) of $185.0 million that contains
a sublimit of $50.0 million for letter of credit issuance. The term loans
made under the credit facilities bear interest at a rate equal to LIBOR
plus 2.75% as adjusted per annum (or the lender's base rate plus 1.75% per
annum) and amortize on a semi-annual basis in aggregate annual installments
of $4.5 million until June, 2004, with the remainder payable in eight equal
subsequent quarterly installments. The revolving loans made under the
credit facilities bear interest at a rate equal to LIBOR plus 2.25% as
adjusted per annum (or the lender's base rate plus 1.25% per annum).
On March 5, 1999, the lenders under the Company's credit facilities
approved the third amendment to the loan agreement. The third amendment
allowed for the acquisitions of the EFM and Roche (see Item 1. Financial
Statements - Notes to Condensed Consolidated Financial Statements, Note 2)
as permitted acquisitions under the credit facilities, increased the amount
of subordinated notes that could be issued by the Company from $150.0
million to $250.0 million and amended the definition of "change of control"
to permit certain sales by the Carlyle Investors of the 6% Preferred Stock
(or Common Stock into which such preferred stock may have been converted).
The third amendment further provides that excess proceeds from the issuance
of subordinated notes utilized to reduce the revolving credit facility
portion of the credit facilities would not affect the future availability
to the Company under the revolving facility. Paydowns of the Company's
revolving facility allow for subsequent re-borrowing under the facility.
On April 9, 1999, the Company issued $225.0 million of senior subordinated
notes (Notes). The Company received $215.8 million in proceeds, net of
expenses of $9.2 million. The Notes have an 11.25% fixed rate of interest
payable every six months in cash commencing in 1999 and will be redeemable
in or after 2004 at a premium. The Notes are general unsecured obligations
of the Company, subordinated to the Company's credit facilities and other
senior indebtedness and pari passu with other existing and future
indebtedness unless the terms of that indebtedness expressly provide
otherwise. The proceeds of the Notes were used to fund the Roche and EFM
acquisitions and to refinance existing indebtedness under the Company's
revolving credit facility.
On May 10, 1999, the lenders under the Company's credit facilities approved
a Consent and Waiver to include the Company's proposed EMCON acquisition
as a permitted acquisition under the loan agreement, subject to certain
customary conditions.
Letters of credit outstanding at June 25, 1999 were $11.9 million, of which
$7.8 million were issued under the revolving credit facility.
The Company also has various miscellaneous outstanding notes payable and
capital lease obligations totaling $12.4 million. These notes payable
mature at various dates between July 1999 and November 2000, at interest
rates ranging from 7.5% to 8.6%.
11. Operating segments:
Organization
The IT Group, Inc. has four reportable segments: Engineering & Construction
(E & C), Consulting & Ventures (C & V), Outsourced Services and
International. The Company's E & C segment manages complex hazardous waste
remediation projects of all sizes involving the assessment, planning and
execution of the decontamination and restoration of property, plant and
equipment that have been contaminated by hazardous substances. The C & V
segment provides a wide range of consulting services including
environmental permitting, facility siting and design, strategic
environmental management, environmental compliance/auditing, risk
assessment/management, pollution prevention, waste minimization,
environmental information systems, and data management. The Outsourced
Services segment provides full service capabilities for operations,
maintenance, management and construction at federal, state and local
government facilities and in the private sector. The Company's
International segment is designed to meet the global needs of the Company's
U.S. based clients and to invest in businesses or enter into joint ventures
to pursue and perform international projects. The Company's international
operations include a 50.1% investment in a Taiwan-based wastewater
treatment design/build firm and with the acquisition
13
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of GTI in December 1998, the Company expanded its international presence
to provide environmental services through subsidiaries located in Europe
and Australia.
Segment Information
<TABLE>
<CAPTION>
Outsourced
E & C C & V Services International Total
----- ----- -------- ------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Quarter ended June 25, 1999
Revenues........................................ $186,266 $ 70,355 $ 27,807 $ 16,862 $301,290
Segment profit.................................. 24,958 12,279 1,772 929 39,968
Quarter ended June 26, 1998
Revenues........................................ $180,200 $ 22,047 $ 19,682 $ 3,259 $225,188
Segment profit (loss)........................... 19,623 3,387 1,285 (339) 23,956
Two quarters ended June 25, 1999
Revenues........................................ $364,936 $119,137 $ 51,139 $ 24,052 $559,264
Segment profit.................................. 44,808 19,818 3,127 1,135 68,888
Two quarters ended June 26, 1998
Revenues........................................ $285,944 $ 45,522 $ 26,501 $ 3,259 $361,226
Segment profit (loss)........................... 31,374 6,350 2,233 (1,702) 38,255
</TABLE>
<TABLE>
<CAPTION>
Quarter ended Two quarters ended
------------------- ------------------
June 25, June 26, June 25, June 26,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Profit or Loss
Total profit for reportable segments.................... $ 39,968 $ 23,956 $ 68,888 $ 38,255
Unallocated amounts:
Corporate selling, general and administrative expense.. (11,439) (10,587) (21,888) (18,278)
Special charges (a).................................... - (24,971) - (30,665)
Interest expense, net.................................. (13,882) (8,902) (22,715) (13,485)
-------- -------- -------- --------
Income (loss) before income taxes....................... $ 14,647 $(20,504) $ 24,285 $(24,173)
======== ======== ======== ========
</TABLE>
(a) Special charges, not included in the measurement of segment profit (loss)
for the quarter ended June 26, 1998 include amounts relating to the sale of
the Quanterra investment and the write down of the HTTS/(R)/ assets, and
for the two quarters ended June 26, 1998 also includes OHM integration
costs, primarily severance and office consolidations.
14
<PAGE>
THE IT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Financial information for subsidiary guarantors
The Company's payment obligations under the Notes are fully and
unconditionally guaranteed on a joint and several basis by substantially
all of the Company's wholly owned domestic subsidiaries. The Notes have not
been guaranteed by the Company's domestic captive insurance subsidiary nor
any of the Company's foreign subsidiaries. The following summarized
financial information presents separately the composition of the Guarantor
Subsidiaries and Non-Guarantor Subsidiaries. The principal elimination
entries eliminate investments in subsidiaries and intercompany balances and
transactions.
Summarized Condensed Financial Information
As of and for the Six Months Ended June 25, 1999
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------- ---------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Current assets.............................. $ - $ 438,165 $33,232 $ (137) $471,260
Non current assets 19,476 1,169,443 35,710 (498,565) 726,064
Current liabilities 7,279 254,328 27,886 (4,747) 284,746
Revenues - 536,681 22,678 (95) 559,264
Gross margin - 76,091 1,908 (95) 77,904
Net income (loss) from continuing operations (5,028) 18,814 1,299 (514) 14,571
Net income (loss) (5,028) 18,814 1,299 (514) 14,571
</TABLE>
Summarized Condensed Financial Information
As of and for the Six Months Ended June 26, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------------- ----------------- -------------- ---------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Current assets $ - $298,976 $10,112 $ (259) $308,829
Non current assets 12,721 622,937 9,140 (119,470) 525,328
Current liabilities 2,487 189,267 17,757 (8,712) 200,799
Revenues - 357,935 3,553 (262) 361,226
Gross margin - 44,894 (185) (262) 44,447
Net income (loss) from continuing operations (1,856) (20,541) 288 (710) (22,819)
Net income (loss) (1,856) (31,207) 288 (710) (33,485)
</TABLE>
13. Subsequent event
On July 28, 1999, the Company announced that within its existing four
segments it would conduct its business through seven principal business
units and announced the promotion of the managers of those units currently
led by existing Vice Presidents, and other officers. The Company also
announced that two senior executives had left the Company; the Senior Vice
President of the Engineering & Construction segment, the Senior Vice
President of the Consulting & Ventures segment, and that the Senior Vice
President and Chief Administrative Officer would be leaving the Company to
pursue other opportunities.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
THE IT GROUP, INC.
FOR QUARTER ENDED JUNE 25, 1999
RESULTS OF OPERATIONS
Overview
We are a leading provider of a broad range of environmental consulting,
engineering and construction, and remediation services, designed to address
clients' environmental needs and to add value by reducing clients' financial
liabilities. In addition, we are leveraging our ability to manage large, complex
environmental projects, one of our core strengths, to offer a variety of
services, such as facilities management, to clients who no longer wish to
perform these services themselves. 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 59% of our revenues for the six months ended
June 25, 1999 from the federal government under more than 100 contracts that
range in length from one to ten years. In addition, we serve 1,600 commercial
clients on projects, which range in length from one month to more than one year.
For the six months ended June 25, 1999, our revenues were $559.3 million.
Approximately 86% of our backlog at June 25, 1999 was under federal government
programs, and approximately 85% is expected to be charged to our clients on a
cost-reimbursable basis.
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 revenues. Our cost of revenues include
subcontractor costs, salaries, direct and indirect overhead costs such as rents,
utilities and travel directly attributable to projects. Our selling, general and
administrative expenses are comprised primarily of costs related to the
executive offices, corporate accounting, information technology, marketing and
bid and proposal costs. These costs are generally unrelated to specific client
projects. In addition, we include in these expenses amortization of intangible
assets such as goodwill resulting from acquisitions.
Revenues and Gross Margins
Company. Revenues for the three months ended June 25, 1999 increased $76.1
million, or 33.8%, to $301.3 million, and for the six-month year to date period
ended June 25, 1999 increased $198.1 million, or 54.8%, to $559.3 million over
the comparable prior year periods ended June 26, 1998. The increases in revenues
are primarily attributable to the acquisitions of OHM Corporation (OHM) in
February and June, 1998, Fluor Daniel GTI, Inc. (GTI) in December 1998, Roche
Limited Consulting Group (Roche) in March 1999, the Environment and Facilities
Management Group of ICF Kaiser International, Inc. (EFM) in April 1999, and
EMCON, Inc. (EMCON) in June 1999 (see Item 1 - Notes to Condensed Consolidated
Financial Statements, Note 2). Revenue levels, year-to-date, are running below
expectations primarily as a result of start-up delays of construction and
remediation activities on various projects. Revenue is expected to increase in
the second half of the year, resulting in revenue of approximately $1.3 billion
for 1999.
Our gross margin for the quarter ended June 25, 1999, improved to 14.8% of
revenues, compared to 12.1% of revenues reported in the quarter ended June 26,
1998. Our gross margin for the six months ended June 25, 1999 increased to
13.9% of revenues, compared to 12.3% of revenues reported in the six months
ended June 26, 1998. The increases in gross margins over the prior year periods
were due to a favorable mix of higher margin revenue and overhead efficiencies.
We do not expect the improvement in our gross margin percentage to continue at
the current level throughout the balance of the year. Our ability to maintain or
improve our gross margin levels as well as to achieve target earnings is
dependent on various factors in addition to the mix of work, including
utilization of professional staff, successful execution of projects and bidding
of new contracts at adequate margin levels, and continued realization of
overhead savings achieved upon the successful integration of recent
acquisitions.
16
<PAGE>
THE IT GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
A significant percentage of our revenues continue to be earned from federal
government contracts with various federal agencies. Revenues from federal
government contracts accounted for 59% of our consolidated revenues in both the
six months ended June 25, 1999 and June 26, 1998. Although the percentage of
revenues from federal government contracts remained about the same for the two
comparable periods, the absolute dollars of federal government revenues
increased to $330.8 million in the six months ended June 25, 1999 compared to
$212.8 million in the six months ended June 26, 1998. This increase is primarily
attributable to the acquisitions of OHM, GTI and EFM. Federal government
revenues are derived principally from work performed for the DOD and, to a
lesser extent, the DOE. We expect to continue to earn a substantial portion of
our Engineering & Construction segment revenues from DOD indefinite delivery
order contracts, which are primarily related to remedial action work. In
addition, management expects to increase our revenues from the DOE in the future
due to an expected transition by the DOE over the next several years to
emphasize remediation, as opposed to studies, combined with our favorable
experience in winning and executing similar work for the DOD and our past
performance on DOE contracts.
Revenue growth from the commercial sector, excluding recent acquisitions, could
continue to 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.
To address this projected trend in industry spending, we have undertaken a
strategy of expanding through acquisitions our integrated environmental service
capabilities to provide additional proactive and cost-effective environmental
solutions based on economic rather than regulatory considerations. In addition,
we have realigned our organizational resources to meet forecasted revenue
growth.
Engineering & Construction. Revenues from the Engineering & Construction segment
increased $6.1 million, or 3.4%, to $186.3 million for the three months ended
June 25, 1999. For the six months ended June 25, 1999, Engineering &
Construction segment revenues increased $79.0 million, or 27.6%, to $364.9
million. Our Engineering & Construction segment includes revenues from the
Department of Defense (DOD), Department of Energy (DOE), other government
agencies, and commercial clients.
For the three months ended June 25, 1999, revenues from the DOD and a small
number of other government agencies increased $8.8 million, or 8.2%, to $116.7
million, DOE revenues increased $13.5 million, or 69.6%, to $32.9 million, and
commercial revenues decreased $16.2 million, or (30.6%), to $36.7 million. DOE
revenues increased primarily due to the transition to the remediation phase 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 (Fernald Project). Commercial revenues in the Engineering &
Construction segment decreased due to delays in starting fieldwork. Segment
revenues also increased as a result of the EFM acquisition.
For the six months ended June 25, 1999, revenues from DOD and other governmental
agencies increased $61.3 million, or 35.8%, to $232.3 million, DOE revenues
increased $23.8 million, or 73%, to $56.4 million, and commercial revenues
decreased $6.7 million, or (8.1%), to $76.2 million. The increase in DOD
revenues was mainly the result of the OHM acquisition. The increase in DOE
revenues is mainly due to the DOE's Fernald Project. The decrease in commercial
revenues is mainly due to delays in starting fieldwork.
Our Engineering & Construction segment profit margin was $25.0 million, or 13.4%
of segment revenues, for the three months ended June 25, 1999, compared to $19.6
million, or 10.9% of segment revenues, for the three months ended June 26, 1998.
Our Engineering & Construction segment profit margin was $44.8 million, or 12.3%
of segment revenues, for the six months ended
17
<PAGE>
THE IT GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
June 25, 1999 compared to $31.4 million, or 11.0% of segment revenues, for the
six months ended June 26, 1998. The increase in gross margin percentages for the
three and six months ended June 25, 1999 over the prior year periods was
primarily due to a favorable mix of higher margin revenue and overhead
efficiencies.
Consulting & Ventures. Revenues from our Consulting & Ventures segment increased
$48.4 million, or 220%, to $70.4 million for the three months ended June 25,
1999. For the six months ended June 25, 1999, Consulting & Ventures revenues
increased $73.6 million, or 162%, to $119.1 million. Most of the revenues in
Consulting & Ventures are derived from commercial clients. The increase in these
revenues is primarily due to the acquisitions of GTI in December 1998 and EFM in
April 1999.
Our Consulting & Ventures segment profit margin was $12.3 million, or 17.5% of
segment revenues in the three months ended June 25, 1999, compared to $3.4
million, or 15.4% of segment revenues, for the three months ended June 26, 1998.
Our Consulting & Ventures segment profit margin was $19.8 million, or 16.6% of
segment revenues, for the six months ended June 25, 1999, compared to the $6.4
million, or 13.9% of segment revenues for the six months ended June 26, 1998.
The increased profit margin in absolute dollars and as a percentage of revenue
is primarily attributable to increased operating efficiencies related to the GTI
acquisition.
Outsourced Services. Outsourced Services revenues increased $8.1 million, or
41.3%, to $27.8 million for the three months ended June 25, 1999. For the six
months ended June 25, 1999, Outsourced Services revenues increased $24.6
million, or 93.0%, to $51.1 million. The revenue increases are attributable to
the OHM acquisition in February 1998 and the inclusion of its outsourcing
operations in our results of operations for the entire six months ended June 25,
1999, as opposed to four months of revenues included in comparable prior year
period. Our outsourcing operations provide a range of project, program and
construction management services to the DOD as well as state and local
government agencies.
Our Outsourced Services segment profit margin was $1.8 million for the three
months ended June 25, 1999, and $1.3 million for the three months ended June 26,
1998. For the six months ended June 25, 1999, the Outsourced Services segment
profit margin was $3.1 million, or 6.1% of segment revenues, compared to $2.2
million, or 8.3% of segment revenues for the six months ended June 26, 1998. The
increase in overall gross margin dollars and the decrease in gross margin
percentage is the result of an increase in contract volume for larger, longer
term contracts that have lower overall margins.
International. International revenues were $16.9 million for the three months
ended June 25, 1999 compared to $3.3 million for the three months ended June 26,
1998. For the six-month periods ended June 25, 1999 and June 26, 1998,
International revenues were $24.1 million and $3.3 million, respectively. The
increase is the result of the acquisitions of GTI in December 1998 and Roche in
March 1999, and an adjustment to certain projects performed in Taiwan by our
50.1% owned subsidiary CMIT for the three months ended March 27, 1998.
Our International segment reported a profit of $0.9 million for the three months
ended June 25, 1999 compared to a loss of $0.3 million in the three months ended
June 26, 1998. International segment profit was $1.1 million for the six months
ended June 25, 1999 compared to a loss of $1.7 million in the six months ended
June 26, 1998. This improvement is primarily due to the GTI and Roche
acquisitions.
The GTI acquisition increased the size of the International segment 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. Roche,
based in Quebec, Canada, had $28.0 million in revenues for 1998.
Backlog. Our total funded and unfunded backlog at June 25, 1999 was $4.0
billion, an increase of $0.5 million from December 25, 1998, primarily due to
the acquisitions of EFM, Roche and EMCON. New contract awards in the period came
from a cross-section of our markets including federal and state/local
government agencies, utility and other commercial clients and outsourced
services. We expect to earn revenues from our backlog primarily over the next
one to five years, with a substantial portion of the backlog consisting of
federal government contracts, many of which are subject to annual funding and
definition of project scope. The backlog at June 25, 1999 includes $3.0 billion
of future work we estimate we will receive (based on
18
<PAGE>
THE IT GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
historical experience) under existing indefinite delivery order programs. In
accordance with industry practices, substantially all of our contracts are
subject to cancellation, delay or modification by the customer.
Our backlog at any given time is subject to changes in scope of services, which
may lead to increases or decreases in backlog amounts. These scope changes have
led to a number of contract claims requiring negotiations with clients in the
ordinary course of business. (See Item 1. Financial Statements - Notes to
Condensed Consolidated Financial Statements - Note 7 - Contract accounting and
accounts receivable.)
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were 5.3% of revenues for
the three months ended June 25, 1999 compared to 6.2% of revenues in the three
months ended June 26, 1998. SG&A expenses were 5.5% of revenues for the six
months ended June 25, 1999 compared to 6.8% of revenues in the six months ended
June 26, 1998. The decreases in SG&A expenses are primarily attributable to the
elimination of certain duplicative overhead functions and other cost savings
achieved as a result of the OHM, GTI, EFM and Roche acquisitions. Management
expects SG&A expenses to decrease slightly as a percentage of revenue because we
anticipate additional cost savings to be achieved from the EFM and EMCON
acquisitions that occurred in 1999 and the GTI acquisition that occurred in
December 1998.
SG&A expenses include goodwill amortization expense of $3.0 million for the
three months ended June 25, 1999 and $2.3 million for the three months ended
June 26, 1998. SG&A expenses (excluding goodwill) were 4.3% of revenues for the
three months ended June 25, 1999 and 5.1% of revenues for the three months ended
June 26, 1998. For the six months ended June 25, 1999, SG&A expenses include
goodwill amortization expense of $5.7 million compared to $2.6 million for the
six months ended June 26, 1998. The increases in goodwill amortization expenses
are primarily due to the OHM, GTI, EFM and Roche acquisitions. SG&A expenses
(excluding goodwill) were 4.5% of revenues for the six months ended June 25,
1999 and 6.0% of revenues for the six months ended June 26, 1998.
Special Charges
Special charges of $30.7 million were recorded in the two fiscal quarters ended
June 26, 1998 as outlined below:
<TABLE>
<CAPTION>
Cash/ Special Reserve balance
Noncash Charges Activity at 6/25/99
------- ------- -------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Sale of the Quanterra Investment Noncash $ (10,550) $ 10,550 $ -
Write-down of assets - Primarily Noncash (14,421) 14,421 -
the Hybrid Thermal Treatment
System (HTTS/(R)/)
Integration costs--OHM acquisition
Severance......................... Cash (2,197) 2,197 -
Duplicative offices/assets........ Cash (2,478) 1,912 (566)
Other.............................. Cash (1,019) 1,019 -
---------- -------- -----
Total............................ $ (30,665) $ 30,099 $(566)
========== ======== =====
</TABLE>
A $10.6 million special charge (net of cash proceeds of $5.8 million) related to
the sale of our investment in Quanterra, Incorporated.
A $14.4 million special charge related to the write down of assets associated
with our HTTS/(R)/ business to estimated salvage value.
A $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
19
<PAGE>
THE IT GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
of integration, we laid-off more than 100 IT employees, primarily in the
operating group and administrative support functions. In addition, as part of
the plan we closed three leased facilities, reduced the size of three more
facilities and subleased a portion of eight additional facilities. As of June
25, 1999, $0.6 million of the integration charge remained to be paid. The
remaining costs relate to the facility closures and office consolidations and
will be paid over the remaining terms of the leases. Most of these lease
commitments will be paid within the next three years. One lease requires
payments over the next six years.
Interest, Net
Net interest expense represented 4.1% of revenues in the two fiscal quarters
ended June 25, 1999 and 3.7% for the two fiscal quarters ended June 26, 1998.
In absolute dollars, net interest expense was $22.7 million and $13.5 million
for the six months ended June 25, 1999 and June 26, 1998, respectively. This
increase in net interest expense is due principally to the April 9, 1999
issuance of $225.0 million, 11.25%, ten year senior subordinated notes and the
increased level of debt required to finance the OHM, GTI and EFM acquisitions.
Income Taxes
The Company recorded an income tax provision (benefit) for the six month periods
ended June 25, 1999 and June 26, 1998 in the amounts of $9.7 million and ($1.4)
million, respectively. The provision for income tax was calculated utilizing an
effective tax rate of 40% of income for the six months ended June 25, 1999. The
benefit for income taxes for the six months ended June 26, 1998 was calculated
utilizing a 40% effective rate on income excluding special charges and giving
effect to changes in the Company's deferred tax valuation allowance. See Item
1. Financial Statements - Notes to Condensed Consolidated Financial Statements,
Note 9.
Extraordinary Item
For the six months ended June 26, 1998, we recorded a $5.7 million charge, net
of income tax benefit of $3.5 million, for the early extinguishment of $65.0
million of senior debt which was refinanced in connection with the acquisition
of OHM. We incurred a $5.6 million payment for the make whole interest provision
as a result of retiring our $65.0 million senior debt early in accordance with
the loan agreement. In addition, we also expensed approximately $3.6 million
related to the unamortized loan origination expenses associated with issuing the
$65.0 million senior debt.
Dividends
Our reported dividends for the two quarters ended June 25, 1999 were $3.2
million and for the two quarters ended June 26, 1998 were $3.1 million. Our
reported dividends for two quarters ended June 26, 1998 include imputed
dividends of $0.8 million, which were paid in stock.
Our dividends are summarized below:
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
---------------------- -------------------------
June 25, June 26, June 25, June 26,
Dividend Summary on Preferred Stock 1999 1998 1999 1998
- ----------------------------------------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
7% Cumulative convertible exchangeable
Cash dividend....................... $ 898,000 $ 899,000 $1,796,000 $1,798,000
6% Cumulative convertible participating
Cash dividend....................... 692,000 - 1,384,000 -
Imputed non-cash dividend........... - 330,000 - 810,000
In kind 3% stock dividend........... - 340,000 - 519,000
---------- ---------- ---------- ----------
Total.......................... $1,590,000 $1,569,000 $3,180,000 $3,127,000
========== ========== ========== ==========
</TABLE>
20
<PAGE>
THE IT GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
Discontinued Operations
In the six months ended June 26, 1998, we increased our provision for loss on
disposition of our discontinued transportation, treatment and disposal business
by $5.0 million net of income tax benefit of $3.0 million. This increased
provision primarily related to an additional accrual for closure costs related
to the former Panoche disposal site. In March 1998, we obtained approval by the
California Department of Toxic Substances Control (DTSC) of the final closure
and post closure plan for the last of our four inactive treatment, storage and
disposal facilities. The approved plans allow us to proceed with the completion
of final closure construction and provides for future submittal of technical
studies that will be utilized to determine final aspects and costs of closure
construction and monitoring programs for the former Panoche disposal site.
For further information regarding our discontinued operations, see Item 1. Notes
to Condensed Consolidated Financial Statements - Note 5 - Discontinued
Operations, and Management's Discussion and Analysis of Results of Operations
and Financial Condition - Financial Condition Transportation, Treatment and
Disposal Discontinued Operations.
21
<PAGE>
THE IT GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES
THE IT GROUP, INC.
FINANCIAL CONDITION
Working capital at June 25, 1999 was $186.5 million, which is an increase of
$66.2 million, or 55%, from the December 25, 1998 working capital of $120.3
million. The current ratio at June 25, 1999 was 1.66:1, which compares to
1.44:1 at December 25, 1998.
Cash used by operating activities, which includes cash outflows related to
discontinued operations, for the six months ended June 25, 1999 totaled $18.5
million compared to $38.2 million used by operating activities in the
corresponding period of last year, a reduction in the use of cash by operating
activities of $19.7 million. The change in cash used by operating activities was
due to the increase in net income to $14.6 million for the six months ended June
25, 1999 compared to a net loss of $33.5 million for the six months ended June
26, 1998, and adjustments to non-cash items, primarily special charges of $25.0
million relating to the write down of the HTTS assets and the sale of our
investment in Quanterra, Inc.
Cash used by investing activities was $186.2 million for the six months ended
June 25, 1999 compared to $208.2 million for the six months ended June 26, 1998.
The uses of cash in both periods were primarily related to the acquisition of
businesses, net of cash acquired. For the six months ended June 25, 1999, we
used $177.3 million for acquisitions, including $74.0 million for EFM, $10.2
million for Roche, $61.9 million for EMCON, and $31.2 million for acquisition
related liabilities including employee severance, relocation and facility
closure costs, and consideration paid relating to previously acquired entities.
For the six months ended June 26, 1998, we used $208.7 million for acquisitions,
including $199.6 for OHM, and $9.1 million related to other acquisitions.
Capital expenditures of $7.5 million for the six months ended June 25, 1999 were
$3.8 million greater than the prior fiscal year principally due to increased
capital expenditure requirements as a result of acquisitions.
Long-term debt of $632.4 million at June 25, 1999 increased from $405.1 million
at December 25, 1998 primarily due to the issuance of $225.0 million in 10 year
senior subordinated notes (Notes), which were used for the acquisitions of EFM
and Roche, and also increased due to borrowings under the revolving credit
facility to finance the EMCON acquisition, and due to seasonal working capital
requirements. The ratio of total debt, including current portion, to equity was
2.60:1 at June 25, 1999 and was 1.77:1 at December 25, 1998. The Notes have a
11.25% fixed rate of interest payable semiannually in cash commencing October
1999 and will be redeemable on or after 2004 at a premium with a stated maturity
of April 2009. The Notes are general unsecured obligations of the Company,
subordinated to the Company's credit facilities (see Item 1. Financial
Statements - Notes to Condensed Consolidated Financial Statements, Note 10) and
other senior indebtedness and pari passu with other existing and future
indebtedness unless the terms of that indebtedness expressly provide otherwise.
As a result of the utilization of funds for acquisition purposes we have
utilized a larger portion of our existing revolving credit capacity than would
normally be expected. Our liquidity under our revolving credit facilities on
June 25, 1999, after the EMCON acquisition, was approximately $35.0 million. The
Company continues to have significant cash requirements, including interest,
operating lease payments, preferred dividend obligations, the potential
requirements of future acquisitions as the Company pursues its growth and
diversification strategy, expenditures for the closure of its inactive disposal
sites and PRP matters (see Transportation, Treatment and Disposal Discontinued
Operations), required term loan and subordinated debenture principal payments,
and contingent liabilities. In connection with the Company's plans for continued
internal growth and growth through acquisitions, additional capital sources may
be required.
22
<PAGE>
THE IT GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Transportation, Treatment and Disposal Discontinued Operation
As a part of the Company's discontinued transportation, treatment, and disposal
operations, the Company operated a series of treatment, storage and disposal
facilities in California, including four major disposal facilities. Closure
plans for all four of these facilities have now been approved by all applicable
regulatory agencies. As of June 25, 1999, three of the Company's inactive
disposal sites have been formally closed and the fourth is in the process of
closure, which is scheduled to be completed in the fall of 2000.
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 we believe 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 and post-closure costs are incurred over a significant number of years
(including post-closure monitoring and maintenance of its disposal facilities
for at least 30 years) and are subject to a number of variables including, among
others, negotiations with and oversight by regulatory agencies regarding the
details of site closure and post-closure. We have estimated the impact of
closure and post-closure costs in the provision for loss on disposition of
transportation, treatment and disposal discontinued operations; however, closure
and post-closure costs could be higher than estimated if regulatory agencies
were to require closure and/or post-closure procedures significantly different
than those in the approved plans, or if 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.
With regard to the carrying value of residual land at the inactive disposal
facilities, a substantial component of which is adjacent to those facilities and
was never used for waste disposal, in June 1999, a local community's review of
its growth strategy resulted in limitations, in line with our expectations, on
our ability to develop a portion of our residual land. If the assumptions used
to determine the carrying value are not realized, the value of the land could be
materially different from the current carrying value.
With respect to the Operating Industries, Inc. Superfund site in Monterey Park,
California, for which USEPA notified a number of entities, including the
Company, that they were PRPs, there were no significant developments during the
quarter.
With respect to the GBF Pittsburg landfill site near Antioch, California, there
were no significant developments during the quarter, but our 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 is scheduled to be mediated
beginning in September 1999. The owner/operators are vigorously defending the
PRP group's litigation, and the outcome of the litigation cannot be determined
at this time.
Failure of the PRP group to effect a satisfactory resolution with respect to the
choice of appropriate remedial alternatives or to obtain an appropriate
contribution towards site remedial costs from the current owner/operators of the
site and other non-cooperating PRPs, could substantially increase the cost to
the Company of remediating the site.
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 miscalculation 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. We are engaged in a company-wide effort (Project) to
address the issues that are likely to arise if computer programs and embedded
computer chips are unable to properly recognize dates in and after the year
2000. The Project is focused on three main areas:
. the information technology systems in our computers and computer
software, including those that are linked to the systems of third
parties;
. the non-information technology systems embedded in equipment that
controls or monitors our operating assets; and
. our business relationships with third parties.
23
<PAGE>
THE IT GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The thrust of the Project is to address those information technology systems,
non-information technology systems and relationships with external agents which
we judge to be materially important to our operating results or financial
condition, including those relating to significant entities (OHM, GTI, EFM,
Roche and EMCON) which we have recently acquired.
Work dealing with both information technology and non-information technology
systems has the following three phases:
. Inventory and Assessment - inventorying all of our systems (including
those that are linked to third parties), identifying our systems that
are not year 2000 compliant, and making judgments as to which of our
systems (both compliant and non-compliant) would likely be materially
important;
. Strategy and Planning - developing strategies and plans for:
. remediating, upgrading or replacing all non-compliant systems
(except those whose failure would, in our judgment, have an
insignificant impact on our operations), and
. testing all systems judged to be materially important, and
estimating the costs of implementing these strategies and
executing these plans; and
. Execution - implementing the strategies and executing the plans.
Work dealing with relationships with external agents has the following three
phases:
. Inventory and Assessment - inventory of our relationships with
external agents and making judgments as to which of these
relationships would likely be materially important;
. Communication and Evaluation - delivery of letters and questionnaires
to materially important external agents to obtain information about
their plans and actions to achieve timely year 2000 readiness, and
evaluating their responses; and
. Follow up - contacting these external agents to obtain further
assurance that they will achieve timely year 2000 readiness.
Additional Project work, discussed below, involves identifying scenarios
involving failures for year 2000 reasons of materially important systems or
materially important relationships with external agents and developing
contingency plans for mitigating the impact of such failures.
For information technology systems, including those of our recently acquired
entities, the materially important systems are the core financial and
administrative software system, network operating systems, desktop and laptop
computers, and telecommunications equipment. The inventory and assessment and
the strategy and planning phases of the work dealing with all materially
important information technology systems are complete. The execution phase of
this work involves both application and infrastructure repair and systems
upgrades and replacements.
Our core financial and administrative software systems are certified as Year
2000 compliant by the vendor. During the year ended March 27, 1998, we
established an integration test plan to test this software and verify Year 2000
compliance. In February 1998, these integration tests were successfully
completed. Our core hardware was also tested and found to be fully compliant
with the Year 2000 requirements. For our recent acquisitions, our core
financial and administrative system is presently used by OHM, GTI, and EFM, and
EMCON will be migrated to this system by August 1999. The financial and
accounting systems of Roche and of other international operations are still in
the assessment phase and are not considered to be materially important to us as
a whole. Approximately 60% of network operating systems, including those
relating to the EMCON acquisition, will require upgrades to be Year 2000
compliant, which will occur by September 1999. Our desktop and laptop computers
will require approximately 20% of the units to be replaced or upgraded in order
to be Year 2000 compliant; this replacement will occur by December 1999. Our
telecommunications equipment includes approximately 30% of the PBX phone systems
which are not Year 2000 compliant and which will be replaced by December 1999.
24
<PAGE>
THE IT GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Materially important non-information technology systems involved in operations
include products purchased from third parties, primarily design and engineering
support software, proprietary software sold by us used in ongoing environmental
remediation and compliance activities, and field monitoring equipment. The
inventory and assessment of Year 2000 compliance is ongoing for design and
engineering support software and field monitoring equipment, with projected
completion by September 1999. The strategy, planning and execution phases of
the work dealing with these systems will have time lines established upon the
completion of the assessment phase. For proprietary environmental software, all
remediation of non-Year 2000 software was completed by July 1999.
The inventory and assessment phase of the work dealing with relationships with
external agents is complete. Our Year 2000 Program Director has coordinated
communications with clients, suppliers, financial institutions and others with
which we do business to obtain information about the state of these parties'
Year 2000 readiness. The communication and evaluation phase of this work is
expected to be completed by August 31, 1999, and we estimate that approximately
20% of the external agents whose relationships we believe to be materially
important had been contacted and had responded as of July 1999. The follow-up
phase of this work will be undertaken on a continuous, ongoing basis through the
end of 1999. Our communications have included various entities of the U.S.
federal government, which comprised approximately 59% of our revenues for the
six months ended June 25, 1999. 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. The failure of the U.S. federal
government to pay its bills on a timely basis could have a material adverse
effect on our consolidated financial condition, liquidity and results of
operations.
Costs. Management has prepared a detailed conversion plan and has estimated the
total cost of Year 2000 compliance to be approximately $6.2 million, including
costs related to the recent acquisitions described above. As of June 25, 1999,
we had incurred costs of approximately $1.5 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. Approximately 90% of both planned and incurred
costs relate to hardware and software expenditures, and approximately 10% relate
to outside consultants. Internal costs of the Project are not separately
tracked. Additional costs could be incurred if significant remediation
activities are required with third parties.
Risks and Contingencies. We are currently developing contingency plans 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 plans will include actions designed to identify and minimize any
third party exposures and management believes that, based on third party
exposures identified to date, these issues should be resolved by the year 2000.
Forward Looking Statements Relating to the Year 2000. The foregoing discussion
about the year 2000 issue includes a number of forward-looking statements, which
are based on our best assumptions and estimates. These include statements
concerning our estimated timetables for completing the uncompleted phases of the
Project work, our estimates of the percentages of the work that remains to be
performed to complete these phases, our estimated timetable for identifying
scenarios involving possible failures for year 2000 issues in materially
important systems and relationships with external agents and the development and
implementation of contingency plans for mitigating the impacts of these
scenarios, and our estimates of the costs of each phase of our year 2000 work.
Actual results could differ materially from the estimates expressed in these
forward-looking statements, due to a number of factors. These factors, which are
not necessarily all the key factors that could cause such differences, include
the following:
. our failure to judge accurately which of our systems and relationships
with external agents are materially important;
. our inability to obtain and retain the staff and third-party
assistance necessary to complete the uncompleted phases of the Project
in accordance with our estimated timetables;
25
<PAGE>
THE IT GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
. the inability of such staff and third parties (1) to locate and
correct all non-year 2000 compliant computer code in materially
important systems and test such corrected code and (2) to install and
test upgrades or new systems containing year 2000-compliant computer
code, all in accordance with our estimated timetables;
. unforeseen costs of completing our year 2000 work;
. our inability or failure to identify significant year 2000 issues not
now contemplated; and
. the failure of external agents to achieve timely year 2000 readiness.
SPECIAL NOTE REGARDING 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. These risks, uncertainties and
assumptions include those identified in the "Risk Factors" and "Business"
sections of this prospectus and the following:
. changes in laws or regulations affecting our operations, as well as
competitive factors and pricing pressures,
. bidding opportunities and successes,
. project results, including success in pursuing claims and change
orders,
. management of our cash resources, particularly in light of our
substantial leverage,
. funding of our backlog,
. matters affecting contracting and engineering businesses generally,
such as the seasonality of work, 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 our recent acquisitions and any future acquisitions,
and achievement of expected cost savings and other synergies from
these acquisitions,
. adequacy of Year 2000 compliance, or assessments regarding compliance,
by ourselves or third parties, including our customers, and the costs
or completeness of remediation or the adequacy of contingency plans,
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.
26
<PAGE>
THE IT GROUP, INC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
On April 9, 1999, the Company issued $225.0 million of senior subordinated notes
which have a fixed interest rate of 11.25%. Since these instruments have a fixed
rate of interest, we are not exposed to the risk of earnings loss due to changes
in market interest rates. The fair value of these instruments at June 25, 1999
was $221.6 million.
There were no other material changes in the Company's exposure to market risk
from December 25, 1998.
27
<PAGE>
PART II
THE IT GROUP, INC.
Item 1. Legal Proceedings.
The continuing operations litigation to which the Company is a party is more
fully discussed in the note "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements in the Company's Annual Report on Form 10-K,
as amended, for the nine months ended December 25, 1998. See also Management?s
Discussion and Analysis of Results of Operations and Financial Condition -
Transportation, Treatment and Disposal Discontinued Operations for information
regarding litigation related to the discontinued operations of the Company.
Except as noted, there have been no material changes in any of the Company's
legal proceedings since the date of the Company's Annual Report on Form 10-K.
<PAGE>
THE IT GROUP, INC.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. These exhibits are numbered in accordance with the
Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description
----------- -----------
10(ii) 32. Agreement and Plan of Merger, dated May 10,
1999, between the Registrant, Seismic
Acquisition Corporation, and EMCON, a
California corporation.(1)
33. Consent to Waiver Letter Agreement, dated as
of May 10, 1999, among Registrant, IT
Corporation, OHM Corporation, OHM Remediation
Services Corp. and Beneco Enterprises, Inc.,
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, BankBoston, N.A., in
its capacity as documentation agent and
Credit Lyonnais, New York Branch, and Royal
Bank of Canada, as co-agents.(2)
10(iii) 43. Amendment Number Eight to IT Corporation
Retirement Plan dated as of July 26, 1999.*
--------------
(1) Filed as an Exhibit (c)(1) to Registrant's
Tender Offer Statement on Schedule 14D-1, filed
May 17, 1999 and incorporated herein by reference.
(2) Filed as an Exhibit (b)(5) to Registrant's
Tender Offer Statement on Schedule 14D-1, filed
May 17, 1999 and incorporated herein by reference.
* Filed as management compensation plan or arrangement
per Item 14(a)(3) of Securities Exchange Act.
(b) Reports on Form 8-K
1. Current Report on Form 8-K, filed May 20, 1999,
reporting under Item 5 the announcement of the
Agreement and Plan of Merger entered into by the
Registrant, EMCON, and the commencement of the
tender offer for EMCON.
2. Current Report on Form 8-K, filed May 28, 1999,
reporting under Item 5 the termination of the
Hart-Scott-Rodino waiting period with respect to
the acquisition of EMCON.
3. Current Report on Form 8-K, filed June 18, 1999,
reporting under Item 2 the completion of the
tender offer for EMCON.
4. Current Report on Form 8-K, filed August 6, 1999,
reporting under Item 5 the reorganization of the
Company's principal business units and related
senior management changes.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE IT GROUP, INC.
(Registrant)
/s/ ANTHONY J. DELUCA August 9, 1999
- --------------------- --------------
Anthony J. DeLuca
President and Chief Executive Officer
and Duly Authorized Officer
/s/ HARRY J. SOOSE, JR. August 9, 1999
- ---------------------- --------------
Harry J. Soose, Jr.
Senior Vice President, Chief Financial Officer
and Principal Financial Officer
/s/ DAVID L. HILL August 9, 1999
- ----------------- --------------
David L. Hill
Vice President, Controller and
Principal Accounting Officer
<PAGE>
Exhibit 10(iii)
AMENDMENT NUMBER EIGHT
IT CORPORATION RETIREMENT PLAN
1993 RESTATEMENT
The IT Corporation Retirement Plan (1993 Restatement) shall be amended
as set forth herein effective January 1, 1999:
Section 7.10(c) shall be amended by the addition of the following
at the end thereof:
17. Fluor-Daniel GTI Company Matching Contributions, subject
to vesting.
18. OHM Company Matching Contributions, subject to vesting.
19. OHM Profit Sharing, subject to vesting.
IN WITNESS WHEREOF, this instrument of amendment
is executed this
26th day of July, 1999.
By: /s/ ANTHONY J. DELUCA
-------------------------
Anthony J. DeLuca
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 25, 1999 AND CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWO FISCAL QUARTERS ENDED JUNE 25,
1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> JUN-25-1999
<CASH> 21,254
<SECURITIES> 0
<RECEIVABLES> 424,020
<ALLOWANCES> 20,882
<INVENTORY> 0
<CURRENT-ASSETS> 471,260
<PP&E> 112,564
<DEPRECIATION> 54,846
<TOTAL-ASSETS> 1,197,324
<CURRENT-LIABILITIES> 284,746
<BONDS> 632,414
0
6,665
<COMMON> 227
<OTHER-SE> 243,912
<TOTAL-LIABILITY-AND-EQUITY> 1,197,324
<SALES> 0
<TOTAL-REVENUES> 559,264
<CGS> 0
<TOTAL-COSTS> 481,360
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,715
<INCOME-PRETAX> 24,285
<INCOME-TAX> 9,714
<INCOME-CONTINUING> 14,571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,571
<EPS-BASIC> .50
<EPS-DILUTED> .44
</TABLE>
