-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tk8g6TtlSCupxms90uKMBtCxKkcGPSdwnd5MDCJu+zwWtJC9b88oa18xoxIc9FFx 3jbFL9DRM2cBWbK7Y8sAYQ== 0000950132-99-000249.txt : 19990323 0000950132-99-000249.hdr.sgml : 19990323 ACCESSION NUMBER: 0000950132-99-000249 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981225 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IT GROUP INC CENTRAL INDEX KEY: 0000731190 STANDARD INDUSTRIAL CLASSIFICATION: HAZARDOUS WASTE MANAGEMENT [4955] IRS NUMBER: 330001212 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09037 FILM NUMBER: 99569708 BUSINESS ADDRESS: STREET 1: 2790 MOSSIDE BLVD CITY: MONROEVILLE STATE: PA ZIP: 15146 BUSINESS PHONE: 4123727701 MAIL ADDRESS: STREET 1: 2790 MOSSIDE BLVD CITY: MONROEVILLE STATE: PA ZIP: 15146 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL TECHNOLOGY CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ---------------- (Mark One) [_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from March 28, 1998 to December 25, 1998 Commission file number 1-9037 The IT Group, Inc. (Exact name of registrant as specified in its charter) Delaware 33-0001212 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2790 Mosside Boulevard, Monroeville, Pennsylvania 15146-2792 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (412) 372-7701 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $.01 Par Value New York Stock Exchange; Pacific Exchange Preferred Stock Depositary Shares New York Stock Exchange; Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No - - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the registrant's voting common stock held by non-affiliates of the registrant at March 5, 1999, was approximately $264,868,334 (based upon the closing sale price of its common stock on the New York Stock Exchange as reported by The Wall Street Journal on such date.) At March 5, 1999 the registrant had issued and outstanding an aggregate of 22,637,858 shares of its common stock, including 44,949 shares held in treasury. Documents Incorporated by Reference Certain information included in the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission for the Annual Meeting of Stockholders of the registrant to be held on May 19, 1999 is incorporated by reference into Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE IT GROUP, INC. ANNUAL REPORT ON FORM 10-K FOR THE NINE MONTHS ENDED DECEMBER 25, 1998 TABLE OF CONTENTS
Item Page ---- ---- PART I 1 Business.......................................................... 3 General........................................................... 3 Industry Overview and Trends...................................... 4 Acquisitions...................................................... 5 Recent Events..................................................... 6 Benefits of the Acquisitions...................................... 7 Operations........................................................ 7 General........................................................... 7 Engineering and Construction...................................... 7 Consulting and Ventures........................................... 8 Outsourced Services............................................... 9 International..................................................... 9 Clients........................................................... 10 Backlog........................................................... 11 Technology Development and Patents................................ 11 Contracts......................................................... 12 Competition....................................................... 12 Regulatory........................................................ 13 Environmental Contractor Risks.................................... 16 Insurance......................................................... 17 Concentration of Revenues......................................... 17 Government Contractor Risks....................................... 17 Fixed-Price Contracts............................................. 18 Closure of Inactive Disposal Sites and Potential CERCLA Liabilities....................................................... 18 Substantial Leverage.............................................. 19 Ability to Service Debt........................................... 20 History of Losses................................................. 20 Fluctuations in our Quarterly Operating Results................... 21 Management of Growth.............................................. 21 Risks of Achievement of Cost Savings and Integration of Operations........................................................ 22 Control of Board of Directors..................................... 22 International Operations.......................................... 22 Reliance on Key Personnel......................................... 23 Discontinued Operations........................................... 23 Employees......................................................... 23 2 Properties........................................................ 24 3 Legal Proceedings................................................. 24 4 Submission of Matters to a Vote of Shareholders................... 24 ---------------- 4A Executive Officers of the Company................................. 25
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Item Page ---- ---- PART II 5 Market for the Registrant's Common Stock and Related Shareholder Matters........................................................... 26 6 Selected Financial Data........................................... 27 7 Management's Discussion and Analysis of Results of Operations and Financial Condition............................................... 27 8 Financial Statements and Supplementary Data....................... 44 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 76 PART III 10 Directors and Executive Officers of the Registrant................ 76 11 Executive Compensation............................................ 79 12 Security Ownership of Certain Beneficial Owners and Management.... 80 13 Certain Relationships and Related Transactions.................... 83 PART IV 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K.... 88
2 PART I ITEM 1. BUSINESS. GENERAL The IT Group, Inc. (we or IT or the Company) is a leading provider of diversified, value-added services in the areas of environmental consulting, engineering and construction and remediation. In addition, we are leveraging our core project management competencies to offer our clients a variety of outsourcing services such as facilities management. We have a strong reputation for both the high quality of our work and the breadth of the services we provide. We provide services through four business platforms: Engineering & Construction, Consulting & Ventures, Outsourced Services and International. The following table provides a brief overview of our four operating platforms. For more information on our platforms, see "Business--Operations".
Percentage of Revenue for Revenue for the Nine the Nine Months Ended Months Ended Platform December 25, 1998 December 25, 1998 Clients Primary Services Provided -------- ----------------- ----------------- ------- ------------------------- (In millions) Engineering & $597.9 78.9% DOD Assessment, planning and Construction DOE execution for: EPA Hazardous waste design State and local agencies and remediation Private sector Decontamination and decommissioning remedial construction Consulting & $79.4 10.5% Private sector clients Remedial investigations Ventures U.S. Government clients Feasibility studies Environmental permitting Facility siting and design Environmental compliance auditing Risk assessment/management Health and safety program design Outsourced $70.4 9.3% DOD Facilities, operation, Services State and local facilities maintenance and Private sector clients construction Construction management services International $9.8 1.3% U.S. and international Engineering, remediation governments and consulting Private sector Wastewater treatment/design Infrastructure, engineering and construction
Our clients are federal, state, and local governments in the U.S. and commercial businesses worldwide. We obtained 69% of our revenues for the nine months ended December 25, 1998 from the federal government under more than 100 contracts that range in length from one to ten years. In addition, we serve more than 1,500 commercial clients on projects which range in length from one month to more than one year. As of December 25, 1998 we employed over 5,600 persons in a network of over 80 domestic and over ten international offices. Approximately 90% of our backlog at December 25, 1998 was under federal government programs and approximately 82% is expected to be charged to our clients on a cost-reimbursable basis. Many of our commercial contracts are evergreen contracts that are typically not part of our backlog. 3 Industry Overview and Trends According to industry sources, from 1993 to 1997, the portion of the domestic environmental services industry in which we compete grew from approximately $25.4 billion in 1993 revenues to approximately $26.5 billion in 1997 revenues, which equates to a compound annual growth rate of approximately 1.1%. Demand for our environmental services is driven by a number of factors, including: . the needs of the U.S. Department of Defense and Department of Energy to restore sites formerly used for weapons production or military bases; . the need to comply with federal, state and municipal environmental regulation and enforcement regarding the quality of the environment; . the need to bring aging production facilities into compliance with current environmental regulations; . the need to minimize waste generation on an ongoing basis; and . the need to reduce or forestall liability associated with pollution- related injury and damage. A significant portion of future DOD and DOE environmental expenditures will be directed to cleaning up hundreds of military bases and to restore former nuclear weapons facilities. DOD has stated that there is an urgent need to ensure that the hazardous wastes present at these sites, often located near population centers, do not pose a threat to the surrounding population, and, in connection with the closure of many military bases, there is an economic incentive to make sure that the environmental restoration enables these sites to be developed commercially by the private sector. DOE has long recognized the need to stabilize and safely store nuclear weapons materials and to clean up areas contaminated with hazardous and radioactive waste. According to federal government publications, the DOD's budget for environmental remediation will be approximately $2.5 billion annually for the next five years and the DOE's budget will be approximately $5.7 billion annually for the same period. Significant environmental laws have been enacted in the U.S. in response to public concern about the environment. These laws and the implementing regulations affected nearly every industrial activity, and efforts to comply with the requirements of these laws create demand for our services. The principal federal legislation that has created a substantial market for us, and therefore has the most significant effect on our business, includes the following: . The Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, established the Superfund program to clean up existing, often abandoned, hazardous waste sites and provides for penalties and significant damages for noncompliance with EPA orders. As of September 1998, the EPA identified approximately 1,370 sites as being significantly contaminated with hazardous materials and, therefore, named them as Superfund sites. Only approximately 41% of these sites have been remediated. . The Resource Conservation and Recovery Act of 1976, or RCRA, provides a comprehensive scheme for the regulation of hazardous waste from the time of generation to its ultimate disposal, and sometimes thereafter, as well as the regulation of persons engaged in the treatment, storage and disposal of hazardous waste. . The Clean Air Act as amended in 1970 empowered the EPA to establish and enforce National Ambient Air Quality Standards, National Emission Standards for Hazardous Air Pollutants and limits on the emission of various pollutants. The 1990 amendments to the Clean Air Act substantially increased the number of sources emitting a regulated air pollutant which will be required to obtain an operating permit; the amendments also addressed the issues of acid rain and ozone protection. . The Clean Water Act of 1972, established a system of standards, permits and enforcement procedures for the discharge of pollutants to surface water from industrial, municipal and other wastewater sources. 4 For more discussion of the regulatory environment in which we operate, see "Business--Operations--Regulatory". In recent years, our industry has experienced a slowing in revenue growth, which is principally attributable to spending patterns of commercial customers. We attribute this slowdown to, among other things: . decreased federal, state and local enforcement of regulations, and . delay in the reauthorization of CERCLA. These factors have been partially offset by an increased desire on the part of commercial clients for strategic environmental services, which: . provide an integrated, proactive approach to environmental issues, and . are driven by economic, as opposed to legal or regulatory concerns. In addition, there is a growing international market arising from the increased awareness on the part of foreign governments and private sector entities of the need for additional and/or initial environmental regulations, studies and remediation. Traditionally DOD has maintained most of its own facilities and performed its own facility activities, but it is now in the process of transferring many of these responsibilities to private contractors and private owners. The privatization market has been created by the government's selling an asset or revenue stream, such as military housing and electric, water and wastewater utilities on a military base, to a private company, which is then responsible for maintenance and operation. The outsourcing market has been created by private contractors' taking over site activities currently conducted by government, often military, personnel. From 1991 to 1998, our industry has experienced substantial consolidation. According to industry sources, the top ten firms in the environmental services industry accounted for approximately 46% of the industry measured by 1998 revenue, up from approximately one third in 1991. This consolidation has been driven by: . the benefits of economies of scale; . growing demand for full service business oriented solutions; . the shift from commercial to government procurement of environmental services as a result of the conversion of military sites to peaceful uses. Acquisitions Since March 1996, we have acquired eight firms representing an aggregate $770.0 million in revenue at the time of acquisition. 5 The following table provides some basic information on these acquisitions.
Most Recent Fiscal Year Revenues Date of Prior to Acquisition Name Location(s) Business Acquisition ----------- ---- ----------- -------- ----------- (In millions) Mar. 1996 Gradient Massachusetts Environmental/human $5 Corporation health risk assessment Litigation support Nov. 1996 Chi Mei IT Taiwan Wastewater treatment $12 design/build May 1997 PHR California Historical pollution $3 Environmental Washington, DC liability research and Consultants, Inc. investigation Sept. 1997 Pacific California Environmental consulting $10 Environmental and engineering services Group, Inc. Jan. 1998 Jellinek, Schwartz & Washington, DC Science-based $12 Connolly, Inc. Colorado environmental consulting England and advocacy services Mar. 1998 LandBank, Inc. Colorado Real estate acquisition $3 and restoration company Feb. and OHM Corporation Over 30 regional offices Leading diversified $525 June 1998 services firm providing a broad range of services for governmental and private sector clients Leading provider of operations, maintenance and construction outsourcing services Dec. 1998 Fluor Daniel Over 30 offices in Broad-based $200 GTI, Inc. North America environmental services Europe and firm Australia
Recent Events On February 5, 1999, we signed an agreement to acquire all of the issued and outstanding capital stock of Roche Limited Consulting Group (Roche) for an initial payment of $10.0 million in cash, plus two potential earnout payments. Roche, an engineering, construction and consulting company based in Canada, is primarily focused on infrastructure development including transportation and water/wastewater treatment facilities. Roche also has completed projects in the pulp and paper and mining markets. Roche operates exclusively outside the U.S., and has current project experience in more than 20 countries. We have collaborated with Roche on projects during the past two years, and we believe that this acquisition will add to our strategic consulting capabilities and experience and expertise in international markets. Roche has approximately 700 employees and had revenue of $28.3 million in its most recent year ended December 31, 1998. The acquisition is expected to close in April 1999. On March 8, 1999, we signed an agreement to acquire specified assets and assume specified liabilities of the Environment and Facilities Management Group (EFM Group) of ICF Kaiser International, Inc. (Kaiser) for a purchase price of $82.0 million reduced by $8.0 million representing working capital retained by Kaiser. The 6 EFM Group provides environmental remediation, program management and technical support for United States Government agencies including the DOD, National Aeronautics and Space Administration (NASA) and the DOE as well as private sector environmental clients. The EFM Group has approximately 500 employees and had revenue of approximately $106 million for the calendar year ended December 31, 1998. The acquisition is expected to close in April 1999. At the same time we announced the EFM acquisition, we announced that our obligation to complete the purchase of EFM was subject to financing, and we have begun the sale of $200.0 million in senior subordinated notes in a private placement (the Notes). Concurrently with the filing on this Report on Form 10- K, the Company is filing a Report on Form 8-K to make information from the offering memorandum for the Notes publicly available, including pro forma financial information, financial statements from the acquired companies, and a description of our business, as though the acquisitions had been completed at the beginning of calender year 1998. Benefits of the Acquisitions We believe our recent acquisitions add capabilities that are complementary to our existing services, and offer us cost savings and other synergies. We also believe that our matrix organization and our comprehensive management information system allow us to: . efficiently integrate acquired operations, . eliminate duplicative costs, . centralize common functions, . consolidate locations that serve the same common areas and . use our low cost structure to bid successfully on new projects. In connection with the OHM acquisition, we implemented a cost reduction program that eliminated approximately $32.0 million in costs on an annualized basis within six months of acquiring the business, principally through headcount reduction and duplicative facilities closures. In connection with the GTI acquisition, we executed a similar plan that has resulted in approximately $18.7 million of annualized cost savings being realized. OPERATIONS General We provide services through four platforms: Engineering & Construction, Consulting & Ventures, Outsourced Services and International. We do not own or operate facilities involved in the on-going commercial disposal of hazardous waste. Engineering & Construction Most of our business is the management of complex hazardous waste remediation projects. These projects involve the assessment, planning and execution of the decontamination and restoration of property, plant and equipment that have been contaminated by hazardous substances. These projects usually require the cleanup of land sites where hazardous or radioactive substances have been disposed. These sites can pose threats to adjacent buildings, production facilities and storage sites and the surrounding rivers, streams and groundwater. These projects require considerable technical engineering and analysis to identify the substances involved, the extent of the contamination, the appropriate alternatives for containing or removing the contamination, and the selection of the technologies for treatment to perform the cleanup of the site. They also require strong project management and construction and remediation skills to control costs and to meet required schedules. 7 Our Engineering & Construction platform provides full-service DOD and DOE delivery order program management, engineering and design services, remedial construction, specialized equipment and decontamination/decommissioning capabilities. Remedial construction services offered by this platform include: . excavation and isolation, . installation of subsurface recovery systems, . bioremediation approaches, . chemical treatment, . soil washing, . fixation or stabilization, . facility or site closures, . solidification, . landfill cell construction and . slurry wall and cap installation We use our Engineering & Construction skills to develop partnering arrangements with clients in which we become the primary supplier of all client environmental management services and assist clients in innovatively reducing total environmental costs. The following is an example of the type of project performed by our Engineering & Construction platform. We completed an approximately $70.0 million site remediation and restoration project for the DOD at Fort Ord in Monterey, California as part of the DOD's base closure program. The project site consisted of an 8,000 acre military site. We provided a range of services at this site, including: . removal of lead and copper from 3.2 miles of beach; . removal and transportation of over 2.0 million cubic yards of soils and waste; . consolidation and closure of four landfills totaling 144 acres; . restoration of a 44 acre site for a municipal park; and . revegetation of 100 acres of disturbed property with native species. Consulting & Ventures Our Consulting & Ventures platform helps clients comply with environmental and/or health and safety regulations. This platform also assists clients in developing corporate policies and procedures in areas such as pollution prevention and waste minimization so that they integrate environmental regulations into their business decisions. Our Consulting & Ventures platform provides a wide range of consulting services including the following: . environmental permitting, . facility siting and design, . strategic environmental management, . environmental compliance/auditing, . risk assessment/management, . air quality assessment/management, 8 . pollution prevention and waste minimization, . environmental information systems, . data management and . industrial hygiene. The following is an example of the type of project performed by our Consulting & Ventures platform. Under a $6.0 million contract with a large, diversified manufacturing company, we conducted a remedial investigation/feasibility study on a Superfund site located at a 95-acre coke plant in Ironton, Ohio. After conducting the study, we prepared a remedial design/action plan, which included construction services and the design of facilities and bioremediation and groundwater management. Our plan resulted in substantial savings for the client. Outsourced Services Through our Outsourced Services platform, we have broad capabilities for operations, maintenance, management and construction at federal facilities and in the private sector. This platform is a leading provider of project, program and construction management services to the DOD and state and local government agencies. As a result of the OHM acquisition, we are leveraging our core competencies into new, high-growth service areas, especially toward outsourcing and privatization occurring in federal, state and local governments. These core competencies meet facilities management needs in the private sector as well. Our Outsourced Services platform also offers recurring services that are not dependent on regulatory enforcement. The following is an example of the type of project performed by our Outsourced Services platform. We have been awarded a third consecutive contract by the Air Force for construction management services over a five year period at Hill Air Force Base in Utah. The value of this contract is approximately $95.0 million, and involves projects ranging from small renovation and replacement work to the installation of sophisticated centrifuge technology. We also are coordinating the activities of several subcontractors that are performing on-going construction activities. International We are building our International platform to meet the global environmental needs of our U.S.-based clients. In November 1996, we bought 50.1% of the stock of Chi Mei Scientech/Entech, a Taiwan-based wastewater treatment design/build firm, now doing business as Chi Mei IT. As a part of our purchase of GTI, we acquired GTI's subsidiaries in Australia, Italy and the United Kingdom. We also entered into a four-year marketing agreement with Fluor Daniel, Inc. that is expected to provide us project diversification on a worldwide basis. In February 1999, we signed an agreement to acquire Roche, a 700 employee firm based in Canada. Roche has current project experience in over 20 countries. Also, we have in the past, and may in the future, enter into joint venture agreements or investments for international projects. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-- Results of Operations--Continuing Operations--Revenues." The following is an example of the type of project performed by our International platform. We were appointed to design, install and operate a soil vapor extraction system to remediate a former gasworks site in London, England, under a contract for approximately (Pounds)500,000 (or approximately $800,000). Under a detailed design, created to speed installation and minimize commissioning time, we were able to treat an area of 43,000 square meters. During the course of the project, we bioremediated or volatillised over 100 tons of contaminated soil. The site will now be redeveloped as a major exhibition site. 9 Clients Our clients are federal, state and local governments and commercial businesses worldwide. Federal, State and Local Governmental Clients Due to our technical expertise, project management experience and full- service capabilities, we have successfully bid on and executed CERCLA and RCRA- related contracts for many federal and other government agencies. See "Business--Operations--Regulations." Federal government contracts are typically awarded through competitive bidding pursuant to federal procurement regulations and involve several bidders. After a successful bidder is selected, there is usually a period for contract negotiations. Government contracts also typically have annual funding limitations and are limited by public sector budgeting constraints. Some of these contracts provide a maximum amount of services that may be performed by us, and specific services are authorized from time to time through a series of task orders under the master contract. Many of these government contracts are multi-year Indefinite Delivery Order (IDO) agreements. These programs provide estimates of what the agency expects to spend, and our program management and technical staffs work closely with the client to define the scope and amount of work required. While these contracts do not initially provide us with any specific amount of work, as projects are defined, the work is awarded to us without further formal competitive bidding. Approximately 40% of our revenues for the nine months ended December 25, 1998 were from IDOs. Although we generally serve as the prime contractor on our federal government contracts, or as a part of a joint venture which is the prime contractor, we also serve as a subcontractor to other prime contractors on some federal government programs. As has become typical in the environmental industry, we have entered and may continue to enter into joint venture or teaming arrangements with competitors when bidding on the largest, most complex contracts. The table below sets forth the percentage of revenues we receive from federal, state and local government contracts as a percentage of our consolidated revenues.
Twelve Months Ended Nine Months Ended ------------------------- ----------------- March 28, March 27, December 25, 1997 1998 1998 Source --------- --------- ------------ Federal government: DOD........................ 42% 47% 52% DOE........................ 14 9 10 Other federal agencies..... 3 2 7 ---------- ---------- --- 59 58 69 State and local governments.. 8 5 5 ---------- ---------- --- Total...................... 67% 63% 74% ========== ========== ===
Bidding Process We have a set of company-wide estimating and proposal development procedures designed to provide consistency across all operating platforms during the preparation of both commercial and government proposals. Our shared services group implements these procedures and provides resources to our business platforms for preparation of cost estimates, proposals and bid submittals. Each of our platforms has responsibility for responding to customer solicitations. The final decision requires coordination between operations management, business development personnel and corporate management. Before our bid is submitted to a client, the approach and pricing are reviewed by operations and estimating management, which 10 performs a risk evaluation of commercial terms and conditions and technical aspects of the bid opportunity. Pricing then is established in accordance with an authority limits matrix that is issued by our legal department. Commercial Clients We serve numerous commercial clients including chemical, petroleum and other manufacturing firms, utilities, real estate and transportation service companies and law firms. Much of our commercial work represents new contracts awarded by existing clients. No single commercial client accounted for 10% or more of our consolidated revenues in the nine months ended December 25, 1998, or during fiscal years 1998 or 1997. Although in recent years enforcement of CERCLA has diminished, clients are still seeking strategic, integrated solutions to their environmental problems, which we seek to provide. Backlog As of December 25, 1998, we had existing backlog of $3.5 billion including approximately $0.9 billion of funded backlog, of which $0.7 billion is expected to be completed during 1999. Approximately 90% of our backlog at December 25, 1998 was under government programs, for which funds have already been appropriated. In addition, approximately 82% of our backlog is expected to be charged to our clients on a cost-reimbursable basis. Many of our commercial contracts are evergreen contracts and are typically not part of our backlog. The predictability and stability of our backlog permits us to manage our fixed costs appropriately, minimize our overhead and bid selectively on new work. Technology Development and Patents Our technology development program focuses on innovative applications to client projects of new and existing technologies and methods. The program has four principal goals: . to support project managers and clients to ensure successful application of environmental technologies, . to continue to improve technologies developed in-house through use on client projects, . to evaluate and implement technologies developed by others that present commercial opportunities for us, and . to improve third party technologies for enhanced client value. We emphasize several technologies including bioremediation. For example, we have used naturally occurring organisms in our patented BIOFAST(R) system to clean a number of sites. We have licensed from a third party "barrier wall and reactive gate technology," which assists in the decomposition of contaminants, and continue to apply it to client projects. The EPA has also extended for a third year our contract to operate its Test & Evaluation Facility in Cincinnati, Ohio, which is available for private party sponsored technology evaluations. It also provides treatability testing and process development services on contaminated waste waters, sludges and soils. Major efforts this year focused on safe drinking water and water treatment processes including filtration and disinfection technologies. We also have improved our environmental information management technologies. We have received extensive patent coverage for the Manage IT system, which we use to manage and track hazardous waste at client sites. Through the use of proprietary and other environmental information management systems, we have become a leading user of advanced data base management technology to serve clients' needs. We hold over 20 patents for various environmental technologies. Two specific patents cover certain design features of equipment used in our on-site remediation business. The first patent is for a filtration system to remove pollutants from flowing creeks and streams and the second, known as a Portable Method for Decontaminating Earth, is for a decontamination system to remove contaminants from the soil through a 11 process commonly known as soil vapor extraction. We also have the X*TRAX(R) and LT*X(R) thermal desorption processes. The X*TRAX(R) and LT*X(R) systems are waste treatment processes that thermally separate organic contaminants from soils or solids and then treat the resulting organic vapor stream. Contracts We enter into various types of contracts with our clients, including fixed- price and cost-reimbursable plus fixed fee and award fee contracts. For the nine months ended December 25, 1998, 20% of our revenue was derived from fixed- price contracts and 80% from cost-reimbursable plus fixed fee and award fee contracts. Under a fixed-price contract, the client agrees to pay a specified price for our performance of the entire contract. Under a cost-plus contract, we charge clients negotiated rates based on our direct and indirect costs plus a fee component. Our ability to perform profitably under fixed-price and other types of contracts often depends on our ability to identify, manage and recover on claims for differing and unanticipated conditions and other changes. For a description of the risks we face with our fixed-price contracts, see "Business--Operations--Fixed-Price Contracts" and "Business--Operations-- Government Contractor Risks." We provide our services under contracts, purchase orders or retainer letters. We bill all of our clients periodically based on costs incurred, on either an hourly-fee basis or on a percentage of completion basis, as the project progresses. Generally, our contracts do not require that we provide performance bonds, although we typically require our subcontractors to post a bond. A performance bond, issued by a surety company, guarantees the contractor's performance under the contract. If the contractor defaults under the contract, the surety will, in its discretion, step in to finish the job or pay the client the amount of the bond. We have signed indemnity agreements with our two sureties to indemnify them from obligations under bonds that arise from our failure to perform under contracts for which bonds are issued. If, however, the contractor does not have a performance bond and defaults in the performance of a contract, the contractor is responsible for all damages resulting from the breach of contract. These damages include the cost of completion, together with possible consequential damages such as lost profits. To date, we have not incurred material damages beyond the coverage of any performance bond, and we have never had a bond called where the surety has been required to take over a project or pay damages. For the nine months ended December 25, 1998 subcontractor costs comprised approximately 30% of our revenues. The absence of qualified subcontractors with whom we have a satisfactory relationship could adversely affect the quality of our services and our ability to perform under some of our contracts. Competition We believe that the principal competitive factors in all areas of our business are: . technical proficiency, . operational experience, . price, . breadth of services offered, and . local presence. We compete with a diverse array of small and large organizations including the following: . national or regional environmental management firms; . national, regional and local architectural, engineering and construction firms; 12 . environmental management divisions or subsidiaries of international engineering, construction and systems companies; and . hazardous waste generators that have developed in-house capabilities. Increased competition, combined with changes in client procurement procedures, has resulted in, among other things: . lower contract margins, . more fixed-price or unit-price contracts, and . contract terms that increasingly require us to indemnify our clients against damages or injuries to third parties and property and environmental fines and penalties. The entry of large systems contractors and international engineering and construction firms into the environmental services industry has increased competition for major federal government contracts and programs, which have been our primary source of revenue in recent years. In addition, our industry recently has been subject to intense consolidation. We are participating actively in this consolidation to support our growth and diversification strategy. However, we cannot assure that we will be able to compete successfully given the intense competition and trends in our industry. Regulatory Our clients and we are subject to extensive and evolving environmental laws and regulations. The level of enforcement of these laws and regulations affects the demand for many of our services and creates certain significant risks and potential opportunities for us in providing our services. Regulatory enforcement and changes may also affect our inactive disposal sites in Northern California. See "Business--Operations-- Environmental Contractor Risks" and our "Notes to Consolidated Financial Statements--Discontinued Operations." Over the past several years, interested parties have proposed a number of significant changes to existing environmental laws. Most of the proposed changes have been delayed in Congress. The proposals would overhaul the government regulatory process, require regulatory risk assessments and cost- benefit analyses and reduce requirements for reporting to the government. Although the impact of these proposed changes upon our business cannot yet be fully predicted, the proposed changes in regulations and the perception that enforcement of current environmental laws has been reduced, appear to have decreased the demand for some of our services, as clients anticipate and adjust to the potential changes. Proposed changes could result in increased or decreased demand for some of our services. For example, if regulatory changes decrease the cost of remediation projects or result in more funds being spent for actual remediation, that portion of our business could increase while amounts spent for studies could decrease. The ultimate impact of the proposed changes will depend upon a number of factors, including the overall strength of the U.S. economy and clients' views on the cost-effectiveness of remedies available under the changed regulations. The principal environmental legislation and proposed changes in those laws affecting us and our clients is described below: Comprehensive Environmental Response, Compensation and Liability Act of 1980. CERCLA governs the cleanup of sites at which there have been or may be releases or threatened releases of hazardous substances into the environment. CERCLA provides that any person who (1) currently or at the time of disposal of a hazardous substance, owned or operated any facility at which hazardous substances were released, (2) arranged for disposal, treatment, or transportation of hazardous substances by others or (3) accepted hazardous substances for transport to facilities or sites from which there is a release or threatened release of hazardous substances, is liable for the costs of cleanup and damages to natural resources. These persons are called potentially responsible parties (PRPs). CERCLA provides that the federal government can either clean up these sites itself or order the PRPs to do so. CERCLA created the Hazardous Substance Superfund to be used by 13 the federal government to pay for certain cleanup efforts. When the federal government expends Superfund money for remedial activities, it must seek reimbursement from the PRPs. CERCLA generally imposes strict, joint and several retroactive liability upon PRPs. CERCLA's Superfund taxing authority expired in December 1995, and CERCLA's authority to expend funds originally expired in September 1994. However, Congress has extended the EPA's authority to use funds on an interim basis. Congress to date has linked long-term reinstatement of Superfund's taxing and spending authority to comprehensive reauthorization and revision of CERCLA. The Congressional Budget Office estimates that the Superfund trust fund has sufficient funds for the CERCLA program through the year 2001. A number of changes in CERCLA have been proposed. The suggested changes include changes in cleanup standards, remedy selection, the amount of funds available for cleanup, and CERCLA's provision for allocating responsibility for cleanups. We believe Congress' failure to reauthorize CERCLA, and continuing uncertainty concerning the details of the legislation, have resulted in project delays and/or the failure of clients to initiate projects. Arguments over state participation in CERCLA programs and provisions for damages to natural resources make passage of a bill reauthorizing CERCLA more uncertain. Potential exhaustion of the monies in the Superfund trust may accelerate the passage of legislation reauthorizing CERCLA. In response to Congressional and private sector pressure and, in part, to avoid more sweeping changes by Congress, the EPA has relaxed regulatory requirements and enforcement. For example, the EPA has attempted, through various regulatory initiatives, to make it easier to redevelop "brownfields," i.e., lightly to moderately contaminated urban sites. Brownfields sites nationally have been estimated to number in the hundreds of thousands. Similar legislation has also been introduced, and a number of states have initiated similar programs. The EPA is currently attempting to raise funds for brownfields programs through bond programs. While we believe such programs offer additional opportunities, we cannot predict the ultimate impact of these programs. Resource Conservation and Recovery Act of 1976. RCRA restricts the land disposal of certain wastes, prescribes more stringent management standards for hazardous waste disposal sites, sets standards for underground storage tank (UST) management and provides for corrective action procedures. RCRA also imposes liability and stringent management standards on generators or transporters of hazardous waste and owners or operators of waste treatment, storage or disposal facilities. RCRA's requirement that USTs be upgraded to double-walled tanks with leak detection systems became effective on December 22, 1998, with some 250,000 tanks estimated to remain in violation nationwide. We believe that increased state and EPA enforcement actions for UST noncompliance will prompt increased repair or replacement of these tanks. Further, in November 1998, the EPA adopted its new Hazardous Waste Identification Rule regulation, allowing more flexible and cost-effective approaches to site cleanups. In particular, the final rule streamlines permitting, treatment and technological requirements for waste remediation. Clean Air Legislation. The Clean Air Act requires compliance with National Ambient Air Quality Standards for specific pollutants and empowers the EPA to establish and enforce limits on the emission of various pollutants from specific types of facilities. The Clean Air Act Amendments of 1990 modified the Clean Air Act in a number of significant areas. Among other changes, these amendments . established emissions allowances for sulfur and nitrogen oxides, . established strict requirements applicable to emissions of air toxics, . established a facility-wide operating permit program for all major sources of regulated pollutants, . established requirements for management of accidental releases of toxic air pollutants, and . created significant new penalties, both civil and criminal, for violations of the Clean Air Act. 14 Although the EPA recently promulgated regulations significantly tightening standards for ozone and particulate emissions, and these regulations might eventually increase demand for our air quality services, the proposals have met with substantial opposition (including court challenges) and their ultimate fate and impact remain uncertain. Also, while world leaders recently agreed to the "Kyoto Protocol" (treaty) to reduce greenhouse gas emissions, and these proposals could increase demand for our air quality services, they have also met with substantial opposition, and their ultimate fate remains uncertain. Also uncertain are the fate and impact of proposals for tax credits for greenhouse gas emission reductions as an alternative to the Kyoto Protocol. The Price Anderson Act (PAA). Approximately 11% of our $3.5 billion in backlog consists of projects in our energy and nuclear services business. We service the need of the DOE in converting its weapons facilities to civilian purposes and the need of the nuclear power industry in the decontamination and decommissioning of nuclear power plants. We expect this portion of our business to continue to grow as up to 35 operating commercial power plants reach the end of their useful lives over the next 20 years. The PAA promotes and regulates the nuclear power industry in the U.S. The PAA comprehensively regulates the manufacture, use and storage of radioactive materials, and promotes the nuclear power industry by offering broad indemnification to nuclear power plant operators and DOE contractors. While the PAA's indemnification provisions are broad, it has not been determined whether they apply to all liabilities that might be incurred by a radioactive materials cleanup contractor such as us. Also, the PAA expires in 2002. Because nuclear power remains controversial and no new nuclear plants are planned in the U.S., it is not clear that the PAA and its indemnification provisions will be extended beyond 2002. Our business could be adversely affected if the PAA were not extended beyond 2002. The Food Quality Protection Act (FQPA) of 1996. FQPA has created an increased demand for agricultural chemical registration and defense services. JSC, one of our recent acquisitions, is a leading supplier of these services. Also, the regulatory initiatives incorporated in FQPA, including more comprehensive risk evaluation and management for hazardous chemicals, are likely to influence future EPA policies and practices. Such regulatory developments may increase demand for our services. Other Federal and State Environmental Laws. Our clients also use our services in complying with, and our operations are subject to regulation under, among others, the following federal laws: . the Toxic Substances Control Act, . the Clean Water Act, . the Safe Drinking Water Act, . the Occupational Safety and Health Act, and . the Hazardous Materials Transportation Act. Many states also have passed Superfund-type legislation and other regulations and policies to cover more detailed aspects of hazardous materials management. This legislation addresses such topics as: . air pollution control, . UST and aboveground storage tank (AST) management, . water quality, . solid waste, . hazardous waste, . surface impoundments, 15 . site cleanup, and . wastewater discharge. Environmental Contractor Risks Although we believe that we generally benefit from increased environmental regulation, and from enforcement of those regulations, increased regulation, enforcement and private litigation also create significant risks for us. These risks include potentially large civil and criminal liabilities from violations of environmental laws and regulations and liabilities to clients and to third parties for damages arising from performing services for clients. Our failure to observe the laws or the terms and conditions of licenses and permits we hold could adversely impact our ability to carry on our business as presently conducted. Liabilities Arising out of Environmental Laws and Regulations Our operations are subject to regulation by a number of federal and other laws and agencies. As such, we may be held directly liable for failure to abide by these laws. Any such failure could lead to our debarment or suspension as a government contractor. Companies that are subject to environmental liabilities have also sought to expand the reach of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or (Superfund), the Resource Conservation and Recovery Act (RCRA) and similar state statutes to make contractor firms responsible for cleanup costs. These companies claim that environmental contractors are owners or operators of hazardous waste facilities or that they arranged for treatment, transportation or disposal of hazardous substances. If we are held responsible under CERCLA or RCRA for damages caused while performing services or otherwise, we may be forced to bear this liability by ourselves, notwithstanding the potential availability of contribution or indemnification from other parties. Further, one of our businesses involves the purchase and redevelopment of environmentally impaired property. As the owner of such properties, we may be required to clean up all contamination at these sites, even if we did not place it there. We use insurance and other risk mitigation techniques to manage these risks but we cannot guarantee the adequacy of those measures. Potential Liabilities to Clients and Third Parties In performing services for our clients, we could become liable for breach of contract, personal injury, property damage, negligence and other causes of action. The damages available to a client are potentially large and could include consequential damages. Many potential clients, particularly in connection with projects involving large scale cleanups, try to shift to contractors the risk of completing the project, if the contamination is either more extensive or difficult to resolve than they anticipated. In this competitive market, clients increasingly try to pressure contractors to accept greater risks of performance, liability for damage or injury to third parties or property and liability for fines and penalties. We have from time to time been involved in claims and litigation involving disputes over such issues. Environmental management contractors also potentially face liabilities to third parties for property damage or personal injury stemming from a release of toxic substances resulting from a project performed for clients. These liabilities could arise long after completion of a project. Over the past several years, the EPA and other federal agencies have constricted significantly the circumstances under which they will indemnify their contractors against liabilities incurred in connection with CERCLA projects and continue their attempts to renegotiate previously agreed indemnities. 16 Insurance We maintain liability insurance programs that are structured to provide coverage for major and catastrophic losses. We self insure against losses that may occur in the ordinary course of business. Effective April 1, 1998, our liability insurance program provides for coverage of up to $75.0 million. This coverage has a $500,000 deductible. We also carry pollution liability insurance with policy limits of up to $35.0 million. This coverage has a $1.0 million deductible. However, we cannot assure that any future claims will not exceed our coverages. In preceding years, our insurance program required us to self-insure for the first $5.0 million retention for each of its general liability, automobile liability and contractor's pollution liability coverages. We are obligated to indemnify our insurance carriers against liabilities and costs of defense, subject to certain limitations for each of these kinds of coverage, up to that $5.0 million limit. Letters of credit support this indemnity commitment. Although we believe our insurance program is appropriate for the management of our risks, our insurance policies may not fully cover our operations. Policy coverage exclusions, retaining risks through deductible and self-insured retention programs, or losses in excess of the coverage may cause all or a portion of one or more losses not to be covered by our insurance. Concentration of Revenues Agencies of the federal government are among our most significant clients. For the nine months ended December 25, 1998, approximately 69% of our net revenue was derived from federal agencies as follows: . 52% from the DOD; . 10% from the DOE; and . 7% from other federal agencies. Many of our contracts with federal government agencies require annual funding approval and may be terminated at their discretion. A reduction in spending by federal government agencies could limit the continued funding of our existing contracts with them and could limit our ability to obtain additional contracts. These limitations, if significant, could have a material adverse effect on our business. Government Contractor Risks As a major provider of services to governmental agencies, we face the risks associated with government contracting, which include the risk of substantial civil and criminal fines and penalties for violations of applicable regulations and the risk of public scrutiny of our performance at high profile sites. Government contracting requirements are complex, highly technical and subject to varying interpretations. As a result of our government contracting business, we have been, are and expect in the future to be, the subject of audits and investigations by governmental agencies, including the Defense Contract Audit Agency (the DCAA) and the EPA's Office of Inspector General (EPAOIG). During the course of an audit, the DCAA or EPAOIG may disallow costs if it determines that we improperly accounted for such costs in a manner inconsistent with Cost Accounting Standards. Under the type of "cost reimbursable" government contracts that we typically perform, only those costs that are reasonable, allocable and allowable are recoverable under the Federal Acquisition Regulations and Cost Accounting standards. At present, there are several unresolved and/or ongoing audits of our billings dating back to 1995 (and, in some instances, earlier years as well). A disallowance of a significant amount of our costs could have a material adverse effect on our business. In addition to the damage to our business reputation, the failure to comply with the terms of one or more of our government contracts could also result in our suspension or debarment from future government contract projects for a significant period of time. This could result in a material adverse effect on our business. On or 17 about September 2, 1998, OHM Corporation, one of its subsidiaries, and The IT Group entered into a Compliance Agreement with the EPA to address alleged past practices by OHM that, according to the EPA, may constitute a basis for our suspension and/or debarment. A breach of the Compliance Agreement by us or any of our subsidiaries is potentially cause for our immediate suspension from work and/or debarment. In this regard, EFM also has several open audits by EPAOIG and investigations involving both the Department of Justice and EPAOIG. Fixed-Price Contracts We enter into various types of contracts with our clients, including fixed- price contracts. For the nine months ended December 25, 1998, approximately 20% of our net revenue was derived from fixed-price contracts. Fixed-price contracts protect clients but expose us to a number of risks. These risks include: . underestimation of costs; . problems with the appropriate choice of technologies; . unforeseen costs or difficulties; . delays beyond our control; and . economic and other changes that may occur during the contract period. The risks we face under fixed-price contracts could have a material adverse effect on our business. Closure of Inactive Disposal Sites and Potential CERCLA Liabilities Before 1987, we were a major provider of hazardous waste transportation, treatment and disposal operations in California. In December 1987, we adopted a strategic restructuring program that included a formal plan to divest our transportation, treatment and disposal operations and we stopped taking new business. Closure plans for all four of these facilities have now been approved by all applicable regulatory agencies. Closure construction has been completed at three of these facilities (Montezuma Hills, Benson Ridge and Vine Hill). At December 25, 1998, our consolidated balance sheet included accrued liabilities of approximately $7.9 million to complete the closure and post-closure of our disposal facilities and the potentially responsible party (PRP) matters, net of certain trust fund and annuity investments, restricted to closure and post- closure use and net of anticipated insurance settlements. Impact of Uncertainty in Closure Cost Estimates Closure and post-closure costs associated with our inactive disposal sites are incurred over a significant number of years and are subject to a number of variables. We have estimated the impact of these costs in our provision for loss on disposition of discontinued operations. However, closure and post- closure costs could be higher than estimated if regulatory agencies were to require procedures significantly different than those in the plans developed by us or if there are additional delays in the closure plan approval process. Since recording our initial provision for loss, we have been required to make four upward adjustments to the provision. During each of the three fiscal years ended December 25, 1998, we funded accrued costs of $11.1 million, $14.9 million and $15.7 million relating to our closure plans and construction and PRP matters. We expect to incur costs over the next several years; however, we expect the nature of the costs to change from closure design and construction to post-closure monitoring. Closure plans for our Panoche facility, the final facility to be closed, were approved on March 18, 1998. The approved plans provide for submittal of technical studies that will be utilized to determine final aspects, details and costs of closure construction and monitoring programs. While we believe that the approved closure 18 plans substantially reduce future cost uncertainties, the ultimate costs will depend upon the results of the technical studies called for in the approved plans. Closure construction under the plans is scheduled for completion in the fall of 2000. Uncertainties in Carrying Value of Long-Term Assets The carrying value of our long-term assets of transportation, treatment and disposal discontinued operations of $40.0 million at December 25, 1998 is principally comprised of unused residual land at the inactive disposal facilities and assumes that sales will occur at market prices estimated by us based on certain assumptions about entitlements, development agreements and other factors. A portion of the residual land is the subject of a local community review of our development strategy, which will be the subject of public hearings and City Council deliberation through the second quarter of 1999. We can make no assurances as to the timing of development or sales of any of our residual land, or our ability to ultimately liquidate the land for the sale prices assumed. If our assumptions are not realized, the value of the land could be materially different from the current carrying value. Impact of Possible PRP Liabilities As a major provider of hazardous waste transportation, treatment and disposal operations in California prior to the December 1987 adoption of our strategic restructuring program, we have been named a PRP at a number of other sites including the GBF Pittsburg Superfund site, and may from time to time be so named at additional sites, and also may face damage claims by third parties for alleged releases or discharges of contaminants or pollutants arising out of our transportation, treatment and disposal discontinued operations. Summary Our provision for loss on disposition of transportation, treatment and disposal discontinued operations is based on various assumptions and estimates, including those discussed above. We periodically reevaluate the adequacy of this provision in light of developments since our adoption of the divestiture plan, and we believe that the provision as adjusted is reasonable. However, the ultimate effect of the divestiture on our consolidated financial condition, liquidity and results of operations is dependent on future events, the outcome of which we cannot determine at this time. Closure and post-closure costs could be higher than estimated if regulatory agencies were to require closure and/or post-closure procedures significantly different than those in the approved plans, or if we are required to perform unexpected remediation work at the facilities in the future or to pay penalties for alleged noncompliance with regulations or permit conditions. Outcomes significantly different from those used to estimate the provision for loss could result in a material adverse effect on our business. For additional information about our discontinued operations, see the "Notes to the Consolidated Financial Statements--Discontinued Operations". Substantial Leverage We have now and, after the Note offering, will continue to have a significant amount of indebtedness. The following chart shows certain important credit statistics as of the dates or at the beginning of the periods specified below without giving effect to the Note offering or the EFM or Roche acquisitions:
At December 25, 1998 -------------------- Total indebtedness......................................... $422,662 Stockholders' equity....................................... $238,168 Debt to equity ratio....................................... 1.8:1
19 Our substantial indebtedness could have important consequences. For example, it could: . increase our vulnerability to general adverse economic conditions; . limit our ability to pursue our acquisition business strategy; . limit our ability to obtain necessary financing or bonding, fund future working capital, capital expenditures and other general corporate requirements; . require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; . limit our flexibility in planning for, or reacting to, changes in our business and the environmental services industry; . place us at a competitive disadvantage compared to our competitors that have less debt; and . limit, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds. And, failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on us. We may be able to incur substantial additional indebtedness in the future. During 1998, we amended and restated our credit facilities so that they now provide for a $228.0 million eight-year term loan and a $185.0 million six-year revolving credit facility. At December 25, 1998, we had outstanding $225.8 million of borrowings under the term loan and $143.0 million under the revolving credit facility. If new debt is added to our current debt levels, the related risks that we now face could increase. For more information on our indebtedness, see "Notes to Consolidated Financial Statements--Long-term debt" and "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources". Ability to Service Debt Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and any future acquisitions will depend on our ability to generate cash in the future. Our success is dependent upon our results of operations, which are heavily dependent on various factors, including managing utilization of our professional staff, properly executing projects and successfully bidding new contracts at adequate margin levels. This, to a certain extent, is also subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flow from operations, available cash and available borrowings under our credit facilities will be adequate to meet our future liquidity needs, excluding acquisitions, for the next twelve months. We can make no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our credit facilities in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. History of Losses The following table shows the losses we have incurred in our five most recent fiscal periods. We cannot assure you that we will not continue to incur losses. For a more detailed discussion of our operating results and special charges, see "Management's Discussion and Analysis of Results of Operations and Financial Condition." 20
Twelve Months Ended ------------------------------------------ Nine Months Ended March 31, March 29, March 28, March 27, December 25, 1995 1996 1997 1998 1998 --------- --------- --------- ---------- ----------------- (In thousands) Net loss applicable to common stock........... $(18,483) $(3,654) $(13,693) $(23,193) $(12,091) Net income (loss) applicable to common stock, excluding special charges........ $ 7,000 $ 4,600 $ (5,300) $ 2,800 $ 11,200
Fluctuations in our Quarterly Operating Results Our quarterly revenues, expenses and operating results may fluctuate significantly due to a number of factors, including: . the seasonality of the spending cycle of our public sector clients, notably the federal government; . employee hiring and utilization rates; . the number and significance of client projects commenced and completed during a quarter; . delays incurred in connection with a project; . the ability of our clients to terminate projects without penalties; . weather conditions. Variations in any of these factors could cause significant fluctuations in our operating results from quarter to quarter and could result in net losses. Management of Growth We are growing rapidly through acquisitions. Our revenues were $400.0 million for the twelve months ended March 29, 1996 and since that time, we have acquired eight companies representing an aggregate of $770.0 million in annual revenue at the time of acquisition. Our growth presents numerous managerial, administrative, operational and other challenges. Furthermore, our business strategy calls for continued growth and diversification through acquisitions. Identifying and pursuing future acquisition opportunities requires a significant amount of management time and skill. Additionally, acquisitions involve certain risks that could cause our actual growth or operating results to differ from our or others' expectations. For example: . We may not be able to identity suitable acquisition candidates or to acquire additional companies on favorable terms; . We may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions; . We may fail to successfully integrate or manage these acquired companies due to differences in business backgrounds or corporate cultures or inadequate internal systems or controls; 21 . These acquired companies may not perform as we expect; . If we fail to successfully integrate any acquired company or are unable to improve our internal systems and controls fast enough to accommodate our growth, our reputation could be damaged. This could make it more difficult to market our services or to acquire additional companies in the future; . The acquisition and integration process could take significant time away from management's responsibilities for supervising the ongoing business. Risks of Achievement of Cost Savings and Integration of Operations Our future success depends in part on our ability to achieve cost savings from our acquisitions. We cannot guarantee that we will realize any cost savings or other benefits from our recent acquisitions other than those already realized, or that we will realize any cost savings or other benefits from future acquisitions. Control of Board of Directors In November 1996, The Carlyle Group and some of its affiliates acquired 45,000 shares of our 6% cumulative convertible participating preferred stock and warrants to purchase 1,250,000 shares of our common stock. As a result of paid-in-kind dividends, paid through December 25, 1998, Carlyle now holds 46,095 shares of convertible preferred stock, which totals approximately 21%, or approximately 24% assuming the warrants are exercised, of the voting power of the Company. The terms of our convertible preferred stock provide that until November 20, 2001, the holders of our convertible preferred stock have the right to elect a majority of the Board of Directors, as long as they continue to hold at least 20% of the voting power of the Company. In addition, the sale by Carlyle of its interests under specific conditions constitute events of default under our credit facilities. For more information on our relationship with Carlyle, see "Management--Board of Directors," "Description of Capital Stock" and our "Notes to Consolidated Financial Statements--Preferred Stock-- Carlyle Investment." International Operations For the nine months ended December 25, 1998, approximately 1.3% of our revenues came from international operations. Our international operations in general are subject to a number of risks including: . foreign currency risks, . differences in accounting practices, . work stoppages, . transportation delays and interruptions, . political instability, . expropriation and nationalization, . tariffs and import and export controls, 22 . differing licensing and permit requirements, . conflicting U.S. and foreign laws. We cannot predict what effect, if any, these risks would have on our business. Reliance on Key Personnel Our future success is significantly dependent on our senior management team, which has significant experience. We have entered into employment agreements with a number of our senior executives. The loss of the services of our senior executives could have a material adverse effect on our business. In addition, we also are dependent on the continuing contributions of our platform and project managers, scientists and other professionals and other key personnel, particularly those employees who maintain close relationships with our clients, which relationships are extremely important to our continued success. Our failure to attract and retain key personnel also could have a material adverse effect on our business. DISCONTINUED OPERATIONS At December 25, 1998, our consolidated balance sheet included accrued liabilities of $7.9 million to complete the closure and post-closure of our disposal facilities and the PRP matters, net of trust fund and annuity investments, restricted to closure and post-closure use and anticipated insurance settlement proceeds. In December 1987, we adopted a strategic restructuring program which included a formal plan to divest the transportation, treatment and disposal operations through sale of some facilities and closure of others. Subsequent to this date, we ceased obtaining new business for these operations. We have funded previously accrued costs of $11.1 million for the nine months ended December 25, 1998, $14.9 million in the twelve months ended March 27, 1998 and $15.7 million in the twelve months ended March 28, 1997 relating to our closure plans and construction and PRP matters. We expect to incur costs over the next several years, but the nature of the costs will change from closure design and construction to post-closure monitoring. See "Business--Operations--Closure of Inactive Disposal Sites and Potential CERCLA Liabilities," "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources" and our "Notes to Consolidated Financial Statements--Discontinued Operations" for more information on the financial implications of our discontinued operations. EMPLOYEES At December 25, 1998, without giving effect to the EFM and Roche acquisitions, we employed approximately 5,600 employees. Many of these are professional level employees, including over 700 engineers, 300 environmental scientists, 300 geologists and 500 other specialists in related fields. In addition, our professional employees hold in the aggregate over 950 masters degrees and 150 PhD's. Our ability to retain, expand and utilize our staff, including those employees that have primary responsibility for maintaining client relationships, will be a significant factor in our future success. None of our employees are represented by labor unions under Company-wide collective bargaining agreements. However, we do employ union labor from time to time on a project-specific basis. We consider our relations with our employees to be good. 23 ITEM 2. PROPERTIES. We own or lease property in 36 states, the District of Columbia, the United Kingdom, Italy and Australia. Excluding discontinued operations, we own approximately 54 acres and lease approximately 1.8 million square feet of property for various uses, including . regional and project offices, . technology and process development laboratories, . field remediation support service facilities, and . corporate offices. We consider these facilities adequate for our present and anticipated activities. Additionally, we own approximately 2,800 acres related to discontinued operations, principally in Northern California, of which approximately 900 acres were used for hazardous waste disposal facilities and approximately 1,900 are adjacent to those facilities, but were never used for waste disposal. ITEM 3. LEGAL PROCEEDINGS. Continuing Operations Legal Proceedings We are subject from time to time to a number of different types of claims arising in the ordinary course of our business, including contractual disputes with clients, subcontractors and suppliers, claims for professional negligence, environmental claims, governmental audits and investigations and claims for personal injuries and property damage. We do not believe that any of these claims will have a material adverse effect on our business. See our "Notes to Consolidated Financial Statements--Commitments and Contingencies-- Contingencies" for information regarding the legal proceedings related to our continuing operations. Discontinued Operations Legal Proceedings We have been, are and may in the future be subject from time to time to a number of different types of claims arising out of our discontinued operations including environmental claims for recovery of all or a portion of the cleanup costs at sites we previously owned or operated or to which we took our or a client's wastes, including claims for personal injuries and property damage. We do not believe any of these claims will have a material adverse effect on our business. See our "Notes to Consolidated Financial Statements--Discontinued Operations" for information regarding the legal proceedings related to our transportation, treatment and disposal discontinued operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS. We submitted one matter to a vote of our shareholders during the quarter ended December 25, 1998. Pursuant to a Consent Statement dated October 23, 1998, we requested that our stockholders grant their written consent in lieu of voting at a special meeting to the amendment of the Company's Certificate of Incorporation to change its name to "The IT Group, Inc." As of November 16, 1998, the initial date through which we announced we would continue the solicitation, we received the approval of approximately 89% of the shares entitled to consent. On October 22, 1998, the record date for soliciting consents, there were outstanding 24 and entitled to vote 22,628,433 shares of common stock, and 45,819 shares of 6% Convertible Preferred Stock convertible into 6,036,653 shares of common stock, for a total of 28,665,086 shares of common stock entitled to consent on an as- converted basis, and they approved the name change as follows:
For Against & Withheld Non-votes --- ------------------ --------- 25,519,802 24,472 3,120,812
In addition, all 45,819 shares of 6% Convertible Preferred Stock, voting as a single class, approved the name change. On December 23, 1998, we filed with the Delaware Security State the Certificate of Amendment of our Certificate of Incorporation finally changing our name to "The IT Group, Inc." ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY. The following table provides information as of December 25, 1998 regarding our executive officers and the positions they hold. The officers are appointed annually by the Board of Directors to serve at the discretion of the Board.
First elected officer of Name Age Position the Company - ---- --- -------- ------------- Anthony J. DeLuca....... 51 Chief Executive Officer and President 1990 David L. Backus......... 57 Senior Vice President, Outsourced Services and International 1998 James G. Kirk........... 60 Vice President, General Counsel and Secretary 1996 James R. Mahoney........ 60 Senior Vice President, Consulting and Ventures 1991 Raymond J. Pompe........ 64 Senior Vice President, Engineering and Construction 1988 Philip O. Strawbridge... 44 Senior Vice President, Chief Administrative Officer 1998
Mr. DeLuca was named Chief Executive Officer and President of the Company on July 22, 1997 and President and Acting Chief Executive Officer and a director of the Company as of July 1, 1996. Prior thereto, Mr. DeLuca had been Senior Vice President and Chief Financial Officer of the Company since March 1990. Before joining the Company Mr. DeLuca had been a partner at the public accounting firm Ernst & Young LLP. Mr. Backus joined us as Senior Vice President, Outsourced Services and International in December 1998 in connection with the GTI acquisition. Mr. Backus joined GTI in 1992 as Vice President of GTI's Western Operations. Prior to joining GTI, Mr. Backus was employed by Morrison Knudsen Corporation from 1975 to 1992 in various executive positions, including Group Vice President of Morrison Knudsen's Environmental Group. From 1972 to 1975, Mr. Backus was the Director of Business Development for M.K. Ferguson Company. Prior to that, Mr. Backus was involved in the construction business. Mr. Kirk, who joined the Company as General Counsel, Eastern Operations, in 1991, was named Vice President, General Counsel and Secretary in September 1996. Prior to joining the Company, Mr. Kirk served as Vice President and General Counsel for Limbach Constructors from 1978 to 1991. From 1973 to 1978, Mr. Kirk was Assistant General Counsel for Dravo Corporation. Mr. Mahoney, who joined the Company in January 1991 as Senior Vice President and Director of Technology, was named Senior Vice President, Corporate Development and Sales in April 1992, Senior Vice President, Technical Operations and Corporate Development in March 1995, and Senior Vice President, Consulting and Ventures in July 1996. Prior to joining the Company, Mr. Mahoney was Director of the National Acid Precipitation Assessment Program, a U.S. government research and assessment program, from 1988 to 1991. From 1984 to 1987, Mr. Mahoney served in various environmental managerial capacities with Bechtel Group, Incorporated, a major engineering and construction firm. 25 Mr. Pompe joined the Company in 1988 as Vice President, Construction and Remediation, was named Senior Vice President, Project Operations, in March 1995, and Senior Vice President, Engineering and Construction in July 1996. Prior to joining the Company, Mr. Pompe was employed by Dravo Corporation, a major construction firm, from 1956 to 1988 in various executive capacities, most recently as Senior Vice President responsible for construction projects. Mr. Strawbridge joined the Company through the Company's acquisition of OHM Corporation ("OHM") in May 1998 as Senior Vice President and Chief Administrative Officer. Mr. Strawbridge joined OHM Corporation in February 1996 as Senior Vice President, Chief Financial and Administrative Officer and was given the additional responsibility of President of OHM's wholly owned subsidiary OHM Energy Services in October, 1996. Prior to joining OHM, Mr. Strawbridge was employed by Fluor Corporation from 1988 to 1996 in various managerial capacities including Senior Director of Contracts and Finance and acting Vice President of Fluor Daniel Fernald. From 1976 to 1988, Mr. Strawbridge was employed by the U.S. Government in various management and executive capacities. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS. Our common stock is listed on the New York Stock Exchange (NYSE) and Pacific Stock Exchange under the symbol ITX. The following table sets forth the high and low sale prices of the common stock, as reported by the NYSE for the periods indicated.
Quarter ended High Low - ------------- -------- --------- June 27, 1997................................................ $ 8 1/4 $ 6 3/8 September 26, 1997........................................... 9 1/4 6 13/16 December 26, 1997............................................ 9 9/16 7 March 27, 1998............................................... 10 5/8 7 3/8 June 26, 1998................................................ 11 1/2 8 7/8 September 25, 1998........................................... 10 1/4 5 December 25, 1998............................................ 11 1/2 5 1/2
On March 5, 1999, the closing sale price of the common stock on the NYSE as reported by The Wall Street Journal was $13.9375 per share. On that date there were 2,020 stockholders of record. We have not paid a cash dividend on our common stock for the nine months ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997. We have no present intention to pay cash dividends on our common stock in the foreseeable future in order to retain all earnings for investment in our business. Our credit agreements prohibit cash dividends on common stock. 26 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth income statement information for the Company's continuing operations and other financial information for the nine months ended December 25, 1998 (the transition period as a result of our change in fiscal year) and the periods ended March 27, 1998, March 28, 1997, March 29, 1996 and March 31, 1995. Share and per share data have been restated to reflect the one-for-four reverse stock split effective November 21, 1996.
Nine Months Twelve Months Ended Ended ------------------------------------------ December 25, March 27, March 28, March 29, March 31, 1998 1998 1997 1996 1995 ------------ --------- --------- --------- --------- (In thousands, except per share data) INCOME STATEMENT INFORMATION Revenues................ $757,435 $442,216 $362,131 $400,042 $423,972 Gross margin............ 90,961 51,090 38,138 58,152 61,916 Special charges......... 24,971 14,248 8,403 -- -- Loss from continuing operations (net of preferred stock dividends)............. (12,091) (12,527) (13,693) (3,654) (7,880) Loss per common share from continuing operations............. (0.63) (1.28) (1.48) (0.41) (0.89) Weighted average shares outstanding............ 19,149 9,737 9,227 8,982 8,889 OTHER FINANCIAL INFORMATION Working capital......... $120,260 $ 74,924 $110,705 $ 89,174 $ 73,838 Costs in excess of net assets of acquired businesses............. 356,619 211,878 9,363 8,770 7,728 Total assets............ 948,606 709,217 342,531 315,314 362,152 Long-term debt.......... 405,059 284,697 65,874 65,611 80,189 Long-term accrued liabilities............ 31,979 27,528 15,184 30,223 45,207 Stockholders' equity.... 238,168 148,150 168,853 140,865 145,921
No cash dividends were paid on common shares for any period. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. RESULTS OF OPERATIONS Overview We are a leading provider of diversified, value-added services in the areas of environmental consulting, engineering and construction and remediation. In addition, we are leveraging our core project management competencies to offer our clients a variety of outsourcing services such as facilities management. We have a strong reputation for both the high quality of our work and the breadth of the services we provide. Our clients are federal, state and local governments in the U.S. and commercial businesses worldwide. We obtained 69% of our revenues for the nine months ended December 25, 1998 from the federal government under more than 100 contracts that range in length from one to ten years. In addition, we serve 1,500 commercial clients on projects which range in length from one month to more than one year. For the nine months ended December 25, 1998, our revenues were $757.4 million. Approximately 90% of our backlog at December 25, 1998 was under federal government programs, and approximately 82% is expected to be charged to our clients on a cost-reimbursable basis. Many of our commercial contracts are evergreen contracts and are typically not part of our backlog. In the course of providing our services, we routinely subcontract services. These subcontractor costs are passed through to clients and, in accordance with industry practice, are included in our revenue. Our cost of 27 revenue includes subcontractor costs, salaries, direct and indirect overhead costs such as rents, utilities and travel directly attributable to projects. Our selling, general and administrative expenses are comprised primarily of costs related to the executive offices, corporate accounting, information technology, marketing and bid and proposal costs. These costs are generally unrelated to specific client projects. In addition, we include in these expenses amortization of intangible assets such as goodwill resulting from acquisitions. Acquisitions Since 1996, we have made eight acquisitions to expand and diversify our business to meet our strategic objectives. The following table provides some information on these acquisitions.
Most Recent Fiscal Year Date of Revenues Acquisition Name Location(s) Business Prior to Acquisition ----------- ---- ----------- -------- -------------------- (In millions) Mar. 1996 Gradient Massachusetts Environmental/human $5 Corporation health risk assessment Litigation support Nov. 1996 Chi Mei IT Taiwan Wastewater treatment $12 design/build May 1997 PHR California Historical pollution $3 Environmental Washington, DC liability research and Consultants, Inc. investigation Sept. 1997 Pacific California Environmental consulting $10 Environmental and engineering services Group, Inc. Jan. 1998 Jellinek, Schwartz & Washington, DC Science-based $12 Connolly, Inc. Colorado environmental consulting England and advocacy services Mar. 1998 LandBank, Inc. Colorado Real estate acquisition $3 and restoration company Feb. and OHM Corporation Over 30 regional offices Leading diversified $525 June 1998 services firm providing a broad range of services for governmental and private sector clients Leading provider of operations, maintenance and construction outsourcing services Dec. 1998 Fluor Daniel Over 30 offices in Broad-based $200 GTI, Inc. North America, environmental services Europe and firm Australia
On February 5, 1999, we signed an agreement to acquire all of the outstanding common stock of Roche Limited Consulting Group (Roche) for an initial payment of $10.0 million in cash, plus two potential earnout payments. Roche is based in Quebec City, Canada and provides engineering and construction services to wastewater, paper, mining and transportation industries worldwide. Roche has approximately 700 employees and had revenue of $28.3 million in its most recent year ended December 31, 1998. The acquisition is expected to close in April 1999. 28 On March 8, 1999, we signed an agreement to acquire specified assets of the Environment and Facilities Management Group (EFM Group) of ICF Kaiser International, Inc. (Kaiser) for a purchase price of $82.0 million reduced by $8.0 million representing working capital retained by Kaiser. We also agreed to assume specified liabilities. The EFM Group provides environmental remediation, program management and technical support for United States Government agencies including the DOD, National Aeronautics and Space Administration (NASA) and the DOE as well as private sector environmental clients. The EFM Group has approximately 500 employees and had revenue of $105.9 million for the calendar year ended December 31, 1998. The acquisition is expected to close in April 1999. Change in Fiscal Year In June 1998, we changed our fiscal year-end from the last Friday in March to the last Friday in December of each year effective with the nine months ended December 25, 1998. Accordingly, the following discussion compares financial results for a nine-month period to a full twelve-month year. Likewise, the financial results for the nine-month period ended December 25, 1998 include OHM's results for the entire nine-month period while the financial results for the twelve-month period ended March 27, 1998 include only one month of OHM financial results because we acquired 54% of OHM on February 25, 1998. In addition, our operating results will be discussed based on the business platforms we established when we adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" for the nine months ended December 25, 1998. These platforms include Engineering & Construction, Consulting & Ventures, Outsourced Services and International. Nine Months Ended December 25, 1998 Compared to Twelve Months Ended March 27, 1998 Revenues and Gross Margin Company. Revenues for the nine months ended December 25, 1998 were $757.4 million, an increase of approximately 71%, when compared to the $442.2 million in revenues reported in the twelve months ended March 27, 1998. This increase is primarily attributable to higher revenues in the Engineering & Construction platform resulting from the OHM acquisition. Our gross margin for the nine months ended December 25, 1998 was 12.0%, slightly higher than the 11.6% gross margin reported in the twelve months ended March 27, 1998. In the 1999 fiscal year, management expects to maintain these gross margin levels. However, our ability to maintain or improve our gross margin levels is heavily dependent on various factors including utilization of professional staff, proper execution of projects, successful bidding of new contracts at adequate margin levels and continued realization of overhead savings achieved upon the completed integration of recent acquisitions. Engineering & Construction. Revenues from the Engineering & Construction platform were $597.9 million for the nine months ended December 25, 1998 compared to $346.1 million for the twelve months ended March 27, 1998, an increase of approximately 73%. Our Engineering & Construction platform includes revenues from the Department of Defense (DOD), Department of Energy (DOE) and commercial clients. Revenues from the DOD and a small number of other government agencies were $363.0 million in the nine months ended December 25, 1998 or $163.6 million greater than the $199.4 million of DOD revenues in the twelve months ended March 27, 1998. DOE revenues of $79.8 million in the nine months ended December 25, 1998 were $39.3 million higher than the $40.5 million of DOE revenues reported in the twelve months ended March 27, 1998. Commercial revenues were $155.1 million in the nine months ended December 25, 1998 or $48.9 million higher than the $106.2 million of commercial revenues reported in the twelve months ended March 27, 1998. A substantial percentage of our revenues continue to be earned from federal governmental contracts with various federal agencies. Revenues from federal governmental contracts accounted for 69% of our revenues in the nine months ended December 25, 1998 compared to 58% in the twelve months ended March 27, 1998. The increase in government revenues for the nine months ended December 25, 1998 both in absolute dollars and as 29 a percentage of revenue is primarily attributable to the OHM acquisition. Federal governmental revenues are derived principally from work performed for the DOD and, to a lesser extent, the DOE and are thus included in our Engineering & Construction platform. We expect to continue to earn a substantial portion of our Engineering & Construction revenues from the DOD indefinite delivery order contracts which are primarily related to remedial action work. In addition, management expects to increase our revenues from the DOE in the future due to an expected transition by the DOE over the next several years to emphasize remediation, as opposed to studies, combined with our favorable experience in winning and executing similar work for the DOD and our past performance of DOE studies. We believe that we have begun to benefit from this transition by the DOE with the commencement in 1998 of a $122.0 million project to perform the excavation, pretreatment and drying of an estimated one million tons of materials for the DOE's Fernald Environmental Management Project. The increase in commercial revenues for the nine months ended December 25, 1998 is primarily attributable to the OHM acquisition. However, revenue growth from the commercial sector, excluding recent acquisitions, could be restricted in the near term partly due to increased emphasis on competitive bids and commercial clients delaying certain work until final Congressional action is taken on the reauthorization of CERCLA. As for CERCLA, it is uncertain when reauthorization will occur or what the details of the legislation, including retroactive liability, cleanup standards, and remedy selection, may include. Uncertainty regarding possible rollbacks of environmental regulation and/or reduced enforcement could further decrease the demand for our services, as clients anticipate and adjust to the new regulations. These factors have been partially offset by an increased desire on the part of commercial clients for strategic environmental services that provide an integrated, proactive approach to environmental issues and that are driven by economic, as opposed to legal or regulatory, concerns. Further, legislative or regulatory changes could also result in increased demand for our services if such changes decrease the cost of remediation projects or result in more funds being spent for actual remediation. The ultimate impact of any such changes will depend upon a number of factors, including the overall strength of the U.S. economy and clients' views on the cost effectiveness of the remedies available. Our Engineering & Construction platform segment profit was $63.8 million for the nine months ended December 25, 1998, an increase of 72% when compared to the $37.0 million segment profit for the twelve months ended March 27, 1998. This increase is primarily attributable to the OHM acquisition. The Engineering & Construction segment profit was 10.7% of Engineering & Construction revenues for both the nine months ended December 25, 1998 and for the twelve months ended March 27, 1998. Consulting & Ventures. Revenues from our Consulting & Ventures (C & V) platform were $79.4 million for the nine months ended December 25, 1998 compared to $79.6 million reported during the twelve months ended March 27, 1998, a decrease of approximately 0.3%. Most of the revenues from Consulting & Ventures are derived from commercial clients. The increase in these revenues on an annualized basis is primarily due to four acquisitions of specialized companies during the twelve months ended March 27, 1998 as well as the GTI acquisition during the nine months ended December 25, 1998. For a description of our recent acquisitions, see "Acquisitions." Excluding any future acquisitions, revenue growth from the commercial sector could be restricted as discussed above under Engineering & Construction. Our Consulting & Ventures platform segment profit was $10.6 million for the nine months ended December 25, 1998, an increase of 45% when compared to the $7.3 million segment profit reported in the twelve months ended March 27, 1998. The Consulting & Ventures segment profit was 13.4% and 9.2% of Consulting & Ventures revenues for the nine months ended December 25, 1998 and the twelve months ended March 27, 1998, respectively. The increase in absolute dollars and as a percentage of revenue is primarily attributable to the acquisitions of JSC and GTI. Outsourced Services. Outsourced Services revenues were $70.4 million for the nine months ended December 25, 1998 compared to $6.8 million reported in the twelve months ended March 27, 1998. This increased revenue is almost entirely attributable to the OHM acquisition and the inclusion of its outsourcing 30 operations in our results of operations for the nine months ended December 25, 1998, as opposed to the one month of results included in the twelve months ended March 27, 1998. OHM's outsourcing operations provide a range of project, program and construction management services to the DOD as well as state and local government agencies. Our Outsourced Services platform segment profit improved to $7.9 million for the nine months ended December 25, 1998, an increase of $7.0 million when compared to the $0.9 million segment profit reported in the twelve months ended March 27, 1998. This increase is also a result of the OHM acquisition. International. International revenues, primarily from our 50.1% investment in Chi Mei IT, a subsidiary operating in Taiwan, were $9.8 million for the nine months ended December 25, 1998 compared to $9.6 million for the twelve months ended March 27, 1998. The increase, on an annualized basis, is the result of Chi Mei increased project volume and the GTI acquisition on December 3, 1998. See "Business--Operations--International" for a more detailed description of the International platform. Our International platform reported a loss of $0.4 million for the nine months ended December 25, 1998 compared to a loss of $1.4 million in the twelve months ended March 27, 1998. This improvement is primarily due to improved project margins on several Chi Mei projects. Through the Chi Mei board of directors, we undertook to improve management oversight, project management skills and change order negotiation efforts. We believe these efforts will minimize future potential losses and provide the basis for profitable Chi Mei operations. The GTI acquisition increased the size of the International platform with operations primarily in Australia, the United Kingdom and Italy. The GTI acquisition included approximately $80.0 million of contract backlog for work to be performed for the U.S. Air Force Center for Environmental Excellence under a worldwide five-year indefinite delivery order cost- reimbursable contract. We expect to increase the platform further with the acquisition of Roche in 1999 (see "Notes to Consolidated Financial Statements-- Subsequent Events"). Backlog. Our total funded and unfunded backlog at both December 25, 1998 and March 27, 1998 was approximately $3.5 billion. At December 25, 1998, the backlog included approximately $525.0 million of funded contracted backlog scheduled to be completed during 1999 and approximately $320.0 million of unfunded project work expected to be defined and performed in 1999 under existing indefinite delivery order contracts. We expect to earn revenues from our backlog primarily over the next one to five years, with a substantial portion of the backlog consisting of governmental contracts, many of which are subject to annual funding and definition of project scope. The backlog at both December 25, 1998 and March 27, 1998 includes $2.7 billion of future work we estimate we will receive (based on historical experience) under existing indefinite delivery order programs. In accordance with industry practices, substantially all of our contracts are subject to cancellation, delay or modification by the customer. Our backlog at any given time is subject to changes in scope of services which may lead to increases or decreases in backlog amounts. These scope changes have led to a number of contract claims requiring negotiations with clients in the ordinary course of business. (See "Notes to Consolidated Financial Statements--Summary of significant accounting policies--Contract accounting and accounts receivable"). Selling, General and Administrative Expenses Selling, general and administrative expenses were 5.5% of revenues for the nine months ended December 25, 1998 compared to 7.2% of revenues in the twelve months ended March 27, 1998. This decrease is primarily attributable to the elimination of certain duplicative overhead functions and other cost savings achieved as a result of the OHM acquisition. In fiscal 1999, management expects selling, general and administrative expenses to decrease slightly as a percentage of revenues because the full effect of the cost savings from the OHM acquisition will be realized. In addition, we anticipate additional cost savings to be achieved from the GTI acquisition that occurred on December 3, 1998. 31 Selling, general and administrative expenses include goodwill amortization expense of $7.0 million for the nine months ended December 25, 1998 and $1.4 million for the twelve months ended March 27, 1998. The significant increase to goodwill amortization is primarily due to the OHM acquisition. Selling, general and administrative expenses (excluding goodwill) were 4.6% of revenues for the nine months ended December 25, 1998 and 6.9% of revenues for the twelve months ended March 27, 1998. Special Charges We recorded special charges of $25.0 million for the nine months ended December 25, 1998 compared to $14.2 million for the twelve months ended March 27, 1998. For the nine months ended December 25, 1998 we recorded a non-cash charge of $25.0 million, including $10.6 million (net of cash proceeds of $5.8 million) related to the sale of our investment in Quanterra, Incorporated and $14.4 million, related to the write-down of assets associated with the HTTS(R) business. A summary of the special charges incurred during the nine months ended December 25, 1998 is outlined below:
Nine Months Ended December 25, 1998 ----------------------------------------------- Cash/ Special Reserve balance Noncash Charges Activity at 12/25/98 ------- -------------- -------- --------------- (In thousands) Write-off of the Quanterra Investment.................... Noncash $(10,550) $10,550 $-- Write-down of the assets-- Primarily the Hybrid Thermal Treatment System(R)........... Noncash (14,421) 14,421 -- -------- ------- --- Total........................ $(24,971) $24,971 $-- ======== ======= ===
Quanterra. On May 27, 1998, our Board of Directors considered and approved the divestiture of certain non-core assets including our 19% common stock ownership interest in Quanterra, Incorporated, an environmental laboratory business. This charge of $10.6 million represented the net book value of our investment in Quanterra less proceeds of $5.8 million from a sale completed in June 1998. No additional cash was expended in connection with the writeoff. Hybrid Thermal Treatment System(R). On May 27, 1998, our Board of Directors considered and approved the divestiture of the assets associated with our Hybrid Thermal Treatment System(R) (HTTS(R)) business. This resulted in a charge of $14.4 million representing the net book value of these assets less estimated salvage value. 32 The special charges of $14.2 million recorded in the twelve months ended March 27, 1998 included $5.7 million for integration costs associated with the acquisition of OHM, a $3.9 million non-cash charge related to a project claim settlement, a $2.8 million charge associated with the relocation of our corporate headquarters, and a $1.8 million loss from the sale of a small remediation services business. A summary of the special charges incurred during the twelve months ended March 27, 1998 is outlined below:
Twelve Months Ended March 27, 1998 ----------------------------------------------- Cash/ Special Reserve balance Noncash Charges Activity at 12/25/98 ------- -------------- -------- --------------- (In thousands) Integration costs--OHM acquisition Severance................... Cash $ (2,197) $ 2,197 -- Duplicative offices/assets.. Cash (2,478) 1,226 $(1,252) Other....................... Cash (1,019) 1,019 -- Claim Settlement Helen Kramer................ Noncash (3,943) 3,943 -- Relocation of Corporate Headquarters Severance and relocation.... Cash (1,743) 1,743 -- Duplicative offices/assets.. Cash (710) 710 -- Other....................... Cash (358) 358 -- Sale of remediation business.. Noncash (1,800) 1,800 -- -------- ------- ------- Total....................... $(14,248) $12,996 $(1,252) ======== ======= =======
OHM Acquisition. The $5.7 million special charge for integration costs associated with the acquisition of OHM included $2.2 million of costs for severance and $3.5 million of costs and other related items for closing and eliminating duplicative offices. As part of the plan of integration, we laid- off more than 100 employees, primarily in the operating group and administrative support functions. In addition, as part of the plan we closed three leased facilities, reduced the size of three more facilities and subleased a portion of eight additional facilities. As of December 25, 1998, $1.3 million of the integration charge remained to be paid. The remaining costs relate to the facility closures and office consolidations and will be paid over the remaining terms of the leases. Most of these lease commitments will be paid within the next three years. One lease requires payments over the next seven years. Helen Kramer. In December 1997, we settled a contract claim which has been outstanding in excess of five years with the US Army Corps of Engineers, the Environmental Protection Agency and the Department of Justice (jointly Government) arising out of work performed by our joint venture with Davy International at the Helen Kramer Superfund project. On December 26, 1997, the joint venture received a $14.5 million payment from the Government to resolve all outstanding project claims related to additional work resulting from differing site conditions. In early January 1998, the joint venture paid $4.3 million to the Government to resolve related civil claims by the Government. Our share of the joint venture results is 60%, accordingly, we received net cash of $6.0 million, our proportionate share of the settlement. In December 1997, we recorded a non-cash pre-tax charge of $3.9 million because the cash received was less than the receivables related to this project which totaled approximately $9.9 million. Relocation of Corporate Headquarters and Sale of Remediation Business. The special charges that occurred in the first quarter of the twelve months ended March 27, 1998 resulted from the relocation of our corporate headquarters from Torrance, California to Monroeville (Pittsburgh), Pennsylvania and the sale of our California based small project remediation services business. The headquarters relocation consolidated the corporate overhead functions with our largest operations office and moved us closer to our lenders and largest shareholders, which are located in the Eastern United States. As a result of this relocation, we incurred a pre-tax charge of $2.8 million. The relocation charge included $0.8 million of costs for severance, $0.9 million of 33 costs for the relocation of some employees, $0.7 million of costs related to the closure of the offices in Torrance, California and $0.4 million of other related costs. As part of this relocation, 32 employees were laid off, primarily corporate management and administrative support personnel. As of December 25, 1998, these amounts have been paid. In May 1997, we incurred a non-cash pre-tax charge of $1.8 million to sell our California based small projects remediation services business. Interest, Net Net interest expense was 3.3% of revenues for the nine months ended December 25, 1998 and 1.8% for the twelve months ended March 27, 1998. The following table shows net interest expense for these comparative periods:
Nine Months Twelve Months Ended Ended December 25, March 27, 1998 1998 ------------ ------------- (In thousands) Interest incurred.................................... $25,876 $10,730 Capitalized interest................................. -- (10) Interest income...................................... (981) (2,751) ------- ------- Interest, net...................................... $24,895 $ 7,969 ======= =======
The increase in interest expense is primarily attributable to the credit facilities used in the OHM acquisition (see "Notes to Consolidated Financial Statements--Long-term debt"). Income Taxes For the nine months ended December 25, 1998, we reported a loss from continuing operations of $0.7 million and recorded an income tax charge of $9.7 million before adjusting for the special charge. We also provided a deferred tax asset valuation adjustment for a portion of the special charges and recognized a tax benefit of $3.0 million on the divestiture of the HTTS(R) business (see "Special Charges"). The total net tax charge is $6.7 million. Our effective income tax rate from continuing operations is more than the federal statutory rate primarily due to the valuation adjustment for the above charge and amortization of cost in excess of net assets of acquired businesses (see "Notes to Consolidated Financial Statements--Income taxes"). For the twelve months ended March 27, 1998, we reported a loss from continuing operations before income taxes and an extraordinary item of $2.2 million and recorded an income tax charge of $4.2 million after adjusting for the special charge and a $2.3 million deferred tax asset valuation adjustment prior to the acquisition of OHM. We also recognized a tax benefit of $3.5 million on an extraordinary charge for the early extinguishment of debt and a $3.0 million benefit for a loss from disposition of a discontinued operation. The total net tax benefit is $2.4 million. Our effective income tax rate from continuing operations is more than the federal statutory rate primarily due to the above charge, state income taxes and nondeductible expenses (see "Notes to Consolidated Financial Statements--Income taxes"). We will need to have approximately $288.0 million of future earnings to fully realize our deferred tax asset of $109.6 million (net of a valuation allowance of $50.3 million) at December 25, 1998, assuming a net 38% federal and state tax rate. We evaluate the adequacy of the valuation allowance and the realizability of the deferred tax asset on an ongoing basis. Because of our position in the industry, recent acquisitions and restructuring, and existing backlog, management expects that our future taxable income will more likely than not allow us to fully realize our recorded deferred tax asset of $109.6 million. The increase in gross deferred tax asset is primarily due to the acquisitions of OHM and GTI. 34 Extraordinary Item For the twelve months ended March 27, 1998, we recorded a $5.7 million charge, net of income tax benefit of $3.5 million, for the early extinguishment of $65.0 million of senior debt which was refinanced in connection with the acquisition of OHM. We incurred a $5.6 million payment for the make whole interest provision as a result of retiring our $65.0 million senior debt, in accordance with the loan agreement. In addition, we also expensed approximately $3.6 million related to the unamortized loan origination expenses associated with issuing the $65.0 million senior debt. Dividends Our reported dividends for the nine months ended December 25, 1998 were $4.7 million and $6.2 million for the twelve months ended March 27, 1998. Our reported dividends include imputed dividends on our Convertible Preferred Stock of $0.9 million for the nine months ended December 25, 1998 and $2.1 million for the twelve months ended March 27, 1998, which are not payable in cash or stock. Commencing with November 21, 1997, our Convertible Preferred Stock outstanding accrued a 3% in-kind stock dividend for one year during which the statement of operations also included an imputed dividend at a rate of approximately 3% per annum. This additional imputed dividend of $0.9 million for the nine months ended December 25, 1998 and $0.5 million for the twelve months ended March 27, 1998, will never be paid in cash, except for fractional shares, and represents the amortization of the fair market value adjustment recorded since the date of issuance. Commencing with November 21, 1998, our outstanding Convertible Preferred Stock is entitled to a 6% cumulative cash dividend payable quarterly. We reported cash dividends on our outstanding depositary shares each representing 1/100 of a share of our 7% cumulative convertible exchangeable preferred stock (the 7% Preferred Stock) of $2.7 million in the nine months ended December 25, 1998 and $3.6 million for the twelve months ended March 27, 1998. The decrease in cash dividends between the March 27, 1998 and December 25, 1998 fiscal periods of $0.9 million is due to the shortened fiscal period. Our dividends are summarized below:
Nine Months Twelve Months Ended Ended December 25, March 27, 1998 1998 ------------ ------------- (In thousands) 7% Cumulative convertible exchangeable cash dividend.......................................... $2,697 $3,595 6% Cumulative convertible participating --Imputed non-cash dividend...................... 860 2,105 --In kind 3% stock dividend...................... 894 467 --Cash dividend.................................. 213 -- ------ ------ Total.......................................... $4,664 $6,167 ====== ======
Twelve Months Ended March 27, 1998 Compared to Twelve Months Ended March 28, 1997 Revenues and Gross Margin Company. Revenues for the twelve months ended March 27, 1998 were $442.2 million or 22% higher than the $362.1 million in revenues reported in the twelve months ended March 28, 1997. The twelve months ended March 27, 1998 include the results of OHM Corporation since February 25, 1998, the date on which we acquired a 54% controlling interest. Revenues related to OHM in the twelve months ended March 27, 1998 were $42.1 million. Gross margins were 11.6% of revenues in the twelve months ended March 27, 1998 and 10.5% in the twelve months ended March 28, 1997. The improved gross margin was due to spreading fixed overhead costs over higher revenue levels. 35 Engineering & Construction. Engineering & Construction revenues were $346.1 million in the twelve months ended March 27, 1998 compared to $308.6 million in the twelve months ended March 28, 1997, an increase of approximately 12%. DOD revenues were $199.4 million in the twelve months ended March 27, 1998 or $45.9 million greater than the $153.5 million of DOD revenues in the twelve months ended March 28, 1997. The strong improvement in DOD activity was due to increased funding of the DOD indefinite delivery order programs and an increase in the number of DOD contracts being executed. In addition, OHM contributed about $20.0 million to the increase in DOD revenues in the twelve months ended March 27, 1998. DOE revenues of $40.5 million in the twelve months ended March 27, 1998 were $9.1 million lower than the $49.6 million of DOE revenues reported in the twelve months ended March 28, 1997. Commercial revenues were $106.2 million in the twelve months ended March 27, 1998 or $0.7 million higher than the $105.5 million in commercial revenue reported in the twelve months ended March 28, 1997. Our Engineering & Construction platform segment profit of $37.0 million in the twelve months ended March 27, 1998 increased 43% over the $25.9 million segment profit reported in the twelve months ended March 28, 1997. This increase is primarily a result of the increase in higher margin, DOD revenues. The Engineering & Construction segment profit was 10.7% and 8.4% of Engineering & Construction revenues for the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997, respectively. Consulting & Ventures. Consulting & Ventures revenues of $79.6 million in the twelve months ended March 27, 1998 exceeded the twelve months ended March 28, 1997 revenues of $48.8 million by $30.8 million, an increase of approximately 63%. This increase is primarily attributable to the acquisitions of specialized companies primarily serving targeted commercial markets. Our Consulting & Ventures platform segment profit was $7.3 million in the twelve months ended March 27, 1998 compared to $0.7 million in the twelve months ended March 28, 1997. The increase in segment profit is also due to the acquisitions that occurred in the twelve months ended March 27, 1998. The Consulting & Ventures segment profit was 9.1% and 1.4% of Consulting & Ventures revenues for the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997, respectively. Outsourced Services. Outsourced Services revenues in the twelve months ended March 27, 1998 were $6.8 million, from the OHM acquisition, compared to none in the twelve months ended March 28, 1997. As discussed previously, the OHM acquisition occurred on February 25, 1998 and consequently no revenue from OHM was included in the twelve months ended March 28, 1997 results. Outsourced Services reported $0.9 million in segment profit in the twelve months ended March 27, 1998 compared to none in the twelve months ended March 28, 1997. International. International revenues were $9.6 million in the twelve months ended March 27, 1998 compared to $4.7 million in the twelve months ended March 28, 1997. This increase is the result of the Chi Mei acquisition in October 1996. The International platform segment loss of $1.4 million in the twelve months ended March 27, 1998 compares to segment profit of $0.2 million in the twelve months ended March 28, 1997. The higher loss is the result of losses on selected international projects. Selling, General and Administrative Expenses Selling, general and administrative expenses were 7.2% of revenues in the twelve months ended March 27, 1998 and 9.2% in the twelve months ended March 28, 1997. Selling, general and administrative expenses of $31.8 million in the twelve months ended March 27, 1998 were $1.7 million or 5.0% lower than the twelve months ended March 28, 1997 level primarily due to the full year impact of the corporate restructuring initiated at the end of the second fiscal quarter of 1997 and the relocation of our corporate headquarters in the first quarter of the twelve months ended March 27, 1998 which resulted in reduced lease expense and labor cost as 36 we integrated and consolidated management and corporate functions into our largest facility (see "Special Charges"). Selling, general and administrative expenses include goodwill amortization of $1.4 million for the twelve months ended March 27, 1998 and $0.8 million for the twelve months ended March 28, 1997. Selling, general and administrative expenses, excluding goodwill, were 6.9% of revenues for the twelve months ended March 27, 1998 and 9.0% of revenues for the twelve months ended March 28, 1997. Special Charges Special charges of $14.2 million were recorded in the twelve months ended March 27, 1998. These special items include $5.7 million for integration costs associated with the acquisition of OHM, $3.9 million non-cash charge related to the Helen Kramer project claim settlement, $2.8 million charge associated with the relocation of our corporate headquarters, and $1.8 million loss from the sale of a small remediation services business. See previous table on Special Charges incurred in the twelve months ended March 27, 1998. Corporate Restructuring. Special charges of $8.4 million were recorded in the twelve months ended March 28, 1997. The special charge relating to a corporate restructuring included $3.4 million for severance, $4.1 million for closing and reducing the size of selected offices and $0.9 million for other related items. As part of the restructuring plan, we laid-off 133 employees and paid over $2.5 million in termination benefits. In addition, we approved a plan to close five leased facilities and reduce the size of eleven other leased facilities by either sublease or abandonment. The remaining costs to be paid relate to the facility closures and office space reductions which will be paid out over the terms of the leases. One of these facility closures has a remaining lease obligation of approximately six years. A summary of the special charges incurred during the twelve months ended March 28, 1997 is outlined below:
Twelve Months Ended March 28, 1997 ----------------------------------------------- Cash/ Special Reserve balance Noncash Charges Activity at 12/25/98 ------- -------------- -------- --------------- (In thousands) Corporate Restructuring: Severance and relocation...... Cash $(3,400) $3,400 $ -- Duplicative offices/assets.... Cash (4,100) 3,227 (873) Other......................... Cash (903) 903 -- ------- ------ ----- Total....................... $(8,403) $7,530 $(873) ======= ====== =====
Interest, Net Net interest expense was 1.8% of revenues in the twelve months ended March 27, 1998 and 1.5% of revenues in the twelve months ended March 28, 1997. The following table shows net interest expense for these comparative periods:
Twelve Months Ended ------------------- March 27, March 28, 1998 1997 --------- --------- (In thousands) Interest incurred........................................... $10,730 $ 7,168 Capitalized interest........................................ (10) -- Interest income............................................. (2,751) (1,908) ------- ------- Interest, net............................................. $ 7,969 $ 5,260 ======= =======
The increase in the twelve months ended March 27, 1998 net interest expense compared to the twelve months ended March 28, 1997 of $2.7 million is attributable to the credit facilities used in the OHM acquisition 37 (see "Notes to Consolidated Financial Statements--Long-term debt"). Loan origination costs, fees and interest expense incurred for the period February 25, 1998 to March 27, 1998 related to the acquisition of OHM stock were approximately $3.4 million. Income Taxes For the twelve months ended March 27, 1998, we reported a loss from continuing operations before income taxes and an extraordinary item of $2.2 million and recorded an income tax charge of $4.2 million after adjusting for the special charge and a $2.3 million deferred tax asset valuation adjustment prior to the acquisition of OHM. We also recognized a tax benefit of $3.5 million on an extraordinary charge for the early extinguishment of debt and a $3.0 million benefit for a loss from disposition of a discontinued operation. The total net tax benefit is $2.4 million. Our effective income tax rate from continuing operations is more than the federal statutory rate primarily due to the above charge, state income taxes and nondeductible expenses (see "Notes to Consolidated Financial Statements--Income taxes"). For the twelve months ended March 28, 1997, in which we reported a loss from continuing operations before income taxes of $9.0 million, we recorded an income tax benefit of $0.2 million which included a $4.6 million tax charge resulting from the adjustment of our deferred tax asset valuation allowance based on our assessment of the uncertainty as to when we will generate a sufficient level of future earnings to realize the deferred tax asset created by the special charges (see "Special Charges"). Dividends Our dividends are summarized below:
Dividend Summary on Preferred Stock ------------------- March 27, March 28, 1998 1997 --------- --------- (In thousands) 7% Cumulative convertible exchangeable cash dividend....... $3,595 $4,050 6% Cumulative convertible participating --Imputed non-cash dividend.............................. 2,105 866 --In kind 3% stock dividend (including cash paid of $12,000 for fractional shares).......................... 467 -- ------ ------ Total.................................................. $6,167 $4,916 ====== ======
Commencing with November 21, 1997, our Convertible Preferred Stock outstanding accrued a 3% in-kind stock dividend for one year during which the statement of operations also included an imputed dividend at a rate of approximately 3% per annum. Discontinued Operations At December 25, 1998, our consolidated balance sheet included accrued liabilities of $7.9 million to complete the closure and post-closure of our disposal facilities and the PRP matters net of trust fund and annuity investments, restricted to closure and post-closure use and anticipated insurance settlement proceeds. In the twelve months ended March 27, 1998, we increased our provision for loss on disposition of our discontinued transportation, treatment and disposal business by $5.0 million net of income tax benefit of $3.0 million. This increased provision primarily related to an additional accrual for closure costs related to the former Panoche disposal site. In March 1998, we announced approval by the California Department of Toxic Substances Control of the final closure and post closure plan for the last of our four inactive treatment, storage and disposal facilities. The approved plans allow us to proceed with the completion of final closure 38 construction and provides for future submittal of technical studies that will be utilized to determine final aspects and costs of closure construction and monitoring programs for the former Panoche disposal site. For further information regarding our discontinued operations, see "Notes to Consolidated Financial Statements--Discontinued operations." 39 THE IT GROUP, INC. LIQUIDITY AND CAPITAL RESOURCES Working capital increased by $45.4 million or 60.6% to $120.3 million at December 25, 1998 from $74.9 million at March 27, 1998 as a result of the acquisitions of OHM and GTI. The current ratio at December 25, 1998 was 1.44:1 which compares to 1.38:1 at March 27, 1998. Cash used by operating activities for the nine months ended December 25, 1998 totaled $34.5 million compared to $19.5 million of cash used for operating activities in the twelve months ended March 27, 1998. This $15.0 million increase is principally due to an increase in working capital requirements as a result of the OHM acquisition. The $34.5 million of cash used for operating activities during the nine months ended December 25, 1998 also includes $11.1 million of costs associated with our discontinued operations (see "Notes to Consolidated Financial Statements--Discontinued operations"). We expect our discontinued operations cash usage for the twelve months ended December 31, 1999 to be less than $8.0 million. Capital expenditures were $6.9 million, $4.8 million and $3.4 million for the nine months ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997, respectively. Capital expenditures for the nine months ended December 25, 1998 were $2.1 million higher than the twelve months ended March 27, 1998 due primarily to computer related expenditures required to integrate our recent acquisitions. We expect capital expenditures to increase to approximately $14.0 million in fiscal year 1999 due to information technology upgrades required to integrate recent acquisitions. Cash used for the acquisition of businesses, net of cash acquired was $81.3 million and $163.2 million for the nine months ended December 25, 1998 and the twelve months ended March 27, 1998, respectively. On February 25, 1998, we purchased 54% of OHM for $160.2 million which is included in the Consolidated Statements of Cash Flows net of $12.0 million of cash acquired. On June 11, 1998, we paid $34.8 million as part of the consideration to acquire the balance of OHM. On December 3, 1998, we acquired GTI for $69.4 million (or $40.1 million net of $29.3 million in cash acquired). We also acquired speciality consulting firms PHR, PEG, JSC and LandBank for cash during the twelve months ended March 27, 1998. These acquisition agreements, along with the acquisition of Beneco by OHM, include potential future contingent payments. The total potential future contingent payments range from a low of $1.9 million to a maximum of approximately $19.1 million. We do not expect to pay significant cash income taxes over the next several years due to our net operating loss carryforwards. (See "Notes to Consolidated Financial Statements--Income taxes" and "Management's Discussion and Analysis of Results of Operations and Financial Condition--Income Taxes".) In connection with the OHM acquisition, we entered into a $240.0 million credit facility which was used to complete the cash tender offer to acquire 54% of OHM, to refinance our $65.0 million principal amount of senior notes and for working capital purposes until we acquired the balance of OHM on June 11, 1998. On June 11, 1998, the credit facilities were amended and restated to effect a $378.0 million refinancing. Under this refinancing, we initially borrowed $228.0 million under term loan provisions and approximately $85.0 million through a revolving credit facility. On September 14, 1998, the lenders under the credit facilities approved the first amendment, increasing the revolving credit facility from $150.0 million to $185.0 million. Long-term debt, including OHM's 8% convertible subordinated debentures, of $405.1 million at December 25, 1998 increased from $284.7 million at March 27, 1998 primarily due to the acquisitions of OHM and GTI. (See "Notes to Consolidated Financial Statements--Long-term debt".) Our ratio of total debt, including current portion, to equity was 1.77:1 at December 25, 1998, 2.03:1 at March 27, 1998 and 0.42:1 at March 28, 1997. See "Notes to Consolidated Financial Statements--Long-term debt". Due to conditions existent in the long-term credit markets during the third and fourth quarter of 1998, we utilized our revolving credit facility and current cash flow as described above to finance the acquisition of GTI. 40 As a result of the utilization of funds for acquisition purposes and a $28.8 million increase in unbilled receivables related to certain government projects which, according to the contract terms can not be billed until certain milestones are achieved, we have utilized a larger portion of our existing revolving credit capacity than would normally be expected. Between the date of the GTI acquisition and mid March 1999, we have had average daily availability under our revolving credit facilities and cash of $25.0 million. We continue to have significant cash requirements including interest, operating lease payments, preferred dividend obligations, required term loan and subordinated debenture principal payments, the potential acquisition contingent payments discussed above, expenditures for the closure of our inactive disposal sites and PRP matters (see "Transportation, Treatment and Disposal Discontinued Operations") and contingent liabilities. The EFM and Roche acquisitions require an aggregate cost which (excluding potential earnout payments) we estimate to be approximately $85.4 million. To finance the acquisitions and to pay down borrowings under our revolving credit facilities, and with improving conditions in the capital markets, we have begun a private placement of $200 million of senior subordinated notes (Notes). If the offering is completed, the Notes will have a fixed rate of interest payable every six months in cash commencing in 1999 and will be redeemable on or after 2004. The Notes will be general unsecured obligations, subordinated to borrowings under our credit facilities and other senior indebtedness and pari passu with other existing future indebtedness unless the terms of that indebtedness expressly provide otherwise. As of December 25, 1998, on an as adjusted basis after giving effect to the Note offering and the EFM and Roche acquisitions, the aggregate amount of debt including the current portion would have been approximately $518.2 million, and approximately $127.7 million would have been available for additional working and acquisition capital under the revolving credit facilities. Our obligation to close the EFM acquisition is subject to the successful completion of the Note offering and if the acquisition does not close on or before May 27, 1999, either party can terminate the agreement and we will forfeit $5.5 million in payments we will have made under the agreement by that time. Our obligations to close the Roche acquisition are not subject to any financing contingencies, however, we have agreed with Roche's shareholders to purchase certain shareholders' interests for approximately $3.5 million by March 31, 1999 and to postpone the purchase of the remaining interests until completion of the Note offering. Quantitative and Qualitative Disclosures About Market Risk The following discussion of our exposure to various market risks contains "forward looking statements" that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in the circumstances and in light of information currently available to us. Nevertheless, because of the inherent unpredictability of interest rates, actual results could differ materially from those projected in such forward-looking information. At December 25, 1998, we had fixed-rate debt totaling $44.5 million in principal amount and having a fair value of $40.7 million. These instruments are fixed rate and, therefore, do not expose us to the risk of earnings loss due to changes in market interest rates. However, the fair value of these instruments would decrease to approximately $40.0 million if interest rates were to increase by 10% from their levels at December 25, 1998. At December 25, 1998, we had floating-rate long-term debt totaling $368.8 million in principal amount and having a fair value of $368.8 million. These borrowings are under our Bank Credit Facilities (see "Notes to Consolidated Financial Statements--Long-term debt"). We have entered into a swap agreement with a notional amount of $126.0 million as required by our credit facilities and to reduce our exposure to adverse fluctuations in interest rates relating to this debt. We have not entered into any other derivative financial instruments for trading purposes. If floating rates were to increase by 10% from December 25, 1998 levels, we would incur additional interest expense of approximately $1.8 million. 41 As discussed in our Notes to Consolidated Financial Statements--Discontinued Operations, our consolidated balance sheet includes $7.9 million of accrued liabilities to complete the closure and post-closure of our disposal facilities and other matters, net of certain trust fund and annuity investments which are restricted to closure and post-closure use and insurance recovery. These trust fund assets total $20.1 million at December 25, 1998 and consist predominately of high quality common stocks, fixed rate AAA rated corporate and government bonds, and annuity investments which provide for periodic payments into the trust fund. If interest rates were to increase by 10% from their levels at December 25, 1998, the decrease in fair value of the fixed-rate debt securities would not be material to us. If the market prices of the individual equity securities were to decrease by 10% from their levels at December 25, 1998, the resulting loss in fair value of these securities would not be material to us. Year 2000 Compliance The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. State of Readiness Our core financial and administrative software systems are certified as Year 2000 compliant by the vendor. During the twelve months ended March 27, 1998, we established an integration test plan to test this software and verify Year 2000 compliance. In February 1998, we completed the integration tests which verified that the Company's core financial and administrative software systems were Year 2000 compliant. Our core hardware was also tested and was found to be fully compliant with the Year 2000 requirements. We recently hired a Year 2000 Program Director and have begun communicating with clients, suppliers, financial institutions and others with which we do business to coordinate Year 2000 conversion. A significant portion of our business (69%) is attributable to the U.S. federal government (see "Business--Operations--Clients"). If the U.S. federal government is not Year 2000 compliant, there could be a delay in the collection of accounts receivable from the U.S. federal government in January 2000. At this time, we cannot predict the impact on our consolidated financial condition, liquidity and results of operations of the U.S. federal government's Year 2000 readiness. However, we do not believe there will be any significant delays in the collection of our accounts receivable. Costs We have prepared a detailed conversion plan and have estimated the total cost of Year 2000 compliance to be approximately $3.1 million. As of December 25, 1998, we have incurred costs of approximately $0.5 million to address year 2000 issues. All of the costs have been or will be charged to operating expense and funded through operating cash flows. Risks and Contingencies We are currently developing a contingency plan to address how we will handle the most reasonably likely worst case scenarios including situations where our clients, suppliers, financial institutions and others are not Year 2000 compliant on January 1, 2000. We do not have control over these third parties and, as a result, cannot currently estimate to what extent future operating results may be adversely affected by the failure of these third parties to successfully address their Year 2000 issues. However, our contingency plan will include actions designed to identify and minimize any third party exposures and management believes that, based on third party exposures identified to date, these issues should be resolved by the year 2000. 42 FORWARD LOOKING STATEMENTS Statements of our intentions, beliefs, expectations or predictions for the future, denoted by the words "anticipate," "believe," "estimate," "expect," "project," "imply," "intend," "foresee," and similar expressions are forward- looking statements that reflect our current views about future events and are subject to risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include those identified in the "Business" section of this report and the following: . changes in laws or regulations affecting our operations, as well as competitive factors and pricing pressures, . bidding opportunities and success, . project results, including success in pursuing claims and change orders, . management of our cash resources, particularly in light of our substantial leverage, . funding of backlog, . matters affecting contracting and engineering businesses generally, such as the seasonality of work and the impact of weather and clients' timing of projects, . our ability to generate a sufficient level of future earnings to utilize our deferred tax assets, . the ultimate closure costs of our discontinued operations, . the success of our acquisition strategy, including the effects of the integration of recent acquisitions and any future acquisitions, including the proposed acquisitions of EFM and Roche described in this report, and achievement of expected cost savings and other synergies therefrom, and . industry-wide market factors and other general economic and business conditions. Our actual results could differ materially from those projected in these forward-looking statements as a result of these factors, many of which are beyond our control. 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE FOR THE NINE MONTHS ENDED DECEMBER 25, 1998 AND TWO YEARS ENDED MARCH 27, 1998 Consolidated Financial Statements.
Page ---- Report of Ernst & Young LLP, Independent Auditors...................... 45 Consolidated Balance Sheets--December 25, 1998 and March 27, 1998...... 46 Consolidated Statements of Operations--Nine Months Ended December 25, 1998 and Years Ended March 27, 1998 and March 28, 1997..................... 47 Consolidated Statements of Stockholders' Equity--Nine Months Ended December 25, 1998 and Years Ended March 27, 1998 and March 28, 1997... 48 Consolidated Statements of Cash Flows--Nine Months Ended December 25, 1998 and Years Ended March 27, 1998 and March 28, 1997..................... 49 Notes to Consolidated Financial Statements............................. 50 Financial Statement Schedule. II. Valuation and qualifying accounts.................................. 95
Schedules not filed herewith are omitted because of the absence in all material respects of conditions under which they are required or because the information called for is shown in the consolidated financial statements or notes thereto. 44 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS The Board of Directors The IT Group, Inc. We have audited the accompanying consolidated balance sheets of The IT Group, Inc. as of December 25, 1998 and March 27, 1998 and the related consolidated statements of operations, stockholders' equity, and cash flows for the nine months ended December 25, 1998 and for each of the two years in the period ended March 27, 1998. Our audits also included the financial statement schedule listed in the index at Item 8. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The IT Group, Inc. at December 25, 1998 and March 27, 1998 and the consolidated results of its operations and its cash flows for the nine months ended December 25, 1998 and each of the two years in the period ended March 27, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Pittsburgh, Pennsylvania February 15, 1999, except for the subsequent event footnote as to which the date is March 8, 1999 45 THE IT GROUP, INC. CONSOLIDATED BALANCE SHEETS
December 25, March 27, 1998 1998 ------------ --------- (In thousands) ASSETS Current assets: Cash and cash equivalents............................. $ 21,265 $ 24,765 Accounts receivable, less allowance for doubtful accounts of $18,958,000 and $19,026,000, respectively......................................... 338,589 210,630 Prepaid expenses and other current assets............. 17,308 25,523 Deferred income taxes................................. 15,919 12,750 --------- --------- Total current assets................................ 393,081 273,668 Property, plant and equipment, at cost: Land and land improvements............................ 2,166 846 Buildings and leasehold improvements.................. 15,072 18,222 Machinery and equipment............................... 81,763 159,433 --------- --------- 99,001 178,501 Less accumulated depreciation and amortization...... 51,331 102,480 --------- --------- Net property, plant and equipment................. 47,670 76,021 Cost in excess of net assets of acquired businesses.... 356,619 211,878 Investment in Quanterra................................ -- 16,300 Other assets........................................... 17,469 17,557 Deferred income taxes.................................. 93,719 73,745 Long-term assets of discontinued operations............ 40,048 40,048 --------- --------- Total assets........................................ $ 948,606 $ 709,217 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................... $ 150,912 $ 82,597 Accrued wages and related liabilities................. 44,929 38,395 Billings in excess of revenues........................ 8,219 3,723 Other accrued liabilities............................. 43,254 42,091 Short-term debt, including current portion of long- term debt............................................ 17,603 16,738 Net current liabilities of discontinued operations.... 7,904 15,200 --------- --------- Total current liabilities........................... 272,821 198,744 Long-term debt......................................... 364,824 240,147 8% convertible subordinated debentures................. 40,235 44,550 Long-term accrued liabilities of discontinued operations, net....................................... -- 3,773 Other long-term accrued liabilities.................... 31,979 23,755 Minority interest...................................... 579 50,098 Commitments and contingencies Stockholders' equity: Preferred stock, $100 par value; 180,000 shares authorized 7% cumulative convertible exchangeable, 20,556 issued and outstanding, 24,000 shares authorized... 2,056 2,056 6% cumulative convertible participating, 46,095 and 45,271 shares issued and outstanding............... 4,609 4,451 Common stock, $.01 par value; 50,000,000 shares authorized; 22,675,917 and 9,737,589 shares issued, respectively......................................... 227 97 Treasury stock at cost, 47,484 and 8,078 shares, respectively......................................... (74) (74) Additional paid-in capital............................ 348,794 246,681 Deficit............................................... (116,984) (104,893) Accumulated other comprehensive income (deficit)...... (460) (168) --------- --------- Total stockholders' equity.......................... 238,168 148,150 --------- --------- Total liabilities and stockholders' equity.......... $ 948,606 $ 709,217 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 46 THE IT GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Twelve Months Ended Nine Months Ended -------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- Revenues............................... $757,435 $442,216 $362,131 Cost and expenses: Cost of revenues..................... 666,474 391,126 323,993 Selling, general and administrative expenses............................ 41,828 31,774 33,431 Special charges...................... 24,971 14,248 8,403 -------- -------- -------- Operating income (loss)................ 24,162 5,068 (3,696) Other income, net...................... -- 716 -- Interest, net.......................... (24,895) (7,969) (5,260) -------- -------- -------- Loss from continuing operations before income taxes.......................... (733) (2,185) (8,956) (Provision) benefit for income taxes... (6,694) (4,175) 179 -------- -------- -------- Loss from continuing operations........ (7,427) (6,360) (8,777) Discontinued operations--closure costs (net of $3,040 income tax benefit).... -- (4,960) -- -------- -------- -------- Loss before extraordinary item......... (7,427) (11,320) (8,777) Extraordinary item--early extinguishment of debt (net of $3,497 income tax benefit)................... -- (5,706) -- Net loss............................... (7,427) (17,026) (8,777) Less preferred stock dividends......... (4,664) (6,167) (4,916) -------- -------- -------- Net loss applicable to common stock.... $(12,091) $(23,193) $(13,693) ======== ======== ======== Net loss per share basic and diluted: Continuing operations (net of preferred stock dividends).......... $ (0.63) $ (1.28) $ (1.48) Discontinued operations--loss from remediation......................... -- (0.51) -- Extraordinary item--early extinguishment of debt.............. -- (0.59) -- -------- -------- -------- $ (0.63) $ (2.38) $ (1.48) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 47 THE IT GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For nine months ended December 25, 1998 and two years ended March 27, 1998 (In thousands)
7% 6% cumulative cumulative Accumulated convertible convertible Other exchangeable participating Additional Comprehensive preferred preferred Common Treasury paid-in Income stock stock stock stock capital Deficit (Deficit) Totals ------------ ------------- ------ -------- ---------- --------- ------------- -------- Balance at March 29, 1996................... $2,400 $ -- $ 91 $(84) $206,465 $ (68,007) $ -- $140,865 Comprehensive income: Net loss.............. -- -- -- -- -- (8,777) -- (8,777) Foreign currency translation adjustments net of tax.................. -- -- -- -- -- -- (17) (17) -------- Comprehensive loss..... (8,794) -------- Net proceeds from preferred stock and warrants issued to Carlyle............... -- 4,117 -- -- 36,492 -- -- 40,609 Conversion of preferred stock................. (344) -- 7 -- 337 -- -- -- Restricted stock awards, net........... -- -- (1) 10 214 -- -- 223 Dividends on preferred stock................. -- 87 -- -- 779 (4,916) -- (4,050) ------ ------ ---- ---- -------- --------- ----- -------- Balance at March 28, 1997................... 2,056 4,204 97 (74) 244,287 (81,700) (17) 168,853 Comprehensive income: Net loss.............. -- -- -- -- -- (17,026) -- (17,026) Foreign currency translation adjustments net of tax.................. -- -- -- -- -- -- (151) (151) -------- Comprehensive loss..... (17,177) -------- Restricted stock....... -- -- -- -- 223 -- -- 223 Dividends on preferred stock................. -- 247 -- -- 2,232 (6,167) -- (3,688) Stock options exercised............. -- -- -- -- (61) -- -- (61) ------ ------ ---- ---- -------- --------- ----- -------- Balance at March 27, 1998................... 2,056 4,451 97 (74) 246,681 (104,893) (168) 148,150 Comprehensive income: Net loss.............. -- -- -- -- -- (7,427) -- (7,427) Foreign currency translation adjustments net of tax.................. -- -- -- -- -- -- (292) (292) -------- Comprehensive loss..... (7,719) -------- Restricted stock....... -- -- -- -- 38 -- -- 38 Dividends on preferred stock................. -- 158 -- -- 1,421 (4,664) -- (3,085) IT shares issued in exchange for OHM stock, net of stock issue costs........... -- -- 130 -- 100,654 -- -- 100,784 ------ ------ ---- ---- -------- --------- ----- -------- Balance at December 25, 1998................... $2,056 $4,609 $227 $(74) $348,794 $(116,984) $(460) $238,168 ====== ====== ==== ==== ======== ========= ===== ========
The accompanying notes are an integral part of these consolidated financial statements. 48 THE IT GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Twelve Months Ended Nine Months Ended -------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- Cash flows from operating activities: Net loss.............................. $ (7,427) $ (17,026) $ (8,777) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Net loss from discontinued operations....................... -- 4,960 -- Extraordinary charge for early retirement of debt............... -- 3,640 -- Depreciation and amortization..... 20,094 13,158 14,363 Non-recurring special charges..... 24,971 5,743 -- Deferred income taxes............. 6,187 678 370 Other............................. 13 (980) (45) Changes in assets and liabilities, net of effects from acquisitions and dispositions of businesses: (Increase) decrease in receivables.. (88,612) 386 25,422 (Increase) decrease in prepaid expenses and other current assets.. (364) (717) 601 Increase (decrease) in accounts payable............................ 65,359 (7,687) 905 (Decrease) increase in accrued wages and related liabilities............ (14,825) (4,471) 2,473 Increase (decrease) in billings in excess of revenues................. 4,496 (4,634) 5,183 (Decrease) increase in other accrued liabilities........................ (30,190) 1,591 (2,111) (Decrease) increase in other long- term accrued liabilities........... (3,126) 733 452 Decrease in liabilities of discontinued operations............ (11,069) (14,914) (14,041) --------- --------- -------- Net cash (used for) provided by operating activities............... (34,493) (19,540) 24,795 Cash flows from investing activities: Capital expenditures.................. (6,860) (4,766) (3,361) Investment in Quanterra............... -- -- (3,325) Proceeds from sale of equity interest in Quanterra......................... 5,750 -- -- Proceeds from disposition of business -- 2,800 -- Acquisition of businesses, net of cash acquired............................. (81,332) (163,189) (1,455) Other, net............................ 1,003 (4,896) 700 --------- --------- -------- Net cash used by investing activities........................... (81,439) (170,051) (7,441) Cash flows from financing activities: Financing costs....................... (6,179) (4,113) -- Repayments of long-term borrowings.... (409,690) (68,666) (438) Long-term borrowings.................. 531,015 210,940 962 Net proceeds from issuance of preferred stock...................... -- -- 40,609 Dividends paid on preferred stock..... (2,714) (2,702) (4,050) Issuances of common stock, net........ -- -- (33) --------- --------- -------- Net cash provided by financing activities........................... 112,432 135,459 37,050 --------- --------- -------- Net (decrease) increase in cash and cash equivalents............................ (3,500) (54,132) 54,404 Cash and cash equivalents at beginning of period.............................. 24,765 78,897 24,493 --------- --------- -------- Cash and cash equivalents at end of period................................. $ 21,265 $ 24,765 $ 78,897 ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 49 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of significant accounting policies: Basis of presentation and principles of consolidation The consolidated financial statements include The IT Group, Inc. (formerly International Technology Corporation) (IT or the Company) and its wholly-owned and majority-owned subsidiaries. The Company uses the equity method to account for certain joint ventures in which the Company does not have in excess of 50% of voting control. Intercompany transactions are eliminated. On June 9, 1998, the Board of Directors of IT approved a change in IT's fiscal year end from the last Friday in March of each year to the last Friday of December of each year. The report covering the transition period is IT's Annual Report on Form 10-K for the nine months ended December 25, 1998. Estimates used in the preparation of the consolidated financial statements The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results inevitably will differ from those estimates and such differences may be material to the consolidated financial statements. Recent Accounting Pronouncements In June of 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement will be required to be adopted as of the first fiscal quarter of the year 2000. The Company intends to adopt FASB No. 133 by the effective date although earlier adoption is permitted. The statement requires the swap agreements, used by the Company to manage the interest rate risks associated with the variable nature of the Company's Credit Facilities, to be recorded at fair market value and reflected in earnings. The Company has evaluated its existing interest rate contracts and management does not believe that the effect of market volatility on interest rates will have a material effect on earnings for the existing contracts including anticipated modifications. 50 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Transition Period The Company elected to change its fiscal year-end from the last Friday in March to the last Friday in December effective for the nine months ended December 25, 1998. Comparative information for the nine months ended December 25, 1998, December 26, 1997 and December 27, 1996 is as follows:
Nine Months Ended -------------------------------------- December 25, December 26, December 27, 1998 1997 1996 ------------ ------------ ------------ (unaudited) (unaudited) (In thousands, except per share data) Revenues............................... $757,435 $306,178 $266,419 Cost of revenues....................... 666,474 271,572 239,778 -------- -------- -------- Gross profit........................... 90,961 34,606 26,641 Selling, general and administrative expense............................... 41,828 21,182 25,339 Special charges........................ 24,971 8,554 8,403 -------- -------- -------- Operating income (loss)................ 24,162 4,870 (7,101) Interest, net.......................... (24,895) (3,386) (4,105) -------- -------- -------- Income (loss) from continuing operations............................ (733) 1,484 (11,206) (Provision) benefit for income taxes... (6,694) (4,316) 1,146 -------- -------- -------- Net loss............................... (7,427) (2,832) (10,060) -------- -------- -------- Less preferred stock dividends......... (4,664) (4,609) (3,395) -------- -------- -------- Net loss applicable to common stock.... $(12,091) $ (7,441) $(13,455) ======== ======== ======== Basic and diluted loss per common share................................. $ (0.63) $ (0.76) $ (1.48) ======== ======== ========
Cash equivalents Cash equivalents include highly liquid investments with an original maturity of three months or less. Contract accounting and accounts receivable The Company primarily derives its revenues from providing environmental management services in the United States, principally to federal, state and local governmental entities, large industrial companies, utilities and waste generators. Services are performed under time-and-material, cost-reimbursement, fixed-price and unit-bid contracts. The Company's contracts are generally completed within 2 years. Revenues from time-and-material and cost-reimbursement contracts are recognized as costs are incurred. Estimated fees on such contracts and revenues on fixed-price and certain unit-bid contracts are recognized under the percentage-of-completion method determined based on the ratio of costs incurred to estimated total costs. Anticipated losses on contracts are recorded as identified. Certain contracts include provisions for revenue adjustments to reflect scope changes and other matters, including claims, which require negotiations with clients to settle the amounts in the ordinary course of business, leading to some estimates of claim or scope change amounts being included in revenues. When such amounts are finalized, any changes from the estimates are reflected in earnings. Included in accounts receivable, net at December 25, 1998 are billed receivables, unbilled receivables and retention in the amounts of $269.0 million, $60.6 million and $9.0 million, respectively. Billed receivables, unbilled receivables and retention from the U.S. Government as of December 25, 1998 were $145.6 million, 51 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $37.5 million and $2.2 million, respectively. At March 27, 1998, billed receivables, unbilled receivables and retention were $172.7 million, $27.0 million and $10.9 million, respectively. Billed receivables, unbilled receivables and retention from the U.S. Government as of March 27, 1998 were $93.1 million, $9.9 million and $2.2 million, respectively. Unbilled receivables typically represent amounts earned under the Company's contracts but not yet billable according to the contract terms, which usually consider the passage of time, achievement of certain milestones, negotiation of change orders or completion of the project. Generally, unbilled receivables are expected to be billed and collected in the subsequent year. Billings in excess of revenues represent amounts billed in accordance with contract terms, which are in excess of the amounts includable in revenue. Included in accounts receivable at December 25, 1998 is approximately $31.6 million associated with claims and unapproved change orders, which are believed by management to be probable of realization. Most of these claims and change orders are being negotiated or are in arbitration and should be settled within one year. This amount includes contract claims in litigation (see "Notes to Consolidated Financial Statements--Contingencies"). While management believes no material loss will be incurred related to these claims and change orders, the actual amounts realized could be materially different than the amount recorded. The Company performs periodic evaluations of its clients' financial condition and generally does not require collateral. At December 25, 1998, accounts receivable are primarily concentrated in federal, state and local governmental entities and in commercial clients in which the Company does not believe there is any undue credit risk. Property, plant and equipment The cost of property, plant and equipment is depreciated using primarily the straight-line method over the following useful lives of the individual assets: buildings--20 to 30 years, land improvements--3 to 20 years, and machinery and equipment--3 to 10 years including salvage value. Amortization of leasehold improvements is provided using the straight-line method over the term of the respective lease. Interest Interest incurred was $25.9 million, $10.7 million and $7.2 million for the nine months ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997, respectively. Interest income is principally earned on the Company's investments in cash equivalents and was $1.0 million, $2.8 million and $1.9 million for the nine months ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997, respectively. Intangible assets Cost in excess of net assets of acquired businesses is amortized over 20 to 40 years on a straight-line basis. At December 25, 1998 and March 27, 1998, accumulated amortization is $16.6 million and $9.6 million, respectively. The Company periodically evaluates the recoverability of intangibles resulting from business acquisitions and measures the amount of impairment, if any, by assessing current and future levels of income and cash flows as well as other factors, such as business trends and prospects and market and economic conditions. Other intangibles arising principally from acquisitions, are amortized on a straight-line basis over periods not exceeding 20 years. 52 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-based compensation The Company grants stock options for a fixed number of shares to employees and members of the Board of Directors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for its stock grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," (APB No. 25) and the related interpretations. The pro forma information regarding net income and earnings per share as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS No. 123) is disclosed in the note Stock incentive plans: Compensation cost. Changes in Presentation of Comparative Financial Statements Certain amounts in the March 27, 1998 financial statements were reclassified to conform with the presentation in the current period. Risks and uncertainties The Company provides a broad range of environmental and hazardous waste remediation services to its clients located primarily in the United States. The assessment, remediation, analysis, handling and management of hazardous substances necessarily involve significant risks, including the possibility of damages or injuries caused by the escape of hazardous materials into the environment, and the possibility of fines, penalties or other regulatory action. These risks include potentially large civil and criminal liabilities for violations of environmental laws and regulations, and liability to clients and to third parties for damages arising from performing services for clients, which could have a material adverse effect on the consolidated financial condition, liquidity and results of operations of the Company. Although the Company believes that it generally benefits from increased environmental regulations and from enforcement of those regulations, increased regulation and enforcement also create significant risks for the Company. The Company does not believe there are currently any material environmental liabilities related to continuing operations not already recorded or disclosed in its financial statements. The Company anticipates that its compliance with various laws and regulations relating to the protection of the environment will not have a material effect on its capital expenditures, future earnings or competitive position. The Company's revenue from governmental agencies accounted for 74%, 63% and 67% of revenue for the nine months ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997, respectively. Because of its dependence on government contracts, the Company also faces the risks associated with such contracting, which could include civil and criminal fines and penalties. As a result of its government contracting business, the Company has been, is and may in the future be subject to audits and investigations by government agencies. The fines and penalties which could result from noncompliance with the Company's government contracts or appropriate standards and regulations, or the Company's suspension or debarment from future government contracting, could have a material adverse effect on the consolidated financial condition, liquidity and results of operations of the Company. The dependence on government contracts will also continue to subject the Company to significant financial risk and an uncertain business environment caused by any federal budget reductions. In addition to the above, there are other risks and uncertainties that involve the use of estimates in the preparation of the Company's consolidated financial statements. (See "Business Acquisitions and Commitments and contingencies"). 53 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fair value of financial instruments (continuing operations) The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet approximates its fair value. Long and short-term debt: The fair value of the 8% convertible subordinated debentures was based on a quoted market price at December 25, 1998. The carrying amount of the credit agreement and other debt approximates its fair value. The carrying amounts and estimated fair values of the Company's financial instruments are:
December 25, 1998 March 27, 1998 ------------------- ------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value -------- ---------- -------- ---------- (In thousands) Cash and cash equivalents.............. $ 21,265 $ 21,265 $ 24,765 $ 24,765 Long and short-term debt: Credit agreement debt: Revolver borrowings outstanding-- pre-OHM Merger.................... -- -- 33,200 33,200 Revolver borrowings outstanding.... 143,000 143,000 126,293 126,293 Term Loan.......................... 225,750 225,750 80,000 80,000 8% Convertible Subordinated Debentures--Due October 1, 2006..... 44,548 40,650 46,753 45,643 Other................................ 9,364 9,364 15,189 15,189
Business Acquisitions: Fluor Daniel GTI, Inc. On December 3, 1998, the Company acquired the outstanding common stock of Fluor Daniel GTI, Inc. (GTI), an environmental consulting, engineering and construction management services company. GTI operates mainly throughout the United States with minor foreign operations. Total consideration amounted to $69.4 million plus approximately $2.0 million in transaction costs. This transaction was accounted for as a purchase in accordance with Accounting Principles Board (APB) No. 16. The excess of the purchase price over the fair value of assets acquired and liabilities assumed in the merger of $16.3 million is primarily classified as cost in excess of net assets of acquired businesses and is being amortized over forty years. The estimated fair value of the assets acquired and liabilities assumed of GTI are as follows:
Description Amount - ----------- -------------- (In thousands) 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
54 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As a result of the merger with GTI, the Company has adopted a plan and commenced the process of closing specific overlapping facilities and reducing consolidated employment. The acquired balance sheet includes an accrual of $7.9 million for the estimated GTI severance, office closure costs and lease termination costs of which $0.9 million has been paid through December 25, 1998. The balance will be paid primarily over the next twelve months. The purchase price allocation is preliminary and based upon information currently available. Management is continuing to gather and evaluate information regarding the valuation of assets and liabilities at the date of the acquisition. Management does not anticipate material changes to the preliminary allocation. OHM Acquisition In January 1998, the Company entered into a merger agreement to acquire OHM Corporation (OHM), an environmental and hazardous waste remediation company servicing primarily industrial, federal government and local government agencies located primarily in the United States. The transaction was effected through a two-step process for a total purchase price of $303.4 million consisting of (a) the acquisition of 54% of the total outstanding shares through a cash tender offer, which was consummated on February 25, 1998, at $11.50 per share for 13.9 million shares of OHM common stock, for a total consideration of $160.2 million plus $4.6 million in acquisition costs and (b) the acquisition on June 11, 1998 of the remaining 46% of the total outstanding shares through the exchange of 12.9 million shares of Company common stock valued at $8.04 per share, or $103.8 million and payment of $30.8 million plus $4.0 million in acquisition costs. This transaction was accounted for as a step acquisition and therefore the effects of the first phase of the merger were included in the March 27, 1998 financial statements and the effects of both phases were included in the June 26, 1998 financial statements. The excess of the purchase price over the fair value of assets acquired and liabilities assumed in the merger of $328.5 million has been finalized during the nine months ended December 25, 1998 and is classified as cost in excess of net assets of acquired businesses with amortization over forty years. The estimated fair value of the assets acquired and liabilities assumed of OHM as adjusted are as follows:
Description Amount - ----------- -------------- (In thousands) Current assets................................................... $117,309 Property and equipment........................................... 19,324 Cost in excess of net assets of acquired businesses.............. 328,495 Other long term assets........................................... 72,666 Current liabilities.............................................. 126,385 Long term liabilities, primarily debt............................ 107,924
As a result of the merger with OHM (the OHM Merger), the Company adopted a plan and has commenced the process of closing specific overlapping facilities and reducing consolidated employment. The acquired balance sheet includes an accrual of $16.2 million for the estimated OHM severance, office closure costs and lease termination costs of which $7.3 million has been paid through December 25, 1998. The balance relating primarily to office lease costs is anticipated to be paid over the next seven years. Pro Forma Effects of Acquisitions The following unaudited pro forma condensed statements of operations gives effect to the GTI acquisition as if the acquisition occurred on March 28, 1997 and the effect of the OHM merger as if this merger occurred 55 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) on March 29, 1996. Basic and diluted loss per share has been calculated utilizing the basic and diluted weighted average of IT shares outstanding during the periods adjusted for approximately 12.9 million shares of common stock issued June 11, 1998 for the OHM acquisition assuming the 12.9 million shares were outstanding as of the beginning of the periods presented.
Twelve Months Ended Nine months ended ----------------------------- December 25, 1998 March 27, 1998 March 28, 1997 Pro Forma Pro Forma Pro Forma ----------------- -------------- -------------- (In thousands, except per share data) Revenues...................... $897,284 $1,119,115 $984,945 Loss from continuing operations before extraordinary item........... (3,680) (53,074) (12,280) Net loss...................... (9,771) (48,602) (12,280) Net loss applicable to common stock........................ (14,435) (54,769) (17,196) Loss per share: Basic and diluted........... (0.64) (2.42) (0.78)
The above amounts are based upon certain assumptions and estimates which the Company believes are reasonable. The pro forma results do not reflect anticipated cost savings and do not necessarily represent results which would have occurred if the GTI and OHM mergers had taken place at the date and on the basis assumed above. Other Acquisitions The Company acquired certain other businesses during the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997 for aggregate consideration of $12.3 million and $1.5 million, respectively. These acquisition agreements include potential contingent payments. The Company paid $1.3 million in cash under two of these agreements through December 25, 1998. Potential future contingent payments relating to these acquisitions as of December 25, 1998 range from a low of $1.9 million to a maximum of approximately $9.1 million. The Company paid $1.9 million in January 1999. In accordance with Accounting Principles Board Opinion No. 16--Business Combinations, these acquisitions were accounted for using the purchase method and in the aggregate were not material to require disclosure of pro forma financial information. In addition, in connection with the acquisition of OHM, the Company assumed the potential future earnout payments relating to Beneco, a company acquired by OHM in June 1997, which range from a low of zero to a maximum of $10.0 million. See "Subsequent Events" also for acquisitions after December 25, 1998. Consolidated statements of cash flows supplemental disclosures: Supplemental cash flow information is:
Twelve Months Ended Nine Months Ended ------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- (In thousands) Interest paid, net of amounts capitalized............................ $ 24,634 $ 11,060 $6,713 Interest received....................... 1,008 2,652 1,730 Income taxes paid....................... 335 770 287 Income tax refunds received............. -- 3 1,178 Acquisition liabilities assumed......... 66,050 218,440 6,346 Stock issued in connection with acquisitions........................... 103,810 -- --
56 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Special Charges: Asset Sales. On May 27, 1998, the Company's Board of Directors considered and approved the divestiture of certain non-core assets. The non-core assets primarily include the Company's 19% common stock ownership interest in Quanterra, Inc., (an environmental laboratory business) and the assets associated with the Company's Hybrid Thermal Treatment System (HTTS(R)) business (thermal transportable incineration equipment). As a result of these actions, the Company recorded a non-cash charge of $25.0 million in the three months ending June 26, 1998 including $10.6 million (net of cash proceeds of $5.8 million) related to the sale of the Quanterra investment and $14.4 million, primarily related to assets associated with the HTTS(R) business. Special charges of $14.2 million were recorded in the twelve months ended March 27, 1998. The charges include $5.7 million for integration costs associated with the acquisition of OHM, a $3.9 million non-cash charge related to a project claim settlement, a $2.8 million charge associated with the relocation of the Company's corporate headquarters, and a $1.8 million loss from the sale of a small remediation services business. OHM. The $5.7 million special charge for integration costs associated with the acquisition of OHM included $2.2 million of costs for severance and $3.5 million of costs and other related items for closing and consolidating the Company's offices with OHM offices. As part of the plan of integration, the Company identified slightly more than 100 IT employees, primarily in the operating group and administrative support functions, to be laid-off. In addition, the Company approved a plan for restructuring IT offices in which it would close three leased facilities, reduce the size of three more facilities and sublease a portion of eight additional facilities. As of December 25, 1998, $1.3 million of the integration charge remained to be paid. The remaining costs relate to the facility closures and office consolidations and will be paid over the remaining terms of the leases. Most of these lease commitments will be paid within the next three years. One lease requires payments over the next seven years. Helen Kramer. In December 1997, the Company settled a contract claim which has been outstanding in excess of five years with the US Army Corps of Engineers, the U.S. Environmental Protection Agency (USEPA) and the Department of Justice (jointly Government) arising out of work performed by the joint venture of IT and Davy International at the Helen Kramer Superfund project. On December 26, 1997, the joint venture received a $14.5 million payment from the Government to resolve all outstanding project claims related to additional work resulting from differing site conditions. In early January 1998, the joint venture paid $4.3 million to the Government to resolve related civil claims by the Government. IT's share of the joint venture results is 60%, accordingly, IT received net cash of $6.0 million, its proportionate share of the settlement. In December 1997, the Company recorded a non-cash pre-tax charge of $3.9 million as the cash received was less than the unbilled and billed receivables related to this project which totaled approximately $9.2 million and $0.7 million, respectively. Relocation. The special charges that occurred in the first quarter of the twelve months ended March 27, 1998 resulted from the relocation of the Company's corporate headquarters from Torrance, California to Monroeville (Pittsburgh), Pennsylvania and the sale of its California based small project remediation services business. The headquarters relocation consolidated the corporate overhead functions with the Company's largest operations office and moved it closer to its lenders and largest shareholders which are located in the Eastern United States. As a result of this relocation, the Company incurred a pre-tax charge of $2.8 million. The relocation charge included $0.8 million of costs for severance, $0.9 million of costs for the relocation of IT employees, $0.7 million of costs related to the closure of the offices in Torrance, California and $0.4 million of other related costs. As part of this relocation, 32 employees were laid off, primarily corporate management and administrative support personnel. As of December 25, 1998, these amounts have been paid. In May 1997, the 57 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Company incurred a non-cash pre-tax charge of $1.8 million to sell its California based small projects remediation services business. Restructuring. In conjunction with the corporate restructuring which was initiated in the second quarter of the twelve months ended March 28, 1997, the Company incurred a pre-tax restructuring charge of $8.4 million. The restructuring charge included $3.4 million of costs for severance, $4.1 million of costs for closing and reducing the size of a number of the Company's offices, and $0.9 million of costs for other related items. As part of the plan of termination, the Company laid-off 133 employees and paid over $2.5 million in termination benefits. In addition, the Company approved a plan to close five leased facilities and reduce the size of eleven other leased facilities by either sublease or abandonment. Most of the remaining costs to be paid relate to the facility closures and office space reductions which will be paid out over the terms of the lease. One of these facility closures has a remaining lease obligation of approximately six years. At December 25, 1998, $0.9 million of the charge remained to be paid. Long-term debt: Long-term debt consists of the following:
December 25, March 27, 1998 1998 ------------ --------- (In thousands) 8% Convertible Subordinated Debentures--Due October 1, 2006................................................ $ 44,548 $ 46,753 Credit Agreement Debt: Revolver borrowings outstanding...................... -- 33,200 Revolver borrowings outstanding...................... 143,000 126,293 Term Loan............................................ 225,750 80,000 Other.................................................. 9,364 15,189 -------- -------- 422,662 301,435 Less current portion................................... 17,603 16,738 -------- -------- $405,059 $284,697 ======== ========
Aggregate maturity of long-term debt, including annual mandatory sinking fund payments for the convertible subordinated debentures, for the five fiscal years following December 25, 1998 is: 1999, $17.6 million; 2000, $9.4 million; 2001, $8.8 million; 2002, $8.8 million; 2003 and thereafter $378.0 million. The convertible subordinated debentures are convertible into 45.04 shares of common stock and $107.50 cash per $1,000 unit with interest payable semiannually on April 1 and October 1, and are redeemable at the option of the Company. The convertible subordinated debentures require annual mandatory sinking fund payments of 7.5% of the principal amount which commenced in 1996, and continue through October 1, 2005. IT executed the OHM Tender Offer with a $240.0 million credit facility (the credit facilities). The credit facilities were used to complete the Tender Offer, to refinance IT's $65.0 million principal amount of senior notes and for working capital purposes during the period from the Tender Offer closing date of February 25, 1998 until the merger closing date of June 11, 1998. Loans made under the credit facilities bore interest at a rate equal to LIBOR plus 2.50% per annum (or the Bank's base rate plus 1.50% per annum) through June 10, 1998, at the Company's option and required no amortization. The Company recorded an extraordinary charge of $9.2 million, reduced by $3.5 million of deferred tax benefit, as the result of the early extinguishment of existing debt necessary to obtaining the credit facilities. On June 11, 1998, upon consummation of the second step of the OHM acquisition (see "Business Acquisitions"), the Company's credit facilities were refinanced. As such, the 58 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Company classified applicable portions of the credit facilities outstanding as of March 27, 1998 as long-term debt in accordance with the provisions of the credit facilities. After the refinancing in conjunction with the OHM Merger, the credit facilities consist of an eight-year amortizing term loan (term loans) of $228.0 million and a six-year revolving credit facility (revolving loans) of $185.0 million that contains a sublimit of $50.0 million for letter of credit issuance. The term loans made under the credit facilities bear interest at a rate equal to LIBOR plus 2.50% per annum (or the lender's base rate plus 1.50% per annum) and amortize on a semi-annual basis in aggregate annual installments of $4.5 million for the first six years after the OHM Merger, with the remainder payable in eight equal quarterly installments in the seventh and eighth years after the OHM Merger. The revolving loans made under the credit facilities bear interest at a rate equal to LIBOR plus 2.00% per annum (or the lender's base rate plus 1.00% per annum). Six months after completion of the merger, adjustments to the interest rates were made based on the ratio of IT's consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization. The credit facilities are secured by a security interest in substantially all of the assets of the Company and its subsidiaries. In addition, the facilities include representations, warranties and covenants customary for facilities of this type that include various financial covenants and limitations (subject to certain exceptions) on indebtedness, lease obligations, mergers and acquisitions and other fundamental changes prohibit the payment of cash dividends on common stock and limit capital expenditures. The credit facilities also include customary events of default. Events constituting default include a change of control of IT including among other things, the disposition under certain circumstances of the Company's 6% Cumulative Convertible Participating Preferred Stock and warrants on or after the funding of the credit facilities on June 11, 1998 to a person other than the Preferred Stock Group (see "Notes to Consolidated Financial Statements--Preferred stock"). On September 14, 1998, the lenders under the credit facilities approved the first amendment to the loan agreement covering the credit facilities to increase the revolving credit facility from $150.0 million to $185.0 million. This increase in revolver funding availability was based upon growth projections of the Company's business, the increase in seasonality of revenue streams related to OHM contracts and to create additional flexibility to finance further strategic and diversifying acquisitions, particularly due to turmoil in the long-term credit markets during the second half of 1998. At October 26, 1998, the lenders under the credit facilities approved the second amendment to the agreement. This second amendment provided for the acquisition of GTI as a permitted acquisition under the credit facilities, provided for the borrowing of up to $35.0 million under the revolving credit facility to make the GTI acquisition and amended the financial covenants to provide for the effects of the GTI acquisition. IT closed the acquisition of GTI on December 3, 1998. The GTI acquisition was funded through the use of the Company's cash on hand, borrowing of $35.0 million under the revolving facility and use of $20.0 million of GTI's cash on hand, which was loaned to the Company and is evidenced by an interest bearing promissory note payable on demand. Letters of credit outstanding at December 25, 1998 were $20.4 million. As required by the credit facilities, on August 11, 1998, the Company executed a six year swap agreement with a large multi national banking organization. The swap agreement is based upon a notional amount of $126.0 million wherein the Company, the fixed-rate payer, pays (receives) the difference between 3-month LIBOR and a fixed rate of 5.58% with its swap counter-party, the floating-rate payer. The LIBOR rate is adjusted quarterly and amounts owing or due are settled at each quarterly reset date. The Company charges (credits) amounts exchanged under the swap to interest expense. Net credits to the Company in the nine months ended December 25, 1998 were not material. The swap agreement contains a one time cancellation option for the counter-party and an imbedded interest rate cap for the Company. At any quarterly reset date beginning with February 11, 2000, the counter-party, at its option, may cancel the swap agreement for the remaining term. If the counter-party elects to exercise its cancellation option, the Company receives the benefit of a 7% interest 59 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) rate cap on the notional amount of $126.0 million. The terms of the interest rate cap allow the Company to utilize the interest rate cap for any six quarterly periods during the term of the swap agreement remaining after exercise of the cancellation option by the counter-party. The election of the six quarterly cap periods by the Company need not be consecutive quarters. The mark to market value of the swap at December 24, 1998 represents a cost to the Company of $3.3 million. This value is based on 1) the shape of the yield curve at the valuation date, 2) the assumption that future rate changes are parallel shifts along the yield curve at all points, 3) LIBOR futures prices at the measurement date and 4) that option volatility remains unchanged from current levels. The market value of the swap, assuming only a 50 basis point increase in LIBOR rates, is a positive $1.2 million, reflecting the significant change in market values associated with small interest rate changes. The Company also has various miscellaneous outstanding notes payable and capital lease obligations totaling $9.4 million. These notes payable mature at various dates between January 1999 and November 2000, at interest rates ranging from to 7.5% to 8.6%. Income taxes: Income tax provision (benefit), net of changes in the deferred tax valuation allowance, consists of the following:
Twelve Months Ended Nine Months Ended ------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- (In thousands) Current: Federal................................. $ 57 $ 54 $(764) State................................... 450 559 215 ------ ------- ----- 507 613 (549) ------ ------- ----- Deferred: Federal................................. 5,696 (2,801) 336 State................................... 491 (174) 57 Foreign................................. -- -- (23) ------ ------- ----- 6,187 (2,975) 370 ------ ------- ----- Total provision (benefit)............... $6,694 $(2,362) $(179) ====== ======= =====
Income tax provision (benefit) is included in the statements of operations as follows:
Twelve Months Ended Nine Months Ended ------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- (In thousands) Continuing operations before extraordinary items.................... $6,694 $ 4,175 $(179) Extraordinary item: early extinguishment of debt................................ -- (3,497) -- ------ ------- ----- 6,694 678 (179) Discontinued operations................. -- (3,040) -- ------ ------- ----- Total provision (benefit)............. $6,694 $(2,362) $(179) ====== ======= =====
60 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation of the provision (benefit) for income taxes on the total provision (benefit) computed by applying the federal statutory rate of 34% to the loss from continuing operations before income taxes and the reported provision (benefit) for income taxes of the total provision (benefit) is as follows:
Twelve Months Ended Nine Months Ended ------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- (In thousands) Income tax benefit computed at statutory federal income tax rate................ $ (249) $ (743) $(3,045) State income taxes, net of federal tax benefit, if any........................ 335 504 179 Equity in income (loss) of foreign subsidiaries........................... -- 121 -- Amortization of cost in excess of net assets of acquired businesses.......... 2,557 287 100 Extraordinary item: early extinguishment of debt................................ -- (3,129) -- Discontinued operations................. -- (2,720) -- Federal deferred tax asset valuation allowance adjustment................... 6,059 1,906 2,597 Research and development tax credits.... (2,540) -- -- Other................................... 532 1,412 (10) ------- ------- ------- Total provision (benefit)............. $ 6,694 $(2,362) $ (179) ======= ======= =======
At December 25, 1998 and March 27, 1998, the Company had deferred tax assets and liabilities as follows:
December 25, March 27, 1998 1998 ------------ --------- (In thousands) Deferred tax assets: Closure accruals--discontinued operations............. $ 11,229 $ 15,771 NOL carryforwards..................................... 64,490 72,319 Tax basis in excess of book basis in Quanterra........ -- 11,145 Capital loss carryover................................ 17,446 -- Alternative minimum tax credit carryforwards.......... 3,458 3,458 Investment and other tax credit carryforwards......... 12,750 10,474 Other accrued liabilities............................. 5,458 17,050 Asset basis difference--OHM and GTI................... 62,292 25,987 Other, net............................................ 23,253 7,933 -------- -------- Gross deferred tax asset............................ 200,376 164,137 Valuation allowance for deferred tax asset............ (50,267) (31,865) -------- -------- Total deferred tax asset............................ 150,109 132,272 Deferred tax liabilities: Tax depreciation in excess of book depreciation....... (17,120) (19,465) Asset basis difference--discontinued operations....... (11,576) (13,012) Other, net............................................ (11,775) (13,300) -------- -------- Total deferred tax liabilities...................... (40,471) (45,777) -------- -------- Net deferred tax asset.............................. $109,638 $ 86,495 ======== ======== Net current asset....................................... $ 15,919 $ 12,750 Net noncurrent asset.................................. 93,719 73,745 -------- -------- Net deferred tax asset.............................. $109,638 $ 86,495 ======== ========
61 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Approximately $15.2 million and $3.9 million of the valuation allowance relates to the OHM and GTI acquisitions, respectively. Tax benefits subsequently recognized that are related to these amounts will reduce cost in excess of net assets of acquired businesses. At December 25, 1998, the Company had net operating losses (NOL's), tax credit carryforwards and capital losses with expiration dates as follows:
Research Net and Capital Operating Development Other Loss Expiration Dates Losses Tax Credits Credits Carry Over - ---------------- --------- ----------- ------- ---------- (In thousands) 1998--2003............................. $ 72 $ 1,140 $2,225 $45,910 2004--2008............................. 18,700 3,393 -- -- 2009--2013............................. 156,386 5,992 -- -- Indefinite............................. -- -- 3,458 -- -------- ------- ------ ------- Total................................ $175,158 $10,525 $5,683 $45,910 ======== ======= ====== =======
During the nine months ended December 25, 1998, the Company increased its deferred tax asset valuation allowance from $31.9 million to $50.2 million. The increase was principally related to the acquisition of OHM and GTI corporations, respectively, and based on the Company's assessment of the uncertainty as to when it will generate a sufficient level of future earnings of applicable character to realize a portion of the deferred tax asset created by the special charges. Because of the Company's position in the industry, recent restructuring and acquisitions, and existing backlog, management expects that its future taxable income will more likely than not allow the Company to fully realize its deferred tax asset. The Company evaluates the adequacy of the valuation allowance and the realizability of the deferred tax asset on an ongoing basis. During the twelve months ended March 27, 1998, the Company increased its deferred tax asset valuation allowance from $9.5 million to $31.9 million. The increase was principally related to the acquisition of OHM corporation and the Company's assessment of its ability to fully utilize the deferred tax asset. During 1998, prior to the acquisition of OHM, the Company increased its valuation allowance to offset increases in the deferred tax asset balance. During the fourth quarter, the Company acquired OHM (see "Business Acquisitions--OHM Acquisition") which substantially increased projected taxable income. During the twelve months ended March 28, 1997, the Company increased its deferred tax asset valuation allowance from $4.9 million to $9.5 million. This change was principally due to the Company's assessment of the uncertainty as to when it will generate a sufficient level of future earnings to realize the deferred tax asset created by the special charges (see "Special Charges"). 62 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Earnings per share The following table sets forth the computation of basic and diluted earnings per share:
Twelve Months Ended Nine Months Ended -------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- (In thousands, except per share data) Numerator: Loss from continuing operations and before extraordinary items............ $ (7,427) $ (6,360) $ (8,777) Preferred stock dividends.............. (4,664) (6,167) (4,916) -------- -------- -------- Numerator for basic and dilutive earnings per share--income available to common stockholders................ (12,091) (12,527) (13,693) Discontinued operations--closure costs (net of income tax benefit)........... -- (4,960) -- -------- -------- -------- (12,091) (17,487) (13,693) Extraordinary charge for early retirement of debt (net of income tax benefit).............................. -- (5,706) -- -------- -------- -------- Net income (loss) applicable to common stock................................... $(12,091) $(23,193) $(13,693) ======== ======== ======== Denominator: Weighted-average number of common shares outstanding for basic and dilutive earnings per share........... 19,149 9,737 9,227 ======== ======== ======== Net loss per share: Earnings from continuing operations (net of preferred stock dividends).... $ (0.63) $ (1.28) $ (1.48) Earnings from discontinued operations.. -- (0.51) -- Extraordinary item--early extinguishment of debt................ -- (0.59) -- -------- -------- -------- Net loss per share....................... $ (0.63) $ (2.38) $ (1.48) ======== ======== ========
In June 1998, approximately 12.9 million shares were issued in connection with the second step of the OHM Merger. (See Business Acquisitions.) Commitments and contingencies: Lease commitments The Company's operating lease obligations are principally for buildings and equipment. Most leases contain renewal options at varying terms. Generally, the Company is responsible for property taxes and insurance on its leased property. At December 25, 1998, future minimum rental commitments under noncancelable leases with terms longer than one year aggregate $125.1 million and require payments in the five succeeding years and thereafter of $36.8 million, $31.1 million, $22.5 million, $14.6 million, $8.6 million, and $11.5 million, respectively. A portion of these leased assets represent duplicative facilities and equipment resulting from the OHM and GTI acquisitions. The Company is currently and actively involved in attempting to sublease these assets. Rental expense related to continuing operations was $29.4 million for the nine months ended December 25, 1998, $12.9 million (including $1.2 million of the special charges) for the twelve months ended 63 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) March 27, 1998, and $12.6 million (including $2.2 million of the special charges) for the twelve months ended March 28, 1997. Contingencies Coakley Landfill Action On March 9, 1998, the Coakley Landfill PRP Steering Committee terminated, allegedly for cause, IT Corporation's contract to perform design and remediation services at the Coakley Landfill and sued IT for damages for delay, redesign, regrading, repair costs, as well as for possible exposure to penalties by the USEPA. (The Coakley Landfill Group v. IT Corporation v. Gary W. Blake, Inc., et al., U.S.D.C., D.N.H., Case No. 98-167-JD) IT disputes that the Steering Committee is entitled to terminate the agreement for cause and believes the termination action arose from IT's pending change order request of approximately $6.3 million (which has now grown to $7.2 million). IT has answered and counterclaimed for damages for wrongful termination, issuing defective plans and specifications, breach of contract and unfair trade practices. Discovery of the case is ongoing, and no trial date has been set and the ultimate outcome of this matter cannot yet be predicted. Occidental Chemical Litigation OHM is in litigation in the U.S. District Court for the Western District of New York with Occidental Chemical Corporation (Occidental) relating to the Durez Inlet Project performed in 1993 and 1994 for Occidental in North Tonawanda, New York. (Occidental Chemical Corporation v. OHM Remediation Services Corporation, U.S.D.C., W.D.N.Y, Case No 94-0955(H)) OHM's account receivables at December 25, 1998 include a claim receivable of $8.7 million related to this matter. OHM's work was substantially delayed and its costs of performance were substantially increased as a result of conditions at the site that OHM believes were materially different than as represented by Occidental. Occidental's amended complaint seeks $8.8 million in damages primarily for alleged costs incurred as a result of project delays and added volumes of incinerated waste. OHM's counterclaim seeks an amount in excess of $9.2 million (inclusive of $8.7 million of claim receivable) for damages arising from Occidental's breach of contract, misrepresentation and failure to pay outstanding contract amounts. The Company has established additional reserves for a portion of the receivables related to this matter. Management believes that it has established adequate reserves should the resolution of the above matter be lower than the amounts recorded. The parties have completed discovery in the case and filed motions for summary judgement against each other. Although the court may rule on the matter at any time, its ultimate outcome cannot be predicted. GM--Hughes Massena Litigation These two matters (General Motors Corporation v. OHM Remediation Services Corporation, U.S.D.C., N.D.N.Y., Case No. 7:96-CV-1214TJMDS) and (OHM Remediation Services Corporation v. Hughes Environmental Systems, Inc. And ERM Northeast, Inc., U.S.D.C., N.D.N.Y., Case No. 7:96-CV-0110TJMDS) have now been fully settled. Other The Company is subject to other claims and lawsuits in the ordinary course of its business. In the opinion of management, all such other pending claims are either adequately covered by insurance or, if not insured, will not individually or in the aggregate result in a material adverse effect on the consolidated financial condition, liquidity and results of operations of the Company. In the course of the Company's business, there is always 64 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) risk and uncertainty in pursuing and defending claims and litigation and, not withstanding the reserves currently established, adverse future results in litigation or other proceedings could have a material adverse effect upon the Company's consolidated financial condition, liquidity and results of operations. Governmental regulation: The Company is subject to extensive regulation by applicable federal, state and local agencies. All facets of the Company's business are conducted in the context of a complex statutory, regulatory and governmental enforcement framework and a highly visible political environment. The Company's operations must satisfy stringent laws and regulations applicable to performance. Future changes in regulations may have a material adverse effect on the consolidated financial conditional, liquidity and results of operations of the Company. Preferred stock: Carlyle Investment At the November 20, 1996 Annual Meeting of Stockholders, IT's shareholders voted to approve a $45.0 million investment (the Carlyle Investment) by The Carlyle Group (Carlyle), a Washington, D.C. based merchant banking firm. The Carlyle Investment consists of 45,000 shares of 6% Cumulative Convertible Participating Preferred Stock, par value $100 per share (Convertible Preferred Stock) and detachable warrants to purchase 1,250,000 shares of IT common stock, par value $.01 per share (Carlyle Warrants). The net proceeds to IT (after related offering costs of $4.4 million) from the Carlyle Investment were $40.6 million. Carlyle holds approximately 21% (approximately 24% assuming exercise of the Carlyle Warrants) of the voting power of IT. Until November 20, 2001, the holders of the Convertible Preferred Stock have the right to elect a majority of the IT Board of Directors, provided that such holders continue to hold at least 20% of the voting power of IT. The terms of the Convertible Preferred Stock provide that, until November 20, 2001, the holders of the Convertible Preferred Stock have the right to elect a majority of the Board of Directors of the Company, provided that Carlyle continues to own at least 20% of the voting power of the Company. The Convertible Preferred Stock ranks, as to dividends and liquidation, pari passu to the Company's 7% Preferred Stock (see "7% Preferred Stock") and prior to the Company's common stock. The Convertible Preferred Stock is entitled to cumulative annual dividends. No dividends were payable in the first year; dividends were payable quarterly in kind for the second year at the rate of 3% per annum and, through November 1998, Carlyle was paid dividends of an additional 1,095 shares of Convertible Preferred Stock. Commencing November 21, 1998, dividends are payable quarterly in cash at the rate of 6% per annum. The Convertible Preferred Stock is entitled to a liquidation preference of $1,000 per share. The Convertible Preferred Stock and detachable warrants may at any time, at the option of Carlyle, be converted into IT common shares. At December 25, 1998, 7,323,015 and 1,250,000 common shares are issuable upon conversion of the Convertible Preferred stock and Carlyle Warrants, respectively. The conversion price of the Convertible Preferred Stock is $7.59 per share and the exercise price of the warrants is $11.39 per share. The Company will be entitled at its option to redeem all of the Convertible Preferred Stock at its liquidation preference plus accumulated and unpaid dividends on or after November 21, 2003. Although the first two years' dividends are paid at a rate of 0% and 3%, respectively, dividends were imputed during this period at a rate of approximately 6% per annum. Imputed dividends were $0.9 million, $2.1 million and $0.9 million in the nine months ended December 25, 1998, the twelve months ended 65 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) March 27, 1998 and the twelve months ended March 28, 1997, respectively. Any imputed dividends will never be paid in cash or stock. 7% Preferred stock In a September 1993 public offering, the Company issued 2,400,000 depositary shares, each representing a 1/100th interest in a share of the Company's 7% Cumulative Convertible Exchangeable Preferred Stock (7% Preferred Stock). The depositary shares entitle the holder to all proportional rights and preferences of the 7% Preferred Stock, including dividend, liquidation, conversion, redemption and voting rights and preferences. The 7% Preferred Stock ranks, as to dividends and liquidation, pari passu to the Convertible Preferred Stock (see "Carlyle Investment") and prior to the Company's common stock. The dividend per annum and liquidation preference for each share of 7% Preferred Stock are $175 and $2,500, respectively, and for each depositary share are $1.75 and $25, respectively. Dividends on the 7% Preferred Stock and depositary shares are cumulative and payable quarterly. The 7% Preferred Stock is convertible at the option of the holder into shares of the Company's common stock at a conversion price of $23.36 per share, subject to adjustment under certain circumstances. At December 25, 1998, 2,199,903 shares of common stock are issuable upon conversion of the 7% Preferred stock. On any dividend payment date, the 7% Preferred Stock is exchangeable at the option of the Company, in whole but not in part, for 7% Convertible Subordinated Debentures Due 2008 in a principal amount equal to $2,500 per share of Preferred Stock (equivalent to $25 per depositary share). The 7% Preferred Stock may be redeemed at any time, at the option of the Company, in whole or in part, initially at a price of $2,622.50 per share of Preferred Stock (equivalent to $26.225 per depositary share) and thereafter at prices declining to $2,500 per share of Preferred Stock (equivalent to $25 per depositary share) on or after September 30, 2003. Additionally, the 7% Preferred Stock has a special conversion right that becomes effective in the event of certain significant transactions affecting ownership or control of the Company. In such situations, the special conversion right would, for a limited period, reduce the then prevailing conversion price to the greater of the market value of the common stock or $12.68 per share. The Carlyle Investment (see "Carlyle Investment") triggered this special conversion right. On January 9, 1997, holders of 344,308 depositary shares elected to convert such shares to 678,816 shares of IT common stock. The 7% Preferred Stock is non-voting, except that holders are entitled to vote as a separate class to elect two directors if the equivalent of six or more quarterly dividends (whether consecutive or not) on the 7% Preferred Stock are in arrears. Such voting rights will continue until such time as the dividend arrearage on the 7% Preferred Stock has been paid in full. Stock incentive plans: Summary At the November 20, 1996 Annual Meeting of Stockholders, IT's shareholders voted to approve the Company's 1996 Stock Incentive Plan (1996 Plan) which provides for the issuance of the Company's common stock or any other security or benefit with a value derived from the value of its common stock. Options are granted at exercise prices equal to or greater than the quoted market price at the date of grant. At December 25, 1998, the maximum number of shares of the Company's common stock that may be issued pursuant to awards granted under the 1996 Plan is 242,819. At January 1 of each year, the maximum number of shares available for award under the 1996 Plan may be increased by Board approval by an amount which represents up to 2% of the number of the Company's common stock which are issued and outstanding at that 66 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) date. During the nine months ended December 25, 1998, 331,500 stock options were granted under the 1996 Plan, which expire in fiscal year 2008. The Company's 1991 Stock Incentive Plan (1991 Plan) and 1983 Stock Incentive Plan (1983 Plan) provided for the granting of incentive and non-qualified stock options and the issuance of the Company's common stock or any other security or benefit with a value derived from the value of its common stock. No shares are available for grant under these plans as such authority to grant as to the 1991 Plan expired in March 1996 and as to the 1983 Plan expired in September 1993. Options granted under the plans and outstanding at December 25, 1998 will expire at various dates through January 20, 2008. Changes in the number of shares represented by outstanding options under the 1996 Plan, the 1991 Plan and the 1983 Plan during the nine months ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997 are summarized as follows:
Twelve Months Ended Nine Months Ended -------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- Outstanding at beginning of year......... 770,457 747,679 744,847 Options converted........................ 262,125 -- -- Options granted (Nine months ended December 25, 1998, $6.44--$10.13 per share; 1998, $7.00-- $8.50 per share; 1997, $8.63 per share)................................ 331,000 132,921 171,000 Options exercised (Nine months ended December 25, 1998, $10.24 per share 1997, $11.50 per share)................................ (750) -- (3,629) Options expired and forfeited............ (51,156) (110,143) (164,539) --------- -------- -------- Outstanding at end of year ($7.00--$32.50 per share).............................. 1,311,676 770,457 747,679 ========= ======== ======== Vested options........................... 776,500 486,520 473,257 ========= ======== ======== Common stock reserved for future issuance................................ 1,554,495
Additional information regarding stock options granted to employees is outline below:
Twelve Months Ended Nine Months Ended ------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- Weighted average fair value of options at grant date.......................... $ 6.19 $ 4.79 $ 5.34 Weighted average exercise price of all outstanding options.................... $11.11 $13.99 $15.96 Weighted average exercise price of vested options......................... $12.39 $16.95 $19.04 Weighted average exercise price of options exercised...................... $10.24 $11.50 $ -- Weighted average exercise price for expired and forfeited options.......... $22.73 $19.69 $18.53 Weighted average remaining contractual life of options outstanding............ 7.4 6.7 6.8
Approximately 188,000 OHM stock options converted into approximately 262,000 IT stock options on June 11, 1998. As of December 25, 1998, these options remain outstanding. Compensation cost The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options 67 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) because, as discussed below, the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123) requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. SFAS No. 123 provides that, if its optional method of accounting for stock options is not adopted (and which the Company has not adopted), disclosure is required of pro forma net income and net income per share. In determining the pro forma information for stock options granted, the fair value for these options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
Twelve Months Ended Nine Months Ended ------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- Risk free interest rate based upon zero- coupon U.S. Treasury Notes............. 6.0% 6.0% 6.38% Dividend yield.......................... None None None Volatility factor of expected market price of the Company's common stock.... 0.443 0.395 0.395 Weighted average expected life of each option................................. 7.4 6.7 6.8
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferrable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. If compensation cost for the Company's stock options had been determined based on the fair value at the grant dates as defined by SFAS No. 123, the Company's net loss applicable to common stock and net loss per common share would have increased to the following pro forma amounts:
Twelve Months Ended Nine Months Ended -------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- (In thousands, except per share data) Net loss applicable to common stock As reported.......................... $(12,091) $(23,193) $(13,693) ======== ======== ======== Pro forma............................ $(12,367) $(23,386) $(13,735) ======== ======== ======== Net loss per common share As reported.......................... $ (0.63) $ (2.38) $ (1.48) ======== ======== ======== Pro forma............................ $ (0.65) $ (2.40) $ (1.49) ======== ======== ========
Additionally, under the 1991 Plan, the Company awarded shares of nonvested restricted stock to officers and key employees which amounted to 266,019 in the twelve months ended March 29, 1996. Vesting of awards is dependent upon continued employment and, in the case of certain performance-related awards, the sustained level of a target market price for the Company's common stock that exceeds the related market price on the date of grant. On December 25, 1998, the total number of shares of restricted stock outstanding was 105,900. 68 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The cost of restricted stock awards is generally expensed over the vesting period, which ranges from two to five years, and amounted to $0.2 million, $0.5 million and $0.6 million for the nine months ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997, respectively. Employee benefit plans: The Company has a defined contribution, contributory pension and profit sharing plan (the Plan), covering all employees with one year of continuous service. The Company amended the Plan, effective December 25, 1998, to discontinue the minimum annual contribution of 3% of participants' eligible compensation. Additionally, beginning January 1, 1999, the Company amended its voluntary 401(k) savings plan. The Company now contributes up to 4% of participants' eligible compensation by matching 100% of each participants' contribution (up to 4% of eligible compensation). Prior to January 1, 1999, the Company contributed up to 2% of participants' eligible compensation by matching 50% of each participant's contribution (up to 4% of eligible compensation) to the Company's voluntary 401(k) savings plan. The Plan currently allows a maximum contribution of up to 15% of participants' eligible compensation up to $10,000 annually. The Company funds current costs as accrued, and there are no unfunded vested benefits. Pension and profit sharing expense was $3.5 million, $3.6 million and $3.6 million for the nine months ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997, respectively. Operating segments: Organization The IT Group, Inc. has four reportable segments: Engineering & Construction (E & C), Consulting & Ventures (C & V), Outsourced Services and International. The Company's E & C Platform manages complex hazardous waste remediation projects of all sizes involving the assessment, planning and execution of the decontamination and restoration of property, plant and equipment that have been contaminated by hazardous substances. The Outsourced Services Platform provides full service capabilities for operations, maintenance, management and construction at federal, state and local government facilities and in the private sector. The C & V Platform provides a wide range of consulting services including environmental permitting, facility siting and design, strategic environmental management, environmental compliance/auditing, risk assessment/management, pollution prevention, waste minimization, environmental information systems, and data management. The Company's International Platform is designed to meet the global needs of the Company's U.S. based clients and to invest in businesses or enter into joint ventures to pursue and perform international projects. Current International operations consist of a 50.1% investment in a Taiwan-based wastewater treatment design/build firm and with the acquisition of GTI in December 1998, the Company expanded its international presence and provides environmental services through offices located in Europe and Australia. 69 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Segment Information
Outsourced E & C Services C & V International Total -------- ---------- ------- ------------- -------- (In thousands) Nine months ended December 25, 1998 Revenues................. $597,897 $70,400 $79,353 $ 9,785 $757,435 Segment profit (loss).... 63,817 7,896 10,617 (418) 81,912 Depreciation expense..... 6,044 162 1,607 69 7,882 Segment assets........... 218,940 11,697 56,896 8,539 296,072 Twelve Months Ended March 27, 1998 Revenues................. $346,143 $ 6,819 $79,643 $ 9,611 $442,216 Segment profit (loss).... 37,045 948 7,272 (1,419) 43,846 Depreciation expense..... 4,387 22 1,605 113 6,127 Segment assets........... 188,342 6,226 22,395 4,118 221,081 Twelve Months Ended March 28, 1997 Revenues................. $308,635 $ -- $48,832 $ 4,664 $362,131 Segment profit........... 25,909 -- 694 177 26,780 Depreciation expense..... 8,704 -- 758 56 9,518 Segment assets........... 73,650 -- 19,828 7,087 100,565
Twelve Months Ended Nine months ended -------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- Profit or Loss Total profit for reportable segments............................ $ 81,912 $ 43,846 $ 26,780 Unallocated amounts: Corporate selling, general and administrative expense............ (32,779) (23,814) (22,073) Special charges (a)................ (24,971) (14,248) (8,403) Interest expense, net.............. (24,895) (7,969) (5,260) -------- -------- -------- Loss before income taxes, extraordinary item and discontinued operations.. $ (733) $ (2,185) $ (8,956) ======== ======== ======== Assets (b) Assets for reportable segments....... $296,072 $221,081 $100,565 Other assets......................... 652,534 488,136 241,966 -------- -------- -------- Total consolidated assets.......... $948,606 $709,217 $342,531 ======== ======== ======== Depreciation Expense Depreciation for reportable segments............................ $ 7,882 $ 6,127 $ 9,518 Depreciation on corporate assets (c)................................. 2,059 2,606 2,842 -------- -------- -------- Total depreciation expense......... $ 9,941 $ 8,733 $ 12,360 ======== ======== ========
- -------- (a) See "Notes to Consolidated Financial Statements--Special Charges". These special charges are excluded from segment profit (loss) because most of these items can not be identified with a particular segment and because management does not include special charges when analyzing the Company's business segments. (b) Segment assets include primarily accounts receivable of each business segment. Other assets are principally long-term assets including property and equipment, cost in excess of net assets of acquired businesses, income tax assets and assets of discontinued operations. (c) Depreciation on corporate assets includes corporate facilities, furniture and equipment and the Company's mainframe computer hardware and software which have not been allocated to the operating segments. 70 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Geographic Information
Twelve Months Ended Nine months ended ----------------------------------------------- December 25, 1998 March 27, 1998 March 28, 1997 ----------------------- ----------------------- ----------------------- Long-Lived Long-Lived Long-Lived Revenues (a) Assets (b) Revenues (a) Assets (b) Revenues (a) Assets (b) ------------ ---------- ------------ ---------- ------------ ---------- (In thousands) United States........... $746,992 $458,233 $431,599 $358,973 $351,152 $117,386 Other foreign countries.............. 10,443 3,573 10,617 2,831 10,979 1,848 -------- -------- -------- -------- -------- -------- $757,435 $461,806 $442,216 $361,804 $362,131 $119,234 ======== ======== ======== ======== ======== ========
- -------- (a) Revenues are attributed to countries based on the location of clients. (b) Long-lived assets include non-current assets of the Company, excluding deferred income taxes. Major Clients The Company's revenues attributable to the U.S. federal government were $525.0 million, $255.9 million and $215.1 million for the nine months ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve months ended March 28, 1997, respectively. All four of the Company's operating segments report revenues from the U.S. government. No other customer accounted for 10% or more of the Company's consolidated revenues in any fiscal period. Revenues by Products and Services
Twelve Months Ended Nine months ended ------------------- December 25, March 27, March 28, 1998 1998 1997 ----------------- --------- --------- (In thousands) Site remedial action projects........... $607,682 $355,754 $313,299 Project, program and construction management............................. 70,400 6,819 -- Consulting and engineering services..... 79,353 79,643 48,832 -------- -------- -------- $757,435 $442,216 $362,131 ======== ======== ========
Quarterly results of operations (unaudited):
First Second Third quarter quarter quarter ------------ ------------ ------------ (In thousands, except per share data) Nine months ended December 25, 1998: Revenues............................. $ 225,188 $ 260,187 $ 272,060 Gross margin......................... 27,058 30,553 33,350 Income (loss) from continuing operations.......................... (19,291) 5,468 6,396 Net income (loss) applicable to common stock........................ (20,860) 3,899 4,870 Net income (loss) per share: Basic.............................. $ (1.76) $ 0.17 $ 0.22 ============ ============ ============ Diluted............................ $ (1.76) $ 0.16 $ 0.19 ============ ============ ============
71 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
First Second Third Fourth quarter quarter quarter quarter --------- --------- --------- --------- (In thousands, except per share data) Twelve Months Ended March 27, 1998: Revenues........................... $ 98,181 $ 102,840 $ 105,157 $ 136,038 Gross margin....................... 11,424 11,412 11,770 17,200 Income (loss) from continuing operations before extraordinary item.............................. (2,914) 1,922 (1,840) (3,528) Discontinued operations--closure costs............................. -- -- -- (4,960) Extraordinary item--early extinguishment of debt............ -- -- -- (5,706) Net income (loss) applicable to common stock...................... (4,447) 385 (3,379) (15,752) Net income (loss) per share: Basic and diluted: Earnings from continuing operations (net of preferred stock dividends)...................... (0.46) 0.04 (0.35) (0.52) Discontinued operations.......... -- -- -- (0.51) Extraordinary item--early extinguishment of debt.......... -- -- -- (0.59) -------- --------- --------- --------- Net income (loss) per share........ $ (0.46) $ 0.04 $ (0.35) $ (1.62) ======== ========= ========= =========
See "Notes to Consolidated Financial Statements--Special Charges". Discontinued operations: Overview Prior to December 1987 the Company was a major provider of hazardous waste transportation, treatment, and disposal operations in California. In December 1987, the Company's Board of Directors adopted a strategic restructuring program which included a formal plan to divest the transportation, treatment and disposal operations through sale of some facilities and closure of certain other facilities. Subsequent to this date, the Company ceased obtaining new business for these operations. During the quarter ended March 27, 1998, the Company recorded an increase in the provision for loss on disposition of $8.0 million or $5.0 million, net of income tax benefit of $3.0 million, primarily for additional closure costs related to the approval of the closure plan by the DTSC for the Panoche disposal site. Prior to the twelve months ended March 27, 1998, the Company cumulatively recorded a provision for loss on disposition (including the initial provision and three subsequent adjustments) in the amount of $168.2 million, net of income tax benefit of $32.9 million. During each of the three fiscal years ended December 25, 1998, the Company funded previously accrued costs of $11.1 million, $14.9 million and $15.7 million relating to the closure plans and construction and PRP matters. The Company expects to incur costs over the next several years; however, the nature of the costs will change from closure design and construction to post-closure monitoring. At December 25, 1998, the Company's consolidated balance sheet included accrued liabilities of approximately $7.9 million to complete the closure and post-closure of its disposal facilities and the PRP matters, net of certain trust fund and annuity investments, restricted to closure and post- closure use. The trust funds are invested in high quality common stock and AAA rated corporate and government bonds which are recognized at fair market value and annuity investments which pay periodic payments into the trust fund. The annuities and trust fund assets are held in a legally binding trust agreement by a third party trustee naming the California EPA, Department of Toxic Substances control (DTSC) as the beneficiary of the trust. As closure and post closure obligations are met by the Company, DTSC is obligated to release funds from the trusts to reflect reduced estimates of remaining costs. 72 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The provision for loss on disposition of transportation, treatment and disposal discontinued operations is based on various assumptions and estimates, including those discussed below. The adequacy of the provision for loss is periodically reevaluated in light of the developments since the adoption of the divestiture plan, and management believes that the provision as adjusted is reasonable; however, the ultimate effect of the divestiture on the consolidated financial condition, liquidity and results of operations of the Company is dependent upon future events, the outcome of which cannot be determined at this time. Closure and post-closure costs could be higher than estimated if regulatory agencies were to require closure and/or post-closure procedures significantly different than those in the approved plans, or if the Company is required to perform unexpected remediation work at the facilities in the future or to pay penalties for alleged noncompliance with regulations or permit conditions. Outcomes significantly different from those used to estimate the provision for loss could result in a material adverse effect on the consolidated financial condition, liquidity and results of operations of the Company. Northern California Facilities As a part of the Company's discontinued operations, the Company operated a series of treatment, storage and disposal facilities in California, including four major disposal facilities. Closure plans for all four of these facilities have now been approved by all applicable regulatory agencies. Closure construction has been completed at three of these facilities (Montezuma Hills, Benson Ridge, and Vine Hill). On March 18, 1998, the DTSC certified the Environmental Impact Report and approved the Closure Plan for the Panoche facility. The approved plans provide for submittal of technical studies that will be utilized to determine final aspects, details and costs of closure construction and monitoring programs. While IT believes that the approved closure plans substantially reduce future cost uncertainties to complete the closure of the Panoche facility, the ultimate costs will depend upon the results of the technical studies called for in the approved plans. Closure construction for the plan is scheduled to be completed in the fall of 2000. The carrying value of the long-term assets of discontinued operations of $40.0 million at December 25, 1998 is principally comprised of unused residual land at the inactive disposal facilities and assumes that land sales will occur at market prices estimated by the Company based on certain assumptions (entitlements, development agreements, etc.). A portion of the residual land is the subject of a local community review of its strategy which will be the subject of public hearings and city council deliberation through the second quarter of 1999. There is no assurance as to the timing of development or sales of any of the Company's residual land, or the Company's ability to ultimately liquidate the land for the estimated sale prices. If the assumptions used to determine such prices are not realized, the value of the land could be materially different from the current carrying value. The Company maintains Environmental Impairment Liability coverage for the Northern California facilities through the Company's captive insurance company. The limits of the policy are $32.0 million which meet the current requirements of both federal and state law. Operating Industries, Inc. Superfund Site In June 1986, USEPA notified a number of entities, including the Company, that they were PRPs with respect to the Operating Industries, Inc. (OII) Superfund site in Monterey Park, California. Between October 1995 and April 1996, the Company, the USEPA and the Steering Committee agreed to settlements of the Company's alleged liability for certain prior response costs incurred by the USEPA. While resolving the Company's alleged liability for these response costs, the settlement did not include a release of liability for 73 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) future or final OII remedies. The USEPA has requested, and the Steering Committee and the Company have submitted, proposals to work cooperatively with interested parties on the final remedy. While the USEPA has estimated response costs for the final remedy to approximate $161.8 million, and the USEPA has alleged the Company generated 2% by volume of the manifested hazardous wastes disposed of at the site, the Company believes that USEPA's final remedy cost estimates are substantially overstated. Should the costs of the final remedy be greater than the amounts recognized or should the Company be forced to assume a disproportionate share of the costs of the final remedy, the cost to the Company of concluding this matter could materially increase. GBF Pittsburg Site In September 1987, the Company and 17 others were served with a Remedial Action Order (RAO) issued by the DTSC, concerning the GBF Pittsburg landfill site near Antioch, California. From the 1960's through 1974, a predecessor to IT Corporation operated a portion of one of the two parcels as a liquid hazardous waste site. In June 1997, the DTSC completed and released a final Remedial Action Plan (RAP) selecting DTSC's preferred pump-and-treat remedial alternative, which the Company now estimates to cost up to $18.0 million based on DTSC's prior estimates. As part of the RAP, the DTSC also advised the PRP group of its position that all PRPs, including the Company, are responsible for paying the future closure and postclosure costs of the overlying municipal landfill, which have been estimated at approximately $4.0 million. (The DTSC also seeks approximately $1.0 million in oversight costs from all PRPs.) The PRP group continues to believe that its preferred alternative of continued limited site monitoring, which was estimated to cost approximately $4.0 million, is appropriate and has filed an application with the appropriate Regional Water Quality Control Board (RWQCB) for designation of the site as a containment zone which, if approved, would facilitate the PRP group's preferred remedial alternative. The Company and the PRP group initiated litigation (Members of the GBF/Pittsburg Landfill(s) Respondents Group, etc., et al, v. State of California Environmental Protection Agency Contra Costa County, California Superior Court Case No. C97-02936) challenging the final RAP, and the PRP group and the DTSC have agreed to stay this litigation and implementation of major RAP elements pending the RWQCB's review of the containment zone application. The PRP group continues to work with the RWQCB and the DTSC to determine the scope of the studies necessary for consideration of the application. In the final RAP the DTSC assigned the Company and the other members of the PRP group collective responsibility (on a non-binding basis) for 50% of the site's response costs. The PRP group continues to believe that the DTSC allocation is inappropriate and current owner/operators should pay a larger portion of the site's response costs and the PRP group has initiated litigation (Members of the GBF/Pittsburg Landfill(s) Respondents Group, etc., et al, v. Contra Costa Waste Service, etc., et al. U.S.D.C., N.D. CA, Case No. C96- 03147SI) against the owner/operators of the site and other non-cooperating PRPs to cause them to bear their proportionate share of site remedial costs. The owner/operators are vigorously defending the PRP group's litigation, and the outcome of the litigation cannot be determined at this time. Mediation of this litigation has been postponed until late September 1999. IT Corporation has paid approximately 50% of the PRP group's costs to-date on an interim basis. Failure of the PRP group to effect a satisfactory resolution with respect to the choice of appropriate remedial alternatives or to obtain an appropriate contribution towards site remedial costs from the current owner/operators of the site and other non-cooperating PRPs, could substantially increase the cost to the Company of remediating the site. 74 THE IT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Other Site Cleanup Actions The Company, as a major provider of hazardous waste transportation, treatment and disposal operations in California prior to the December 1987 adoption of its strategic restructuring program, has been named a PRP at a number of other sites and may from time to time be so named at additional sites and may also face damage claims by third parties for alleged releases or discharges of contaminants or pollutants arising out of its transportation, treatment and disposal discontinued operations. The Company has either denied responsibility and/or is participating with others named by the USEPA and/or the DTSC in conducting investigations as to the nature and extent of contamination at the sites. Based on the Company's experience in resolving claims against it at a number of sites and upon current information, in the opinion of management, with advice of counsel, claims with respect to sites not described above at which the Company has been notified of its alleged status as a PRP will not individually or in the aggregate result in a material adverse effect on the consolidated financial condition, liquidity and results of operations of the Company. The Company has initiated against a number of its past insurers claims for recovery of certain damages and costs with respect to both its Northern California sites and certain PRP matters. The carriers dispute their allegations to the Company and the Company expects them to continue to contest the claims. The Company has included in its provision for loss on disposition of discontinued operations (as adjusted) an amount that, in the opinion of management, with advice of counsel, represents a probable recovery with respect to those claims. Subsequent events: On February 5, 1999, the Company signed an agreement to acquire all of the stock of Roche Limited Consulting Group (Roche) for $10.0 million plus two potential earnout payments. Roche is based in Quebec City, Canada and provides engineering and construction services to wastewater, paper, mining and transportation industries worldwide. Roche has approximately 700 employees and had revenue of $28.0 million in its most recent year ended December 31, 1998. The acquisition is expected to close in April 1999. On March 8, 1999, the Company signed an agreement to acquire specified assets of the Environment and Facilities Management Group (EFM Group) of ICF Kaiser International, Inc. for $82.0 million in cash reduced by $8.0 million representing working capital retained by Kaiser. The EFM Group provides environmental remediation, program management and technical support for United States Government agencies including the DOD, National Aeronautics and Space Administration (NASA) and the DOE as well as private sector environmental clients. The EFM Group has approximately 500 employees and had revenue of approximately $106.0 million for the calendar year ended December 31, 1998. The acquisition is expected to close in April 1999. The Company has begun a private placement of $200 million of subordinated notes (Notes). If the offering of the Notes is completed, the Notes will have a fixed rate of interest payable every six months in cash commencing in 1999 and will be redeemable in or after 2004 at a premium. The Notes will be general unsecured obligations of the Company, subordinated to the Company's credit facilities (see Notes to Consolidated Financial Statements--Long-term debt) and other senior indebtedness and pari passu with other existing future indebtedness unless the terms of that indebtedness expressly provide otherwise. The proceeds of the Notes, assuming the offering is completed, will be used to fund the Roche and EFM acquisitions and to refinance existing indebtedness. On March 5, 1999, the lenders under the Company's credit facilities approved the third amendment to the loan agreement. The third amendment provides for the Company to issue up to $250 million in subordinated notes for the acquisitions (discussed above) and to pay down outstanding borrowings under the revolving credit facility portion of the credit facilities. 75 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were none. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. At the 1996 Annual Meeting of Stockholders, stockholders approved a cash investment (the Investment) of $45,000,000 in the Company by certain investors affiliated with The Carlyle Group (collectively, Carlyle), a private merchant bank headquartered in Washington, D.C. In consideration of its investment, Carlyle received 45,000 shares of newly issued Cumulative Convertible Participating Preferred Stock, par value $100 per share (the Convertible Preferred Stock), and warrants (the Warrants) to purchase up to 1,250,000 shares of our Common Stock (at the current exercise price of $11.39 per share). Carlyle's purchase of the Convertible Preferred Stock and Warrants was financed through the private sale of interests in limited partnerships affiliated with Carlyle or through other entities. These partnerships and other entities then purchased the Convertible Preferred Stock and Warrants. Pursuant to the terms of the Investment, Carlyle is entitled to elect a majority of our Board of Directors, until November 20, 2001, which date is five years from the consummation of the Investment (the Five-Year Period), provided that Carlyle continues to own at least 20% of the voting power of the Company. Also pursuant to the terms of the Investment, the number of directors comprising our Board will be an odd number. A majority of the directors (the Preferred Stock Directors) will be elected by the holders of the Convertible Preferred Stock acting by written consent and without a meeting of the Common Stock holders, and the remaining directors (the Common Stock Directors) will be elected by the Common Stock holders. The Preferred Stock Directors serve for annual terms. The Investment agreements also provide that at least two of the directors elected by the holders of the Common Stock will have no employment or other relationship with us or Carlyle, other than their positions as directors of the Company. During the Five-Year Period, holders of the Convertible Preferred Stock will not participate in elections of the Common Stock Directors and the Preferred Stock Directors will not have the right to vote on the election of any director to fill a vacancy among the Common Stock Directors. At the end of the Five-Year Period, provided that Carlyle continues to own at least 20% of the voting power of the Company, holders of the Convertible Preferred Stock will be entitled to elect the largest number of directors which is a minority of the directors and to vote with the Common Stock holders (as a single class) on the election of the remaining directors. Additionally, the holders of the Convertible Preferred Stock, in the event they no longer have the right to elect at least a minority of the directors, will have the right (voting as a class with holders of our 7% Cumulative Convertible Exchangeable Preferred Stock, par value $100 per share, and any other parity stock) to elect two directors to the Board in the event we fail to make payment of dividends on the Convertible Preferred Stock for six dividend periods. Pursuant to an agreement of merger dated January 15, 1998 (the OHM Merger Agreement), the Company acquired OHM Corporation (OHM) in a two-step transaction, comprised of a tender offer for 13,933,000 shares of OHM common stock, or 54% of the outstanding OHM stock, for $160,300,000 in cash, which was consummated on February 25, 1998, and a merger (the OHM Merger) of an IT subsidiary into OHM on June 11, 1998. In the OHM Merger, the former OHM shareholders received IT common stock representing approximately 57% of the outstanding IT common stock and 45% of the voting power of IT, as well as cash in the aggregate amount of $30,800,000. Subsequent to the OHM Merger, holders of the Convertible Preferred Stock own approximately 21% (approximately 24% assuming exercise of the Carlyle Warrants) of the Company's voting power. At the Special Meeting of Shareholders held on June 11, 1998 (the Special Meeting), at which the OHM Merger was approved, the shareholders also voted to eliminate our classified Board of Directors system. 76 Under that system, the Common Stock Directors served for three year terms which were staggered to provide for the election of approximately one-third of the Board members each year. As a result of the shareholders' vote to eliminate our classified Board of Directors system, the holders of the Common Stock are entitled to vote each year on the election of all Common Stock Directors. After the OHM Merger, pursuant to the OHM Merger Agreement, Richard W. Pogue and Charles W. Schmidt were appointed to the Board of Directors as Common Stock Directors. In connection with their appointment, the authorized number of directors (both Common and Preferred Stock Directors) was increased to nine (9), with the Board consisting of five Preferred Stock Directors and four Common Stock Directors so that the Preferred Stock Directors continue to represent a majority of the Board of Directors. To allow for this change, one of the Common Stock Directors, E. Martin Gibson, resigned as such and was reappointed as a Preferred Stock Director. After giving effect to the changes approved in connection with the OHM Merger, our Board of Directors is constituted as follows:
Term to Director of the Name Age Current Position Expire IT Group Since - ---- --- ---------------- ------- --------------- Common Stock Directors: Anthony J. DeLuca (1)... 51 Director, Chief Executive Officer 1999 1996 and President James C. McGill (3)..... 55 Director 1999 1990 Richard W. Pogue (3).... 70 Director 1999 1998 Charles W. Schmidt (2).. 71 Director 1999 1998 Preferred Stock Directors: Daniel A. D'Aniello (1) (2).................... 52 Director and Chairman of the 1999 1996 Board (non-officer position) Philip B. Dolan (1) (2).................... 40 Director 1999 1996 E. Martin Gibson (3).... 60 Director 1999 1994 Robert F. Pugliese (3).. 66 Director 1999 1996 James David Watkins (2).................... 72 Director 1999 1996
- -------- (1) Member of Executive Committee (2) Member of Compensation Committee. (3) Member of Audit Committee. Background of the Directors: Mr. D'Aniello has been a Managing Director for Carlyle since 1987. Mr. D'Aniello was Vice President, Finance and Development for Marriott Corporation, a hospitality company, from 1981 to 1987. He currently serves on the Board of Directors for GTS Duratek, Inc., an environmental services company, Baker & Taylor, Inc., a wholesale distributor of books, and PRA International, Inc. Mr. D'Aniello is Chairman of GTS Duratek, Inc. and Vice Chairman of Baker & Taylor, Inc. Mr. DeLuca was named Chief Executive Officer and President on July 22, 1997 and President and Acting Chief Executive Officer and a Director as of July 1, 1996. Prior thereto, Mr. DeLuca had been Senior Vice President and Chief Financial Officer of the IT Group since March 1990. Before joining us Mr. DeLuca had been a senior partner at the public accounting firm Ernst & Young LLP. 77 Mr. Dolan has been a Principal for Carlyle since 1998. Prior thereto, he was a Vice President for Carlyle from 1989. He also serves on the Board of Directors of Baker & Taylor, Inc. Prior to joining Carlyle, Mr. Dolan was an investment analyst and fund manager with the Trust Division of the Mercantile- Safe Deposit and Trust Company and was engaged in management consulting and practiced public accounting with Seidman & Seidman. Mr. Dolan is a Certified Public Accountant. Mr. Gibson served as Chairman of the Board of Directors, a non-officer, non- employee position, from April 6, 1995 until his resignation as Chairman upon completion of the Investment. From 1990 until December 1994, Mr. Gibson served as Chairman of Corning Life Sciences, Inc., a subsidiary of Corning Incorporated. Mr. Gibson served in various other senior management capacities with Corning Incorporated during his 32 year career there, including as a Senior Vice President and General Manager of Corning Medical and Scientific Division from 1980 until 1983, and as Group President of Corning Consumer Products and Laboratory Sciences from 1983 until 1990. From 1983 to 1994, Mr. Gibson served on the Board of Directors of Corning Incorporated. Mr. Gibson also serves on the Boards of Directors of Hardinge, Inc., NovaCare, Inc. and Primerica, Inc. Mr. McGill is currently, and has been for at least five years, a private investor. He served as Chairman of McGill Environmental Systems, Inc. from 1970 to 1987. Mr. McGill serves on the Board of Trustees of the University of Tulsa and on the Boards of Directors of two private corporations that are engaged in venture capital and health exercise equipment businesses. Mr. Pogue is a consultant with Dix & Eaton, a public relations firm. Effective June 30, 1994, Mr. Pogue retired as Senior Partner of the law firm of Jones, Day, Reavis & Pogue, Cleveland, Ohio, of which he had been a partner since 1961. Mr. Pogue is also a Director of Continental Airlines, Inc., Derlan Industries Limited, M.A. Hanna Company, KeyCorp, LAI Worldwide, Inc., Rotek Incorporated and TRW Inc. Mr. Pogue was a Director of OHM for 12 years prior to the OHM Merger. Mr. Pugliese has been Special Counsel to Eckert Seamans Cherin & Mellott since 1993. Mr. Pugliese was Executive Vice President, Legal and Corporate Affairs for Westinghouse Electric Corporation and served as General Counsel from 1976 to 1992. Mr. Pugliese is a member of the Association of General Counsel. Mr. Pugliese has served as Secretary to the Board of Directors of Westinghouse Electric Corporation and Chairman of the Board of Trustees at the University of Scranton, and served as a Director of OCWEN Asset Investment Corporation and St. Clair Memorial Hospital. Mr. Schmidt retired in January 1991 as Senior Vice President, External Affairs of Raytheon Company, a broadly diversified manufacturer of industrial and consumer products, and was formerly President and Chief Executive Officer of SCA Services, Inc., a company that provided waste management-related services and previously was President and Chief Executive Officer of S.D. Warren Company, a division of Scott Paper Company. Mr. Schmidt also serves as a trustee of the Massachusetts Financial Services Family of Mutual Funds and is a Director of Mohawk Paper Company. Mr. Schmidt was a Director of OHM for 12 years prior to the OHM Merger. Admiral Watkins has been the President of the Joint Oceanographic Institutions, Inc. since 1993 and President of Consortium Oceanographic Research and Education since 1994. Admiral Watkins was Secretary of Energy of the United States from 1989 to 1993. Prior to his appointment as Secretary of Energy, the Admiral served as Director of Philadelphia Electric Company and VESTAR, Inc. (a pharmaceutical company), and was a consultant to the Carnegie Corporation of New York. From 1982 to 1986, he served as the Chief of Naval Operations, capping a career spanning nearly four decades. Admiral Watkins was also appointed to chair the Presidential Commission on AIDS from 1987 to 1988. He was a Trustee of the Carnegie Corporation of New York from 1993 to 1998. Admiral Watkins currently serves as a Director of Edison International and GTS-Duratek and as Chairman of Eurotech, Ltd. 78 Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 (the Exchange Act) requires directors, certain officers of the Company and persons holding more than 10% of the Company's Common Stock to file reports concerning their ownership of Common Stock by dates established under the Exchange Act and also requires that the Company disclose any noncompliance with those requirements during fiscal year 1998. Based solely upon a review of reports delivered to the Company, the Company believes all Section 16(a) filing requirements were satisfied. ITEM 11. EXECUTIVE COMPENSATION. The "Executive Compensation" section of Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission for the nine months ended December 25, 1998 is incorporated herein by reference. 79 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Principal Stockholders The following table sets forth information as of March 5, 1999 with respect to beneficial ownership of (a) Common Stock, (b) Depositary Shares, each representing 1/100 of a share of 7% Preferred Stock (the Depositary Shares), (c) Convertible Preferred Stock and (d) the Warrants, by (w) each person known by the Company to be the beneficial owner of 5% or more of the outstanding Common Stock (based solely on information contained in Schedules 13D, -G, or -F filed by such persons and delivered to the Company), Depositary Shares, Convertible Preferred Stock or Warrants, (x) each director of the Company, (y) the executive officers of the Company and (z) all directors and persons serving as executive officers of the Company as a group.
Amount and Amount and Amount and Percent of Nature of Percent of Nature of Percent of Nature of Convertible Beneficial Common Beneficial Depositary Beneficial Preferred Ownership of Stock Ownership of Shares Ownership of Stock Common Beneficially Depositary Beneficially Convertible Beneficially Name Stock (1)(2) Owned (2) Shares Owned Preferred Stock Owned ---- ------------ ------------ ------------ ------------ --------------- ------------ TCG Holdings, L.L.C..... 6,556,061(3) 22.49% 41,263 89.52% Carlyle Investment Management, L.L.C...... 766,954(4) 3.28% 4,832 10.48% Brahman Capital Corp. et al..................... 2,939,492(5) 13.01% T. Rowe Price Associates, Inc.(6).... 1,493,311 6.60% Dimension Fund Advisors (7).................... 1,239,915 5.49% Baron Capital Group, Inc. (8)............... 1,200,000 5.31% Daniel A. D'Aniello (9).................... 0 -- Philip B. Dolan (11).... 0 -- E. Martin Gibson........ 12,226 * 5,000 * James C. McGill (10).... 20,713 * 1,000 * Robert F. Pugliese...... 2,966 * James D. Watkins........ 2,966 * Anthony J. DeLuca....... 188,485 * David L. Backus......... 0 * James G. Kirk........... 2,624 * James R. Mahoney........ 85,730 * Richard W. Pogue........ 69,841(11) * Raymond J. Pompe........ 74,725 * Charles W. Schmidt...... 15,940 * Philip O. Strawbridge... 173,195 * All directors and executive officers as a group (14 persons) (12)................... 649,411 2.83%
- -------- *Less than 1% (1) The number of shares of Common Stock beneficially owned includes shares of Common Stock in which the persons set forth in the table have either investment or voting power. Unless otherwise indicated, all of such interests are owned directly, and the indicated person or entity has sole voting and investment power, subject to community property laws where applicable. The number of shares beneficially owned also includes shares that the following individuals have the right to acquire within 60 days of March 5, 1999 upon exercise of stock options (and conversion of Depositary Shares in the case of Messrs. Gibson and McGill) in the following amounts: (i) 6,875 shares upon exercise of options and 5,351 shares upon conversion of the Depositary Shares as to Mr. Gibson, (ii) 1,875 shares upon exercise of options and 1,070 shares upon conversion of the Depositary Shares as to Mr. McGill, (iii) 55,760 shares as to Mr. Pogue, (iv) 13,940 shares as to Mr. Schmidt, (v) 38,834 shares as to Mr. DeLuca, (vi) 31,834 shares as to Mr. Mahoney, (vii) 20,355 shares as to Mr. Pompe, (viii) 2,624 shares as to Mr. Kirk, and (ix) 136,565 shares as to Mr. Strawbridge. 80 (2) For the purposes of determining the number of shares of Common Stock beneficially owned, as well as the percentage of outstanding Common Stock held, by each person or group set forth in the table, the number of such shares is divided by the sum of the number of outstanding shares of Common Stock on March 5, 1999 plus (i) the number of shares of Common Stock subject to options exercisable currently or within 60 days of March 5, 1999 by such person or group, (ii) shares of Common Stock into which persons who hold Depositary Shares or Convertible Preferred Stock may convert such security (or otherwise obtain Common Stock), and/or receive Common Stock upon exercise of Warrants, in accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as amended (Rule 13d-3(d)(1)). Depositary Shares may be converted at any time into Common Stock at the ratio of 1.0702 shares of Common Stock for each Depositary Share. The Convertible Preferred Stock may be converted at any time into Common Stock at the ratio of 131.75 shares of Common Stock for each share of Convertible Preferred Stock (reflecting a conversion price of $7.59 per share of Convertible Preferred Stock). (3) Represents shares of Common Stock issuable upon conversion of all shares of Convertible Preferred Stock and exercise of all Carlyle Warrants held by certain limited partnerships controlled by TCG Holdings, L.L.C., a Delaware limited liability company (TCG Holdings), as set forth in more detail in the following sentence. The cumulative TCG Holdings ownership figure represents (i) 1,826,339 shares beneficially owned by Carlyle Partners II, L.P., a Delaware limited partnership (CPII), (ii) 82,936 shares beneficially owned by Carlyle Partners III, L.P., a Delaware limited partnership (CPIII), (iii) 1,530,275 shares beneficially owned by Carlyle International Partners II, L.P., a Cayman Islands limited partnership (CIPII), (iv) 82,095 shares beneficially owned by Carlyle International Partners III, L.P., a Cayman Islands limited partnership (CIPIII), (v) 344,474 shares beneficially owned by C/S International Partners, a Cayman Islands partnership (C/SIP), (vi) 1,907 shares beneficially owned by Carlyle Investment Group, L.P., a Delaware limited partnership (CIG), (vii) 2,407,370 shares beneficially owned by Carlyle-IT International Partners, L.P., a Cayman Islands limited partnership (CITIP), (viii) 80,818 shares beneficially owned by Carlyle-IT International Partners II, L.P., a Cayman Islands limited partnership (CITIPII), and (ix) 199,847 shares beneficially owned by Carlyle-IT Partners, L.P., a Delaware limited partnership (CITP). TC Group, L.L.C., a Delaware limited liability company (TC Group), may be deemed to be the beneficial owner of 6,556,061 shares of ITC Common Stock as the general partner of CPII, CPIII, CIG, and CITP, and as the managing general partner of CIPII, CIPIII, C/SIP, CITIP and CITIPII. TCG Holdings, as a member holding a controlling interest in TC Group, may be deemed to share all rights herein described belonging to TC Group. Furthermore, because certain managing members of TCG Holdings are also managing members of Carlyle Investment Management, L.L.C., a Delaware limited liability company (CIM), TCG Holdings may be deemed the beneficial owner of the shares of Common Stock controlled by CIM (see footnote 4 below). The principal business address of TC Group and TCG Holdings is c/o The Carlyle Group, 1001 Pennsylvania Avenue, N.W., Suite 220 South, Washington DC 20004. The principal business address of CPII, CPIII, CIG, CITP and CIM is Delaware Trust Building, 900 Market Street, Suite 200, Wilmington, Delaware 19801. The principal business address of CIPII, CIPIII, C/SIP, CITIP and CITIPII is Coutts & Co., P.O. Box 707, Cayman Islands, British West Indies. (4) Represents shares of Common Stock issuable upon conversion of all shares of Convertible Preferred Stock and exercise of all Carlyle Warrants held by the State Board of Administration of the State of Florida over which CIM holds sole voting and disposition power. Because certain managing members of TCG Holdings are also managing members of CIM, CIM may be deemed to be the beneficial owner of the shares of Common Stock controlled by TCG Holdings (see footnote 3 above). (5) Such information is derived solely from a Schedule 13G filed by the Brahman Stockholders, which is comprised of the entities listed in the following sentence (filing as joint filers), with the SEC dated February 12, 1999. The Brahman Stockholders' cumulative ownership represents (i) 469,042 shares with respect to which Brahman Partners II, L.P. has shared power to vote or direct the vote and shared power to dispose or direct the disposition, (ii) 1,052,641 shares with respect to which Brahman Institutional Partners, L.P. has shared power to vote or direct the vote and shared power to dispose or direct the 81 disposition, (iii) 1,214,219 shares with respect to which BY Partners, L.P. has shared power to vote or direct the vote and shared power to dispose or direct the disposition, (iv) 2,735,902 shares with respect to which Brahman Management, L.L.C. has shared power to vote or direct the vote and shared power to dispose or direct the disposition, (v) 1,273,509 shares with respect to which Brahman Capital Corp. has shared power to vote or direct the vote and shared power to dispose or direct the disposition (which position includes shares owned by Brahman Partners II Offshore, Ltd), and (vi) 2,795,192 shares with respect to which each of Peter A. Hochfelder, Robert J. Sobel, and Mitchell A. Kuflik have shared power to vote or direct the vote and shared power to dispose or direct the disposition. The Brahman Stockholders further report in such Schedule 13G that (i) none of the above named entities individually has the sole power to vote or direct the vote or to dispose or direct the disposition of the shares it beneficially owns, (ii) but that Brahman Management, as the sole general partner of Brahman Partners II, L.P., BY Partners, L.P. and Brahman Institutional Partners, L.P., has the power to vote and dispose of the shares owned by each of Brahman Partners II, L.P., BY Partners, L.P. and Brahman Institutional Partners, L.P., and (iii) further that Brahman Capital Corp., pursuant to investment advisory contracts and arrangements, has the power to vote and dispose of the shares owned by BY Partners, L.P. and Brahman Partners II Offshore, Ltd., a Cayman Islands exempted company. The address of Brahman Capital Corp and the affiliated reporting persons is 277 Park Avenue, 26th Floor, New York, New York 10172 except in the case of Brahman Partners II Offshore, Ltd., the address of which is c/o Citco, N.V. Kaya Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. (6) Such information is based solely from a Schedule 13G filed by T. Rowe Price Associates (Price) with the SEC dated February 12, 1999. Price's ownership represents (i) 1,328,000 shares which Price owns directly and (ii) 165,911 shares deemed outstanding and owned directly subject to warrants and conversion privileges. Further, of the 1,493,911 share Price holds, it has sole power to vote or direct the vote of 271,300 shares. These securities are owned by various individual and institutional investors which Price serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price is deemed to be a beneficial owner of such securities; however, Price expressly disclaims that it is, in fact, the beneficial owner of such securities. Price's address is 100 E. Pratt Street, Baltimore, Maryland 21202. (7) Such information is derived solely from a Schedule 13G filed by Dimension Fund Advisors, Inc. (Dimension) with the SEC dated February 11, 1999. Dimension reports that it is an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, and furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other investment vehicles, including commingled group trusts. (These investment companies and investment vehicles are the Portfolios.) In its role as investment advisor and investment manager, Dimension possesses both voting and investment power over the securities of the Company described that are owned by the Portfolios. All securities reported in this schedule are owned by the portfolios, and Dimension disclaims beneficial ownership of such securities. Dimension further reports that none of its advisory clients, to its knowledge, owns more than 5% of the class. Dimension disclaims beneficial ownership of all such securities. Dimension's address is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. (8) Such information is derived solely from a Schedule 13G filed by the Baron Shareholders, which is composed of the entities listed in the following sentence (filing as joint filers), with the SEC dated June 4, 1998. The Baron Stockholders is comprised of Baron Capital Group, Inc. (BCG), Bamco, Inc. (BAMCO), Baron Small Cap Fund (BSC), Baron Asset Fund (BAF), and Ronald Baron. The Baron Stockholders report in such Schedule 13G that (i) BCG, BAMCO, BSC and Ronald Baron have the shared power to vote or direct the vote of 1,200,000 shares of Common Stock; (ii) BCG, BAMCO, BAF and Ronald Baron have shared power to dispose of or direct the disposition of 1,200,000 shares of Common Stock, but that none of BCG, BAMCO, BSC, or Ronald Baron have the sole power to vote or direct the vote of or the sole power to dispose or to direct the disposition of, any Common Stock. BAMCO is a subsidiary of BCG. 82 BSC is an investment advisory client of BAMCO. Ronald Baron owns a controlling interest in BCG. BCG and Ronald Baron disclaim beneficial ownership of shares held by their controlled entities (or the investment advisory client thereof) to the extent such shares are held by persons other than BCG and Ronald Baron. BAMCO disclaims beneficial ownership of shares held by its investment advisory clients to the extent such shares are held by persons other than BAMCO and its affiliates. The address of Baron Capital Group, Inc. and the affiliated reporting persons is 767 Fifth Avenue, 24th Floor, New York, New York 10153. (9) Mr. D'Aniello is a Managing Member of TCG Holdings. Mr. D'Aniello's interest in TCG Holdings is not controlling and thus Mr. D'Aniello expressly disclaims any beneficial ownership in the shares of Company Common Stock beneficially owned by TCG Holdings. Mr. Dolan is an employee of The Carlyle Group and holds no economic interest in either TC Group or TCG Holdings, and as such expressly disclaims any beneficial ownership in the shares of Company Common Stock beneficially owned by any of such entities. (10) Includes 1,000 shares of Common Stock and 1,000 Depositary Shares (convertible into 1,070 shares of Common Stock) owned by Mr. McGill's wife, as to which Mr. McGill has no voting or dispositive power, and 1,250 shares owned by a revocable living trust maintained by Mr. McGill. Mr. McGill disclaims beneficial ownership of all such shares. Also includes 1,875 shares that may be purchased upon the exercise of options that are currently exercisable or that will become exercisable within 60 days of March 5, 1999. (11) Includes 1,081 shares of Common Stock owned by a revocable trust for Mr. Pogue's wife with respect to which Mr. Pogue is a trustee. Mr. Pogue disclaims beneficial ownership of all such shares. (12) Includes 308,662 shares of Common Stock that may be purchased upon the exercise of options that are currently exercisable or that will become exercisable within 60 days of March 5, 1999 and 6,000 Depositary Shares (convertible into 6,421 shares of Common Stock). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Employment Agreements. The Company and each of Anthony J. DeLuca, James R. Mahoney and Raymond J. Pompe have entered into employment agreements with terms through November 1999. The employment agreements provide for initial base salaries at the rates in effect at the time of the closing of the Investment, subject to annual upward adjustment at the discretion of the Compensation Committee of the Board of Directors (the "Compensation Committee"). Salaries are subject to reduction only in connection with action taken by the Board of Directors for all management employees. Each of the employment agreements provides for a short-term incentive compensation plan to be administered by the Compensation Committee. The target short-term incentive compensation level is 40%, and the maximum level is 60%, of base salary, except in the case of Mr. DeLuca, for whom the target level is 50%, and the maximum level is 75%, of base salary. The Company also is required to maintain long-term incentive plans to be administered by the Compensation Committee, which will make awards, primarily of stock options, based on appropriate performance criteria. The annual awards are at the discretion of the Compensation Committee and will generally target long-term incentive opportunities. The agreements provide for severance payments under certain circumstances. Under the agreements, the Company will have "good reason" to terminate Messrs. DeLuca, Mahoney or Pompe because of the Company's performance if such persons fail to meet certain management forecasts for two consecutive fiscal years. If the executive is terminated because of the Company's performance (under the circumstances permitted in the agreements) within 24 months after a change in control, is terminated without reason, or resigns for cause, he is entitled to receive his base salary as adjusted from time to time (presently $400,000 in the case of Mr. DeLuca, $260,000 in the case of Mr. Mahoney and $280,000 in the case of Mr. Pompe) for 12 months following the termination (24 months in the case of Mr. DeLuca), or, if he is terminated because of the Company's performance (under the circumstances permitted in the agreements) but not within 24 months after a change in control, he is entitled to receive his base salary for six months following the termination (12 months in the case of Mr. DeLuca). In addition, under certain circumstances, the executive's short-term 83 incentive compensation will be paid on a pro-rated basis, and he will be entitled to Company employee benefits for a specified period. The Company has provided loans to Messrs. DeLuca, Mahoney and Pompe to allow them to make substantial purchases of the Company's Common Stock in the open market. The agreements each required that within three months of the closing of the Investment, Mr. DeLuca purchase between $100,000 and $125,000 worth of Common Stock and Messrs. Mahoney and Pompe each purchase between $75,000 and $100,000 worth of Common Stock. All of the executives have purchased the required amounts of Common Stock, and Messrs. DeLuca, Mahoney, and Pompe have received loans in the principal amounts of $125,000, $100,000, and $100,000, respectively, to purchase the stock. In connection with the short-term compensation plan described above, the Company may provide for forgiveness of a certain portion of the loan principal and interest if previously agreed to targets are met or exceeded. The loans bear interest at the rate of 8.25% per year and are repayable at upon the earlier of the executive's termination of employment or November 19, 1999. The employment agreements also provide for reimbursement for business expenses and vacation and other benefits consistent with existing Company policies and practices. Additionally, as part of their employment agreements, each of Messrs. DeLuca, Mahoney and Pompe are bound by non-compete provisions with the Company if they terminate their employment by resignation. The Company has also agreed to enter into employment agreements with David L. Backus and Philip O. Strawbridge with terms similar to those of the employment agreements for Messrs. Mahoney and Pompe. The Company has also agreed to enter into severance agreements with certain other key executives of the Company. Such agreements generally will provide for the payment of 12 months of base salary in the event the executive is involuntarily terminated for other than cause. Mr. Strawbridge, as well as other senior executives at OHM, entered into employment agreements with OHM prior to the execution of the Merger Agreement, and the tender offer for OHM resulted in a change in control of OHM for purposes of those employment agreements. As a result of the change in control, under his employment agreement, Mr. Strawbridge was entitled to continue his employment with OHM in his position at the time of the tender offer for a period of approximately three years following the date of the change in control. During his term of employment, Mr. Strawbridge would have been entitled to receive a base salary and to continue to participate in incentive and employee benefit plans at levels no less favorable to him than existed prior to the change in control. In the event of a termination by OHM or by Mr. Strawbridge of his employment during the employment term under circumstances amounting to good reason under his employment agreement, Mr. Strawbridge would have been entitled to receive a lump sum payment, subject to an overall limitation to assure that payments will not constitute "excess parachute payments" under federal income tax law. Mr. Strawbridge has agreed to remain employed but the Company has agreed to pay to Mr. Strawbridge the amount he would have received under his employment agreement if his employment had been terminated, and pursuant to that agreement Mr. Strawbridge has received $1,400,000. Backus Arrangements. David L. Backus, a Senior Vice President has agreed to be employed by the Company following the acquisition of GTI. While employed at GTI, Mr. Backus was on loan from his previous employer. The Company paid Mr. Backus $200,000 as full consideration for the value of foregone benefits and compensation that he would have been entitled to if he had returned to his previous employer. Coffman Agreement. In connection with his resignation from the Company, Franklin E. Coffman, a Senior Vice President, entered into an agreement dated as of April 17, 1998 superceding his employment agreement. See "Certain Transactions--Employment Agreements." Pursuant to that agreement Mr. Coffman resigned as an officer of the Company and received a one-time payment of $275,000, less payroll deductibles representing one year's salary and the cash value of certain benefits. Mr. Coffman's eligibility to participate in Company benefits ceased as of the date of the agreement. The Company and Mr. Coffman also agreed that he would have the right to exercise vested options during a two year period after the agreement and that all unvested options will expire on the earlier of their scheduled expiration or April 7, 2000. The Company also 84 agreed to lift vesting restrictions on 8,971 shares of previously awarded restricted stock. The terms of the agreement were consistent with terms that he would have received if he had retired from the Company. Retention of Eckert Seamans Cherin & Mellott. The Company has retained the law firm of Eckert Seamans Cherin & Mellott, to which Robert F. Pugliese, a director of the Company, is Special Counsel, to perform certain limited services in connection with the Company's credit agreement and the merger of OHM Corporation. Relocation Loans. In certain circumstances, the Company has granted and may in the future grant interest-free loans to executive officers, officers and certain other employees principally for real estate purchases in connection with company-initiated transfers to a new location. All loans are approved by the Compensation Committee and are to be secured by the principal residence of the individual. Mr. James R. Mahoney, Senior Vice President, entered into a relocation loan arrangement with the Company with an original principal amount of $200,000 and secured by a deed of trust on his personal residence in California. The loan was interest free so long as Mr. Mahoney remained an employee. Beginning December 31, 1991 and on each December 31st thereafter until the due date of the loan, 5% of the original principal amount (to a maximum of 50% of the original principal amount) was forgiven by the Company. Additionally, Mr. Mahoney agreed to repay the remaining 50% of the original principal amount in installments related to the issuance of awards under the Company's incentive compensation plan. In April 1997, $122,451 remained outstanding on this loan. In May 1998, Mr. Mahoney repaid in full the $102,451 then remaining outstanding on his loan in connection with the sale of his California residence. In connection with the relocation and consolidation of the Company's corporate headquarters from Torrance, California to Pittsburgh, Pennsylvania in June 1997, and other relocations occurring at approximately the same time, the Company offered relocation assistance to a limited number of officers and key employees. Relocation assistance packages offered to these individuals involve three elements: 1) reimbursement of out-of-pocket relocation expenses, including travel, real estate brokerage commissions (up to a 6% maximum), and loan origination fees (up to a maximum of two points), 2) a loan to be used for the purchase of a new residence, and 3) a mobility allowance of between 15% and 30% of salary (Mr. Mahoney received an allowance of 30% of salary in connection with his relocation and Mr. DeLuca received a 30% allowance in connection with his relocation). Amounts paid to reimburse out-of-pocket expenses were "grossed-up" for tax purposes. The loans to relocating associates have ten year terms, are to be secured by the residence purchased, and do not bear interest as long as the associate stays with the Company. Five percent of the loan principal is required to be repaid annually by the associate and 5% will be forgiven annually by the Company for each year the associate remains with the Company. The loans are also due upon the sale of the residence purchased. Mr. DeLuca and Mr. Mahoney each were offered and accepted relocation loans on such terms in the original principal amounts of up to $100,000. Mr. DeLuca accepted a loan of $70,000 in May 1997 and the balance of $30,000 in August 1998. During the fiscal year ended December 25, 1998, (i) Mr. DeLuca repaid $3,500 of the loan, and (ii) the maximum amount owed by Mr. DeLuca to the Company under the loan was $91,500. As of March 5, 1999, the principal amount outstanding for Mr. DeLuca's loan was $86,500. Mr. Mahoney accepted a loan of $100,000 in April 1998. During the fiscal year ended December 25, 1998, the maximum amount owed by Mr. Mahoney to the Company under the loan was $100,000. As of March 5, 1999, the principal amount outstanding for Mr. Mahoney's loan was $90,000. Total relocation costs for all relocating employees was approximately $953,000. Executive Stock Ownership. The Company has adopted an Executive Stock Ownership Program which requires that within three years certain key executives own an amount of the Company's Common Stock equal to a multiple of their salary ranging from one times salary for vice presidents to three times salary for Mr. DeLuca. To assist these executives in meeting the ownership guidelines, the Company has provided loans to Messrs. DeLuca, Mahoney, Pompe, and Strawbridge in the amounts of $939,100, $152,600, $164,300 and $233,300 respectively, to purchase the Company's Common Stock. The Company also provided similar loans totaling $510,700 to four other key executives. All of the executives used the loans solely to purchase the Company's Common Stock at current market prices. The loans bear interest at the rate of 4.46% per year and 85 are repayable upon the earlier of the executives' termination of employment or November 23, 2001. It is expected that the executives will be able to repay the loans from incentive compensation payments earned throughout the three-year loan period. Carlyle Financial Advisory Fees. In connection with the Investment, the Company agreed to pay Carlyle (i) an annual financial advisory fee of $100,000, payable quarterly; and (ii) investment banking fees (equal to 1% of transaction value) and reimbursement of reasonable out-of-pocket expenses for investment banking services rendered to the Company. The Company has paid $2,500,000 in investment banking fees to Carlyle (and reimburse reasonable out-of-pocket expenses) for services rendered in connection with the Merger transactions, which is less than the 1% fee to which Carlyle would otherwise have been entitled pursuant to the terms of its existing agreement with the Company. Indemnification. The General Corporation Law of the State of Delaware, the state of incorporation of the Company, and the Bylaws of the Company provide for indemnification of directors and officers. Section 145 of the Delaware General Corporation Law provides generally that a person sued as a director, officer, employee or agent of a corporation may be indemnified by the corporation for reasonable expenses, including attorneys' fees, if, in cases other than actions brought by or in the right of the corporation, he or she has acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation (and in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful). Section 145 provides that no indemnification for any claim or matter may be made, in the case of an action brought by or in the right of the corporation, if the person has been adjudged to be liable, unless the Court of Chancery or other court determines that indemnity is fair and reasonable despite the adjudication of liability. Indemnification is mandatory in the case of a director, officer, employee or agent who has been successful on the merits, or otherwise, in defense of a suit against him or her. The determination of whether a director, officer, employee or agent should be indemnified must be made by a majority of disinterested directors, independent legal counsel or the stockholders. Directors and officers of the Company are covered under policies of directors' and officers' liability insurance. The directors and all officers serving the Company as Senior Vice President or in a higher position and certain other officers are parties to Indemnity Agreements (the Indemnity Agreements). The Indemnity Agreements provide indemnification for the directors and covered officers in the event the directors' and officers' liability insurance does not cover a particular claim for indemnification or if such a claim or claims exceed the limits of such coverage. The Indemnity Agreements are generally intended to provide indemnification for any amounts a director or covered officer is legally obligated to pay because of claims arising out of the director's or officer's service to the Company. Additionally, the Company's Certificate of Incorporation provides that its directors are not to be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty to the fullest extent permitted by law. This provision is intended to allow the Company's directors the benefit of the Delaware General Corporation Law which provides that directors of Delaware corporations may be relieved of monetary liabilities for breach of their fiduciary duty of care, except under certain circumstances, including breach of the director's duty of loyalty, acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law or any transaction from which the director derived an improper personal benefit. The Investment agreements also contain additional provisions for the indemnification of Company directors and officers in certain circumstances. The Investment Agreement provides that the Company will indemnify, defend and hold harmless Carlyle, and its affiliates, directors, officers, advisors, employees and agents to the fullest extent lawful from and against all demands, losses, damages, penalties, claims, liabilities, obligations, actions, causes of action and reasonable expenses (Losses) arising out of the Investment Agreement or the related transactions or arising by reason of or resulting from the breach of any representation, warranty, covenant or agreement of the Company contained in the Investment Agreement for the period for which such representation or warranty survives; provided, however, that the Company shall not have any liability to indemnify Carlyle with respect to Losses arising from the bad faith or gross negligence of the Carlyle indemnified party. 86 The Investment agreements also provide that Carlyle will indemnify, defend and hold harmless the Company, its affiliates, directors, officers, advisors, employees and agents from and against all Losses arising out of the breach of any representation, warranty, covenant or agreement of Carlyle contained in the Investment Agreement for the period for which such representation or warranty survives; provided, however, that Carlyle shall not have any liability to indemnify the Company with respect to Losses arising from the bad faith or gross negligence of the Company indemnified party. The Investment agreements provide that no claim may be made against an indemnifying party for indemnification until the aggregate dollar amount of all Losses exceeds $1,500,000 and the indemnification obligations of the respective parties shall be effective only until the dollar amount paid in respect of the Losses indemnified against aggregates to an amount equal to $45,000,000. Further, pursuant to the Merger Agreement with OHM, the Company will, from and after the effective time of the OHM Merger, indemnify and hold harmless, to the fullest extent permitted under applicable law (and the Company will also advance expenses as incurred to the fullest extent permitted under applicable law, provided the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification), each present and former director and officer of OHM and its subsidiaries against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the effective time of the OHM Merger, including the transactions contemplated by the OHM Merger Agreement, which is based or arises out of the fact that such person is or was a director or officer of OHM or any of its subsidiaries. In addition, for not less than six years after the effective time, the Company and OHM will maintain OHM's and its subsidiaries' existing directors' and officers' liability insurance ("D&O Insurance"), subject to certain maximum premium payments, provided that the Company may substitute therefor policies having at least the same coverage and containing terms which are no less advantageous to the intended beneficiaries thereof than the existing D&O Insurance with respect to matters existing or occurring at or prior to the effective time or may purchase a six-year extended reporting endorsement under OHM's existing D&O Insurance. The Company has substantially similar indemnification obligations with respect to persons who are or were directors, officers, employees or agents of GTI before or after the effective time of the merger with GTI, pursuant to the agreement for the acquisition of GTI. 87 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. Exhibits These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description ------- ----------- 2 Omitted--Inapplicable. 3(i) Certificate of Incorporation of the Registrant as amended by the Amendment to Certificate of Incorporation filed September 17, 1987, with the Delaware Secretary of State(1), and by the Certificate of Amendment to Certificate of Incorporation filed June 19, 1998(2), with the Delaware Secretary of State(2) and by the Certificate of Amendment of Certification of Incorporation of International Technology Corporation, dated as of December 21, 1998, as filed with the Delaware Secretary of State on December 23, 1998.(3) 3(ii) Amended and Restated Bylaws of the Registrant as amended through June 12, 1998.(2) 4(i) 1. Certificate of Designations with respect to the Registrant's 7% Cumulative Convertible Exchangeable Preferred Stock, $100 par value.(4) 2. Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions Thereof of Cumulative, Convertible Participating Preferred Stock of The IT Group, Inc., issued November 20, 1996.(5) 4(ii) 1. Indenture for the Registrant's 7% Convertible Subordinated Debentures Due 2008.(4) 2. Indenture dated as of October 1, 1986 between OHM Corporation and United States Trust Company of New York, Trustee, relating to OHM Corporation's 8% Convertible Subordinated Debentures due October 1, 2006.(6) 3. Specimen Debenture Certificate.(7) 4. First Supplemental Indenture dated as of May 20, 1994 by and among OHM Corporation and United States Trust Company of New York.(8) 5. Second Supplemental Indenture dated as of June 11, 1998 among OHM Corporation, The IT Group, Inc., a guarantor, and United States Trust Company of New York.(2) 9 Omitted--Inapplicable. 10(ii) 1. Amended and Restated Credit Agreement, dated as of June 11, 1998, among the Registrant, IT Corporation, OHM Corporation, the institutions from time to time party thereto as lenders, the institutions from time to time party thereto as issuing banks, Citicorp USA Inc., in its capacity as administrative agent, and BankBoston, M.A., in its capacity as documentation agent.(9) 2. First Amendment dated September 16, 1998 to the Amended and Restated Credit Agreement, dated as of June 11, 1998, among the Registrant, IT Corporation, OHM Corporation, the institutions from time to time party thereto as lenders, the institutions from time to time party thereto as issuing banks, Citicorp USA Inc., in its capacity as administrative agent, and BankBoston, N.A., in its capacity as documentation agent.(10)
88
Exhibit No. Description ------- ----------- 3. Second Amendment dated October 26, 1998 to the Amended and Restated Credit Agreement, dated as of June 11, 1998, among the Registrant, IT Corporation, OHM Corporation, the institutions from time to time party thereto as lenders, the institutions from time to time party thereto as issuing banks, Citicorp USA Inc., in its capacity as administrative agent, and BankBoston, N.A., in its capacity as documentation agent.(10) 4. Third Amendment dated March 5, 1999 to the Amended and Restated Credit Agreement, dated as of June 11, 1998, among the Registrant, IT Corporation, OHM Corporation, the institutions from time to time party thereto as lenders, the institutions from time to time party thereto as issuing banks, Citicorp USA Inc., in its capacity as administrative agent, and BankBoston, N.A., in its capacity as documentation agent. 5. Agreement and Plan of Merger, dated as of January 15, 1998, among OHM Corporation, Registrant and IT-Ohio, Inc.(11) 6. Parent Voting Agreement dated January 15, 1998 among OHM Corporation, Registrant and the stockholders of Registrant named therein.(11) 7. Company Voting Agreement dated January 15, 1998 among OHM Corporation, Registrant and the shareholders of OHM Corporation named therein.(11) 8. Option Termination Agreement dated January 15, 1998 between James L. Kirk and OHM Corporation.(11) 9. Share Repurchase Agreement dated January 15, 1998 among OHM Corporation, Registrant, Rust International, Inc. and Waste Management, Inc.(11) 10. Second Amended and Restated Share Repurchase Agreement, dated as of February 17, 1998, among OHM Corporation, WMX, Rust, Rust Remedial Services Holding Company Inc. and Registrant.(12) 11. Stock Purchase Agreement dated as of June 17, 1997 by and among OHM Corporation, Beneco Enterprises, Inc., Bennie Smith, Jr., Robert Newberry and Scott Doxey.(13) 12. Agreement and Plan of Merger, dated as of October 27, 1998, among Fluor Daniel GTI, Inc., Tiger Acquisition Corporation and the Registrant.(10) 13. Amended and Restated Marketing Agreement dated as of October 27, 1998 between Fluor Daniel GTI, Inc. and Fluor Daniel, Inc.(10) 14. Intercompany Services Agreement dated October 27, 1998 between the Registrant, Fluor Daniel, Inc. and Fluor Daniel GTI, Inc.(10) 15. Share Purchase Agreement dated February 5, 1999 by and between the shareholders of Roche Limited, Consulting Group and IT Holdings Canada, Inc. and The IT Group, Inc. 16. Asset Purchase Agreement, dated as of March 8, 1999, between IT and ICF Kaiser International, Inc.(14) 17. Stock Redemption Agreement dated as of June 26, 1998, between Quanterra Incorporated, the registrant and IT Corporation.(15) 18. Securities Purchase Agreement dated as of August 28, 1996 between the Registrant and certain Purchasers identified therein affiliated with The Carlyle Group(5), including agreement by and between The Carlyle Group and the Registrant re financial advisory and investment banking fees.(16)
89
Exhibit No. Description ------- ----------- 19. Amendment No. 1, dated November 20, 1996, to Securities Purchase Agreement dated August 28, 1996, by and among the Registrant and certain Purchasers identified therein affiliated with The Carlyle Group.(17) 20. Form of Warrant Agreement by and among the Registrant and certain Warrant Holders defined herein affiliated with The Carlyle Group, dated as of November 20, 1996.(5) 21. Form of Registration Rights Agreement by and among the Registrant and certain Investors affiliated with The Carlyle Group, dated November 20, 1996.(5) 22. Master Loan and Security Agreement dated May 11, 1993, between OHM Remediation Services Corp. and BOT Financial Corporation.(18) 23. Amendment No. 1 to Master Loan and Security Agreement dated as of January 19, 1995 between BOT Financial Corporation and OHM Remediation Services Corp.(19) 24. Promissory Note dated December 23, 1993 executed by OHM Remediation Services Corp. in favor of BOT Financial Corporation.(20) 25. Promissory Note dated December 28, 1994 executed by OHM Remediation Services Corp. in favor of BOT Financial Corporation.(8) 26. Loan and Security Agreement dated as of August 1, 1994 by and between OHM Remediation Services Corp. and Internationale Nederlanden Lease Structured Finance B.V.(21) 27. Promissory Note dated August 31, 1994 executed by OHM Remediation Services Corp. in favor of Internationale Nederlanden Lease Structured Finance B.V.(21) 28. Continuing Corporate Guaranty dated as of August 1, 1994 executed by OHM Corporation in favor of Internationale Nederlanden Lease Structured Finance B.V.(21) 10(iii) 1. Non-Employee Directors' Retirement Plan, as amended and restated June 2, 1994(22)(23), as amended by the Amended and Restated Non- Employee Directors Retirement Plan, Amendment No. 5, dated November 20, 1996.(22)(16) 2. Description of the Special Turn-a-Round Plan (Fiscal Year 1995 Management Incentive Plan) of the Registrant.(22)(24) 3. 1983 Stock Incentive Plan, as amended.(22)(25) 4. 1991 Stock Incentive Plan(22)(26) as modified by waiver dated November 20, 1996, by certain former Non-Employee Directors, in favor of the Registrant.(16)(22) 5. Form of Amendment dated October 23, 1998, to the Restricted Stock and Escrow Agreement under the Registrant's 1991 Stock Incentive Plan.(22)(27) 6. 1996 Stock Incentive Plan, as amended and restated effective June 11, 1998.(22)(28) 7. OHM Corporation 1986 Stock Option Plan, as amended and restated as of May 10, 1994.(22)(29) 8. OHM Corporation Nonqualified Stock Option Plan for Directors.(22)(30) 9. OHM Corporation Directors' Deferred Fee Plan.(8)(22) 10. Amendment No. 1 to OHM Corporation Directors' Deferred Fee Plan.(19)(22) 11. OHM Corporation Retirement Savings Plan, as amended and restated as of January 1, 1994.(8)(22)
90
Exhibit No. Description ------- ----------- 12. Amendment No. 1 to OHM Corporation Retirement Savings Plan, as amended and restated as of January 1, 1994.(19)(22) 13. Amendment No. 2 to OHM Corporation Retirement Savings Plan, as amended and restated as of January 1, 1994.(22)(31) 14. OHM Corporation Retirement Savings Plan Trust Agreement between OHM Corporation and National City Bank, as Trustee, as amended and restated effective July 1, 1994.(8)(22). 15. Fiscal Year 1997 Management Incentive Plan.(16)(22) 16. Fiscal Year 1998 Management Incentive Plan.(16)(22) 17. Retirement Agreement dated March 3, 1994 between Murray H. Hutchison and the Registrant.(24)(22) as amended by First Amendment dated January 6, 1995 to the Retirement Agreement dated March 3, 1994 between Murray H. Hutchison and the Registrant.(22)(32) 18. Retirement Plan of IT, 1993 Restatement.(22)(24) 19. Amendment Number One to IT Corporation Retirement Plan, dated as of July 1, 1995.(22)(33) 20. Amendment Number Two to IT Corporation Retirement Plan, dated as of October 1, 1995.(22)(33) 21. Amendment Number Three to IT Corporation Retirement Plan, dated as of July 15, 1996.(22)(34) 22. Amendment Number Four to IT Corporation Retirement Plan, dated as of February 1, 1997.(16)(22) 23. Amendment Number Five to IT Corporation Retirement Plan, dated as of May 13, 1997.(16)(22) 24. Amendment Number Six to IT Corporation Retirement Plan dated as of May 27, 1998.(2)(22) 25. Amendment Number Seven to IT Corporation Retirement plan dated as of December 31, 1998.(22) 26. Executive Stock Purchase Interest Reimbursement Plan, approved September 6, 1995.(22)(26) 27. Executive/Directors Deferred Compensation Plan, effective January 1, 1996.(22)(26) 28. Executive Restoration Plan, effective July 1, 1995 as amended through May 13, 1997.(22)(26) 29. IT Corporation Deferred Compensation Plan (amended and restated effective January 1, 1998).(2)(22) 30. IT Corporation Restoration Plan amended and restated effective January 1, 1998.(2)(22) 31. 1997 The IT Group, Inc. Non-Employee Directors Stock Plan-- Director Fees, dated as of February 26, 1997.(22)(34) 32. Employment Agreement, dated as of November 20, 1996, by and between the Registrant, IT Corporation, and Anthony J. DeLuca.(16)(22) 33. Separation Agreement, dated as of April 10, 1998, by and between the Registrant, its subsidiaries and affiliates, and Franklin E. Coffman.(2)(22) 34. Employment Agreement, dated as of November 20, 1996, by and between the Registrant, IT Corporation, and James R. Mahoney.(16)(22) 35. Employment Agreement, dated as of November 20, 1996, by and between the Registrant, IT Corporation, and Raymond J. Pompe.(16)(22)
91
Exhibit No. Description ------- ----------- 36. Employment Continuation, Non-competition and Confidentiality Agreement dated the 17th day of June, 1997, by and between Beneco Enterprises, Inc., a Utah corporation, OHM Corporation, an Ohio corporation, and Scott Doxey.(2)(22) 37. Employment Continuation, Non-competition and Confidentiality Agreement dated the 17th day of June, 1997, by and between Beneco Enterprises, Inc., a Utah corporation, OHM Corporation, an Ohio corporation, and Robert Newberry.(2)(22) 38. Employment Continuation, Non-competition and Confidentiality Agreement dated the 17th day of June, 1997, by and between Beneco Enterprises, Inc., a Utah corporation, OHM Corporation, an Ohio corporation, and Bennie Smith, Jr.(2)(22) 39. Form of Employment Agreement by and between OHM Corporation, and each of Pamela K.M. Beall, Robert J. Blackwell, Kris E. Hansel, Steven E. Harbour, James L. Kirk, Philip V. Petrocelli, Philip O. Strawbridge, and Michael A. Szomjassy, as amended by Amendment No. 1 in the case of each of Ms. Beall and Messrs. Blackwell, Hansel, Harbour, Strawbridge and Szomjassy, and as amended by Amendment No. 2 in the case of each of Ms. Beall and Messrs. Blackwell, Hansel, and Harbour.(2)(22) 40. The IT Group, Inc. Severance and Retention Bonus Plan dated March 5, 1998.(2)(22) 41. Executive Stock Ownership Program by and between the Registrant and certain executive officers of the Registrant.(22) 42. The IT Group, Inc. Executive Bonus Plan effective November 17, 1998 (22) 11 Omitted--Inapplicable. 12 Omitted--Inapplicable. 13 Omitted--Inapplicable. 16 Omitted--Inapplicable. 18 Omitted--Inapplicable. 20 Omitted--Inapplicable. 21 List of the Registrant's subsidiaries. 22 Omitted--Inapplicable. 23 1. Consent of Ernst & Young LLP, Independent Auditors. 24 Omitted--Inapplicable. 27 Financial Data Schedule for the year ended December 25, 1998. 28 Omitted--Inapplicable. 99 Omitted--Inapplicable.
- -------- Footnotes (1) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1988 (No. 1-9037) and incorporated herein by reference. (2) Previously filed with the Securities and Exchange Commission as an Exhibit to Registrant's Report on Form 10-K for the year ended March 27, 1998 and incorporated herein by reference. 92 (3) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Report on Form 8-K dated December 23, 1998 and incorporated herein by reference. (4) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-65988) and incorporated herein by reference. (5) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Form 8-K dated September 20, 1996 and incorporated herein by reference. (6) Previously filed with the Securities and Exchange Commission as an Exhibit to OHM Corporation's Annual Report on Form 10-K for the year ended December 31, 1986 and incorporated herein by reference. (7) Previously filed with the Securities and Exchange Commission as an Exhibit to OHM Corporation's Amendment No. 1 to Registration Statement of Form S- 1, No. 33-8296 and incorporated by reference. (8) Previously filed with the Securities and Exchange Commission as an Exhibit to OHM Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. (9) Previously filed with the Securities and Exchange Commission as an Exhibit to Registrant's Report on Form 8-K dated June 11, 1998 and incorporated herein by reference. (10) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Schedule 14D-1 dated November 3, 1998 and incorporated herein by reference. (11) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Report on Form 8-K dated January 15, 1998. (12) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Schedule 14D-1 (Amendment No. 5) dated February 18, 1998 and incorporated herein by reference. (13) Previously filed with the Securities and Exchange Commission as an Exhibit to OHM Corporation's Report on Form 8-K filed on July 2, 1997 and incorporated herein by reference. (14) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 8-K dated March 12, 1999 and incorporated herein by reference. (15) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 26, 1998 and incorporated herein by reference. (16) Previously filed with the Securities and Exchange Commission as an Exhibit to Registrant's Report on Form 10-K for the year ended March 28, 1997. (17) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 27, 1996 and incorporated herein by reference. (18) Previously filed with the Securities and Exchange Commission as an Exhibit to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference. (19) Previously filed with the Securities and Exchange Commission as an Exhibit to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference. (20) Previously filed with the Securities and Exchange Commission as an Exhibit to OHM Corporation's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (21) Previously filed with the Securities and Exchange Commission as an Exhibit to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. (22) Filed as a management compensation plan or arrangement per Item 14(a)(3) of the Securities Exchange Act. 93 (23) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995 and incorporated herein by reference. (24) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1994 and incorporated herein by reference. (25) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1993 and incorporated herein by reference. (26) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended March 29, 1996 and incorporated herein by reference. (27) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 25, 1998 and incorporated herein by reference. (28) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Proxy Statement dated May 11, 1998 and incorporated herein by reference. (29) Previously filed with the Securities and Exchange Commission as an Appendix to OHM Corporation's Proxy Statement for its Annual Meeting held May 10, 1994 and incorporated herein by reference. (30) Previously filed with the Securities and Exchange Commission as an Exhibit to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992 and incorporated herein by reference. (31) Previously filed with the Securities and Exchange Commission as an Exhibit to the OHM Corporation's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. (32) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 and incorporated herein by reference. (33) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Form S-8 (No. 333-00651) and incorporated herein by reference. (34) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 333-26143) and incorporated herein by reference. (35) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Form 8-K, dated January 17, 1997 and incorporated herein by reference. Reports on Form 8-K 1. Current report on Form 8-K, dated November 3, 1998, reporting under Item 5 relating to the announcement of the Agreement and Plan of Merger entered into among the registrant, Tiger Acquisition Corporation (a newly formed wholly owned subsidiary of the registrant), Flour Daniel GTI, Inc. and Fluor Daniel, Inc. 2. Current report on Form 8-K, dated November 19, 1998, reporting under Item 5 relating to the announcement of the early termination of the 15-day waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 in connection with the registrant's previously announced acquisition of Fluor Daniel GTI, Inc. 3. Current report on Form 8-K, dated December 3, 1998, reporting under Item 2 relating to the merger of Tiger Acquisition Corporation, a wholly owned subsidiary of the registrant, with and into Fluor Daniel GTI, Inc., pursuant to the previously announced Agreement and Plan of Merger, dated as of October 27, 1998 and Item 7 the Financial Statements of Businesses acquired and Pro Forma Financial Information. 4. Current report on Form 8-K, dated December 23, 1998, reporting under Item 5 the completion of all steps necessary to change its name from International Technology Corporation to The IT Group, Inc. and Item 7 Financial Statements of Businesses Acquired in connection with the previously announced acquisition of Fluor Daniel GTI, Inc. 5. Current report on Form 8-K, dated March 8, 1999, reporting under Item 5 the announcement of the Asset Purchase Agreement entered into by the registrant and ICF Kaiser International, Inc. 94 THE IT GROUP, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Balance at Provision Accounts Balance beginning charged written at end of period to income off Other of period ---------- ---------- -------- ------- --------- Nine months ended December 25, 1998: Allowance for doubtful accounts................ $19,026 $1,203 $(3,101) $ 1,830(1) $18,958 Valuation allowance for deferred tax asset...... $31,865 $6,059 $ -- $12,343(5) $50,267 Year ended March 27, 1998: Allowance for doubtful accounts................ $ 2,055 $ 206 $(1,147) $17,912(2) $19,026 Valuation allowance for deferred tax asset...... $ 9,471 $2,252 $ -- $20,142(4) $31,865 Year ended March 28, 1997: Allowance for doubtful accounts................ $ 2,943 $ 304 $(1,208) $ 16(3) $ 2,055 Valuation allowance for deferred tax asset...... $ 4,869 $4,602 $ -- $ -- $ 9,471
- -------- (1) Represents allowance for doubtful accounts recorded on the books of GTI at acquisition. (2) Represents allowance for doubtful accounts at the date of acquisition for business acquired during the twelve months ended March 27, 1998 totaling $18,020 less the allowance for doubtful accounts of $108 relating to the sale of IT's remediation services business. (3) Represents allowance for doubtful accounts at November 1996 for receivables acquired in the purchase of Chi Mei. (4) Represents valuation allowance adjustment relating to the acquisition of OHM Corporation. (5) Represents valuation allowance adjustment relating to the acquisitions of OHM and GTI corporations. 95 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Monroeville, Pennsylvania on the 22nd day of March, 1999. THE IT GROUP, INC. /s/ Anthony J. Deluca By: _________________________________ Anthony J. DeLuca President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Daniel A. D'Aniello Chairman of the Board of March 22, 1999 ______________________________________ Directors Daniel A. D'Aniello /s/ Anthony J. Deluca Director, President and March 22, 1999 ______________________________________ Chief Executive Officer Anthony J. DeLuca and Duly Authorized Officer /s/ Philip B. Dolan Director March 22, 1999 ______________________________________ Philip B. Dolan /s/ E. Martin Gibson Director March 22, 1999 ______________________________________ E. Martin Gibson /s/ James C. McGill Director March 22, 1999 ______________________________________ James C. McGill /s/ Richard W. Pogue Director March 22, 1999 ______________________________________ Richard W. Pogue /s/ Robert F. Pugliese Director March 22, 1999 ______________________________________ Robert F. Pugliese /s/ Charles W. Schmidt Director March 22, 1999 ______________________________________ Charles W. Schmidt /s/ James David Watkins Director March 22, 1999 ______________________________________ James David Watkins /s/ Philip O. Strawbridge Senior Vice President, March 22, 1999 ______________________________________ Chief Administrative Philip O. Strawbridge Officer and Principal Financial Officer /s/ Harry J. Soose Vice President, Finance March 22, 1999 ______________________________________ and Principal Accounting Harry J. Soose Officer
96 EX-10.(II)(4) 2 THIRD AMENDMENT TO CREDIT AGREEMENT Exhibit 10(ii)(4) EXECUTION COPY THIRD AMENDMENT TO CREDIT AGREEMENT This Third Amendment to Credit Agreement dated as of March 5, 1999 (this "Amendment"), is entered into among The IT Group, Inc. (f/k/a International Technology Corporation) (the "Company"), IT Corporation ("ITC"), OHM Corporation ("OHM"), OHM Remediation Services Corp. ("OHM Remediation") and Beneco Enterprises, Inc. ("Beneco"; together with the Company, ITC, OHM and OHM Remediation, the "Borrowers") and the Lenders (as defined below) party hereto, and amends the Credit Agreement dated as of February 25, 1998, as amended and restated as of June 11, 1998 and as further amended pursuant to the First Amendment to Credit Agreement dated as of September 16, 1998 and the Second Amendment to Credit Agreement dated as of October 26, 1998 (as amended hereby and as the same may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement") entered into among the Borrowers, the institutions from time to time party thereto as lenders (the "Lenders"), the institutions from time to time party thereto as issuing banks (the "Issuing Banks"), Citicorp USA, Inc., in its capacity as administrative agent for the Lenders and the Issuing Banks (in such capacity, the "Administrative Agent"), BankBoston, N.A., in its capacity as documentation agent for the Lenders and the Issuing Banks, and Royal Bank of Canada and Credit Lyonnais New York Branch, in their respective capacities as co-agents. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. W I T N E S S E T H: -------------------- WHEREAS, the Company has informed the Administrative Agent that the Company intends (i) to acquire (the "EFM Acquisition") certain assets of the Environmental & Facilities Management operations ("EFM") of ICF Kaiser International, Inc. ("ICF") for a purchase price of (x) approximately $82,000,000, for all assets of EFM other than its interest in the Kaiser-Hill Company, LLC joint venture ("Kaiser Hill"), payable on the date of the consummation of the EFM Acquisition (the "Closing EFM Purchase Price"), (y) approximately $20,000,000 for ICF's interest in Kaiser Hill, which would be payable on (or within 10 days after) the date of the consummation of the EFM Acquisition in the event that CH2M Hill Federal Group, Ltd. does not exercise its right of first refusal to acquire such interest (the "Closing Kaiser Hill Purchase Price"), and (z) a deferred payment of approximately $25,000,000 (the "Deferred Kaiser Hill Purchase Price"; together with the Closing EFM Purchase Price and the Closing Kaiser Hill Purchase Price, the "EFM Purchase Price"), which would be payable in the event certain government contracts of Kaiser Hill were extended or were awarded to Kaiser after a successful rebidding of such contracts and (ii) to acquire (the "Roche Acquisition"; together with the EFM Acquisition, the "Acquisitions") the outstanding capital stock of Roche Ltee Groupe Counseil ("Roche") for a purchase price of approximately $10,000,000 (the "Roche Purchase Price") plus an earn-out of up to an additional $9,200,000 based on certain performance criteria; WHEREAS, the terms of each of the Acquisitions would satisfy the conditions of a Permitted Acquisition (except as otherwise provided herein); WHEREAS, the Company intends to finance the Acquisitions and the fees and expenses to be incurred by the Company in connection therewith and with the financing thereof (the "Transaction Costs") with proceeds from the issuance of senior subordinated notes issued by the Company (the "Subordinated Notes"), the gross proceeds of which are at least $175,000,000 (or, if the Company does not purchase ICF's interest in Kaiser Hill, $150,000,000) but not greater than $250,000,000; WHEREAS, the terms of the Subordinated Notes shall be substantially consistent with the terms thereof set forth on Exhibit B attached hereto and made a part hereof (the "Subordinated Note Term Sheet"); WHEREAS, the Transaction Costs associated with the Acquisitions and the financing provided by the Subordinated Notes are approximately $13,000,000; WHEREAS, with respect to the Acquisitions and the transactions contemplated thereby the Company has, among other things, requested the Requisite Lenders, by amending the Credit Agreement or by otherwise providing their consent, (i) to waive compliance with clause (c) of the definition of Permitted Acquisition in respect of each Acquisition and clause (e) of the definition of Permitted Acquisition in respect of the EFM Acquisition, (ii) to increase the amount of Subordinated Notes that would otherwise be permitted under the terms of the Credit Agreement from $150,000,000 to $250,000,000 and to approve of the terms of such notes, (iii) to permit certain Indebtedness not in excess of Cn.$2,000,000 assumed in connection with the Roche Acquisition to be secured, (iv) to amend certain financial covenants contained in Article X of the Credit Agreement and (v) to amend the definition of Change of Control to permit certain sales by the Carlyle Investors of the 6% Preferred Stock (or Company Common Stock into which such preferred stock may be converted in accordance with its terms); WHEREAS, pursuant to Section 13.07(b) of the Credit Agreement, the consent of the Requisite Lenders is required to modify the Credit Agreement as requested by the Company; NOW, THEREFORE, in consideration of the above premises, the Borrowers and the Lenders party hereto agree as follows: SECTION 1. Amendment to the Credit Agreement. The Credit Agreement --------------------------------- is, effective as of the Amendment Effective Date (as defined below), hereby amended as follows: (a) The definition of "Change of Control" is amended by adding the following proviso immediately prior to the comma at the end of clause (i) thereof: 2 ; provided, however, nothing in this clause (i) shall prohibit the Carlyle -------- ------- Investors from selling 6% Preferred Stock or Company Common Stock (into which the 6% Preferred Stock has been converted in accordance with its terms) from and after any sale by the Company of newly issued shares of Company Common Stock in a public offering or private placement of such shares or in connection with a Permitted Acquisition for which such shares are being issued as part of the purchase price, as long as the number of shares of 6% Preferred Stock (multiplied by the applicable conversion factor of such shares into Company Common Stock) and Company Common Stock sold by the Carlyle Investors at any time thereafter does not exceed the aggregate number of shares of Company Common Stock issued by the Company in such public offering or private placement or in connection with such Permitted Acquisition (b) The definition of "Permitted Subordinated Indebtedness" is amended by replacing the amount "$150,000,000" in clause (i) thereof with the amount "$250,000,000". (c) Section 7.01(a) of the Credit Agreement is amended by inserting the following parenthetical immediately following the phrase "Within thirty (30) days after the end of each fiscal month in each Fiscal Year" at the beginning of such section: (or forty-five (45) days in the case of each such month ending on the last day of a fiscal quarter) (d) Section 9.03 of the Credit Agreement is amended by deleting the "and" at the end of clause (d) thereof, replacing the period at the end of clause (e) thereof with "; and" and adding the following new clause (f) at the end thereof: (f) Liens on the assets of Roche Ltee Groupe Counseil securing Indebtedness permitted under Section 9.01(j)(ii), provided that such ------------------- -------- Indebtedness does not exceed a principal amount of Cn.$2,000,000 at any time. (e) Sections 10.01, 10.02, 10.03 and 10.04 of the Credit Agreement are amended in their entirety to read as follows: 10.01 Minimum Consolidated Net Worth. The Company and its ------------------------------ Subsidiaries shall maintain a Consolidated Net Worth at all times during each period set forth below (commencing on the beginning of the first day of such period through the end of the penultimate day of such period) in an amount not less than the minimum amount set forth opposite such period below; provided, however, in the event the -------- ------- Company or any of its Subsidiaries sells any of the discontinued properties located in northern California, the after-tax equivalent of any loss incurred by the Company and its Subsidiaries in connection with any such sale shall thereafter be excluded in determining Consolidated Net Worth: 3
Period Minimum - ------------------------------------------------------------- ------- The Merger Funding Date to the last day of the First Fiscal $210,000,000 Quarter of Fiscal Year 1999 The last day of the First Fiscal Quarter of Fiscal Year 1999 $214,000,000 to the last day of the Second Fiscal Quarter of Fiscal Year 1999 The last day of the Second Fiscal Quarter of Fiscal Year $217,000,000 1999 to the last day of the Third Fiscal Quarter of Fiscal Year 1999 The last day of the Third Fiscal Quarter of Fiscal Year 1999 $223,000,000 to the last day of the Fourth Fiscal Quarter of Fiscal Year 1999 The last day of the Fourth Fiscal Quarter of Fiscal Year $228,000,000 1999 to the last day of the First Fiscal Quarter of Fiscal Year 2000 The last day of the First Fiscal Quarter of Fiscal Year 2000 $232,000,000 to the last day of the Second Fiscal Quarter of Fiscal Year 2000 The last day of the Second Fiscal Quarter of the Fiscal Year $236,000,000 2000 to the last day of the Third Fiscal Quarter of Fiscal Year 2000 The last day of the Third Fiscal Quarter of the Fiscal Year $243,000,000 2000 to the last day of the Fourth Fiscal Quarter of Fiscal Year 2000 The last day of the Fourth Fiscal Quarter of Fiscal Year $249,000,000 2000 to the last day of the First Fiscal Quarter of Fiscal Year 2001 The last day of the First Fiscal Quarter of Fiscal Year 2001 $254,000,000 to the last day of the Second Fiscal Quarter of Fiscal Year 2001 The last day of the Second Fiscal Quarter of the Fiscal Year $259,000,000 2001 to the last day of the Third Fiscal Quarter of Fiscal Year 2001
4
Period Minimum - ------------------------------------------------------------- ------- The last day of the Third Fiscal Quarter of the Fiscal Year $267,000,000 2001 to the last day of the Fourth Fiscal Quarter of Fiscal Year 2001 The last day of the Fourth Fiscal Quarter of Fiscal Year $274,000,000 2001 to the last day of the First Fiscal Quarter of Fiscal Year 2002 The last day of the First Fiscal Quarter of Fiscal Year 2002 $281,000,000 to the last day of the Second Fiscal Quarter of Fiscal Year 2002 The last day of the Second Fiscal Quarter of the Fiscal Year $287,000,000 2002 to the last day of the Third Fiscal Quarter of Fiscal Year 2002 The last day of the Third Fiscal Quarter of the Fiscal Year $296,000,000 2002 to the last day of the Fourth Fiscal Quarter of Fiscal Year 2002 The last day of the Fourth Fiscal Quarter of Fiscal Year $306,000,000 2002 to the last day of the First Fiscal Quarter of Fiscal Year 2003 The last day of the First Fiscal Quarter of Fiscal Year 2003 $314,000,000 to the last day of the Second Fiscal Quarter of Fiscal Year 2003 The last day of the Second Fiscal Quarter of Fiscal Year $321,000,000 2003 to the last day of the Third Fiscal Quarter of Fiscal Year 2003 The last day of the Third Fiscal Quarter of Fiscal Year 2003 $333,000,000 to the last day of the Fourth Fiscal Quarter of Fiscal Year 2003 The last day of the Fourth Fiscal Quarter of Fiscal Year $344,000,000 2003 to the last day of the First Quarter of Fiscal Year 2004 The last day of the First Fiscal Quarter of Fiscal Year 2004 $353,000,000 to the last day of the Second Fiscal Quarter of Fiscal Year 2004
5
Period Minimum - ------------------------------------------------------------- ------- The last day of the Second Fiscal Quarter of the Fiscal Year $361,000,000 2004 to the last day of the Third Fiscal Quarter of Fiscal Year 2004 The last day of the Third Fiscal Quarter of Fiscal Year 2004 $373,000,000 to the last day of the Fourth Fiscal Quarter of Fiscal Year 2004 The last day of the Fourth Fiscal Quarter of Fiscal Year $386,000,000 2004 to the last day of the First Fiscal Quarter of Fiscal Year 2005 The last day of the First Fiscal Quarter of Fiscal Year 2005 $396,000,000 to the last day of the Second Fiscal Quarter of Fiscal Year 2005 The last day of the Second Fiscal Quarter of Fiscal Year $406,000,000 2005 to the last day of the Third Fiscal Quarter of Fiscal Year 2005 The last day of the Third Fiscal Quarter of the Fiscal Year $420,000,000 2005 to the last day of the Fourth Fiscal Quarter of Fiscal Year 2005 The last day of the Fourth Fiscal Quarter of Fiscal Year $435,000,000 2005 to the last day of the First Fiscal Quarter of Fiscal Year 2006 From and after the last day of the First Fiscal Quarter of $438,000,000 Fiscal Year 2006
10.02 Minimum Fixed Charge Coverage Ratio. The Company and its ----------------------------------- Subsidiaries shall maintain a Fixed Charge Coverage Ratio on a consolidated basis, as determined as of the end of the last day of each fiscal quarter occurring after the Merger Funding Date set forth below, for the four fiscal quarter period (or, if the period from July 1, 1998 to such day is less than four full fiscal quarters, such two or three quarter period, as applicable) ending on such day, of at least the minimum ratio set forth opposite such period:
Fiscal Quarter Minimum Ratio - -------------- ------------- Fourth Fiscal Quarter of Fiscal Year 1998 1.05 to 1.0
6
Fiscal Quarter Minimum Ratio - -------------- ------------- First Fiscal Quarter of Fiscal Year 1999 1.10 to 1.0 Second Fiscal Quarter of Fiscal Year 1999 1.20 to 1.0 Third Fiscal Quarter of Fiscal Year 1999 1.30 to 1.0 Fourth Fiscal Quarter of Fiscal Year 1999 1.30 to 1.0 First Fiscal Quarter of Fiscal Year 2000 1.30 to 1.0 Second Fiscal Quarter of Fiscal Year 2000 1.40 to 1.0 Third Fiscal Quarter of Fiscal Year 2000 1.40 to 1.0 Fourth Fiscal Quarter of Fiscal Year 2000 1.50 to 1.0 First Fiscal Quarter of Fiscal Year 2001 1.50 to 1.0 Second Fiscal Quarter of Fiscal Year 2001 1.50 to 1.0 Third Fiscal Quarter of Fiscal Year 2001 1.50 to 1.0 Fourth Fiscal Quarter of Fiscal Year 2001 1.60 to 1.0 First Fiscal Quarter of Fiscal Year 2002 1.60 to 1.0 Second Fiscal Quarter of Fiscal Year 2002 1.70 to 1.0 Third Fiscal Quarter of Fiscal Year 2002 1.80 to 1.0 Fourth Fiscal Quarter of Fiscal Year 2002 1.90 to 1.0 First Fiscal Quarter of Fiscal Year 2003 through 1.90 to 1.0 the Fourth Fiscal Quarter of Fiscal Year 2003 First Fiscal Quarter of Fiscal Year 2004 2.00 to 1.0 Second Fiscal Quarter of Fiscal Year 2004 2.00 to 1.0 Third Fiscal Quarter of Fiscal Year 2004 and each Fiscal Quarter thereafter 1.00 to 1.0
10.03 Minimum Interest Coverage Ratio. The Company and its ------------------------------- Subsidiaries shall maintain an Interest Coverage Ratio on a consolidated basis, as determined as of the end of the last day of each fiscal quarter set forth below for the four fiscal quarter period (or, if the period from July 1, 1998 to such day is less than four full fiscal quarters, such two or three quarter period, as applicable) ending on such day, of at least the minimum ratio set forth opposite such period: 7
Fiscal Quarter Minimum Ratio - -------------- ------------- Fourth Fiscal Quarter of Fiscal Year 1998 2.00 to 1.0 First Fiscal Quarter of Fiscal Year 1999 2.00 to 1.0 Second Fiscal Quarter of Fiscal Year 1999 2.20 to 1.0 Third Fiscal Quarter of Fiscal Year 1999 2.20 to 1.0 Fourth Fiscal Quarter of Fiscal Year 1999 2.20 to 1.0 First Fiscal Quarter of Fiscal Year 2000 2.30 to 1.0 Second Fiscal Quarter of Fiscal Year 2000 2.50 to 1.0 Third Fiscal Quarter of Fiscal Year 2000 2.60 to 1.0 Fourth Fiscal Quarter of Fiscal Year 2000 2.70 to 1.0 First Fiscal Quarter of Fiscal Year 2001 2.80 to 1.0 Second Fiscal Quarter of Fiscal Year 2001 2.90 to 1.0 Third Fiscal Quarter of Fiscal Year 2001 3.00 to 1.0 Fourth Fiscal Quarter of Fiscal Year 2001 3.10 to 1.0 First Fiscal Quarter of Fiscal Year 2002 3.20 to 1.0 Second Fiscal Quarter of Fiscal Year 2002 3.30 to 1.0 Third Fiscal Quarter of Fiscal Year 2002 and each Fiscal Quarter thereafter 3.50 to 1.0
10.04 Maximum Leverage Ratio. The Company and its Subsidiaries ---------------------- shall maintain a Leverage Ratio on a consolidated basis, as determined as of the end of the last day of each fiscal quarter set forth below for the four fiscal quarter period (or, if the period from July 1, 1998 to such day is less than four fiscal quarters, such two or three quarter period, as applicable) ending on such day (commencing on the beginning of the first day of such period through the end of the last day of such period) of not more than the maximum ratio set forth opposite such period:
Fiscal Quarter Minimum Ratio - -------------- ------------- Fourth Fiscal Quarter of Fiscal Year 1998 5.20 to 1.0 First Fiscal Quarter of Fiscal Year 1999 5.80 to 1.0 Second Fiscal Quarter of Fiscal Year 1999 5.30 to 1.0 Third Fiscal Quarter of Fiscal Year 1999 4.90 to 1.0 Fourth Fiscal Quarter of Fiscal Year 1999 4.50 to 1.0
8
Fiscal Quarter Minimum Ratio - -------------- ------------- First Fiscal Quarter of Fiscal Year 2000 4.20 to 1.0 Second Fiscal Quarter of Fiscal Year 2000 3.90 to 1.0 Third Fiscal Quarter of Fiscal Year 2000 3.70 to 1.0 Fourth Fiscal Quarter of Fiscal Year 2000 3.50 to 1.0 First Fiscal Quarter of Fiscal Year 2001 3.40 to 1.0 Second Fiscal Quarter of Fiscal Year 2001 3.30 to 1.0 Third Fiscal Quarter of Fiscal Year 2001 3.20 to 1.0 Fourth Fiscal Quarter of Fiscal Year 2001 3.00 to 1.0 First Fiscal Quarter of Fiscal Year 2002 2.90 to 1.0 Second Fiscal Quarter of Fiscal Year 2002 2.80 to 1.0 Third Fiscal Quarter of Fiscal Year 2002 2.60 to 1.0 Fourth Fiscal Quarter of Fiscal Year 2002 and each Fiscal Quarter thereafter 2.50 to 1.0
provided, however, that in the event a Permitted Acquisition shall have -------- ------- been consummated during any above-referenced two, three or four fiscal quarter periods, the Leverage Ratio shall be calculated including, on an historical, pro forma consolidated basis giving effect to the subject --- ----- Permitted Acquisition for such fiscal quarter period. (f) Section 10.07 of the Credit Agreement is amended in its entirety to read as follows: 10.07 Maximum Capital Expenditures. The Company shall not, and ---------------------------- shall not permit any of its Subsidiaries to, make or incur Capital Expenditures during any Fiscal Year set forth below in excess of the maximum amount set forth below opposite such Fiscal Year: Fiscal Year 1998 $20,000,000 Fiscal Year 1999 $26,000,000 Fiscal Year 2000 $29,000,000 Fiscal Year 2001 $31,000,000 Fiscal Year 2002 $32,000,000 Fiscal Year 2003 $33,000,000 Fiscal Year 2004 $35,000,000 Fiscal Year 2005 $36,000,000 Fiscal Year 2006 $38,000,000
9 provided, however, if the maximum amount set forth above opposite any -------- ------- Fiscal Year exceeds the amount of Capital Expenditures made or incurred by the Company and its Subsidiaries on a consolidated basis for such Fiscal Year, then Capital Expenditures made or incurred by the Company and its Subsidiaries on a consolidated basis for the next Fiscal Year may exceed the maximum amount set forth above opposite such next Fiscal Year (but not subsequent Fiscal Years) by the Dollar amount of such excess from the immediately preceding Fiscal Year. SECTION 2. Consents. -------- (a) The Lenders party hereto, constituting the Requisite Lenders, hereby: (i) waive compliance with clause (c) of the definition of Permitted Acquisition in respect of the Acquisitions and clause (e) of the definition of Permitted Acquisition in respect of the EFM Acquisition (it being understood and agreed that, with respect to each Acquisition, the Borrowers shall otherwise comply with all other requirements for a Permitted Acquisition on or prior to the consummation of such Acquisition); and (ii) acknowledge and agree that the Subordinated Notes constitute Permitted Subordinated Indebtedness pursuant to clause (i) of the definition thereof and consent to the terms of the Subordinated Notes as required pursuant to such clause; provided that (A) the terms of the -------- Subordinated Notes are substantially similar to those set forth on the Subordinated Note Term Sheet; (B) the documentation evidencing the Subordinated Notes, including the indenture governing the terms thereof, is satisfactory to the Agents; (C) the proceeds of the Subordinated Notes are used to pay the Roche Purchase Price, the EFM Purchase Price (to the extent payable at the time of the issuance thereof) and the Transaction Costs; (D) the gross proceeds received from the issuance of the Subordinated Notes are not greater than $250,000,000; and (E) the proceeds of the Subordinated Notes in excess of those used to fund payment of the Roche Purchase Price, the EFM Purchase Price (to the extent payable at the time of the issuance thereof) and the Transaction Costs shall be applied to the repayment of Revolving Loans (without effecting any corresponding decrease in the Revolving Credit Commitments). (b) Subject to the following sentence, the Lenders party hereto, constituting the Requisite Lenders, hereby consent to the amendment to the Certificate of Incorporation of the Company changing the name of the Company from "International Technology Corporation" to "The IT Group, Inc." and waive any Event of Default that may have arisen as a result of the failure of the Company to comply with the terms of Section 4(a) of the Borrower Security Agreement to which the Company is a party in connection with such name change. SECTION 3. Conditions Precedent to the Effectiveness of this ------------------------------------------------- Amendment. - --------- 10 (a) This Amendment shall become effective as of the date hereof on the date (the "Amendment Effective Date") when the following conditions precedent have been satisfied: (i) Certain Documents. The Administrative Agent shall have ----------------- received on or before the Amendment Effective Date all of the following, all of which shall be in form and substance satisfactory to the Agents, in sufficient originally executed copies for each of the Lenders: (A) this Amendment executed by the Borrowers and Lenders constituting the Requisite Lenders; (B) an Acknowledgment substantially in the form of Exhibit A attached hereto executed by each Subsidiary Guarantor; (C) an execution copy of the acquisition agreements for each Acquisition (the "Acquisition Agreements"); (D) such additional documentation as the Agents or the Requisite Lenders may reasonably require. (ii) Representations and Warranties. Each of the ------------------------------ representations and warranties made by the Borrowers or the Subsidiary Guarantors in or pursuant to the Credit Agreement, as amended by this Amendment, and the other Loan Documents to which the Borrowers or any of the Guarantors is a party or by which the Borrowers or any of the Subsidiary Guarantors is bound, shall be true and correct in all material respects on and as of the Amendment Effective Date (other than representations and warranties in any such Loan Document which expressly speak as of a different date). (iii) Corporate and Other Proceedings. All corporate and other ------------------------------- proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Amendment shall be satisfactory in all respects in form and substance to the Administrative Agent and the Revolving Credit Lenders. (iv) No Events of Default. After giving effect to the waiver in -------------------- Section 2(b) hereof, no Event of Default or Default shall have occurred and be continuing on the Amendment Effective Date. (v) Fees Paid. On the Amendment Effective Date the Borrowers --------- shall have paid (A) to each Lender that has executed this Amendment prior to the close of business on March 5, 1999, an amendment fee equal to fifteen basis points (0.15%) of such Lender's outstanding Term Loans and Revolving Credit Commitments, and (B) to the Administrative Agent the fees set forth in that certain fee letter of even date herewith. 11 (b) Notwithstanding anything herein to the contrary, this Amendment shall cease to be effective if any of the following conditions shall not have been satisfied on or prior to the date of the consummation of any Acquisition, or in the case of the EFM Acquisition, the date of the consummation of any portion of such Acquisition on which a portion of the EFM Purchase Price is due and payable (each a "Consummation Date"): (i) Certain Documents. The Administrative Agent shall have ----------------- received on or before the Consummation Date all of the following, all of which shall be in form and substance satisfactory to the Agents, in sufficient originally executed copies for each of the Lenders: (A) the Officer's Certificate required pursuant to clause (C) of the proviso to the definition of "Permitted Acquisition" relating to the such Acquisition, together with such other documentation required pursuant to such definition, including, without limitation, any collateral documentation required to be executed in connection with clause (g) thereof; (B) an execution copy of the indenture governing the terms of the Subordinated Notes (except in connection with the Roche Acquisition, but only if such Acquisition is subject to the proviso set forth in ------- clause (b)(ii) below); and (C) such additional documentation as the Agents or the Requisite Lenders may reasonably require. (ii) Funding for the Acquisitions. The Company shall have ---------------------------- received gross proceeds from the issuance of the Subordinated Notes in an amount of at least $175,000,000 (or, if the Company does not purchase ICF's interest in Kaiser Hill, $150,000,000); provided, -------- however, solely in the case of the Roche Acquisition, if the Company ------- has not received proceeds from the issuance of the Subordinated Notes by March 31, 1999, then this condition shall be satisfied in the event, after giving effect to the consummation of the Roche Acquisition, the Revolving Credit Availability on the Consummation Date plus unrestricted cash that is not subject to a Lien in favor of any other Person (other than the Administrative Agent) held by the Borrowers on the Consummation Date is greater than $15,000,000. (iii) Purchase Price; Transaction Costs. The purchase price paid --------------------------------- or to be paid in connection with the assets of EFM (other than ICF's interest in Kaiser Hill) shall not exceed the Closing EFM Purchase Price and the purchase price paid or to be paid for ICF's interest in Kaiser Hill shall not exceed the Closing Kaiser Hill Purchase Price and the Deferred Kaiser Hill Purchase Price. The purchase price paid in connection with the Roche Acquisition shall not exceed the Roche Purchase Price (plus an 12 earn-out of up to an additional $9,200,000 based on certain performance criteria). The Transaction Costs shall not exceed $13,000,000 in the aggregate. (vi) Permitted Acquisition Requirements. All documentation and ---------------------------------- other requirements set forth in the definition of "Permitted Acquisition" (to the extent not waived in this Amendment) shall have been satisfied with respect to the consummation of such Acquisition. (vii) No Event of Default. No Event of Default or Default shall ------------------- have occurred and be continuing on the Consummation Date or would result from the consummation of such Acquisition or the funding of the Subordinated Notes on such date. SECTION 4. Covenants. --------- (a) The Company agrees that it will not amend, supplement or otherwise modify the Acquisition Agreements, except for amendments, waivers or modifications of such terms that do not change the substance of such agreement in any material respect and do not, in the aggregate, materially and adversely affect the interests of the Agents and the Lenders in the Loans, the Loan Documents or the Collateral. (b) The Borrowers agree to deliver to the Administrative Agent within 30 days after the date hereof (i) all UCC filings reflecting the new name of the Company (both new UCC-1s and amendments to each UCC-1 of the Company filed in connection with the Credit Agreement) which are appropriate to preserve the perfection of the security interests granted by the Company to the Administrative under the Borrower Security Agreement to which it is a party and (ii) an Officer's Certificate stating that all such filings have been made. SECTION 5. Representations and Warranties. Each Borrower hereby ------------------------------ represents and warrants to the Lenders that (a) as of the date hereof and after giving effect to the terms of this Amendment, no Event of Default or Default under the Credit Agreement shall have occurred and be continuing and (b) all of the representations and warranties of such Borrower contained in Section 6.01 of the Credit Agreement and in any other Loan Document continue to be true and correct as of the date of execution hereof in all material respects, as though made on and as of such date (other than representations and warranties in any such Loan Document which expressly speak as of a different date). In addition, the Company hereby represents, warrants and covenants to the Lenders that, after giving effect to this Amendment, consummation of each Acquisition will constitute a Permitted Acquisition. SECTION 6. Reference to and Effect on the Loan Documents. --------------------------------------------- (a) Upon the effectiveness of this Amendment, on and after the date hereof, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import, and each reference in the other Loan Documents to the 13 Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended above, all of the terms of the Credit Agreement and all other Loan Documents shall remain unchanged and in full force and effect. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender, any Issuing Bank or the Administrative Agent under the Credit Agreement or any of the Loan Documents, nor constitute a waiver of any provision of the Credit Agreement or any of the Loan Documents. SECTION 7. Fees, Costs and Expenses. ------------------------ (a) The Borrowers agree to pay on demand in accordance with the terms of Section 13.02 of the Credit Agreement all costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Amendment and all other Loan Documents entered into in connection herewith, including the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent with respect thereto. (b) On the Amendment Effective Date the Borrowers agree to pay the fees set forth in Section 3(a)(v) of this Amendment. SECTION 8. Execution in Counterparts. This Amendment may be executed ------------------------- and delivered in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original and all of which taken together shall constitute one and the same original agreement. SECTION 9. Affirmation of Borrower Guaranties. Each of the Borrowers ---------------------------------- hereby consents to the terms of this Amendment in its capacity as a guarantor under the Borrower Guaranty to which it is a party and agrees that the terms of this Amendment shall not affect in any way its obligations and liabilities under its Borrower Guaranty or any other Loan Document to which it is a party, all of which obligations and liabilities shall remain in full force and effect and each of which is hereby reaffirmed. SECTION 10. Governing Law. This Amendment shall be interpreted, and ------------- the rights and liabilities of the parties determined, in accordance with the internal law of the State of New York. IN WITNESS WHEREOF, this Amendment has been duly executed on the date set forth above. THE IT GROUP, INC. (f/k/a INTERNATIONAL TECHNOLOGY CORPORATION) 14 By /s/ Richard R. Conte ----------------------------------- Name: Richard R. Conte Title: Vice President IT CORPORATION By /s/ Richard R. Conte ----------------------------------- Name: Richard R. Conte Title: Vice President OHM CORPORATION By /s/ Richard R. Conte ----------------------------------- Name: Richard R. Conte Title: Vice President OHM REMEDIATION SERVICES CORP. By /s/ Richard R. Conte ----------------------------------- Name: Richard R. Conte Title: Vice President BENECO ENTERPRISES, INC. By /s/ Richard R. Conte ----------------------------------- Name: Richard R. Conte Title: Vice President 15 [SIGNATURE BLOCKS FOR THE LENDERS] CITICORP USA, INC. COMERCIA BANK By /s/ Timothy L. Freeman By /s/ David W. Shirey ------------------------------ ------------------------------ Name: Timothy L. Freeman Name: David W. Shirey Title: Managing Director Title: Assistant Vice President BANKBOSTON, N.A. CYPRESSTREE INVESTMENT PARTNERS II, Ltd. By: CypressTree Investment Management Company, Inc., as Portfolio Manager By /s/ Paul F. Hardiman By /s/ Jeffrey W. Heuer ------------------------------ ------------------------------ Name: Paul F. Hardiman Name: Jeffrey W. Heuer Title: Division Executive Title: Principal CREDIT LYONNAIS FLEET BANK, N.A. NEW YORK BRANCH By /s/ Attila Koc By /s/ Christopher Mayruse ------------------------------ ------------------------------ Name: Attila Koc Name: Christopher Mayruse Title: Senior Vice President Title: Vice President ROYAL BANK OF CANADA FLEET BUSINESS CREDIT CORPORATION By /s/ John J. D'Angelo By /s/ Wesley Manus ------------------------------ ------------------------------ Name: John J. D'Angelo Name: Wesley Manus Title: Manager Title: Assistant Vice President AG CAPITAL FUNDING PARTNERS, L.P. THE INDUSTRIAL BANK OF JAPAN, By Angelo, Gordon & Co., L.P. as LIMITED Investment Advisor By /s/ Jeffrey H. A By /s/ Takuya Honjo ------------------------------ ------------------------------ Name: Jeffrey H. A Name: Takuya Honjo Title: Managing Director Title: Senior Vice President ALLSTATE LIFE INSURANCE COMPANY KEYBANK NATIONAL ASSOCIATION By /s/ Robert B. Bodett By /s/ David J. Janus ------------------------------ ------------------------------ Name: Robert B. Bodett Name: David J. Janus Title: Authorized Signatory Title: SVP By /s/ Patricia W. Wilson KISLAK NATIONAL BANK ------------------------------ By: ING CAPITAL ADVISORS, INC., Name: Patricia W. Wilson as Investment Advisor Title: Authorized Signatory By /s/ Michael J. Campbell ------------------------------ ALLIANCE CAPITAL MANAGEMENT L.P. Name: Michael J. Campbell as Manager on behalf of ALLIANCE Title: Senior Vice President & CAPITAL FUNDING, L.L.C. by: Portfolio Manager ALLIANCE CAPITAL MANAGEMENT L.P. CORPORATION, General Partner of KZH CRESCENT-2 LLC Alliance Capital Management L.P. By /s/ Virginia Conway By /s/ Kenneth G. Ostmann ------------------------------ ------------------------------ Name: Virginia Conway Name: Kenneth G. Ostmann Title: Authorized Agent Title: Vice President KZH CYPRESSTREE-1 LLC ARCHIMEDES FUNDING LLC By: ING CAPITAL ADVISORS, INC., By /s/ Virginia Conway as Collateral Manager ------------------------------ Name: Virginia Conway By /s/ Michael J. Campbell Title: Authorized Agent ------------------------------ Name: Michael J. Campbell Title: Senior Vice President & KZH HIGHLAND-2 LLC Portfolio Manager By /s/ Virginia Conway ARCHIMEDES FUNDING II, LTD. ------------------------------ By: ING CAPITAL ADVISORS, INC., Name: Virginia Conway as Collateral Manager Title: Authorized Agent By /s/ Michael J. Campbell ------------------------------ KZH SOLEIL LLC Name: Michael J. Campbell Title: Senior Vice President & By /s/ Virginia Conway Portfolio Manager ------------------------------ Name: Virginia Conway Title: Authorized Agent BANCO ESPIRITO SANTO E COMERCIAL DE LISBOA, NASSAU BRANCH KZH SOLEIL-2 LLC By /s/ Terry R. Hull ------------------------------ By /s/ Virginia Conway Name: Terry R. Hull ------------------------------ Title: Senior Vice President Name: Virginia Conway Title: Authorized Agent By /s/ Andrew M. Orsen ------------------------------ Name: Andrew M. Orsen Title: Vice President ML CLO XX PILGRAM AMERICA (CAYMAN) LTD. BHF BANK AKTIENGESELLSCHAFT By: Pilgram Investments, Inc. as its Investment Manager By /s/ Dan D By /s/ Robert L. Wilson ------------------------------ ------------------------------ Name: Dan D Name: Robert L. Wilson Title: AVP Title: Vice President By /s/ Robert Nowak ------------------------------ THE MITSUBISHI TRUST AND BANKING Name: Robert Nowak CORPORATION Title: AT By /s/ Beatrice E. Kossodo BALANCED HIGH YIELD FUND I LIMITED ------------------------------ as a Lender Name: Beatrice E. Kossodo By: BHF-BANK AKTIENGESELLSCHAFT Title: Senior Vice President acting through its New York Branch, as attorney-in-fact MOUNTAIN CLO TRUST By /s/ Dan D ------------------------------ By /s/ Kazoyoki Nishimura Name: Dan D ------------------------------ Title: AVP Name: Kazoyoki Nishimura Title: Authorized Signatory By /s/ Robert Nowak ------------------------------ PAMCO CAYMON LTD. Name: Robert Nowak By: Highland Capital Management, L.P. Title: AT as Collateral Manager By /s/ Mark K. Okada CFA THE BANK OF NOVA SCOTIA ------------------------------ Name: Mark K. Okada By /s/ F.C.B. Ashby Title: Executive Vice President ------------------------------ Name: F.C.B. Ashby Title: Senior Manager Loan Operations OCTAGON LOAN TRUST by Octagon Credit Investos, as Manager BANK POLSKA KASA OPIEKI S.A. PEKAO S.A. GROUP, By /s/ Joyce C. DeLucca NEW YORK BRANCH ------------------------------ Name: Joyce C. DeLucca By /s/ Harvey Winter Title: Managing Director ------------------------------ Name: Harvey Winter Title: Vice President PNC BANK, NATIONAL ASSOCIATION By /s/ William V. Armitage ------------------------------ Name: William V. Armitage Title: Vice President SENIOR DEBT PORTFOLIO BY BOSTON MANAGEMENT AND RESEARCH AS INVESTMENT ADVISOR By /s/ Payson F. Swaffield ------------------------------ Name: Payson F. Swaffield Title: Vice President SOCIETE GENERALE By /s/ Salvatore Galatioto ------------------------------ Name: Salvatore Galatioto Title: Managing Director UNION BANK OF CALIFORNIA By /s/ A. Pasha Moghaddam ------------------------------ Name: A. Pasha Moghaddam Title: Vice President 16 EXHIBIT A ACKNOWLEDGMENT -------------- Reference is hereby made to the Subsidiary Guaranties (as defined in the Credit Agreement) to which each of the undersigned is a party. Each of the undersigned hereby consents to the terms of the foregoing Third Amendment to Credit Agreement and agrees that the terms thereof shall not affect in any way its obligations and liabilities under the undersigned's Subsidiary Guaranty or any other Loan Document, all of which obligations and liabilities shall remain in full force and effect and each of which is hereby reaffirmed. GRADIENT CORPORATION By /s/ Richard R. Conte ----------------------------------- Title: Treasurer IT-TULSA HOLDINGS, INC. By /s/ Richard R. Conte ----------------------------------- Title: Treasurer IT E&C OPERATIONS, INC. By /s/ Richard R. Conte ----------------------------------- Title: Treasurer PACIFIC ENVIRONMENTAL GROUP, INC. By /s/ Richard R. Conte ----------------------------------- Title: Treasurer UNIVERSAL PROFESSIONAL INSURANCE COMPANY By /s/ Richard R. Conte ----------------------------------- Title: Treasurer 17 EX-10.(II)(15) 3 SHARE PURCHASE AGREEMENT Exhibit 10(ii)(15) SHARE PURCHASE AGREEMENT ------------------------ MEMORANDUM OF AGREEMENT made on the 5th day of February, 1999, BY AND BETWEEN: The persons listed in Exhibit "A" hereto, each of ----------- whom herein represented by Mr. Michel Labbe, its, his or her lawful mandatary, duly authorized for all of the purposes hereof, other than Mr. Michel Labbe who is also herein acting on his own behalf (each, a "Vendor"); AND: IT Holdings Canada, Inc., a corporation incorporated under the Laws of the Province of New Brunswick, with its registered office at 44 Chipman Hill, 10th Floor, St. John, New Brunswick, E2L 4S6, herein acting and represented by Mr. James M. Redwine, Assistant-Secretary (the "Purchaser"); AND INTERVENED TO BY: The IT Group, Inc., a corporation incorporated under the Laws of the State of Delaware, herein acting and represented by Mr. James M. Redwine, Senior Corporate Counsel and Assistant-Secretary, Corporate Development ("ITX"). WHEREAS, prior to the Reorganization, Vendors and certain other Persons own all of the issued and outstanding shares of Corporoche Canada Inc. (the "Corporation") and the Corporation owns all of the issued and outstanding shares of Roche Ltee, Groupe Conseil/Roche Ltd., Consulting Group ("Roche"); WHEREAS, pursuant to the Reorganization, Roche will amalgamate with 3559076 Canada Inc. ("NewCo 1") to form Roche Ltee, Groupe Conseil / Roche Ltd., Consulting Group ("New Roche"), all of the issued and outstanding shares of which to be owned by Vendors; AND WHEREAS Purchaser, a wholly-owned subsidiary of ITX, wishes to purchase, and Vendors wish to sell, all of the issued and outstanding shares of New Roche. NOW, THEREFORE, THIS AGREEMENT WITNESSETH THAT, in consideration of the mutual covenants herein contained, it is agreed by and between the Parties as follows: -2- ARTICLE I INTERPRETATION -------------- 1.1 Definitions. Where used herein or in any amendments hereto or in any ----------- communication required or permitted to be given hereunder, the following terms shall have the following meanings, respectively, unless the context otherwise requires: 1.1.1 "Accounts Receivable" shall mean all accounts receivable, trade accounts, notes receivable, book debts, holdbacks receivable, deposits and other debts due or accruing due to Roche or any Subsidiary. 1.1.2 "Affiliate" shall have the meaning ascribed thereto in the Canada Business Corporations Act. 1.1.3 "Agreement" shall mean this Share Purchase Agreement and all instruments supplemental hereto or in amendment or confirmation hereof; "herein", "hereof", "hereto", "hereunder" and similar expressions mean and refer to this Agreement and not to any particular Article, Section or other subdivision; "Article", "Section or other subdivision of this Agreement means and refers to the specified Article, Section or other subdivision of this Agreement. 1.1.4 "Ancillary Agreements" shall mean the Non-Competition Agreements and any other agreements executed by the Parties in connection with the transactions contemplated herein. 1.1.5 "Associated Companies" shall mean the corporations, companies, partnerships, joint ventures and other Persons in which the Corporation owns, directly or indirectly, fifty percent (50%) or less of the shares, voting interests, partnership interests or economic interests and which do not form part of the Excluded Assets, which Persons are listed in Schedule 1.1.5. -------------- 1.1.6 "Assumed Debt" shall mean the US dollar equivalent of the bank debt of Roche relating to its continuing operations based on the reciprocal of the exchange rate outstanding on January 31, 1999 as published in the Wall Street Journal on February 1, 1999 (being the reciprocal of Cdn $1.5110, or US $0.6618), the whole net of actual cash deposits provided they are fully owned by Roche and unrestricted (cash collateral to guarantee letters of credit not being considered restricted). 1.1.7 "Benefit Plans" shall mean all pension, retirement, bonus, profit sharing, compensation, incentive, stock purchase, stock option, stock appreciation, severance, change-of-control, savings, thrift, insurance, medical, hospitalization, disability, death or other similar plan, program, arrangement or practice of the Corporation, Roche or any Subsidiary providing directors, officers, shareholders or employee benefits. 1.1.8 "Bid" shall mean any quotation, bid, tender or proposal which, if accepted or awarded, would lead to a contract with a Governmental Body, including a prime -3- contractor or a higher tier subcontractor to a Governmental Body, for the design, manufacture or sale of products or the provision of services. 1.1.9 "Books and Records" shall mean all books, records, files and documentation (in whatever medium and wherever situated) of the Corporation, Roche (including NewCo 1), the Subsidiaries other than those which deal exclusively with the Excluded Assets; for greater certainty, the phrase "Books and Records" shall include, without limitation, all statements, books, ledgers, records, financial records, accounting records, consents, approvals, authorizations, written Contracts, Tax returns, Employee files, retiree files, insurance policies, Benefit Plans, documentation, evidence or indication of ownership of the Corporation, Roche or the Subsidiaries in and to any assets (other than those which deal exclusively with the Excluded Assets, other than the Management Pension Plan Surplus) and the properties of the Corporation, Roche or the Subsidiaries and all records and correspondence which pertain to the Licenses. 1.1.10 "Business" shall mean the business of Roche or any of the Subsidiaries as conducted by Roche or any of the Subsidiaries including, without limitation, the fields of engineering, construction and construction management, information management, health care consulting and operation and maintenance services, environmental and infrastructure engineering and management, wood processing and forestry, transportation, water management, municipal finances, real estate appraisals, and consulting with respect to the foregoing. 1.1.11 "Capital Contributions" shall mean the capital contributions made by Purchaser pursuant to Section 2.3. 1.1.12 "Closing" shall mean the delivery to Purchaser of the certificates for the Purchased Shares duly endorsed for transfer and the payment to or on behalf of Vendors of the Purchase Price required to be paid on the Closing Date pursuant to Section 2.2 and the payment of the Capital Contributions required to be made pursuant to Section 2.3. 1.1.13 "Contamination" means the presence of any Hazardous Substance in the environment, including the degradation of water, air or soil quality. 1.1.14 "Contracts" shall mean all written or oral contracts, agreements, indentures, instruments, commitments and orders made by or in favour of the Corporation, Roche, any Subsidiary or any Associated Company, as the case may be, including Government Contracts; and "Contract" shall mean any one of them. 1.1.15 "Dealing" means using, generating, manufacturing, refining, treating, transporting, storing, handling, labeling, documenting, recycling, disposing of, releasing, discharging, depositing, transferring, producing or processing of any Hazardous Substance. 1.1.16 "Employees" shall mean all of the employees of Roche and of the Subsidiaries, in each case immediately prior to the Closing Date; for greater certainty, the word "Employees" shall include part-time employees and employees on short-term or -4- long-term disability, workmen's compensation, sick leave, maternity leave, or leave of absence or laid-off employees prior to Closing Date. 1.1.17 "Environmental Laws" means all applicable Laws in existence on or before the date hereof relating to Hazardous Substances, pollution or protection of the environment, human health or safety, including Laws relating to (a) on-site or off-site Contamination, (b) Releases of any Hazardous Substance into the environment and (c) Dealing in any Hazardous Substance. 1.1.18 "Environmental Permits" means, with respect to a Person, all Licenses and any other approvals required for the operation of the business, operations and assets of the Person pursuant to Environmental Laws. 1.1.19 "Equipment" shall mean (a) all machinery, spare parts, equipment, tools, computers, furniture, fixtures, furnishings, office equipment (including, without limitation, word processing, accounting, communication and reproduction equipment) of Roche or any Subsidiary wherever located, and (b) all assignable warranties of any Person covering all or any part of the aforesaid Equipment. 1.1.20 "Excluded Assets" shall mean Metroplan, 2758-3525 Quebec Inc., 174878 Canada Ltd., the Management Pension Plan Surplus and Solutions Technologiques Internationales STI Inc. 1.1.21 "Financial Statements" shall mean (a) the audited financial statements for Roche as at December 31, 1997 consisting of the consolidated balance sheet (on a non-proportional basis) as at such date and the consolidated statement of earnings, the consolidated statement of retained earnings and the consolidated statement of changes in financial position for the period then ended and notes to the financial statements together with the auditors' report thereon, and (b) the unaudited financial statements of Roche for the eleven (11) months ended November 30, 1998 consisting of a consolidated balance sheet (on a non-proportional basis) as at such date, the consolidated statement of earnings, the consolidated statement of retained earnings and the consolidated statement of changes in financial position for the period then ended, copies of which financial statements are annexed hereto as Schedule 1.1.21. When the financial --------------- statements for the (11) eleven-month period ended November 30, 1998 are referenced in this Agreement, it is understood that such statements do not have all of the normal year-end adjustments of audited statements. 1.1.22 "GAAP" shall mean generally accepted accounting principles from time to time approved by the Canadian Institute of Chartered Accountants applicable as at the date on which the relevant calculation has been made, is made or is required to be made, consistently applied in accordance with the past practice of the Person with reference to whom such term is used. 1.1.23 "Government Contract" means any prime contract, subcontracts, teaming agreement or arrangement, joint venture, basic ordering agreement, letter contract, purchase order, delivery order, Bid, change order, arrangement or other commitment of any kind with (a) any Governmental Body, (b) any prime contractor -5- to a Governmental Body or (c) any subcontractor with respect to any contract described in paragraph (a) or (b) of this definition. 1.1.24 "Governmental Body" means any (a) multinational, federal, provincial, state, regional, municipal, local or other government, governmental or public department, central bank, court, tribunal, professional body such as the Ordre des ingenieurs du Quebec, arbitral body, commission, board, bureau, agency, domestic or foreign, (b) any subdivision, agent, commission, board or authority of any of the foregoing or (c) any quasi- governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the foregoing. 1.1.25 "Hazardous Substance" means any substance or material which is or is deemed to be, alone or in any combination, hazardous, hazardous waste, toxic, a pollutant, a deleterious substance, a contaminant, a waste, a source of pollution or contamination or likely to adversely affect the environment or affect human health and safety in any way under any Environmental Laws. 1.1.26 "Initial Payment" shall mean the Canadian dollar equivalent of Ten Million US dollars (US $10,000,000) less the Capital Contributions (based on the reciprocal of the exchange rate published in the Wall Street Journal on February 1, 1999 such reciprocal being Cdn $1.5110). 1.1.27 "Intellectual Property Rights" shall mean (a) all domestic and foreign patents, trademarks, trade names, service marks, copyrights, industrial designs, trade secrets, processes, inventions, know-how, recipes, manuals, technology, customer and supplier lists, formulas, franchises, licenses, rights-to-use, drawings, specifications for products, materials and equipment, process development, manufacturing information, quality control information, performance data, plant service information, computer software, operating systems and other intellectual property, in each case whether registered or unregistered and (b) all registrations and applications for registration of the aforesaid Intellectual Property Rights. 1.1.28 "Inventory" shall mean all inventories, finished goods, work-in- progress, raw materials, operating supplies, shipping supplies, maintenance items and advertising materials, in each case on hand, in transit, ordered but not delivered, warehoused or wherever situated, of Roche, the Subsidiaries and the Associated Companies. 1.1.29 "Laws" shall mean (a) all laws, statutes, codes, ordinances, orders, decrees, rules, regulations, and municipal by-laws, whether domestic, foreign or international, (b) all judgments, orders, writs, injunctions, rulings, decrees and awards of any Governmental Body, and (c) all policies, practices and guidelines of any Governmental Body having the force of law or which are considered by such Governmental Body as requiring compliance as if having the force of law, which, in each of the above cases, binds or affects the Party or Person referred to in the context in which such word is used. 1.1.30 "Licenses" shall mean permits, licenses, certificates of compliance, consents, approvals and authorizations of, or registrations with, any Governmental Body. -6- 1.1.31 "Liens" shall mean all hypothecs, mortgages, pledges, privileges, prior claims, liens, security interests, transfers of property in stock, security granted under the Bank Act (Canada), charges, deposits, servitudes, easements, reserves, conditional sale contracts, ownership or title retention agreements, capital leases, occupation rights, encroachments, homologated lines, restrictive covenants, title defects and other encumbrances or rights of any nature whatsoever or however arising. 1.1.32 "Management Pension Plan" means the Regime complementaire de retraite des employes de la direction de Roche Ltee, Groupe-Conseil. 1.1.33 "Management Pension Plan Surplus" shall mean the amount by which the assets of the Management Pension Plan exceed the liabilities of the Management Pension Plan as of the date of its termination, the whole as determined by the plan actuary and approved by the relevant authorities. 1.1.34 "Maximum First EBIT Payment" shall equal one half (1/2) of the amount by which Twenty Million Seven Hundred Thousand US dollars (US $20,700,000) exceeds (a) the Assumed Debt and (b) Ten Million US dollars (US $10,000,000). 1.1.35 "Maximum Second EBIT Payment" shall be an amount equal to the Maximum First EBIT Payment. 1.1.36 "Metroplan" shall mean Societe Metroplan, Societe en commandite, a limited partnership formed under the Laws of the Province of Quebec. 1.1.37 "Non-Competition Agreements" shall mean the non-competition agreements to be entered into by Purchaser, ITX and certain Vendors, which agreements shall be substantially in the forms of Exhibit "C". ----------- 1.1.38 "Parties" shall mean Vendors and Purchaser; and "Party" shall mean either one of them. 1.1.39 "Pembroke Project" shall mean the engineering, procurement and construction of a medium density fiberboard plant by RBW Group (a joint venture of Roche and Bennett & Wright Inc.) pursuant to a Lump Sum Engineering, Procurement and Construction contract between MacMillan Bloedel Pembroke Limited Partnership and RBW Group entered into as of the 29th day of May, 1995, as the same may have been amended from time to time. 1.1.40 "Permitted Encumbrances" means: (a) unregistered Liens for Taxes, assessments or governmental charges not yet due and payable, unregistered Liens for workman's compensation assessments and similar obligations not delinquent; (b) any unregistered Lien vested in any lessor or licensor for rent to become due or for other obligations or acts, the performance of which is required under leases, subleases or licenses, so long as the payment of such rent or the performance of such other obligation or act is not delinquent; -7- (c) unregistered Liens of any employees for salaries or wages earned but not yet payable; and (d) unregistered Liens of unpaid vendors of moveable or personal property, or other similar Liens, in each case arising in the ordinary course of business for charges which are not delinquent. 1.1.41 "Person" shall mean an individual, corporation, company, partnership, joint venture, trust, authority or body or similar organization, and pronouns which refer to a Person shall have a similarly extended meaning. 1.1.42 "Purchase Price" shall mean the sum of the Initial Payment, the First EBIT Payment and the Second EBIT Payment, as the same may be adjusted pursuant to Section 2.4, Section 2.8, Article VI, Article VII or Article XII. 1.1.43 "Purchased Shares" shall mean all of the issued and outstanding shares of New Roche which will remain issued and outstanding on the Closing Date after the Reorganization, which shares will be issued and outstanding in the manner set forth on Exhibit "A". ----------- 1.1.44 "Real Property Leases" shall mean the leases for immoveable and real property made in favour of Roche or any Subsidiary, as lessee or tenant (including the current lease between Roche and Metroplan for the premises located at 3075, chemin des Quatre-Bourgeois, Suite 300, Ste- Foy, Quebec), and all leasehold improvements on, in, over or under such leased immoveables and real property, all of which leases are listed in Schedule 1.1.44. --------------- 1.1.45 "Release", when used as a verb, includes release, pump, pour, empty, eject, issue, seep, exhaust, abandon, bury, incinerate, spill, leak, emit, deposit, discharge, disseminate, leach, migrate, dispose, inject, dump or place into the environment. 1.1.46 "Reorganization" shall mean the transfer of the Excluded Assets (other than with respect to the Management Pension Plan Surplus which shall be dealt with in the manner set forth in Article VII) and the other transactions of Vendors, the other shareholders of the Corporation, the Corporation, Roche, NewCo 1, certain subsidiaries and the Excluded Assets to occur on or prior to the Closing Date, the whole as set forth on Schedule 1.1.46. --------------- 1.1.47 "Subsidiaries" shall mean the corporations, companies, partnerships, joint ventures and other Persons in which Roche owns, directly or indirectly, more than fifty percent (50%) of the shares, voting interests, partnership interests or economic interests and which do not form part of the Excluded Assets, which Persons are listed in Schedule 1.1.47. --------------- 1.1.48 "Tax" and "Taxes" shall mean all taxes, including, without limitation, income tax, provincial health insurance plan premiums, Canada and Quebec pension plan contributions, employment insurance premiums, workman's compensation and other payroll taxes, deductions at source, non-resident withholding, immoveable or real property, municipal, corporation, capital, sales, retail, excise, profits, gross -8- receipts, customs duties, transfer, business, provincial sales and goods and services taxes, including any related penalties, interest and fines. 1.2 Other Defined Terms. In addition to the defined terms in Section 1.1, ------------------- each of the following capitalized terms shall have the meaning ascribed thereto in the corresponding Section: Term Section ---- ------- 1998 Year............................ 6.1 Audit Date........................... 2.7.1 Auditors............................. 2.7 Closing Date......................... 13.1 Closing Balance Sheet................ 2.7.1 Collection Account................... 2.2 Contracted Backlog................... 3.1.38 Corporation.......................... Preamble EBIT................................. 2.5 EBIT Statement....................... 2.7.2 Excess First EBIT.................... 2.6 Excess Second EBIT................... 2.6 First EBIT Payment................... 2.5 Immoveables.......................... 3.1.15 Income Taxes......................... 6.1 Indemnified Party.................... 12.3 Indemnifying Party................... 12.3 ITX.................................. Preamble Laframboise.......................... 2.3.1 Losses............................... 12.1 NBV Target........................... 2.4 Net Uncollected Receivables.......... 2.8 New Roche............................ Preamble NewCo 1.............................. Preamble Notice of Dispute.................... 2.7 Offer................................ 8.2 Offer Period......................... 8.2 Offeror.............................. 8.2 Optioned Assets...................... 8.2 Original Offer....................... 8.2 Pembroke Losses...................... 6.1 Prior Year Offset.................... 6.5 Purchase Price Increase.............. 2.4 Purchase Price Reduction............. 2.4 Purchaser............................ Preamble Roche................................ Preamble Second EBIT Payment.................. 2.6 Statements........................... 2.7 Third-Party Auditors................. 2.7 Third-Party Claim.................... 12.5 -9- Term Section ---- ------- Uncollected Receivables.............. 2.8 VendorCo............................. 8.2 Vendors.............................. Preamble 1.3 Schedules and Exhibits. The following is a list of the Schedules and ---------------------- Exhibits attached hereto and incorporated herein by reference: Schedule 1.1.5 ........... Associated Companies Schedule 1.1.21 ........... Financial Statements Schedule 1.1.44 ........... Real Property Leases Schedule 1.1.46 ........... Reorganization Schedule 1.1.47 ........... Subsidiaries Schedule 2.4 .............. Principles used to Prepare Closing Balance Sheet for NBV Target Schedule 2.5 .............. Principles used to Calculate EBIT Schedule 3.1.6 ............ Defaults Schedule 3.1.7 ............ Authorized and Issued Capital and Title Schedule 3.1.9 ............ Shareholders' and Other Agreements Schedule 3.1.13 ........... Operations of the Corporation Schedule 3.1.14 ........... Liens Schedule 3.1.15 ........... Immoveables Schedule 3.1.17 ........... Places of Business Schedule 3.1.18 ........... Intellectual Property Rights Schedule 3.1.20 ........... Material Contracts Schedule 3.1.22 ........... Guarantees Schedule 3.1.23 ........... Government Contract Exceptions Schedule 3.1.24 ........... Insurance Schedule 3.1.25 ........... Bank Accounts; Powers of Attorney Schedule 3.1.26 ........... Litigation Schedule 3.1.27 ........... Tax Matters Schedule 3.1.28 ........... Licenses; Environmental Permits Schedule 3.1.29 ........... Employment Agreements Schedule 3.1.31 ........... Benefit Plans Schedule 3.1.35 ........... Unusual Transactions Schedule 3.1.38 ........... Contracted Backlog of the Business Schedule 3.1.41 ........... Stand Alone Schedule 4.4.12 ........... Liens on Purchased Shares Exhibit "A" ............... Vendors, Purchased Shares, Share of Purchase Price and Indemnification Cap Exhibit "B" ............... Forms of Non-Competition Agreements Exhibit "C" ............... Form of Opinion of Heenan Blaikie Aubut Exhibit "D" ............... Form of Opinion of Stikeman, Elliott 1.4 Knowledge. Whenever any fact or matter is stated to be to the knowledge --------- of Vendors, or any similar reference, such reference shall mean (a) the actual knowledge of any of Vendors without the obligation of enquiry or investigation, (b) the knowledge that any of the directors of the Corporation or directors of Roche can be expected to have -10- acquired in the normal course of their duties as directors, officers or employees, such directors being Pierre Lacroix, Michel Labbe, Andre Vachon, Pierre Brulotte, Christian Berube, Yves Lortie, Sam Hammad, France Michaud, Jean Beaudoin, Marc-Yvan Cote, Serge Dussault, Jean-Guy Lajoie and Pierre Bertrand, and (c) when used in reference to the Associated Companies, shall mean the actual knowledge only of any Vendor. For purposes of this Agreement, each of the directors shall be deemed to have made enquiry of M. Martel, D. Plante, D. Lortie and P. Croteau with respect to the matters referred to in Article III. 1.5 References to "Roche", etc. Unless otherwise specifically set forth or --------------------------- required by the context, references to "Roche" herein shall refer to Roche prior to the Reorganization and "New Roche" subsequent to the Reorganization. ARTICLE II PURCHASE AND SALE; CAPITAL CONTRIBUTIONS ---------------------------------------- 2.1 Purchase and Sale; Capital Contributions. Upon and subject to the terms ---------------------------------------- and conditions hereof, (a) Vendors shall sell, transfer and assign to Purchaser on the Closing Date, and Purchaser shall purchase from Vendors on the Closing Date, the Purchased Shares held by each such Vendor as set forth in Exhibit "A", ----------- in consideration of the payment by Purchaser of the Purchase Price and (b) and (b) Purchaser shall subscribe for Twelve Million Eight Hundred Twenty-Three Thousand Three Hundred Thirty-Five (12,823,335) Class 1 preferred shares of New Roche, and Vendors shall cause New Roche to issue such shares to Purchaser, in consideration of the payment by Purchaser of the amount of the Capital Contributions to, or to the order of, New Roche as set forth in Section 2.3. 2.2 Payment of the Initial Payment. Purchaser shall satisfy the Initial ------------------------------ Payment by payment of the amount thereof on the Closing Date to Vendors by certified cheque, bank draft or wire transfer made to the order of Michel Labbe in trust and deposited to a collection account to be designated by Vendors (the "Collection Account") for the purpose of distribution to Vendors as agreed among themselves. Purchaser shall not set off or compensate the Initial Payment against any amount owed to it but may set off or compensate the Initial Payment against any amounts paid to Michel Labbe in trust pursuant to the promissory notes of even date issued to him to secure the Initial Payment. 2.3 Payment of Capital Contributions. Purchaser shall satisfy the Capital -------------------------------- Contributions by subscribing for Twelve Million Eight Hundred Twenty-Three Thousand Three Hundred Thirty-Five (12,823,335) Class 1 preferred shares of New Roche at a subscription price of One dollar (Cdn $1.00) per share, for an aggregate subscription price of Twelve Million Eight Hundred Twenty-Three Thousand Three Hundred Thirty-Five dollars (Cdn $12,823,335), of which aggregate subscription price: 2.3.1 an amount of Three Million Five Hundred Thousand dollars (Cdn $3,500,000) being directed by New Roche to be paid to London Guarantee Insurance Company and Four Million dollars (Cdn $4,000,000) being directed by New Roche to be paid to Axa Boreal Insurance Inc. as reimbursements of amounts paid by such bonding companies on behalf of Roche to settle litigation instituted by Robert Laframboise Mechanical Limited and related parties (collectively, "Laframboise") related to the -11- Pembroke Project, in exchange for releases given by such bonding companies to New Roche; and 2.3.2 an amount of Five Million Three Hundred and Twenty-Three Thousand Three Hundred and Thirty-Five Million dollars (Cdn $5,323,335) being directed by New Roche to be paid to Michel Labbe in trust for the purposes of payment of promissory notes given as consideration for the repurchase for cancellation of various classes of shares of the Corporation and New Roche as set forth in steps 3, 4, 12, 17 and 19 of the memorandum of Le Group Mallette Maheu set forth in Schedule 1.1.46, in exchange for full --------------- and final releases from each such shareholder. Purchaser shall not set off or compensate the subscription price for the Capital Contributions against any amounts owed to it but may set off or compensate the Capital Contributions against any amounts paid to the Persons identified in Section 2.3 pursuant to the promissory notes of even date issued to such Persons. 2.4 Purchase Price Adjustment. The Purchase Price shall be reduced, on a ------------------------- dollar-for-dollar basis, (the "Purchase Price Reduction") by the amount, if any, by which the net book value of Roche as shown on the Closing Balance Sheet is less than Nine Million Nine Hundred Twenty-Five Thousand US dollars (US $9,925,000) ("NBV Target"). The Purchase Price shall be increased, on a dollar- for-dollar basis, (the "Purchase Price Increase") by the amount, if any, by which the net book value of Roche as shown on the Closing Balance Sheet is more than the NBV Target. For the purposes hereof, the net book value of Roche shall be converted to US dollars based on the daily noon spot rate of the Bank of Canada on December 31, 1998, being Cdn $1.5305, or US $0.6534. Any Purchase Price Reduction shall be payable by Vendors to Purchaser solely by compensation (deduction and set off) against (a) any First EBIT Payment payable to Vendors, and (b) if the First EBIT Payment is insufficient to cover all or any of the Purchase Price Reduction, then against any Second EBIT Payment payable to Vendors. For greater certainty, if no First EBIT Payment and Second EBIT Payment are payable hereunder, any Purchase Price Reduction shall not be payable by Vendors. Any Purchase Price Increase shall be payable by Purchaser to Vendors by certified cheque, bank draft or wire transfer to the Collection Account on the date the First EBIT Payment is required to be made or, if no First EBIT Payment is made, on the date the First EBIT Payment would have been paid had it been payable. For the purposes hereof and the Closing Balance Sheet, net book value shall (a) exclude the Management Pension Plan Surplus, any assets associated with the Pembroke Project and any associated liabilities to the extent assumed and paid by Vendors up to the date hereof, and any current and deferred income Taxes associated with the Pembroke Project, (b) exclude the effects of the Reorganization, (c) include the reserve for disputed Pembroke-related claims referred to in Section 3.1.36 (if still outstanding on the date of the Closing Balance Sheet), and an equivalent credit in recognition of Vendors' assumption of such claims, (d) include the litigation reserves set forth in Schedule -------- 3.1.26, and (e) incorporate the principles set forth in Schedule 2.4. - ------ ------------ -12- 2.5 First EBIT Payment. Purchaser shall pay to Vendors, within three (3) ------------------ months after the closing of the 1999 financial year, the Maximum First EBIT Payment based on New Roche achieving an earnings before interest and taxes ("EBIT") level of at least Two Million Seven Hundred Thousand US dollars (US $2,700,000) during the twelve (12) month period ending December 1999 (the "First EBIT Payment"). The First EBIT Payment will be reduced proportionally for any 1999 EBIT performance level less than Two Million Seven Hundred Thousand US dollars (US $2,700,000) with fifty-six percent (56%) of the Maximum First EBIT Payment paid if 1999 EBIT equals One Million Five Hundred Thousand US dollars (US $1,500,000) and zero paid if 1999 EBIT is less than One Million Five Hundred Thousand US dollars (US $1,500,000). The 1999 EBIT performance will be determined from the EBIT Statement for the year ending December 1999. The First EBIT Payment shall be payable by Purchaser (a) by compensation against any Purchase Price Reduction, then, as to any balance, (b) by certified cheque, bank draft or wire transfer in the amount of such balance to the Collection Account, for the purpose of distribution to Vendors as agreed among themselves, within ten (10) calendar days of the date on which the EBIT Statement for the twelve (12) month period to end December 1999 becomes final and binding on the Parties. For the purposes hereof, EBIT shall (a) exclude any effect on earnings of the Pembroke Project to the extent the same are for the benefit of or actually assumed and paid for by Vendors pursuant to this Agreement, (b) be net of any sums paid or accrued pursuant to any New Roche incentive compensation plan, (c) exclude any debt, liability, expense, write-off or reserve to the extent the same constituted Losses for which Purchaser has actually been indemnified pursuant to Article XII (including as a result of a breach of Section 3.1.35), or to the extent there has been any other Purchase Price reduction hereunder, (d) include any reversal during the applicable period of reserves taken on the Closing Balance Sheet in accordance with Section 2.9, (e) be converted to US dollars by using the average daily noon spot rate as published by the Bank of Canada for the calendar year in which the earnings were generated, and (f) incorporate the principles set forth in Schedule 2.5. ------------ 2.6 Second EBIT Payment. Purchaser shall pay to Vendors, within three (3) ------------------- months after the closing of the 2000 financial year, the Maximum Second EBIT Payment based on New Roche achieving an EBIT performance level of at least Three Million Six Hundred Thousand US dollars (US $3,600,000) during the twelve (12) month period ending December 2000 (the "Second EBIT Payment"). The Second EBIT Payment will be reduced proportionally for any 2000 EBIT performance level less than Three Million Six Hundred Thousand US dollars (US $3,600,000) with fifty- six percent (56%) of the Maximum Second EBIT Payment paid if 2000 EBIT equals Two Million US dollars (US $2,000,000) and zero paid if 2000 EBIT is less than Two Million US dollars (US $2,000,000). If, after giving effect to the preceding paragraph, (a) Vendors are entitled to be paid less than the Maximum Second EBIT, and (b) New Roche's EBIT for the 1999 financial year was greater than Two Million Seven Hundred Thousand US dollars (US $2,700,000) (such difference being the "Excess First EBIT"), then the Second EBIT Payment shall be increased by an amount, if any, equal to the difference between (i) the amount the Second EBIT Payment would have been had the Excess First EBIT been earned by New Roche in -13- the 2000 year in addition to the EBIT actually earned in the 2000 year, and (ii) the actual amount of the Second EBIT Payment otherwise earned. If (a) Vendors were paid less than the Maximum First EBIT Payment, and (b) New Roche's EBIT for the 2000 financial year is greater than Three Million Six Hundred Thousand US dollars (US $3,600,000) (such difference being the "Excess Second EBIT"), then the Second EBIT Payment shall be increased by an amount, if any, equal to the difference between (i) the amount the First EBIT Payment would have been had the Excess Second EBIT been earned by New Roche in the 1999 year in addition to the EBIT actually earned in the 1999 year, and (ii) the actual amount of the First EBIT Payment otherwise earned. Any Second EBIT Payment shall be payable by Purchaser first by compensation against any Purchase Price Reduction not previously satisfied, then: (a) by certified cheque, bank draft or wire transfer to the Collection Account, for the purpose of distribution to Vendors as agreed between themselves, within ten (10) calendar days of the date on which the EBIT Statement for the twelve (12) month period to end December 2000 becomes final and binding on the Parties; or (b) in registered, unrestricted and freely tradable shares of common stock, One cent US (US $0.01) par value of ITX; or a combination of both, as Purchaser may elect. Any payment by Purchaser of the Second EBIT Payment by way of shares of common stock of ITX shall be made no later than sixty (60) days after the EBIT Statement for the twelve (12) month period to end December 2000 becomes final and binding on the Parties, shall be subject to obtaining any required approvals under applicable securities Laws and shall not exceed Four Million Six Hundred Thousand US dollars (US $4,600,000) (with any balance payable in cash). Each Vendor shall receive on any such payment a number of shares equal to the quotient obtained by dividing: (a) the amount of such payment which is composed of shares of common stock of ITX payable to such Vendor as agreed among Vendors, by (b) the arithmetic average of the closing price of shares of common stock of ITX on the New York Stock Exchange for the five (5) trading days prior to the date of payment of the Second EBIT Payment, rounded down to the nearest whole share, plus an amount in cash equal to such arithmetic average multiplied by any fraction of a share which was eliminated due to rounding. For greater certainty, if Purchaser is unable to obtain all required approvals under applicable securities Laws, all of such Second EBIT Payment shall be paid in cash within sixty (60) days of the date on which the EBIT Statement for the twelve (12) month period to end December 2000 becomes final and binding on the Parties. 2.7 Closing Balance Sheet and EBIT Statements. Purchaser and Vendors shall ----------------------------------------- jointly instruct Messrs. Mallette Maheu (the "Auditors") to produce and deliver to the Parties: 2.7.1 no later than sixty (60) days after the Closing Date, a consolidated balance sheet showing the assets and liabilities of Roche as at December 31, 1998 (the "Audit Date") based on the audited balance sheet of Roche for the year ended -14- December 31, 1998, adjusted to incorporate the principles set forth in Section 2.4 and any other adjustments specifically set forth in this Agreement (the "Closing Balance Sheet"); and 2.7.2 by February 28 after the applicable financial year, audited consolidated statements of earnings of New Roche for the twelve (12) month periods ending December 1999 (notwithstanding that the 1999 taxation year will be less than twelve (12) months) and December 2000 showing the earnings of New Roche for such periods, including the EBIT of New Roche calculated using the definition thereof set forth in Section 2.5 (each, an "EBIT Statement"). For greater certainty, the 1999 year of Roche used in the preparation of the first EBIT Statement shall be comprised of the year of Roche from January 1, 1999 to the Closing Date and the year of New Roche from the Closing Date to the Tax year end of New Roche in December 1999, notwithstanding the change of control hereunder or the amalgamation to form New Roche or any subsequent amalgamation of New Roche and Purchaser. Such Closing Balance Sheet and EBIT Statements (collectively, the "Statements") shall be prepared in accordance with GAAP, applied on a basis consistent with prior periods and consistent throughout the periods involved. The Closing Balance Sheet shall, either in the Closing Balance Sheet or in the working papers used to prepare it, indicate the amount of all reserves taken, including reserves for accounts receivable, for warranty or project work and each litigation or other claim, the amount of Pembroke Losses (as a separate item) and the amount of Assumed Debt had Assumed Debt been calculated as of such date. The EBIT Statements shall not include charges from Purchaser or ITX for support or other related services unless agreed to by Mr. Anthony J. DeLuca and Mr. Michel Labbe or their respective successors. Purchaser shall be permitted to have its independent auditors and in-house accounting personnel of ITX, review each of the Statements and working papers (which shall be made available in English) used in the preparation thereof, and ask questions to personnel of Vendors and the Auditors with respect to the preparation thereof. Either Party may dispute any matter in a Statement by notice ("Notice of Dispute") to the other Party given within thirty (30) calendar days of the delivery of such Statement to the Parties. Mr. Anthony J. DeLuca or another senior officer of ITX on behalf of Purchaser and Mr. Michel Labbe or another senior representative of Vendors on behalf of Vendors, shall promptly meet within ten (10) calendar days of the date of the Notice of Dispute to use their best efforts to amicably resolve any matters identified in a Notice of Dispute. If any such dispute shall not have been resolved by such individuals within thirty (30) calendar days following the date on which the Notice of Dispute is given, then such unresolved matter shall be referred to Messrs. Deloitte & Touche (Montreal) (the "Third-Party Auditors"). The Parties shall use their reasonable efforts to ensure that the determination of the Third-Party Auditors shall be made within thirty (30) calendar days after the matter has been referred to them. If no Notice of Dispute is given within the thirty (30) day delay prescribed above, upon the expiry of such delay the Statement shall be final and binding on the Parties. If a Notice of Dispute is given in accordance with this Section 2.7, then the Statement, as amended by agreement of the Parties or decision of the Third-Party Auditors, shall be final -15- and binding on the Parties as of and from the date of the agreement of the Parties or the decision of the Third-Party Auditors, as the case may be. The fees and disbursements of the Auditors shall be paid by New Roche. The fees and disbursements of any Third-Party Auditors will be shared equally by Purchaser, on the one hand, and Vendors, on the other hand. 2.8 Accounts Receivable. Purchaser shall cause New Roche and each Subsidiary ------------------- to use its reasonable efforts to collect all Accounts Receivable reflected on the Closing Balance Sheet. Contemporaneously with the delivery of the Closing Balance Sheet, Vendors shall deliver to Purchaser a list of all such Accounts Receivable reflected on the Closing Balance Sheet, and details related thereto including reserves reflected on the Closing Balance Sheet. Any amounts collected by New Roche or any Subsidiary from any debtor of such Accounts Receivable shall be imputed firstly to the oldest Accounts Receivable from such debtor; provided that if a payment of any of the Accounts Receivable is contested, in whole or in part, by the debtor thereof, then any amounts collected by New Roche or the Subsidiary from such debtor shall be imputed to the next oldest uncontested Account Receivable from such debtor. Purchaser shall have no obligation to cause New Roche or any Subsidiary to institute suit to collect any such Accounts Receivable. Purchaser shall use its reasonable efforts to ensure that New Roche and the Subsidiaries do not compromise any Accounts Receivable without Vendors' consent. Purchaser and Vendors may agree to compromise Accounts Receivable if each of Mr. Anthony J. DeLuca and Mr. Michel Labbe, or their respective successors, agree that it is in the best interests of New Roche or any Subsidiary to do so and agree on to how such compromise will require amendments to the application of this Section or any other provision of this Agreement. If any Accounts Receivable remain uncollected on (i) the date the First EBIT Payment, if any, is required to be made and such Accounts Receivable are required to be written-off under GAAP on or before such date or, in any case, (ii) the date the Second EBIT Payment, if any, is required to be made (the "Uncollected Receivables"), then the amount of such Uncollected Receivables, less (a) the amount of any unused reserves provided for Accounts Receivable on the Closing Balance Sheet; (b) the actual income Tax reduction available, if any, to New Roche or the applicable Subsidiary in the year of the write-off of such Uncollected Receivable as a result of such write-off; and (c) the actual amount of GST, QST or other sales Tax reimbursements or credits actually received by New Roche or the Subsidiary as a result of the write off of such Uncollected Receivables, (the net amount of such Uncollected Receivables being the "Net Uncollected Receivables") shall be payable by Vendors to Purchaser solely by compensation (deduction and set off) against the First EBIT Payment, if any, and, if the First EBIT Payment is insufficient, the balance against the Second EBIT Payment, if any. For greater certainty, if no First EBIT Payment and Second EBIT Payment are payable hereunder, no Net Uncollected Receivables shall be payable by Vendors. If, at the time of the payment of such Net Uncollected -16- Receivables, the amount of the actual income Tax benefit is not determinable because the Tax position of New Roche or the applicable Subsidiary has not been finalized, then the Parties shall in good faith estimate such benefit and, upon finalization of such Tax position, the Parties shall settle any outstanding balance promptly. Upon payment by Vendors to Purchaser of the full amount of the Net Uncollected Receivables, Purchaser shall cause New Roche or the Subsidiaries, as the case may be, to assign to such Vendors the Uncollected Receivables for One dollar (Cdn $1.00). If, after assignment of such Uncollected Receivables, New Roche or any Subsidiary receives any payment on account of any such Uncollected Receivables, then Purchaser shall cause New Roche or the Subsidiaries, as the case may be, to forthwith pay over the amount of such payment to such Vendors into the Collection Account. Any such Net Uncollected Receivables which are written off by New Roche or any Subsidiary during either of the periods covered by the EBIT Statements, shall not be deducted from the earnings of New Roche for the purposes of calculating EBIT during such periods, notwithstanding GAAP or Section 2.7. 2.9 Reversal of Reserves. An amount equal to all reserves taken on the -------------------- Closing Balance Sheet which are not used and which are reversed in accordance with GAAP shall, for the purpose of calculating EBIT on the EBIT Statements, be deemed to be added to earnings of New Roche or the appropriate Subsidiary to the extent such reserves are reversed in accordance with GAAP in either of the 1999 year or the 2000 year. Purchaser may request an opinion from the auditors of New Roche to the effect that such reversal was taken at the proper time and for the proper amounts. 2.10 Breakdown of Payments. All cash amounts payable to Vendors pursuant to --------------------- this Agreement shall be paid into the Collection Account for distribution among Vendors as agreed among themselves. 2.11 Assumed Debt. No later than the date on which the Closing Balance Sheet ------------ is delivered to the Parties by the Auditors, Vendors shall have caused the Vice President, Finance of New Roche to deliver to the Parties the calculation of the Assumed Debt as of January 31, 1999. Purchaser may, within thirty (30) days of the delivery of such calculation, require that such calculation be audited by the Auditors. Such calculation, as revised by the Auditors, shall be final and binding on the Parties. The Auditors' fees and disbursements incurred in the course of such work will be paid by Purchaser. 2.12 Allocation of Purchase Price. For purposes of allocation of the Purchase ---------------------------- Price among the Purchased Shares, the US dollar equivalents of the Canadian dollar amounts set forth in Exhibit "A" under "Purchase Price: Preferred" ---------- shall be allocated to the preferred shares, and a percentage of any balance of the Purchase Price shall be allocated to the common shares of each Vendor in the percentage set forth opposite such Vendor's name in the column entitled "% of Share of Purchase Price: Common" in Exhibit "A". ----------- -17- ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ 3.1 Representations and Warranties of Vendors. Vendors solidarily, without ----------------------------------------- the benefit of division and discussion (except as set forth in Section 3.3), represent and warrant to Purchaser as follows and acknowledge that Purchaser is relying upon such representations and warranties in connection with the purchase by Purchaser of the Purchased Shares and that Purchaser would not have entered into this Agreement without such representations and warranties: 3.1.1 Due Incorporation--Each of the Corporation, Roche, the Subsidiaries, ----------------- NewCo1 (prior to the Reorganization) and Vendors which are bodies corporate: (a) is duly incorporated (or amalgamated, as the case may be) or formed, validly existing and up-to-date in its annual filings under the Laws of its jurisdiction of incorporation; and (b) has all necessary corporate or other power and authority to own, lease and operate its properties and to conduct its business as and in the places where such properties are now owned, leased or operated or such business is now conducted. 3.1.2 Due Incorporation of the Associated Companies--Each of the Associated --------------------------------------------- Companies: (a) is duly incorporated or formed and validly existing under the Laws of its jurisdiction of incorporation or formation; and (b) to the knowledge of Vendors, has all necessary corporate or other power and authority to own, lease and operate its properties and to conduct its business as and in the places where such properties are now owned, leased or operated or such business is now conducted. 3.1.3 Due Authorization--Each Vendor has the capacity to execute this Agreement ----------------- and the Ancillary Agreements required to be executed by such Vendor and to perform his, her or its obligations hereunder and thereunder. The execution of this Agreement and the Ancillary Agreements by Vendors and the performance by Vendors of their obligations hereunder and thereunder have been duly authorized by all necessary action on their part. Such execution and performance by Vendors do not require any action or consent of, any registration with, or notification to, any Person on behalf of, by or with respect to Vendors, the Corporation, Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company other than those which will be obtained by the Closing Date. 3.1.4 Enforceability--This Agreement constitutes, and each of the Ancillary -------------- Agreements will constitute upon execution, a legal, valid and binding obligation of Vendors who are parties thereto enforceable against them in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization and similar Laws -18- affecting the enforcement of creditors rights generally and to general equitable principles. 3.1.5 Mandate--The mandate given by each Vendor to Mr. Michel Labbe to execute ------- this Agreement, instruments in connection with this Agreement and the Ancillary Agreements on its, his or her behalf is valid and enforceable and, upon the execution of this Agreement, instruments and the Ancillary Agreements by Mr. Michel Labbe, such agreements and instruments will constitute a legal, binding and enforceable agreement of each Vendor party thereto enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization and similar Laws affecting the enforcement of creditors rights generally and to general equitable principles. 3.1.6 No Conflict--Other than as set forth in Schedule 3.1.6, the execution of ----------- -------------- this Agreement and the Ancillary Agreements, the consummation of the transactions contemplated herein and therein, the performance and compliance by Vendors of their obligations hereunder and thereunder do not and will not: (a) violate, contravene or breach, or constitute a default under, the constating instruments or by-laws of Vendors which are bodies corporate, the Corporation, Roche, any Subsidiary or any Associated Company; (b) violate, contravene or breach, or constitute a default under any Contract, whether by reason of change of control or otherwise, to which any of the Corporation, Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, may be a party, or their properties may be subject, or by which any of them is bound or affected, other than violations, contraventions, breaches or defaults listed in Schedule 3.1.6 and for which appropriate consents or -------------- waivers will have been received on or before the Closing Date; (c) result in, or give any Person the right to seek, or to cause (i) the termination, cancellation, modification, amendment, variation or renegotiation of any Contract (including credit agreements and financial assistance from Governmental Bodies) to which the Corporation, Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies, or any of their properties may be a party or subject or by which they are bound or affected other than benefits offered only to Canadian controlled corporations under Law, or (ii) the acceleration or forfeiture of any term of payment required to be made by the Corporation, Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies, or (iii) the loss in whole or in part of any benefit which would otherwise accrue to the Corporation, Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies other than benefits offered only to Canadian controlled corporations under Law; (d) result in, or require the creation of any Lien upon any of the Purchased Shares or any assets or property of the Corporation, Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies; or -19- (e) violate, contravene or breach any Laws, Licenses, permits, privileges or entitlements. 3.1.7 Authorized and Issued Capital--Upon consummation of the Reorganization, ----------------------------- the authorized capital of New Roche will consist of such classes of shares described in schedule 1 to the memorandum of Le Groupe Mallette Maheu which forms Schedule 1.1.46. --------------- Upon consummation of the Reorganization, the Purchased Shares will represent, prior to the issuance of the Twelve Million Eight Hundred Twenty-Three Thousand Three Hundred Thirty-Five (12,823,335) Class 1 preferred shares pursuant to the Capital Contributions, all of the issued and outstanding shares in the share capital of New Roche and will be registered and beneficially owned by Vendors in the manner set forth in Exhibit "A", and Vendors will transfer good and valid title thereto to ----------- Purchaser, free and clear of all Liens (including the Liens set forth in Schedule 4.4.12), other than any Liens created by or consented to by --------------- Purchaser. The Twelve Million Eight Hundred Twenty-Three Thousand Three Hundred Thirty-Five (12,823,335) Class 1 preferred shares of New Roche to be issued to Purchaser pursuant to the Capital Contributions in Section 2.3 shall, upon payment of the Capital Contributions to the bonding companies identified in Section 2.3.1 and to Mr. Michel Labbe in trust pursuant to Section 2.3.2, be duly authorized, validly issued in the name of Purchaser and fully paid and non-assessable. The authorized capital of Roche consists of six (6) classes of shares designated categories "A" to "F", inclusively, each with no par value, of which nine thousand two hundred ninety (9,290) categories "A" shares (and no more) have been validly subscribed and are issued and outstanding as fully paid and non-assessable and are registered and beneficially owned by the Corporation, free and clear of all Liens. The authorized capital or other ownership interests of the Subsidiaries and Associated Companies consists of the classes of shares or other interests set forth in Schedule 3.1.7, each authorized to be issued up to -------------- the number and with the par value (if any) set forth in Schedule 3.1.7, of -------------- which the number and classes of shares or other ownership interests (and no more) set out therein have been validly subscribed and are issued and outstanding as fully paid and non-assessable and are registered and beneficially owned, free and clear of all Liens by Roche, a Subsidiary or an Associated Company as set forth in Schedule 3.1.7 or, to the knowledge -------------- of Vendors, are registered, free and clear of all Liens and beneficially owned by the other Persons as set forth therein. 3.1.8 Subsidiaries and Associated Companies--The Corporation and Roche do not ------------------------------------- own, directly or indirectly, more than fifty percent (50%) of the shares, voting interests, partnership interests or economic interests in any Person other than the Subsidiaries and, prior to the Reorganization, 2758-3525 Quebec Inc., 174878 Canada Ltd. and Solutions Technologiques Internationales STI Inc. The Corporation and Roche do not own, directly or indirectly, fifty percent (50%) or less of the shares, voting interests, partnership interests or economic interests -20- in any Person other than the Associated Companies and, prior to the Reorganization, Metroplan. 3.1.9 No Options--Except as set forth in Schedule 3.1.9, there is no: ---------- -------------- (a) outstanding security of the Corporation, Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, convertible or exchangeable into any share or shares in the capital of, or other ownership interest in, the Corporation, Roche, any Subsidiary or any Associated Company; (b) outstanding subscription, option, warrant, call, commitment or agreement obligating the Corporation, Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, to issue any share or shares of their capital, any security or securities of any class or kind or any other ownership interests which in any way relate to the authorized or issued capital of, or other ownership interests in, the Corporation, Roche, any Subsidiary or any Associated Company; (c) agreement (other than this Agreement) which grants to any Person the right to purchase or otherwise acquire any Purchased Shares, any of the assets or properties of the Corporation, Roche, the Subsidiaries or, to the knowledge of Vendors, any of the Associated Companies, other than rights of first refusal, piggy-back rights and put and call options for shares, voting interests, partnership interests or economic interests in the capital of the Subsidiaries and the Associated Companies pursuant to the agreements described in Schedule 3.1.9, none of which rights will become enforceable as a -------------- result of the execution of this Agreement or the consummation of the transactions herein; or (d) shareholders agreement, partnership agreement, joint venture agreement, voting trust, voting agreement, pooling agreement or proxy with respect to any shares in the capital of, or other ownership interests in, the Corporation, Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies, other than the agreements set forth in Schedule 3.1.9. -------------- 3.1.10 Books and Records--All of the minute books of the Corporation, Roche and ----------------- the Subsidiaries have been made available to legal counsel to Purchaser. All of such minute books and, to the knowledge of Vendors, all of the minute books and books of partners' proceedings of the Associated Companies, are complete and accurate in all material respects, and contain copies of all by-laws and resolutions passed by the shareholders, directors, partners or joint ventures since the date of their respective incorporations or formations, all of which by-laws and resolutions have been duly passed. The share certificate books, registers of shareholders, registers of partners, registers of transfers and registers of directors of the Corporation, Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, are complete and accurate. -21- The Books and Records of the Corporation, Roche and the Subsidiaries have been maintained in accordance with sound business practices and fairly, accurately and completely present and disclose in accordance with GAAP, the financial position and all material transactions of the Corporation, Roche and the Subsidiaries. 3.1.11 Financial Statements--The Financial Statements fairly, accurately and -------------------- completely present and disclose in all material respects and in accordance with GAAP, (a) the assets, liabilities and obligations (whether accrued, contingent, absolute or otherwise), income, losses, retained earnings, reserves and financial position of Roche and the Subsidiaries, and (b) the results of operations of Roche and the Subsidiaries, all as at the dates and for the periods therein specified. The Closing Balance Sheet shall fairly, accurately and completely present and disclose in all material respects and in accordance with GAAP, the assets, liabilities and obligations (whether accrued, contingent, absolute or otherwise) of Roche and the Subsidiaries as of the Audit Date. 3.1.12 Liabilities--None of the Corporation, Roche or the Subsidiaries has any ----------- liabilities or obligations of any nature whatsoever, whether direct, indirect, absolute, contingent or otherwise which relate to the period ending on or before the date hereof, regardless of when manifested or asserted, ("Liabilities") except for: (a) those Liabilities to be reflected on the Closing Balance Sheet and which had a net impact on the calculation of net book value, (b) those Liabilities incurred during the period between the Audit Date and the date hereof in the usual and ordinary course, and (c) ongoing contractual obligations (other than for breaches or events of default) in the ordinary course. None of the Corporation, Roche or any Subsidiary has any Liabilities of any nature whatsoever whether direct, indirect, absolute, contingent or otherwise, regardless of when manifested or asserted, to or on behalf of any Vendor, or any Person not dealing at arm's length with any Vendors within the meaning of the Income Tax Act (Canada) (including in connection with the Excluded Assets), other than the lease between Roche and Metroplan for the premises located at 3075 chemin des Quatre- Bourgeois, Suite 300, Ste-Foy, Quebec, G1W 4Y4. 3.1.13 Corporation; NewCo 1--Except as set forth in Schedule 3.1.13, the -------------------- --------------- Corporation (a) has no assets and has never had any assets other than shares of Roche, (b) is not, and has never been, bound by any Contracts or guarantees, and does not have, and has never had, any employees, and (c) does not have, and has never had, any operations other than the holding of shares of Roche. NewCo 1 (a) has no assets and never had any assets other than as specifically identified in Schedule 1.1.46, (b) has never been bound by --------------- any Contracts or guarantees, and never had any employees, and (c) never had any operations. -22- 3.1.14 Property--Roche and each of the Subsidiaries, as the case may be, is the -------- sole and unconditional owner of, and has a good and marketable title to, all of the assets reflected on the Financial Statements for the period ended November 30, 1998 (including the Immoveables described in Schedule 3.1.15), or which have been acquired after November 30, 1998 --------------- (other than the Excluded Assets and such assets consumed or disposed of on or after November 30, 1998 in the ordinary course of business and in a manner consistent with past practice), in each case free and clear of all Liens, other than Permitted Encumbrances and other than the Liens set forth in Schedule 3.1.14. --------------- 3.1.15 Immoveables--Schedule 3.1.15 is a true and complete description of all ----------- --------------- immoveable and real property owned by Roche or any Subsidiary (including the immoveable for the centre commercial St-Nicolas owned through La societe en commandite Place du Commerce St-Nicolas) and a brief description of all principal structures thereon and uses thereof (the "Immoveables"). Such Immoveables and all immoveable and real property used by or leased to or from Roche or any Subsidiary and, to the knowledge of Vendors, the immoveable and real property owned by, used by or leased to or from the Associated Companies, does not violate, contravene or breach, and is used in compliance with, any and all Laws. None of Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, has received any notice that any of the Immoveables or any of the aforesaid immoveable or real property (a) is not in compliance with any Laws, (b) is not used in compliance with any Laws, and/or (c) requires work to be done in connection therewith. All real estate Taxes and assessments, and all mutation Taxes, which are due in respect of all such Immoveables and all such immoveable and real property have been paid by Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, to the extent required to be paid by Roche, the Subsidiaries or the Associated Companies, without subrogation or reserve unless contested pursuant to the procedures under applicable Law. No Immoveable is situated in an agricultural zone or zoned for uses other than those carried out thereon. 3.1.16 Condition and Sufficiency of Assets; Inventory--All of the tangible ---------------------------------------------- assets (including the Equipment) of Roche (other than the Excluded Assets), any Subsidiary and, to the knowledge of Vendors, the Associated Companies, are (a) in good operating condition and repair, ordinary wear and tear and aging excepted, (b) not in need of maintenance or repairs (except ordinary or routine maintenance or repairs that are not material in nature or costs, individually or collectively), and (c) adequate and sufficient for the continuing conduct of the Business as now conducted. All Inventory of Roche (other than the Excluded Assets), the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, is of a quality and quantity usable in the ordinary course of business. -23- 3.1.17 Location; Place of Business--None of Roche or any Subsidiary holds, --------------------------- directly or indirectly, any of their property (other than the Excluded Assets prior to the Reorganization) anywhere other than in the locations set forth in Schedule 3.1.17. Roche, the Subsidiaries and, to the --------------- knowledge of Vendors, the Associated Companies, are validly registered to do business in all locations where they are doing business in a manner which requires them to be licensed and, in the case of Roche and the Subsidiaries, all of such locations are listed in Schedule 3.1.17. --------------- 3.1.18 Intellectual Property Rights--Schedule 3.1.18 contains a true and ---------------------------- --------------- complete list of (a) all registered Intellectual Property Rights used by Roche and the Subsidiaries, and (b) all pending applications for Intellectual Property Rights used by Roche (other than those used exclusively in connection with the Excluded Assets) and the Subsidiaries in connection with their business, none of which has been expunged, opposed or held unenforceable. Each of the aforesaid Intellectual Property Rights and, to the knowledge of Vendors, each of the Intellectual Property Rights used by the Associated Companies, is valid, subsisting and enforceable and each of the registrations and applications included in such Intellectual Property Rights is duly recorded in the name of Roche, the Subsidiaries or the Associated Companies, as the case may be. Other than Intellectual Property Rights licensed by way of the purchase of "off the shelf" standard products and other than as disclosed in Schedule 3.1.18, each of Roche, each --------------- Subsidiary and, to the knowledge of Vendors, each Associated Company is the absolute owner and has the sole and exclusive right to hold and use such Intellectual Property Rights, including the right to transfer the same, without making any payment to others or granting rights to others in exchange. None of the Intellectual Property Rights of Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, has been licensed to a third Person except for those license arrangements disclosed in Schedule 3.1.18. The title of Roche, each Subsidiary and, --------------- to the knowledge of Vendors, each Associated Company, to such Intellectual Property Rights is free and clear of any Lien and is not the subject of any conditional sale agreement. To the knowledge of Vendors, there are no assertions or claims challenging the validity of the Intellectual Property Rights of Roche, any Subsidiary or any Associated Company and no Person has requested that any of the foregoing execute a license in favour of such third Person to enable Roche, any Subsidiary or any Associated Company to use such Intellectual Property Rights. To the knowledge of Vendors, no Person is infringing the Intellectual Property Rights of Roche, any Subsidiary or any Associated Company. Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, do not use or infringe the Intellectual Property Rights of any third Person without such Person's consent. Roche has the right to use the name "Roche" in connection with the Business. 3.1.19 Year 2000 Compliance--Roche has established a policy to ensure that the -------------------- information technology systems of Roche and each of the Subsidiaries, including, without limitation, hardware, software and data used, in whole or in part in, or required for, the carrying on of the business of Roche and the Subsidiaries in the -24- manner heretofore carried on, will be designed in a timely fashion to be used prior to, during and after the calendar year 2000 A.D. and to operate during each such time period without error relating to or arising from date-related data. Personnel of Roche have already taken measures under such policy in accordance with the terms of such policy. 3.1.20 Material Contracts--Schedule 3.1.20 contains a true and complete ------------------ --------------- description of all of the following types of written and oral Contracts currently in force to which the Corporation, Roche or any of the Subsidiaries is a party or by which they are bound, other than those described in other Schedules hereto: (a) (i) projects arising in the ordinary course of business and providing for the payment in any twelve (12) month period of Fifty Thousand dollars (Cdn $50,000) or more in one instance or in the aggregate after the Closing Date, or (ii) Contracts not arising in the ordinary course of business; (b) all leases to which Roche or any Subsidiary is a party or its properties are subject which (a) involve immoveable or real property or (b) involve the expenditure or receipt of rent in the amount of Fifty Thousand dollars (Cdn $50,000) or more in any twelve (12) month period after the Closing Date; (c) loan and credit Contracts, hypothecs, mortgages and other agreements evidencing any Lien, guarantees, notes, conditional sales, leasing agreements, sale-lease back agreements or title retention agreements; (d) Licenses relating to Intellectual Property Rights; (e) Government Contracts or Bids; (f) Contracts of non-competition, non-disclosure and/or confidentiality, other than those in the ordinary course of business; (g) Contracts with Persons not dealing at arm's length with the Corporation, Roche, any Subsidiary or any Vendor within the meaning of the Income Tax Act (Canada); and (h) management or service Contracts. 3.1.21 No Default Under Contracts--Each of the Corporation, Roche, each -------------------------- Subsidiary and, to the knowledge of Vendors, each Associated Company, (a) is in good standing and entitled to all benefits under, (b) has performed all obligations required to be performed under, and (c) is not in default under, or in breach of, any Contract. To the actual knowledge of Vendors, no other party to such Contracts is in default or breach thereof and there exists no fact, condition or circumstance which, after notice or lapse of time or both, would result in the default or breach thereof by any such other party. 3.1.22 No Guarantees--None of the Corporation, Roche, any Subsidiary or, to the ------------- knowledge of Vendors, any Associated Company, is a party to or bound either -25- absolutely or on a contingent basis by any comfort letter, understanding or agreement of guarantee, warranty, indemnification, assumption, endorsement, performance bond, letter of credit or any like commitment with respect to the liabilities or obligations of any Person (whether accrued, absolute or otherwise contingent) other than as set forth in Schedule 3.1.22. --------------- 3.1.23 Government Contracts--Except as disclosed in Schedule 3.1.23, with -------------------- --------------- respect to each Government Contract or Bid to which Roche, any Subsidiary or any Associated Company is a party: (a) Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, obtained each Government Contract in compliance with all Laws relating to procurement and ethical business practices; (b) Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, have fully complied with all material terms and conditions and have complied in all material respects with all applicable requirements of Law or agreement, whether incorporated expressly, by reference or by operation of Law; (c) all representations and certifications of Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, were current, accurate and complete in all material respects when made, and Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, have fully complied with all such representations and certifications; (d) no allegation has been made in writing that Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies, are in breach or violation of any statutory, regulatory or contractual requirement or that such breach or violation will not be waived or cannot be cured; (e) no termination for convenience, termination for default, cure notice or show cause notice has been issued with respect to Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies; (f) no cost incurred by Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies, or any of their subcontractors has been questioned or disallowed; and (g) no money in excess of Twenty-Five Thousand dollars (Cdn $25,000) in the aggregate due to Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies, has been withheld or set off or is currently being threatened to be withheld or set off, other than retentions held by a customer in the ordinary course of business that will be ultimately paid. None of Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies, nor any of their directors or officers are (or for the last two (2) years has been), nor has Roche, any Subsidiary or, to the knowledge of Vendors, the Associated Companies, received written notice that any employee of Roche, the -26- Subsidiaries or the Associated Companies is (or for the last two (2) years has been) (i) under administrative, civil or criminal investigation, indictment or information, audit or internal investigation with respect to any alleged irregularity, misstatement or omission regarding a Government Contract or Bid; or (ii) suspended or debarred from doing business with any Governmental Body or declared non- responsible or ineligible for government contracting. None of Roche, the Subsidiaries nor, to the knowledge of Vendors, any of the Associated Companies, has made a voluntary disclosure to any Governmental Body with respect to any alleged irregularity, misstatement or omission arising under or relating to any Government Contract or Bid. To the knowledge of Vendors, there are no circumstances that would warrant the institution of suspension or debarment proceedings or the finding of non- responsibility or ineligibility on the part of Roche, any Subsidiary or any Associated Company for Government Contracts or Bids in the future. Other than as set forth in Schedule 3.1.23, within the last two (2) --------------- years, no Governmental Body or any prime contractor, subcontractor or vendor has asserted any claim or initiated any dispute proceeding which is currently outstanding against Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, nor has Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, asserted in writing any claim or initiated any dispute proceeding, directly or indirectly, against any such party, concerning any Government Contract or Bid. To the knowledge of Vendors, there are no facts upon which such a claim or dispute proceeding may be based in the future that would result in a liability to Roche, any Subsidiary or any Associated Company in excess of Ten Thousand dollars (Cdn $10,000). 3.1.24 Insurance--Roche, each Subsidiary and, to the knowledge of Vendors, each --------- Associated Company, maintains insurance with responsible and reputable insurers in such amounts and covering such risks and with such deductibles as are generally maintained by like businesses. Schedule 3.1.24 is a true and complete list of all insurance policies --------------- currently maintained by or for Roche and the Subsidiaries. The coverage under each such policy is in full force and effect and Roche and the Subsidiaries are in good standing under such policies. To the knowledge of Vendors, the coverage under each insurance policy maintained by or for the Associated Companies is in full force and effect and the Associated Companies are in good standing under such policies. Except as set forth in Schedule 3.1.24, none of Roche, any Subsidiary --------------- or, to the knowledge of Vendors, any Associated Company, has received notice of, or has any knowledge of, any fact, condition or circumstance which might reasonably form the basis of any claim against them which (a) is not fully covered by insurance (subject to standard deductibles) maintained by or for them, or (b) would result in any increase in insurance premiums payable by them. 3.1.25 Bank Accounts; Powers of Attorney--Schedule 3.1.25 sets forth (a) the --------------------------------- --------------- name of each Person with whom Roche or any Subsidiary maintains an account or safety deposit box and the names of all Persons authorized to draw thereon or to have -27- access thereto and (b) the name of each Person holding a general or special power of attorney from Roche or any Subsidiary and a summary of the terms thereof. 3.1.26 Litigation--Except as disclosed in Schedule 3.1.26 (and up to the ---------- --------------- amounts set forth on such Schedule), there are (a) no actions, claims, lien act type proceedings, investigations, arbitrations or other proceedings pending, or to the knowledge of Vendors, threatened against, with respect to, or affecting in any manner, the Corporation, Roche or the Subsidiaries, their properties or the Purchased Shares, (b) to the knowledge of Vendors, notices of deficiency with respect to, or in any manner affecting any of the Corporation, Roche, the Subsidiaries or their properties, and (c) no outstanding judgments, orders, decrees, writs, injunctions, decisions, rulings or awards against, with respect to, or in any manner affecting any of the Corporation, Roche, the Subsidiaries, their properties or the Purchased Shares. The maximum liability of the Corporation, Roche or any Subsidiary for each such matter identified on Schedule 3.1.26, after deduction for any related --------------- insurance coverage, shall not exceed the reserve, if any, specifically indicated in such schedule for such matter or, in the case of the insured litigations identified therein, the aggregate reserve set forth in such schedule, which reserves shall be taken on the Closing Balance Sheet. Except as disclosed in Schedule 3.1.26 (and up to the amounts set forth --------------- on such Schedule), to the knowledge of Vendors there are (a) no actions, claims, lien act type proceedings, investigations, arbitrations or other proceedings pending or threatened against, with respect to, or affecting in any manner, the Associated Companies or their properties, (b) notices of deficiency with respect to, or in any manner affecting any of the Associated Companies or their properties, and (c) no outstanding judgments, orders, decrees, writs, injunctions, decisions, rulings or awards against, with respect to, or in any manner affecting any of the Associated Companies or their properties. To the knowledge of Vendors, the maximum liability of the Associated Companies, for each such matter identified on Schedule 3.1.26, after deduction for any related insurance --------------- coverage, shall not exceed the reserve, if any, specifically indicated in such schedule for such matter or, in the case of the insured litigations identified therein, the aggregate reserve set forth in such schedule, a proportion (based on GAAP) of which reserves shall be taken on the Closing Balance Sheet. Schedule 3.1.26 identifies which of the actions, claims, lien act type --------------- proceedings, investigations, arbitrations or other proceedings therein are not covered by insurance and briefly summarizes the name of the insurer, policy limit and deductible for those that are covered by insurance. None of such actions, claims, lien act type proceedings, investigations, arbitrations or other proceedings which are covered by insurance (a) are subject to reservation of rights by the insurer, or (b) will exhaust the policy limits. 3.1.27 Tax Matters. Other than as set forth in Schedule 3.1.27: ----------- --------------- (a) Computation, Preparation and Payment Each of the Corporation, Roche, each Subsidiary and, to the knowledge of Vendors, each Associated Company, has correctly computed all Taxes, prepared and duly and timely -28- filed all Tax returns, reports, elections, designations and any other related filings required to be filed by it, has timely paid all Taxes which are due and payable and has made provision in the Financial Statements for the period ended November 30, 1998 for the payment of all Taxes, based on an estimated Tax rate of forty percent (40%), which are or may become payable for any taxation year ending on or prior to November 30, 1998, and the Closing Balance Sheet shall have adequate provision made as of the Audit Date for the payment of all Taxes which are or may become payable for any taxation year ending on or prior to the Audit Date. Each of the Corporation, Roche, each Subsidiary and, to the knowledge of Vendors, each Associated Company, has made adequate and timely installments of Taxes required to be made. (b) Accrued Taxes--With respect to any periods for which Tax returns have not yet been required to be filed or for which Taxes are not yet due and payable (including the period between the Audit Date and the date hereof), each of the Corporation, Roche, each Subsidiary and, to the knowledge of Vendors, each Associated Company, has only incurred liabilities for Taxes in the ordinary course of its business and in a manner and at a level consistent with prior periods (other than as set out in the Reorganization). All such Taxes, including for the period between November 30, 1998 and the Audit Date, will be reflected as a current liability on the Closing Balance Sheet. (c) Status of Assessments--All Tax returns of each of the Corporation, Roche and each Subsidiary have been assessed through and including each of the dates set forth in Schedule 3.1.27, and there are no --------------- outstanding waivers of any limitation periods or agreements providing for an extension of time for the filing of any Tax return or the payment of any Tax by any of the Corporation, Roche and each Subsidiary or, to the knowledge of Vendors, any of the Associated Companies or any outstanding objections to any assessment or reassessment of Taxes. Any deficiencies of each of the Corporation, Roche and each Subsidiary and, to the knowledge of Vendors, each Associated Company, proposed as a result of such assessments or reassessments of the Tax returns through and including the dates set forth in Schedule 3.1.27 have been paid and settled. The --------------- maximum liability of Roche for the proposed reassessment of Revenue Canada for the taxation years 1995, 1996 and 1997 will not exceed the reserve therefor in the Closing Balance Sheet. (d) Contingent Tax Liabilities--There are no contingent Tax liabilities or any grounds that could prompt an assessment or reassessment of any of the Corporation, Roche and each Subsidiary or, to the knowledge of Vendors, each Associated Company, including, but without limitation, aggressive treatment of income, expenses, deductions, credits or other amounts in the filing of earlier or current Tax returns, reports, elections, designations or any other related filings, nor has any of the Corporation, Roche and each Subsidiary or, to the knowledge of Vendors, any Associated Company, received any indication from any taxation authorities that an assessment or reassessment of Tax is proposed. -29- (e) Withholdings--Each of the Corporation, Roche and each Subsidiary and, to the knowledge of Vendors, each Associated Company, has withheld from each payment made to any of it past and present shareholders, directors, officers, employees, agents or other Persons whether or not resident in Canada rendering services to them the amount of all Taxes and other deductions required to be withheld and has paid such amounts when due, in the form required under the appropriate legislation, or made adequate provision for the payment of such amounts to the proper receiving authorities. (f) Collection and Remittance--Each of the Corporation, Roche and each Subsidiary and, to the knowledge of Vendors, each Associated Company, has collected from each receipt from any of the past and present customers (or other Persons paying amounts to them) the amount of all Taxes required to be collected and has paid such Taxes (including, for greater certainty, any amount to be collected and remitted under the Excise Tax Act (Canada) and any sales Tax under any applicable provincial legislation) when due, in the form required under the appropriate legislation or made adequate provision for the payment of such amounts to the proper receiving authorities. (g) Assessments--None of any of the Corporation, Roche and any Subsidiary or, to the knowledge of Vendors, any Associated Company, is or will be subject to any assessments, reassessments, levies, penalties or interest with respect to Taxes which will result in any liability on their part in respect of any matter arising on or prior to the date hereof, in excess of the amount to be provided for in the Closing Balance Sheet. (h) Jurisdictions of Taxation--Other than as set forth in Schedule -------- 3.1.27, none of the Corporation, Roche, any Subsidiary or, to the ------ knowledge of Vendors, any Associated Company, has been and is not currently required to file any returns, reports, elections, designations or other filings with any taxation authority located in any jurisdiction outside Canada or outside the province of Quebec. There are no pending, proposed or, to the knowledge of Vendors, threatened claim by any Governmental Body in any jurisdiction in which the Corporation, Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, do not pay Taxes or file Tax returns to the effect that any of them is required to pay Taxes or file Tax returns in such jurisdiction. (i) Related Party--Transactions None of the Corporation, Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, has acquired or had the use of property for proceeds greater than the fair market value thereof from, or disposed of property for proceeds less than the fair market value thereof to, or received or performed services for other than the fair market value from or to, or paid or received interest or any other amount other than at a fair market rate (including any distribution of an asset constituting an Excluded Asset) to or from, any Person with whom it does not deal at arm's length within the meaning of the Income Tax Act (Canada). (j) Research and Development--All research and development investment tax credits ("ITCs") were claimed by each of the Corporation, Roche and each -30- Subsidiary and, to the knowledge of Vendors, each Associated Company, in accordance with the Income Tax Act (Canada) and any applicable provincial legislation and each of the Corporation, Roche and each Subsidiary and, to the knowledge of Vendors, each Associated Company, satisfied, at all times, the relevant criteria and conditions entitling it to such ITCs. All expenses claimed as research and development expenses by each of the Corporation, Roche and each Subsidiary and, to the knowledge of Vendors, each Associated Company, qualified as such. All refunds of ITCs received or receivable by each of the Corporation, Roche and each Subsidiary and, to the knowledge of Vendors, each Associated Company, in any financial year were claimed in accordance with the Income Tax Act (Canada) and any applicable provincial legislation and each of the Corporation, Roche and each Subsidiary and, to the knowledge of Vendors, each Associated Company, satisfied at all times the relevant criteria and conditions entitling it to claim a refund of such ITCs. (k) CCPC Status--Since their dates of incorporation or formation, each of the Corporation, Roche and each Subsidiary and, to the knowledge of Vendors, each Associated Company, have been "Canadian controlled private corporations" within the meaning of the Income Tax Act (Canada) (other than Subsidiaries and Associated Companies which are not bodies corporate). (l) Debt Forgiveness--Each of the Corporation, Roche, each Subsidiary and, to the knowledge of Vendors, each Associated Company, has not at any time benefited from a forgiveness of debt or entered into any transaction or arrangement (including conversion of debt into shares) which would have resulted in the application of sections 80 to 80.04 of the Income Tax Act (Canada). (m) Elections--Other than as set forth on Schedule 3.1.27, each of the --------------- Corporation, Roche, each Subsidiary and, to the knowledge of Vendors, each Associated Company, has not during any of the last three (3) Tax years made any elections or designations for purposes of the Income Tax Act (Canada) including, for greater certainty, any election under section 83 or 85 of the Income Tax Act (Canada) or any relevant provincial taxing statute, or for purposes of any administrative ruling or notices or administrative practices pursuant to the Income Tax Act (Canada) or any such statute. (n) Residence--No Vendor or other shareholder whose shares are to be redeemed or purchased pursuant to the Reorganization, other than Louis Desjardins, is a non-resident of Canada within the meaning of the Income Tax Act (Canada). (o) GST and QST--Roche is a registrant within the meaning of Part IX of the Excise Tax Act (Canada) and Chapter VIII of An Act Respecting the Quebec Sales Tax and its registration numbers are as follows: Federal -- R134915792 Provincial -- 1015403175 -31- (p) Reorganization--Other than as set forth in Schedule 1.1.46 and as --------------- will be reflected on the Closing Balance Sheet, the Reorganization will not result in any present or future Tax liability, reduction of Tax losses or other Tax attributes to the Corporation, Roche, any Subsidiary or Associated Company. 3.1.28 Licenses--Each of Roche, each Subsidiary and, to the knowledge of -------- Vendors, each Associated Company, has, and is in full compliance with and entitled to all of the benefits under, all Licenses necessary or required to conduct its business as presently conducted, and each License has been validly issued and is in full force and effect. Roche, each Subsidiary and, to the knowledge of Vendors, each Associated Company, has not received notice of any event inquiry, investigation or proceeding threatening the validity of such Licenses. Other than as set forth in Schedule 3.1.28, there are no Licenses required to conduct --------------- the business of Roche and the Subsidiaries as presently conducted or the ownership of their properties. No fact, condition or circumstance has occurred to create, and the execution of this Agreement and the transfer of the Purchased Shares hereunder shall not create, any right to terminate, cancel, modify, amend, revoke or expire any such License. 3.1.29 Employee Matters--Each of Roche, each Subsidiary and, to the knowledge ---------------- of Vendors, each Associated Company, has complied with all applicable Laws relating to employment matters, including, without limitation, any provisions thereof relating to wages, hours and collective bargaining. Schedule 3.1.29 is a true and complete list of all written employment, --------------- service, union, agency, consulting, termination and severance agreements entered into by Roche and each Subsidiary with or for any or all of its present directors, officers, Employees and agents. Except as set out in the agreements therein referred to, there are no directors, officers, Employees or agents of Roche or any Subsidiary who are entitled to a specified notice of termination or fixed term of employment or who cannot be dismissed upon such notice as is required by Law. No directors, officers or Employees of Roche or any Subsidiary are entitled to any payment as a result of the transactions contemplated by this Agreement. Except as set out in Schedule 3.1.29, none of Roche or any Subsidiary is --------------- and has never been a party to any collective bargaining agreement. No application for certification of a collective bargaining unit with respect to employees of Roche or any Subsidiary has been instituted or is pending or, to the knowledge of Vendors, threatened. There has not been, in the two (2) prior years to the date hereof, and there is not presently pending or existing any strike, slowdown, picketing, work stoppage, labour arbitration or proceeding in respect of the grievance of any Employee or any past employee or other labour dispute against or affecting Roche or any Subsidiary, or to the knowledge of Vendors, threatened against Roche or any Subsidiary. To the knowledge of Vendors, no fact, condition or circumstance exists which could provide the basis for any work stoppage or other labour dispute. -32- There is no lock-out of any Employee by Roche or any Subsidiary, nor is any such action contemplated by Roche or any Subsidiary. 3.1.30 Practice of the Engineering Profession--Except for non-material -------------------------------------- breaches, no Employee or past employee of Roche or any of the Subsidiaries has, in connection with his or her employment with Roche or any of the Subsidiaries, carried on the practice of the engineering profession in contravention of the Engineers Act, R.S.Q. Ch. I-9, the Professional Code, R.S.Q. Ch. C-26 or any other Law of any jurisdiction. All such Employees who perform any acts which would constitute the practice of the engineering profession as defined in section 3 of the Engineers Act, R.S.Q. Ch. I-9 hold a valid license, and are in good standing, with the Quebec Ordre des ingenieurs du Quebec. 3.1.31 Benefit Plans--Except as set forth in Schedule 3.1.31, none of Roche or ------------- --------------- any Subsidiary is a party to any Benefit Plans. True, complete and up-to-date copies of all Benefit Plans of Roche and the Subsidiaries have been provided to Purchaser. There are no outstanding defaults or violations by Roche or any Subsidiary of any obligation required to be performed by them in connection with any Benefit Plan (which, for greater certainty, includes the Management Pension Plan for the purposes of this Section). There are no actions, claims, investigations, arbitrations, assessments or other proceedings which, to the knowledge of Vendors, are pending or threatened with respect to the Benefit Plans (other than routine claims for benefits) against Roche or any Subsidiary, the funding agent or the fund of such Benefit Plan. No proceeding has been initiated to terminate any Benefit Plan. All Benefit Plans which are required to be registered are duly registered and in good standing with all applicable Governmental Bodies, including Revenue Canada. All Benefit Plans which are funded plans (including, for greater certainty, the Management Pension Plan) are funded in accordance with their rules and all Laws and are fully funded on both a going-concern and a termination basis in accordance with the methods and assumptions utilized in the most recent actuarial report therefor. Except as set forth in Schedule 3.1.31, no Benefit Plan which is not a --------------- pension plan provides post-retirement benefits. 3.1.32 Environmental Matters. --------------------- (a) Compliance with Environmental Laws and Permits--Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, and their respective business, operations and assets, (i) are and have at all times been conducted and used in compliance with all Environmental Laws (including any Environmental Permits) in Quebec, Canada and in all other applicable jurisdictions with environmental regulatory jurisdiction over them and (ii) have obtained all Environmental Permits which are required in order to carry on their respective businesses and operations as presently conducted, and to own or use their respective assets, under all Environmental Laws. No proceeding is pending or, to the knowledge of Vendors, threatened which -33- will review, make subject to limitations or conditions, suspend, revoke, terminate or limit any Environmental Permits of Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies. All Environmental Permits of Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, are listed in Schedule 3.1.28. None of Roche, the Subsidiaries or, to --------------- the knowledge of Vendors, the Associated Companies, or any of their directors or officers has ever (A) been convicted of an offense for non-compliance with any Environmental Law, (B) been fined or otherwise penalized for non-compliance with an Environmental Law, or (C) settled any prosecution for non-compliance with an Environmental Law short of conviction. (b) Environmental Liabilities--None of Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, has incurred or is incurring any liability pursuant to any Environmental Law, including liability arising as a result of Dealing in Hazardous Substances. There is no past or present fact, condition or circumstance relating to Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies, and their respective business, operations and assets that could result in any liability under any Environmental Law in force on the date hereof. (c) Disclosure Regarding Properties--None of the immoveable and real property (including the Immoveables) currently or formerly owned by, used by, leased to or from, or managed, controlled or occupied by Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company, (i) has ever been used by any Person as a landfill site, a waste disposal site, or as a location for the disposal or storage of Hazardous Substances or waste (ii) has ever had any urea formaldehyde foam insulation, asbestos, PCB waste, CFCs, radioactive substances or above ground or underground storage tanks or vessels, active or abandoned, located thereon or thereunder, or (iii) has ever been subject to the Release of a Hazardous Substance. To the knowledge of Vendors, there have been no Releases of Hazardous Substances on property adjacent to immoveable and real property (including the Immoveables) currently or formerly owned by, used by, leased to or from, or managed or controlled by Roche, any Subsidiary or any Associated Company which have migrated or may migrate to such properties. To the knowledge of Vendors, none of such properties is identified by any Governmental Body for investigation pursuant to any Environmental Laws. (d) Disclosure Regarding Waste Disposal--All Hazardous Substances arising from the conduct or use of the business, operations and assets sent off site for disposal, recycling, treatment or other handling have been done in compliance with all Environmental Laws and no such Hazardous Substances have been sent outside of Canada. 3.1.33 Compliance with Laws--Each of the Corporation, Roche, each Subsidiary -------------------- and, to the knowledge of Vendors, each Associated Company, has complied and continues to comply with all Laws. -34- 3.1.34 No Change--Since June 30, 1998, there has not been any material adverse --------- change in the business, operations, properties, prospects or condition of Roche, any Subsidiary or, to the knowledge of Vendors, any Associated Company or any event, condition or contingency that is likely to result in such a material adverse change. 3.1.35 No Unusual Transactions Except as set forth in this Agreement or in the ----------------------- Schedules, including Schedule 3.1.35, since June 30, 1998 (except in --------------- the case of paragraph (t) below), the Corporation, Roche, each Subsidiary and, to the knowledge of Vendors, each Associated Company, has conducted its business in the ordinary course and, without limiting the generality of the foregoing, has not: (a) made or assumed any commitment, obligation or liability which is outside the usual and ordinary course of its business; (b) ceased to operate its properties and to carry on its Business as heretofore carried on or failed to maintain all of its properties, rights and assets consistently with past practices or failed to do any and all things reasonably necessary and within its power to retain and preserve the goodwill of its business; (c) sold or otherwise in any way alienated or disposed of its assets other than in the ordinary course of business and in a manner consistent with past practices; (d) split, combined or reclassified any of its shares or ownership interests, or redeemed, retired, repurchased or otherwise acquired shares in its capital stock or other corporate security or ownership interests, or reserved, declared, made or paid any dividend on its shares or other ownership interests, or made any other distributions or appropriations of profits or capital; (e) issued, sold or otherwise disposed of any shares of its capital stock or any warrants, rights, bonds, debentures, notes or other corporate security; (f) discharged any secured or unsecured obligation or liability (whether accrued, absolute, contingent or otherwise), other than obligations and liabilities discharged in the ordinary course of business and in a manner consistent with past practices; (g) waived or canceled any material claim, account receivable or right outside the ordinary course of business, or made any gift; (h) made any change in the rate or form of compensation or remuneration payable or to become payable to any of the shareholders, directors, officers, employees or agents of the Corporation, Roche or any Subsidiary other in the ordinary course of business; (i) made any change in its accounting principles and practices as utilized in the preparation of -35- the Financial Statements or to be utilized in the preparation of the Closing Balance Sheet (except as agreed to by Purchaser), or granted to any customer any special allowance or discount, or changed its pricing, credit or payment policies, other than in the ordinary course of business; (j) made any capital expenditure other than minor expenditures in the ordinary course of business; (k) made any loan or advance, or assumed, guaranteed or otherwise became liable with respect to the liabilities or obligations of any Person; (l) suffered any extraordinary losses whether or not covered by insurance; (m) modified its constating instruments, by-laws or capital structure; (n) suffered any material shortage or any cessation or interruption of inventory shipments, supplies or ordinary services; (o) removed any director, auditor or accountant or terminated any officer; (p) purchased or otherwise acquired any corporate security or proprietary, participatory or profit interest in any Person; (q) incurred any indebtedness (including off-balance sheet) other than to trade creditors in the ordinary course of business and in a manner consistent with past practices; (r) modified or changed its business organization or its relationship with its suppliers, customers and others having business relations with it; (s) taken any accounting write-offs or reserves outside of its normal accounting practices and consistent with past levels and practices; (t) allowed the Assumed Debt to exceed the Canadian dollar equivalent of Two Million US dollars (US $2,000,000) on the Audit Date or any time since the Audit Date and up to the date hereof had the Assumed Debt been calculated as of any date during such period; or (u) authorized, agreed or otherwise committed to any of the foregoing. Without limitation to the above, during the period between the Audit Date and the date hereof, the operations of Roche, the Subsidiaries and, to the knowledge of Vendors, the Associated Companies, have been conducted only in the ordinary course and no extraordinary item, material liability or reserve has arisen, been identified or taken during such period which would have the effect of reducing the net book value of Roche by more than Twenty Five Thousand US dollars (US $25,000) other than non-material liabilities or operational losses during such period in the ordinary course. 3.1.36 Pembroke Project--Without limitation to the obligation of ---------------- indemnification in Section 12.1.3, none of the Corporation, Roche, the Subsidiaries or the -36- Associated Companies have assets or liabilities associated with the Pembroke Project, except disputed matters with Noront Steel (1981) Limited, Crawford and Murray Limited and Groupe Sani-Mobile Inc., the liablity for which shall not exceed Three Hundred and Eight Thousand dollars (Cdn $308,000) and for which an appropriate reserve will be taken on the Closing Balance Sheet to the extent not resolved by the date thereof. Without limitation to the foregoing, all claims of Laframboise against Roche and RBW Group have been fully settled and released. 3.1.37 Budgets, Etc.--Vendors reasonably believe that the budgets and financial ------------- projections delivered to Purchaser were based upon assumptions that Vendors believed at the time such budgets and financial projections were made, and continue to believe, to be reasonable in all material respects including with respect to forecast earnings and backlog. There is no fact as of the date hereof (other than matters of a general economic or political nature which do not affect Roche or the Subsidiaries uniquely) known to Vendors which materially adversely affects or in the future may (so far as Vendors can foresee as of the date hereof) materially adversely affect the business, operations, affairs, condition (financial or otherwise), properties, assets of Roche and the Subsidiaries taken as a whole which has not been set forth in the Schedules hereto. 3.1.38 Backlog Volume and Margins--Schedule 3.1.38 is a true and correct -------------------------- --------------- listing of the uncompleted portion of the contracted backlog of the Business as of June 30, 1998 (the "Contracted Backlog"). As of June 30, 1998, to the actual knowledge of Vendors (without any deemed knowledge of Vendors otherwise set forth in Section 1.4) there is no unrecognized negative gross margin on any of the Contracted Backlog on those jobs where no work has been performed by Roche or the Subsidiaries. Gross margin will be calculated using Roche's job cost projections consistent with Roche's past practices. 3.1.39 Reorganization--Had the Reorganization and the transactions contemplated -------------- herein occurred on the date hereof, the redemptions and purchases for cancellation, the amalgamation of Roche and NewCo 1 and the declaration of dividends referred to in the Reorganization would have met all "solvency" tests in the Companies Act (Quebec) and the Canada Business Corporations Act applicable to such transactions. Assuming such solvency tests continue to be met on the Closing Date, each of the steps in the Reorganization prior to step 20 will be duly and validly carried out, and in compliance with all constating documents of the corporations who are parties thereto, all Laws and all shareholders' agreements applicable thereto. 3.1.40 No Broker--None of Vendors, the Corporation, Roche, any Subsidiary, or --------- any of their respective directors, officers, employees or agents has employed or incurred any liability to any broker, finder or agent for any brokerage fees, finder's fees, commissions or other amounts with respect to this Agreement or any of the transactions contemplated hereby. 3.1.41 Stand Alone--Except as set forth in Schedule 3.1.41, no part of the ----------- --------------- Business of Roche, the Subsidiaries or, to the knowledge of Vendors, the Associated Companies, is conducted through any Person other than Roche, the Subsidiaries -37- and the Associated Companies. Except as set forth in Schedule 3.1.41, --------------- none of Vendors, the Corporation, Roche or Persons related thereto or the directors, officers or managers thereof or, to the knowledge of Vendors, any Associated Company, or Persons related thereto has any interest in any property, immoveable or real, movable or personal, tangible or intangible, used in or pertaining to the business of Roche, the Subsidiaries and the Associated Companies except that Metroplan owns the immoveable located at 3075, chemin des Quatre-Bourgeois, Ste-Foy, Quebec. 3.1.42 Full Disclosure--No covenant, agreement, obligation, representation or --------------- warranty given by Vendors contained in this Agreement, the Schedules prepared by them, and any certificates or other documents referred to herein or furnished by them to Purchaser pursuant hereto contains any untrue statement of a material fact or omits to state a material fact necessary to make such covenant, agreement, obligation, representation, warranty, Schedule, certificate or other document not misleading. 3.2 Representations and Warranties of Purchaser. Purchaser represents and ------------------------------------------- warrants to Vendors as follows and acknowledges that Vendors are relying upon such representations and warranties in connection with the sale by Vendors of the Purchased Shares and that Vendors would not have entered into this Agreement without such representations and warranties: 3.2.1 Due Incorporation--Each of Purchaser and ITX is duly incorporated and ----------------- validly existing under the Laws of its jurisdiction of incorporation. 3.2.2 Due Authorization--Each of Purchaser and ITX has the necessary corporate ----------------- power and authority to execute this Agreement and the Ancillary Agreements to be entered into by it and to perform its obligations hereunder and thereunder. The execution of this Agreement and the Ancillary Agreements by Purchaser and ITX, as the case may be, and the performance by them of their obligations hereunder and thereunder have been duly authorized by all necessary corporate action on their part. Such execution and performance by them do not require any action or consent of, any registration with, or notification to, any Person, or any action or consent under any Laws to which Purchaser or ITX are subject, other than the filing by ITX within thirty (30) days of the Closing Date of a Notice of Investment under the Investment Canada Act. 3.2.3 Enforceability--This Agreement, and each of the Ancillary Agreements -------------- will, upon execution thereof, constitute a legal, valid and binding obligation of Purchaser and ITX, as the case may be, enforceable against them in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization and similar Laws affecting the enforcement of creditors rights generally and to general equitable principles. 3.2.4 No Conflict--The execution of this Agreement and the Ancillary ----------- Agreements, the consummation of the transactions contemplated herein and therein, the performance and compliance by Purchaser and ITX of its obligations hereunder and thereunder, as the case may be, do not: -38- (a) violate, contravene or breach, or constitute a default under, the constating instruments or by-laws of Purchaser or ITX; or (b) violate, contravene or breach any Laws. 3.2.5 No Broker--None of Purchaser, ITX or any of their directors, officers, --------- employees or agents has employed or incurred any liability to any broker, finder or agent for any brokerage fees, finder's fees, commissions or other amounts with respect to this Agreement or any of the transactions contemplated hereby. 3.2.6 Full Disclosure--No covenant, agreement, obligation, representation or --------------- warranty given by Purchaser contained in this Agreement, the Schedules prepared by it, and any certificates or other documents referred to herein or furnished by it to Vendors pursuant hereto contains any untrue statement of a material fact or omits to state a material fact necessary to make such covenant, agreement, obligation, representation, warranty, Schedule, certificate or other document not misleading. 3.3 Exceptions to Solidary Representations. Notwithstanding the introductory -------------------------------------- paragraph of Section 3.1, the following representations and warranties are given by each Vendor jointly and not solidarily, with respect to itself and not with respect to any other Vendor: Section 3.1.1 with respect, only, to Vendors which are bodies corporate; Section 3.1.3 (other than with respect to actions, consents, registrations or notifications associated with the Corporation, Roche, any Subsidiary or any Associated Company); Section 3.1.4; Section 3.1.6(a) with respect to Vendors which are bodies corporate only; Section 3.1.7 with respect, only, to the title of the Purchased Shares; and Section 3.1.27(n). ARTICLE IV COVENANTS OF VENDORS -------------------- 4.1 Conduct of Business. Vendors shall cause each of the Corporation, ------------------- Roche and each of the Subsidiaries, from the date hereof up to the Closing Date to conduct its business in the ordinary course and in a manner consistent with past practices and, without limiting the generality of the foregoing, Vendors shall cause the Corporation, Roche and each of the Subsidiaries, not to, without the prior written consent of Purchaser (which consent will not be unreasonably withheld) or unless part of the transactions in the Reorganization: 4.1.1 make, assume or discharge any commitment, obligation (capital or otherwise) or liability which is outside the usual and ordinary course of its business in excess of Two Hundred Fifty Thousand dollars (Cdn $250,000) in the cumulative aggregate; 4.1.2 split, combine or reclassify any of its shares, or redeem, retire, repurchase or otherwise acquire shares in its capital stock or other corporate security, or reserve, declare, make or pay any dividend (except as specifically contemplated in this Agreement), or make any other distributions or appropriations of profits or capital; 4.1.3 issue, sell or otherwise dispose of any shares of its capital stock or any warrants, rights, bonds, debentures, notes or other corporate security; -39- 4.1.4 modify its constating instruments, by-laws or capital structure; 4.1.5 purchase or otherwise acquire any corporate security or proprietary, participatory or profit interest in any Person (other than joint ventures pursuant to projects) and other than as disclosed in the Schedules hereto; 4.1.6 conduct any meeting of shareholders (other than meetings considering this Agreement) or directors of the Corporation, Roche or any of the Subsidiaries, or any committee of any of the foregoing Persons (or solicit or take any action by written consent in lieu of any such meeting) without giving at least seventy-two (72) hours prior notice of and providing an agenda or copy of any proposed action (in English) with respect to such meeting(s) or actions, to the Persons specified in Section 14.5.2 hereof, and without allowing a representative of Purchaser to attend (at least telephonically) such meeting(s) and to participate fully in all discussions at such meeting(s); and 4.1.7 authorize, agree or otherwise commit to any of the foregoing. Vendors shall ensure that Roche does not vote its interests in the Associated Companies in a manner inconsistent with the items set forth in this Section 4.1, it being understood, however, that as Roche does not control the Associated Companies, Vendors cannot guarantee that the Associated Companies will not take such actions. 4.2 [Intentionally left blank.] 4.3 [Intentionally left blank.] 4.4 Closing. If each condition set forth at Section 11.2 is (a) performed or ------- complied with, or (b) waived by Vendors, and if this Agreement is not terminated in accordance with Section 11.1, then Vendors shall on the Closing Date: 4.4.1 take, and shall cause New Roche to take, all actions as may be reasonably required by legal counsel for Purchaser to duly and validly transfer the Purchased Shares to Purchaser, including, without limitation, to cause New Roche (a) to make the necessary inscriptions in the registers of New Roche in order to record the transfer of the Purchased Shares in favour of Purchaser, and (b) to deliver to Purchaser, upon the cancellation of the share certificates representing the Purchased Shares, a new certificate in its name representing the Purchased Shares; 4.4.2 deliver to Purchaser at the place of Closing certificates for the Purchased Shares, duly endorsed for transfer to Purchaser; 4.4.3 if required by Purchaser, cause all or any of the directors, officers and auditors of the Corporation, Roche or any Subsidiary (a) to resign from the Corporation, Roche or the Subsidiaries, as the case may be, effective on the Closing Date, and (b) to deliver to the Corporation, Roche or such Subsidiaries, as the case may be, at the place of Closing, resignations and releases; -40- 4.4.4 deliver to Purchaser at the place of Closing certified copies of resolutions of the shareholders and directors of the Corporation, Roche and the Subsidiaries (in form and substance reasonably satisfactory to Purchaser's legal counsel) (a) authorizing and approving the sale, assignment and transfer of the Purchased Shares from Vendors to Purchaser and their registration in the name of Purchaser, (b) accepting the resignations effective on the Closing Date of the directors, officers and auditors referred to in Section 4.4.3, and (c) appointing such new directors, officers and auditors of the Corporation, Roche and the Subsidiaries as may be nominated by Purchaser; 4.4.5 execute the Non-Competition Agreements substantially in the forms of Exhibit "B", as applicable to each Vendor as the Parties have agreed; ----------- 4.4.6 deliver to Purchaser a favourable opinion of Heenan Blaikie Aubut substantially in the form of Exhibit "C"; ----------- 4.4.7 deliver releases of claims and radiations of Liens on assets of New Roche and Subsidiaries identified in Schedule 3.1.14 under "Status" as --------------- "Acquittance to be Obtained" or undertakings from the holders of such Liens to release them promptly after Closing in form and substance reasonably satisfactory to Purchaser; 4.4.8 deliver copies of full and final settlements between RBW and Laframboise settling all matters at issue in their current litigation and with respect to the work performed by Laframboise on the Pembroke Project; 4.4.9 deliver a copy of an unsigned release of Roche by each of London Guarantee Insurance Company and Axa Boreal Insurance Inc. with respect to the Pembroke Project other than with respect to the outstanding claim of Noront Steel (1981) Limited, which release shall be satisfactory in form and substance to Purchaser and ITX in their entire discretion and which shall be executed by such bonding companies upon receipt of the funds referred to in Section 2.3.1; 4.4.10 deliver a copy of a mutual full and final release of Bennett & Wright and Roche with respect to the Pembroke Project; 4.4.11 [Intentionally left blank]; 4.4.12 deliver (in trust or escrow) to Purchaser satisfactory evidence of all releases of security on the Purchased Shares, a description of which security being set forth in Schedule 4.4.12; --------------- 4.4.13 deliver to Purchaser a copy of the agreement between Vendors relating to their rights and obligations between themselves after Closing and the distribution of the Purchase Price in the form of the draft agreement given to Purchaser on the date hereof; and 4.4.14 deliver to Purchaser an assignment and assumption agreement between Vendors and Roche relating to the liabilities of Pembroke not reflected on the Closing Balance Sheet. -41- 4.5 Year 2000 Cooperation. Vendors will, in their capacities as employees --------------------- of Roche and the Subsidiaries, continue to use their best efforts after the Closing Date (at no expense to Vendors), and will cooperate with ITX in its similar efforts, to ensure that all information systems owned by or used by Roche and the Subsidiaries will be year 2000 compliant in a timely fashion. ARTICLE V POST-CLOSING TAX MATTERS ------------------------ 5.1 Tax Periods Ending on or Before the Closing Date. Vendors shall prepare, ------------------------------------------------ or cause to be prepared, and file, or cause to be filed, all Tax returns for the Corporation, Roche and the Subsidiaries for all periods ending on or prior to the Audit Date which are filed after the Audit Date. Vendors shall permit Purchaser to review and comment on each such Tax return described in the preceding sentence prior to filing. Vendors shall reimburse Purchaser for: 5.1.1 Taxes of the Corporation, Roche and the Subsidiaries with respect to such periods within fifteen (15) days after payment by the Corporation, Roche and the Subsidiaries of such Taxes, and 5.1.2 the loss of Tax losses (other than Pembroke Losses) as a result of increased income or smaller Tax losses within fifteen (15) days of such determination, to the extent such are not reflected in the reserve for Taxes (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) shown on the face of the Closing Balance Sheet. 5.2 Cooperation on Tax Matters. Each Party shall cooperate fully, as and to -------------------------- the extent reasonably requested by the other Party, in connection with the filing of Tax returns pursuant to this Article and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other Party's request) the provision of Books and Records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Purchaser shall: 5.2.1 retain all Books and Records with respect to Tax matters pertinent to the Corporation, Roche and the Subsidiaries relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by either Party, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority; and 5.2.2 to give Vendors reasonable written notice prior to transferring, destroying or discarding any such books and records and, if Vendors so request, Purchaser shall allow Vendors to take possession of such Books and Records. Upon request of a Party, the Parties shall use their best efforts to obtain any certificate or other document from any Governmental Body or any other Person as may be -42- necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). 5.3 Disputes. Any disputes associated with the matters referred to in this -------- Article V shall be resolved in accordance with the procedures of the three (3) last paragraphs of Section 2.7, mutatis mutandis. ARTICLE VI PEMBROKE -------- 6.1 Pembroke Carry Back Losses. Pursuant to steps 14 and 18 of the -------------------------- Reorganization, immediately prior to the Closing, NewCo1 and New Roche will repurchase preferred shares held by Vendors for an aggregate purchase price equal to the amount of Federal and Provincial income taxes ("Income Taxes") to be refunded to New Roche when the losses associated with the Pembroke Project ("Pembroke Losses") are carried-back by New Roche against Income Taxes paid by Roche for its 1995 taxation year. For greater certainty, the Pembroke Losses will be carried back first to the 1995 taxation year prior to the carry-back of non-Pembroke Losses. The promissory notes which constitute payment of such purchase prices shall be payable within ten (10) days of the date such Income Tax refunds are received by New Roche from the relevant Taxing authorities. In the event either of the provincial or federal revenue authorities issues such Income Tax refund prior to the other, the promissory notes shall be payable in part in the aggregate amount of the refund so received, with the balance payable when the other authority issues the refund. In addition, if the operations of Roche in the Tax year ended December 31, 1998 (the "1998 Year") generated taxable income (excluding the effects of the Pembroke Project), Purchaser shall pay Vendors, as an increase in the Purchase Price, an amount equal to the amount of Income Taxes saved by Roche in the 1998 Year as a result of the application of the Pembroke Losses. Such payment shall be made three (3) months after the Closing Date. For the purposes hereof, the Pembroke Losses shall be calculated, and segregated from the other losses of Roche, in accordance with GAAP. At the time of the final delivery of the Closing Balance Sheet, Vendors shall deliver to Purchaser a statement indicating how such Pembroke Losses were calculated. For purposes of this Article VI, the expression "Pembroke Losses" shall include available federal and provincial non-capital losses of BCPTA which became available to Roche in its 1998 Year to be carried forward or backward as a result of the wind-up of BCPTA during the taxation year of Roche ending December 31, 1997 (the "BCPTA Losses"); provided, however, that the amount of the Pembroke Losses available for purposes of Section 6.2 hereof including Pembroke Losses available to reduce income generated by the Reorganization in any taxation year shall be reduced by an amount equal to the BCPTA Losses federally or provincially, as the case may be. Such Pembroke Losses equal to the BCPTA Losses shall be available for the sole benefit of Purchaser and Roche. Similarly, the expression "Pembroke Losses" shall include non-capital losses of Roche not -43- otherwise considered Pembroke Losses incurred in the period between January 1, 1999 and the Closing Date, provided, however, that an identical amount of Pembroke Losses shall not be available in Section 6.2 and shall be for the full benefit of Purchaser and Roche. In the event of any inconsistency between the terms hereof and the terms of the documents executed pursuant to the Reorganization, the terms hereof shall prevail. 6.2 Pembroke Carry Forward Losses. Notwithstanding Article II, Purchaser ----------------------------- shall pay to Vendors, as an increase to the Purchase Price, an amount equal to the Income Taxes saved by Roche in taxation years ending after the 1998 Year as a result of the reduction of taxable income for such subsequent years attributable to the use of the Pembroke Losses. For greater certainty, no amount shall be payable by Purchaser pursuant to this Section 6.2 where the Pembroke Losses are applied in a taxation year subsequent to the 1998 Year to reduce income generated by the Reorganization. For the purposes of the application of this Section, unused losses of Roche shall be carried forward commencing with the oldest years for which losses are available. If any year's available losses are composed both of losses associated with the Pembroke Project and losses associated with the other operations of Roche, the Vendors shall receive under this Section an amount equal to that proportion of the Income Taxes saved by Roche in the subsequent taxation year that the unused Pembroke Losses for such year are to the aggregate of all unused losses for such year. Such Purchase Price increase shall be payable by Purchaser to Vendors sixty (60) days after the end of the taxation year during which Roche benefited from a reduction in Income Taxes as a result of using the Pembroke Losses. 6.3 Disputes. Any disputes associated with the calculations to be made -------- pursuant to Sections 6.1 and 6.2 shall be resolved in accordance with the procedures of the three (3) last paragraphs of Section 2.7, mutatis mutandis. 6.4 Adjustments for Reassessments. In the event any of the taxation years ----------------------------- covered by Sections 6.1 and 6.2 are, after application of either of such Sections, reassessed by the relevant taxation authorities and it is finally determined that the taxable income or losses are different than that used to calculate the amount owing to Vendors thereunder, either Vendors shall pay to New Roche (in the case of the promissory notes referred to in Section 6.1) or Purchaser (in the other cases), or New Roche (in the case of the promissory notes referred to in Section 6.1) or Purchaser (in the other cases) shall pay to Vendors the difference between the amount actually paid to Vendors with respect to such taxation year and the amount, if any, that should have been paid to Vendors for such year had the Parties originally calculated the entitlement therefor using the results finally determined by the relevant taxation authorities. Unless Purchaser is otherwise indemnified therefore pursuant to Article XII, Vendors shall also reimburse Roche for any interest and penalties associated with such final reassessments for taxation years ending prior to the Closing Date, and shall pay Purchaser any interest and penalties associated with such final reassessment for taxation years ending after the Closing Date to the extent that such reassessments involve the disallowance of any of the losses associated with the Pembroke Project. -44- 6.5 Effect of Reassessment on Pembroke Losses. Notwithstanding any other ----------------------------------------- provisions in this Agreement, no amount shall be payable to Vendors pursuant to this Article VI or any other provision of this Agreement for the use of all or a portion of the Pembroke Losses by Roche or any sucescessor corporation in circumstances where, after the Closing Date, any portion of the Pembroke Losses are carried back or otherwise utilized by Roche or any successor, to offset, reduce or mitigate any Income Tax liability for taxation years ending on or prior to the Closing Date resulting from a reassessment or proposed reassessment of Income Taxes for said years (a "Prior Year Offset"). In such circumstances, losses being carried back or otherwise utilized by Roche or any successor to mitigate a liability for Income Taxes for a taxation year ending on or prior to the Closing Date shall be deemed to be Pembroke Losses to the extent of the amount of Pembroke Losses at that time and any excess shall be deemed to be losses other than Pembroke Losses. If Pembroke Losses are used for a Prior Year Offset, Purchaser shall not have any right to claim indemnification from Vendors pursuant to this Agreement, including pursuant to Article XII, for such Income Tax liability to the extent the Pembroke Losses are used for the Prior Year Offset. Nothing in this Section should be construed as reducing or mitigating the amount that can be claimed by Purchaser under this Agreement for interest and penalties, as the case may be, payable as a result of an assessment or reassessment for Taxes or for Taxes which are not offset by a carry back of the Pembroke Losses in the manner set out hereinabove. 6.6 Insurance Recoveries. Purchaser shall cause Roche to pay to Vendors, as -------------------- and when received by Roche, the net after Tax amount of any recoveries from insurance companies providing errors and omissions insurance coverage (but not CGL or construction wrap-up insurance) to Roche as a result of damages suffered by Roche from the Pembroke Project to the extent that such recoveries are not booked on the Closing Balance Sheet. Vendors will consult with Purchaser prior to finalizing their claim on Roche's errors and omissions policies with respect to the Pembroke Project, and will allow Purchaser to review any such claim prior to submittal within five (5) days of receipt thereof. Vendors will accept a settlement of such claim only to the extent it does not require Roche to pay any deductible, expense, or similar amount on account of such claim. ARTICLE VII MANAGEMENT PENSION PLAN SURPLUS ------------------------------- 7.1 Termination of Plan. As soon as practicable after the Closing Date, ------------------- Purchaser shall cause New Roche to commence the total termination, to be effective as of the Closing Date or such other date as required by regulatory authorities having jurisdiction, of the Management Pension Plan. As soon as practicable after the Closing Date, Purchaser shall cause New Roche to take such actions, deliver such documents and seek such regulatory approvals as may be required to effect a distribution of the assets of the Management Pension Plan, including, without limiting the generality of the foregoing, a draft agreement (within the meaning of section 230.2 of the Quebec Supplemental Pension Plans Act) for the distribution of the Management Pension Plan Surplus in the proportions stipulated by -45- Vendors. Purchaser shall cause to be reported to Vendors all material developments in relation to the determination and distribution of the Management Pension Plan Surplus as soon as practicable after such developments occur and Vendors shall be entitled to provide input with regard to all material decisions concerning the Management Pension Plan Surplus. Following the distribution of the Management Pension Plan Surplus, Purchaser shall pay, as an increase to the Purchase Price, by certified cheque or wire transfer of immediately available funds into the Collection Account, for the purpose of distribution to Vendors as agreed among themselves, an amount equal to the net after-tax proceeds of any such Management Pension Plan Surplus so distributed to New Roche (less any expenses associated with the termination of the Management Pension Plan and the distribution of assets therefrom which are borne by New Roche or Purchaser), the whole subject to applicable Laws. For the purposes hereof, the "net after-tax" proceeds of the Management Pension Plan Surplus shall mean a percentage of such Surplus equal to the percentage that New Roche would be allowed to keep after having paid Tax on the Surplus at the federal and provincial Tax rates then applicable to New Roche, regardless of whether New Roche was in a taxable position in the year of the distribution. ARTICLE VIII COVENANTS OF PURCHASER ---------------------- 8.1 Closing. If each condition set forth at Section 11.1 is (a) performed or ------- complied with, or (b) waived by Purchaser, and if this Agreement is not terminated in accordance with Section 11.2, then Purchaser shall on the Closing Date: 8.1.1 deliver to Vendors' Collection Account a certified cheque, bank draft or wire transfer in the amount determined pursuant to Section 2.2; 8.1.2 cause the Capital Contributions to be paid as set forth in Section 2.3; 8.1.3 execute, and cause ITX to execute, the Non-Competition Agreements substantially in the forms of Exhibit "B"; and ----------- 8.1.4 deliver to Vendors a favourable opinion of Stikeman, Elliott substantially in the form of Exhibit "D". ----------- 8.2 Right of First Refusal. If at any time after the Closing Date until the ---------------------- second anniversary of the latest date the Second EBIT Payment, if any, is to be made, Roche or any one hundred percent (100%) owned Subsidiary (the "Offeror") desires to sell, transfer or otherwise alienate: (a) any assets (including all of the shares of a Subsidiary or an Associated Company) which comprise a self-contained business segment, or (b) any assets with an aggregate value of One Hundred Thousand dollars (Cdn $100,000) or more and which do not comprise a self-contained business segment -46- (the "Optioned Assets"), other than sales in the normal course of business and inter-company transfers, to any third Person acting at arm's length to the Offeror (whether the Offeror received an offer from the Person, made an offer to the Person or proposes to make an offer to the Person in each case the "Original Offer") in one (1) transaction or series of related transactions, then Purchaser shall ensure that the Offeror will first offer to sell (the "Offer") such Optioned Assets to all Vendors in accordance with the procedures set forth in this Section 8.2. The Offer shall be sent to Vendors and shall be open for acceptance by any or all Vendors for thirty (30) days (the "Offer Period") from the receipt of the Offer by Vendors. The Offer shall specify the essential terms of the Original Offer, including a description of the Optioned Assets and the price. Vendors shall be obliged by delivering notice to Purchaser within, but not after the expiry of, the Offer Period at their sole option to either (a) accept the Offer, or (b) reject the Offer, in which case the Offer Period shall expire upon such rejection. If any Vendors do not accept the Offer within the Offer Period, then such Vendors shall be deemed to have rejected the Offer. If any Vendors have accepted the Offer, then Purchaser shall cause the Offeror to sell to one (1) corporate vehicle designated by such Vendors ("VendorCo"), and such Vendors shall cause VendorCo to purchase from the Offeror, the Optioned Assets upon the same terms and conditions as specified in the Offer, and the non-competition covenants of such Vendors who own, at the time of such purchase, VendorCo set forth in their Non-Competition Agreements shall not apply to them with respect to the part of the Business associated with such Optioned Assets. If Vendors have or are deemed to have rejected the Offer, then the Offeror shall be free for a period of six (6) months from the end of the Offer Period to sell all or part of the Optioned Assets to any Person on terms not more favourable than as provided in the Offer. If no sale takes place within such six (6) months period, then the Offeror shall not sell, transfer or otherwise alienate the Optioned Assets without again following and being subject to this Section 8.2. For greater certainty, the right of first refusal herein does not apply to sales of any of the Purchased Shares or of all or substantially all of the assets of Roche. Upon the decision of management of Purchaser or ITX to sell any of the Purchased Shares or all or substantially all of the assets of Roche any time prior to the second anniversary of the date the Second EBIT Payment, if any, is required to be made, Purchaser or ITX shall notify Vendors in writing of such decision. Notwithstanding the foregoing, any proposed sales of Optioned Assets shall be subject to any pre-existing rights of third Persons with respect to such Optioned Assets, including rights of first refusal under shareholders agreements. 8.3 Warranty Claims. Following the Closing, Purchaser shall cause Roche and --------------- the Subsidiaries, consistent with past practices of Roche and the Subsidiaries, to perform all required warranty work with respect to services performed by them on or prior to the -47- Closing. Purchaser's agreement under this Section 8.3 to cause Roche and the Subsidiaries to perform required warranty work may not be construed in any way as an assumption of such liability by Purchaser or to create any claim against Purchaser by any customer as a third-party beneficiary under this covenant. Any warranty work so performed which is outside of normal and usual warranty work levels and which involves aggregate expenditures of more than Fifty Thousand dollars (Cdn $50,000) shall be (a) borne by Roche and the Subsidiaries up to the value of the warrantee reserve reflected in the Closing Balance Sheet, and (b) thereafter shall be at Vendors' sole cost and expense. Vendors shall reimburse Roche or the Subsidiaries for all fully burdened costs of such warranty work above the warranty reserve, which reimbursement shall be made by Vendors to Roche (or the Subsidiary) within ten (10) calendar days of receipt by Vendors of the invoice therefor by payment in cash by Vendors, by certified cheque, bank draft or wire transfer. ARTICLE IX EMPLOYEES --------- 9.1 Continued Employment of the Salaried Employees. The terms and conditions ---------------------------------------------- of employment of all salaried and other non-unionized Employees employed by Roche and the Subsidiaries on the Closing Date shall be substantially the same as their terms and conditions of employment on the date hereof with the exception, however, that the Management Pension Plan will be terminated in accordance with Article VII. Nothing in this Article IX shall be construed as a guarantee of employment. ARTICLE X SURVIVAL OF REPRESENTATIONS AND WARRANTIES ------------------------------------------ 10.1 Survival of Representations and Warranties of Vendors. The representations ----------------------------------------------------- and warranties of Vendors contained in this Agreement, in the Schedules or in any certificate or other document delivered or given pursuant to this Agreement are given and are effective as of the date hereof notwithstanding that the Closing Date occurs after such date and shall survive the completion of the transactions contemplated by this Agreement, and notwithstanding such completion or any investigation made by or on behalf of Purchaser or ITX or any knowledge by Purchaser or ITX of any incorrectness in, or breach of, such representations or warranties, shall continue in full force and effect for the benefit of Purchaser for a period ending one (1) year after the date the Second EBIT Payment is actually made or, if no Second EBIT Payment is required to be made or the Second EBIT Payment is not being made because of an unresolved dispute among the Parties, then one (1) year after the date the Second EBIT Payment last could have been made had it been payable or had there been no dispute among the Parties, (a) except for any representation and warranty relating to Tax matters which shall survive until ninety (90) days after the last date on which the relevant Tax authority is entitled to assess or reassess with respect to such Tax matters, (b) except for any representation and warranty in respect of which a claim based on fraud is made, and except for the representations and warranties contained in Section 3.1.7 with respect to number and title to the Purchased Shares and the other shares and interests therein, which in each such case shall be unlimited as to duration. -48- 10.2 Survival of Representations and Warranties of Purchaser. The ------------------------------------------------------- representations and warranties of Purchaser contained in this Agreement or in any certificate or other document delivered or given pursuant to this Agreement are given and are effective as of the date hereof notwithstanding that the Closing Date occurs after such date and shall survive the completion of the transactions contemplated by this Agreement, and notwithstanding such completion or any investigation made by or on behalf of Vendors or any knowledge by Vendors of any incorrectness in, or breach of, such representations or warranties, shall continue in full force and effect for the benefit of Vendors for a period ending one (1) year after the date the Second Payment is actually made or, if no Second EBIT Payment is required to be made or the Second EBIT Payment is not being made because of an unresolved dispute among the Parties, then one (1) year after the date the Second EBIT Payment last could have been made had it been payable or had there been no dispute among the Parties; except for any representation and warranty in respect of which a claim based on fraud is made which shall be unlimited as to duration. ARTICLE XI CONDITIONS OF CLOSING --------------------- 11.1 Conditions for the Benefit of Purchaser. The purchase and sale of the --------------------------------------- Purchased Shares in accordance with the terms of this Agreement are subject to the following conditions, each of which is hereby declared to be for the exclusive benefit of Purchaser. Each condition is to be performed or complied with in all respects at or prior to the Closing Date: 11.1.1 Truth of Representations and Warranties of Vendors--The representations -------------------------------------------------- and warranties of Vendors contained in Sections 3.1.1 to 3.1.5, 3.1.6(a) and 3.1.6(d), and 3.1.7 to 3.1.9 shall have been accurate in all respects as of the date of this Agreement and shall be true and correct in all respects as of the Closing Date as though made on such date. 11.1.2 Performance of Covenants by Vendors--All of the covenants, obligations ----------------------------------- and agreements that Vendors are required to perform or to comply with pursuant to Sections 4.1 and 4.4 at or prior to the Closing Date (considered individually and collectively), shall have been performed or complied with in all material respects in the case of Section 4.1 at or prior to the Closing Date and in all respects in the case of Section 4.4. 11.1.3 Litigation--There shall be no actions, claims, investigations, ---------- arbitrations or other proceedings (whether or not on behalf of Vendors, the Corporation, Roche or any Subsidiary) pending or threatened to restrain, enjoin or invalidate any transaction contemplated by this Agreement. If any of the conditions of this Section 11.1 has not been satisfied as of the Closing Date, or if Closing has not occurred by March 31, 1999 for reasons other than Purchaser's failure to comply with its obligations under this Agreement, Purchaser may, at its option, either (a) terminate this Agreement by notice to Vendors at any time prior to the Closing without further formality, or (b) proceed with the Closing, without prejudice, in either case, to Purchaser's other rights, recourses and remedies. -49- 11.2 Conditions for the Benefit of Vendors. The purchase and sale of the ------------------------------------- Purchased Shares in accordance with the terms of this Agreement are subject to the following conditions, each of which is hereby declared to be for the exclusive benefit of Vendors. Each condition is to be performed or complied with in all respects at or prior to the Closing Date (or as otherwise specified): 11.2.1 Truth of representations and Warranties of Purchaser--The ---------------------------------------------------- representations and warranties of Purchaser contained in this Agreement or in any certificate or other document delivered or given pursuant to this Agreement (considered individually and collectively), shall have been accurate in all aspects as of the date of this Agreement, and shall be true and correct in all respects as of the Closing Date as though made on such date. 11.2.2 Performance of Covenants by Purchaser--All of the covenants, obligations ------------------------------------- and agreements that Purchaser is required to perform or to comply with pursuant to this Agreement at or prior to the Closing Date (considered individually and collectively), shall have been performed or complied with in all respects at or prior to the Closing Date. 11.2.3 Litigation--There shall be no actions, claims, investigations, ---------- arbitrations or other proceedings (whether or not on behalf of Purchaser or ITX) pending or threatened to restrain, enjoin or invalidate any transaction contemplated by this Agreement. 11.2.4 Promissory Notes--On February 5, 1999, ITX shall issue promissory notes ---------------- to the Persons and in the amounts identified in Sections 2.2 and 2.3 hereof, together with interest thereon at the rates, and otherwise on the terms, specified therein. If any of the conditions of this Section 11.2 has not been satisfied as of the Closing Date or if Closing has not occurred by March 31, 1999 for reasons other than Vendors' failure to comply with its obligations under this Agreement, Vendors may, at their option, either (a) terminate this Agreement by notice to Purchaser at any time prior to Closing without further formality, or (b) proceed with the Closing, without prejudice, in either case, to Vendors' other rights, recourses and remedies. ARTICLE XII INDEMNIFICATION --------------- 12.1 Indemnification by Vendors. Vendors shall solidarily, without the -------------------------- benefit of division and discussion, (except as set forth in Section 3.3) indemnify and hold Purchaser harmless from and against any claims, demands, actions, causes of action, judgments, damages, losses (which shall include any diminution in value), liabilities, costs or expenses (including, without limitation, interest, penalties and reasonable attorneys', and experts' fees and disbursements) (collectively, the "Losses") which may be made against Purchaser, the Corporation, Roche, the Subsidiaries or the Associated Companies or which any of them may suffer or incur as a result of, arising out of or relating to: 12.1.1 any violation, contravention or breach of any covenant, agreement or obligation of Vendors under or pursuant to this Agreement; -50- 12.1.2 any incorrectness in, or breach of, any representation or warranty made by Vendors under or pursuant to this Agreement, the Schedules or in any certificate or other document delivered or given pursuant to this Agreement, whether or not Purchaser relied thereon or had knowledge thereof; 12.1.3 any liabilities or obligations of any nature whatsoever associated with the Pembroke Project, whether arising before, on or after the Closing Date, to the extent not booked on the Closing Balance Sheet; 12.1.4 any liabilities or obligations of the Corporation, Roche or the Subsidiaries as a result of the Reorganization, including for Taxes or as a result of any transaction not being in compliance with Law, shareholders' agreements or constating documents, and any undischarged guarantees on behalf of the Excluded Assets (other than, in the case of Metroplan, any liabilities or obligations solely related to Roche's lease obligations to Metroplan); 12.1.5 the failure of the Corporation, Roche or any Subsidiary to obtain all consents for the change of control of Roche and the Subsidiaries, or for the consummation of the Reorganization, under the Contracts (other than consents which could not be obtained by Law or by the terms of a Contract as a result of the non-Canadian resident ownership of Purchaser); 12.1.6 any amount required to be paid by Roche or Purchaser in connection with the distribution of the Management Pension Plan Surplus pursuant to Article VII or into the Management Pension Plan pursuant to sections 228-229 of the Quebec Supplemental Pension Plans Act; and 12.1.7 any withholding or other Taxes for which Roche, the Corporation or Purchaser is liable as a result of redemptions or purchases of shares from non-residents. 12.2 Indemnification by Purchaser. Purchaser shall indemnify and hold Vendors ---------------------------- harmless from and against any Losses which may be made against Vendors or which Vendors may suffer or incur as a result of, arising out of or relating to: 12.2.1 any violation, contravention or breach of any covenant, agreement or obligation of Purchaser under or pursuant to this Agreement; or 12.2.2 any incorrectness in, or breach of, any representation or warranty made by Purchaser under or pursuant to this Agreement, the Schedules or in any certificate or other document delivered or given pursuant to this Agreement, whether or not Vendors relied thereon or had knowledge thereof. 12.3 Obligation to Reimburse. Subject to the provisions of Section 12.4, ----------------------- the Party providing indemnification hereunder (the "Indemnifying Party") shall reimburse to the Party being indemnified hereunder (the "Indemnified Party") the amount of any Losses suffered or incurred by the Indemnified Party, upon the date the Indemnifying Party acknowledges its obligation to reimburse the Indemnified Party the amount of such Losses or, if disputed, upon the date of any final judgment with respect thereto of a court or arbitral body of final jurisdiction for which no further appeal is available. For greater certainty, nothing in this -51- Section 12.3 shall be construed as creating a separate cause of action in addition to those set forth in this Article XII. 12.4 Notification. Promptly upon obtaining knowledge thereof, the ------------ Indemnified Party shall notify the Indemnifying Party of any cause which the Indemnified Party has determined has given or could give rise to indemnification under this Article XII. The omission so to notify the Indemnifying Party shall not relieve the Indemnifying Party from any duty to indemnify and hold harmless which otherwise might exist with respect to such cause unless (and only to that extent) the omission to notify materially prejudices the ability of the Indemnifying Party to exercise its right to defend provided in this Article XII. 12.5 Defense of Third-Party Claim. If any legal proceeding shall be ---------------------------- instituted or any claim or demand shall be asserted by a third party against the Indemnified Party including, if the Indemnified Party is Purchaser, any legal proceeding, claim or demand against any of the Corporation, Roche or any Subsidiary, with respect to a matter for which an Indemnified Party is seeking indemnification hereunder (each a "Third-Party Claim"), then the Indemnifying Party shall have the right, after receipt of the Indemnified Party's notice under Section 12.4 and upon giving notice to the Indemnified Party within thirty (30) calendar days of such receipt, to defend the Third-Party Claim at its own cost and expense with counsel of its own selection, provided that: 12.5.1 the Indemnified Party shall at all times have the right to fully participate in the defense at its own expense; 12.5.2 the Third-Party Claim seeks only monetary damages and does not seek any injunctive or other relief against the Indemnified Party, the Corporation, Roche or any Subsidiary; 12.5.3 the Indemnifying Party unconditionally acknowledges in writing its obligation to indemnify and hold the Indemnified Party harmless with respect to the Third-Party Claim; and 12.5.4 legal counsel chosen by the Indemnifying Party is satisfactory to the Indemnified Party, acting reasonably. Where the Indemnifying Party is Vendors, Purchaser shall cause the Corporation, Roche and the Subsidiaries to make available to Vendors for their inspection the Books and Records of the Corporation, Roche or any of the Subsidiaries and to provide to Vendors such copies of documentation as may be under the possession or control the Corporation, Roche and any of the Subsidiaries which may reasonably be required by Vendors in order to contest the Third Party Claim. Amounts payable by the Indemnifying Party pursuant to a Third-Party Claim shall be paid in accordance with the terms of the settlement or, the judgment, as applicable, but in any event prior to the expiry of any delay for a judgment to become executory. Notwithstanding the foregoing, in the event of a Third-Party Claim by any taxation authorities which challenges the Tax treatment of any aspect of the Reorganization, Vendors shall have the obligation to defend such Third-Party Claim. Purchaser may -52- participate in the defense of such Third-Party Claim in collaboration with Vendors and Vendors shall fully cooperate with Purchaser in respect of such collaboration. 12.6 No Compromise. The Indemnifying Party shall not be permitted to ------------- compromise and settle or to cause a compromise and settlement of any Third-Party Claim, without the prior written consent of the Indemnified Party, unless: 12.6.1 the terms of the compromise and settlement require only the payment of money and do not require the Indemnified Party, the Corporation, Roche or any Subsidiary to admit any wrongdoing or take or refrain from taking any action; and 12.6.2 the Indemnified Party receives, as part of the compromise and settlement, a legally binding and enforceable unconditional satisfaction or release, which is in form and substance satisfactory to the Indemnified Party, acting reasonably, from any and all obligations or liabilities it, the Corporation, Roche or any Subsidiary, as the case may be, may have with respect to the Third-Party Claim. 12.7 Failure to Defend. If the Indemnifying Party fails: ----------------- 12.7.1 within thirty (30) calendar days from receipt of the notice of a Third- Party Claim to give notice of its intention to defend the Third-Party Claim in accordance with Section 12.5; or 12.7.2 to comply at any time with any of Sections 12.5.3 to 12.5.4, then the Indemnifying Party shall be deemed to have waived its right to defend the Third Party Claim and the Indemnified Party shall have the right (but not the obligation) to undertake or, as the case may be, to cause the Corporation, Roche or any Subsidiary, as the case may be, to undertake the defense of the Third-Party Claim and compromise and settle the Third-Party Claim on behalf, for the account and at the risk and expense of the Indemnifying Party. 12.8 Limitation on Indemnification. The obligations of indemnification set ----------------------------- out in Sections 12.1 and 12.2 shall: 12.8.1 survive the Closing for the period prescribed by Law, except the obligation of indemnification arising from any incorrectness in, or breach of, any representation or warranty made by the Indemnifying Party which shall be subject to the limitations regarding survival of representations and warranties set forth in Section 10.1 or 10.2, as the case may be; 12.8.2 survive the expiry of the periods for which indemnification is available hereunder if the notification of a claim under Section 12.4 is given prior to the expiry of the applicable period; 12.8.3 with respect to the obligation of indemnification in Sections 12.1.2 and 12.2.2, not be applicable for a single Loss unless such Loss exceeds Five Thousand US dollars (US $5,000), except in cases of fraud or willful misconduct, in which cases the Indemnifying Party shall be responsible for the full amount of the Losses; -53- 12.8.4 with respect to the obligation of indemnification in Sections 12.1.2 and 12.2.2, not be applicable until the Losses in the aggregate, exceed Four Hundred Thousand US dollars (US $400,000), except in cases of fraud or willful misconduct, in which cases the Indemnifying Party shall be responsible for the full amount of the Losses; 12.8.5 not apply to the extent that the Losses claimed have been reimbursed through insurance to the Indemnified Party including, if the Indemnified Party is Purchaser, to the Corporation, Roche or any Subsidiary; 12.8.6 with respect to each Vendor, not exceed the proportion of the aggregate Purchase Price paid or credited plus the Capital Contributions which is equal to the proportion set forth beside such Vendor's name in Exhibit ------- "A" under "% of Indemnification Cap", except in cases of fraud or --- willful misconduct, in which cases the Indemnifying Party shall be responsible for the full amount of the Losses; and 12.8.7 not apply to the extent that the Indemnified Party has received an adjustment of the Purchase Price in accordance with Article II as a result of such Losses or a payment pursuant to Section 5.1. 12.9 Compensation. If either Party has made a demand upon the other pursuant ------------ to this Article XII or otherwise under this Agreement, the Party making the demand shall be entitled to have such demand satisfied in whole or in part by compensation (deduction and set off) against amounts otherwise payable by it to the other Party pursuant to the transactions contemplated by this Agreement, including, without limitation, against any Purchase Price Increase, Purchase Price Reduction, First EBIT Payment or Second EBIT Payment; provided, however, that any Purchase Price Reduction or payment by Vendors of Net Uncollected Receivables under Section 2.8 may only be set off against any First EBIT Payment or Second EBIT Payment, and provided further that no compensation may be made against any amounts payable pursuant to Articles VI or VII. The Party against whom such compensation has operated shall be entitled to continue to contest the validity of such demand. The Party claiming to apply such compensation shall be entitled to withhold payment otherwise required by it hereunder until the Losses associated with such claim have been finally resolved by agreement among the Parties or by a court or arbiter of final jurisdiction, for which no further appeal is available. 12.10 No Indemnification if Adjustments. For greater certainty, Purchaser --------------------------------- shall not be entitled to seek indemnification from Vendors under this Article XII to the extent it has actually received payment or effected compensation under the provisions of this Agreement for the full amount of the Losses with respect to matters which are the subject of such indemnification, except that any Purchase Price Reduction or payments of Net Uncollected Receivables pursuant to Section 2.8 shall be effected exclusively by compensation against any First EBIT Payment and Second EBIT Payment. 12.11 Purchase Price Adjustment. Any indemnification actually made by a ------------------------- Party to the other under this Article XII or under the assignment and assumption agreement referred to in Section 4.4.14 shall be considered a reduction or an increase to the Purchase Price, as the case may be. -54- 12.12 Sole Remedies. The provisions of this Article XII and any other ------------- recourses specifically referred to in this Agreement shall be the sole remedies of the Parties with respect to the matters herein, subject, however, to the right of any Party to seek specific performance or any other extraordinary remedy in a court of competent jurisdiction for breaches which give rise to such extraordinary remedies. 12.13 Absence of Bad Faith. The Indemnified Party shall not act in bad faith -------------------- with respect to any Losses it is claiming against the Indemnifying Party such that the amount of the Losses is greater than it would have been absent such bad faith. ARTICLE XIII CLOSING ------------ 13.1 Date, Time and Place of Closing. The Closing shall take place at the ------------------------------- offices of Roche, three (3) business days after funding of ITX's proposed bridge loan but in any event no later than March 31, 1999 (the "Closing Date"), at 10:00 a.m., or at such place, on such other date and/or at such other time as may be agreed between the Parties. Funding of such bridge financing is not a condition to Closing. ARTICLE XIV MISCELLANEOUS ------------- 14.1 Purchaser Free to Organize Affairs. Subject to the other provisions of ---------------------------------- this Agreement (including restrictions on ITX charges during the earn-out periods), Purchaser shall be permitted to organize the affairs of Roche and the Subsidiaries as it deems best, including by changing the Tax year end thereof to match the Tax year end of ITX. Purchaser shall act at all times until the expiry of the period covered by the Second EBIT Payment in good faith in order to avoid any adverse effects on EBIT levels until the expiry of such period which would not have occurred except for the Purchaser's ownership of and direction over Roche. Vendors shall have a period of twenty (20) calendar days from the date of their knowledge of any action of Purchaser or ITX with respect to Roche or any Subsidiary to object to the same on the basis that such actions will adversely affect the EBIT levels, failing which they shall be deemed to have consented to such actions. Subject to the foregoing, any Party may, at any time, refer any approvals which could so effect EBIT to Mr. Anthony DeLuca and Mr. Michel Labbe, or their respective successors, for their prior approval. If such individuals are unable to agree on such matters within twenty (20) calendar days after it has been referred to them, the matter shall be referred to an independent business valuator (who is neither an accountant nor an attorney by principal profession) agreed to by the Parties (or, if the Parties are unable to agree on such Person within ten (10) days of the end of such (20) twenty-day period, a business valuator in the Montreal office of PricewaterhouseCoopers) who shall finally determine whether and how such matter should be acted upon, balancing the interests of both Parties to maximize EBIT and the maximization of long-term profitability of Roche and the Subsidiaries. The fees and expenses of any such business valuator shall be shared equally by the Parties. -55- 14.2 Announcements. Any press release, public announcement or publicity with ------------- respect to the transactions contemplated in this Agreement shall be made only with the prior written consent of Purchaser and Vendors. The Parties shall keep the terms of this Agreement strictly confidential and make no disclosure thereof to any Person except (a) the Parties' counsel and advisors, (b) as required in connection with the consummation of the transactions contemplated hereby, (c) as determined by a court of competent jurisdiction, (d) as required to prosecute or defend an action, (e) as required by Law including by applicable securities authorities such as the Securities and Exchange Commission or self regulatory organization such as a stock exchange, or (f) with the prior agreement of all Parties. 14.3 Further Assurances. Each Party upon the request of the other, ------------------ whether at or after the Closing, shall do, execute, acknowledge and deliver or cause to be done, executed, acknowledged or delivered all such further acts, deeds, documents, assignments, transfers, conveyances, powers of attorney and assurances as may be reasonably necessary or desirable to effect complete consummation of the transactions contemplated by this Agreement. 14.4 Successors in Interest. This Agreement and the provisions hereof ---------------------- shall enure to the benefit of and be binding upon the Parties and their respective successors and assigns. Vendors may not assign this Agreement or any of their rights and obligations hereunder without the prior written consent of Purchaser. Purchaser may assign this Agreement and all of Purchaser's rights and obligations hereunder to an Affiliate of Purchaser, provided however, that such assignment shall not relieve Purchaser of its obligations hereunder. 14.5 Notices. Any notice, consent, authorization, direction or other ------- communication required or permitted to be given hereunder shall be in writing and shall be delivered either by personal delivery or by telecopier and addressed as follows: 14.5.1 in the case of any of Vendors, to it, him or her at: Roche Ltee, Groupe Conseil 3075 chemin des Quatre-Bourgeois Sainte-Foy, Quebec G1W 4Y4 Attention: Mr. Michel Labbe --------------------------- Telecopier: (418) 654-9698 -56- with a copy to: Heenan Blaikie Aubut 900, boulevard Rene-Levesque East Bureau 600 Quebec, Quebec G1R 4T4 Attention: Mr. Guy Plante ------------------------- Telecopier: (418) 524-1717 14.5.2 in the case of Purchaser or ITX, to it at: The IT Group, Inc. 3347 Michelson Drive Suite 200 Irvine, California 92612-2692 Attention: Mr. Drew E. Park, Jr. --------------------------------- Telecopier: (949) 474-8309 / (949) 859-8729 and to: The IT Group, Inc. 2790 Mosside Boulevard Monroeville, Pennsylvania 15146-2792 Attention: General Counsel -------------------------- Telecopier: (412) 858-3997 with a copy to: Stikeman, Elliott 1155 Rene-Levesque Blvd. West Suite 4000 Montreal, Quebec H3B 3V2 Attention: Mr. John W. Leopold ------------------------------ Telecopier: (514) 397-3222 Any notice, consent, authorization, direction or other communication delivered as aforesaid shall be deemed to have been effectively delivered and received, if sent by -57- telecopier, on the calendar day next following receipt of such transmission or, if delivered, to have been delivered and received on the date of such delivery, provided, however, that if such date is not a business day in the jurisdiction of receipt then it shall be deemed to have been delivered and received on the business day next following such delivery. Any Party may change its address for service by notice delivered as aforesaid. 14.6 Representative of Vendors. Without limitation to Section 14.5, Purchaser ------------------------- and ITX shall be entitled to deal and communicate with Mr. Michel Labbe or his replacement as the representative of all Vendors. Consents, directions to, notices to or claims made by Purchaser or ITX to Mr. Michel Labbe or his replacement on behalf of Vendors, unless expressly indicated otherwise, shall constitute consents, directions to, notices to or claims made against all or any of Vendors and vice versa. Each of the Vendors hereby grants Mr. Michel Labbe, or his successor appointed by Vendors who are holders of a majority of the Purchased Shares, his or her respective, irrevocable power of attorney (coupled with an interest, but limited in duration and scope as noted in this sentence) to act as each such Vendor's attorney in fact (with full power of substitution) solely with respect to all matters under this Agreement. Mr. Michel Labbe shall act as agent for service with respect to legal processes served on any or all of the Vendors pursuant to this Agreement and the transactions contemplated hereby, without prejudice, however, to the right of Purchaser to serve a Vendor directly. Vendors may collectively notify Purchaser from time to time as to the replacement of Michel Labbe as agent for service with another Person. 14.7 Expenses. Subject to Section 2.7, all costs, expenses and fees -------- (including without limitation, legal counsel and accounting fees and disbursements) in connection with the preparation, execution and consummation of this Agreement and the transactions contemplated hereunder: 14.7.1 incurred by Vendors, the Corporation, Roche or the Subsidiaries, shall be borne and paid by Vendors, and 14.7.2 incurred by Purchaser or ITX shall be borne and paid by Purchaser or ITX. 14.8 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which when so executed shall be deemed an original, and such counterparts together shall constitute one and the same instrument. 14.9 Severability. Any Article, Section or other subdivision of this ------------ Agreement or any other provision of this Agreement which is, or becomes, illegal, invalid or unenforceable shall be severed herefrom and shall be ineffective to the extent of such illegality, invalidity or unenforceability and shall not affect or impair the remaining provisions hereof, which provisions shall (a) be severed from any illegal, invalid or unenforceable Article, Section or other subdivision of this Agreement or any other provision of this Agreement, and (b) otherwise remain in full force and effect. -58- 14.10 Governing Law. This Agreement shall be governed by and interpreted and ------------- construed in accordance with the internal Laws presently in force in the Province of Quebec. 14.11 Arbitration. All disputes or differences arising out of or related ----------- in any way to this Agreement except for those for which other dispute resolution mechanisms have been specifically provided for shall be submitted to the decision of three (3) arbitrators, one (1) each to be chosen by each Party (the Purchaser and ITX being considered as one (1) Party for the purposes hereof), and the third to be chosen by the two (2) previously selected arbitrators. The arbitration proceedings shall commence by the issuance by a Party to the other Party of a demand to arbitrate which shall include the nomination by the Party issuing the demand of an arbitrator. The other Party shall have ten (10) days from receipt of the demand to appoint an arbitrator, failing which such arbitrator shall, at the request of Party issuing the demand, be appointed by application to the courts of the Province of Ontario having competent jurisdiction therefor. The arbitration proceedings shall take place in Toronto, Ontario in English. Other than as specified herein, the rules of the Arbitrations Act, 1991 of Ontario shall apply. The applicant shall submit its case in writing within thirty (30) days after the appointment of the arbitration panel, and the respondent shall submit his reply in writing within thirty (30) days after receipt of such case. The arbitrators shall apply the rules of evidence and Law applicable in courts sitting in the Province of Ontario. The arbitration panel shall be empowered to award provisional (including injunctive) relief upon proper application, but a Party shall be entitled, pending the appointment of all such arbitrators and the convening of such arbitration, to seek such relief from any court otherwise having competent jurisdiction over such matter. The arbitration panel shall have the discretion to order a pre-hearing exchange of information by the Parties, including, without limitation, production of requested documents, exchanging of summaries of testimony of proposed witnesses and examination by deposition of Parties. The arbitration panel shall render a written, reasoned decision on each issue before it, in which decision it shall also state how each arbitrator voted. Any decision by the arbitration panel shall be binding upon the Parties and may be entered as a final judgment in any court having jurisdiction. The cost of any arbitration proceeding shall be borne by the Parties as the arbitration panel shall determine if the Parties have not otherwise agreed. 14.12 Entire Agreement. This Agreement, including the Schedules, constitutes ---------------- the entire Agreement between the Parties pertaining to the subject matter hereof, and supersedes all prior agreements, understandings, negotiations and discussions of the Parties pertaining to the subject matter hereof including, without limitation, the Term Sheet executed by ITX and the Corporation on September 2, 1998. 14.13 Inconsistency. This Agreement shall override the Schedules to the extent ------------- of any inconsistency. -59- 14.14 Gender. Any reference in this Agreement to any gender shall include ------ both genders and the neutral, and words herein importing the singular number only shall include the plural and vice versa. 14.15 Currency. All dollar amounts mentioned in this Agreement or in the -------- Schedules shall be in Canadian funds except as otherwise expressly indicated. 14.16 Headings; Preamble. The headings in this Agreement and the preamble ------------------ to this Agreement are inserted for convenience of reference only and shall not affect the interpretation hereof. 14.17 Amendment. No amendment shall be binding unless expressly provided --------- in an instrument duly executed by the Parties. 14.18 Waiver. No waiver, whether by conduct or otherwise, of any of the ------ provisions of this Agreement shall be deemed to constitute a waiver of any other provisions (whether or not similar) nor shall such waiver constitute a continuing waiver unless otherwise expressly provided in an instrument duly executed by the Parties. 14.19 Language of Agreement. The parties acknowledge that it is their express --------------------- wish that this Agreement and all related documents be prepared in English. Les parties ont demande que cette convention et tous documents y afferents soient rediges en langue anglaise. 14.20 No Third-Party Beneficiaries. This Agreement and any agreement entered ---------------------------- into pursuant to this Agreement shall not benefit or create any right or cause of action in or on behalf of any Person (including, without limitation, any of the Employees) other than the Parties or the parties to such other agreements, and no Person (including, without limitation, any of the Employees), other than the Parties or the parties to such other agreements, shall be entitled to rely on the provisions hereof or any agreement entered into pursuant hereto in any action, proceeding, hearing or other forum. 14.21 Waiver of Take-Over Bid Provisions. Each Party waives, and will not ---------------------------------- raise in any claim against any other Party, the application of Part XVII of the Canada Business Corporations Act to the transactions contemplated herein. Vendors will indemnify and hold Purchaser harmless against any claim by a third Person based on the non-compliance by Purchaser of Part XVII of such act. 14.22 Additional Insurance. Each Party shall assume one half (1/2) of the -------------------- premium payable for any additional E&O insurance coverage in excess of Ten Million dollars (Cdn $10,000,000) up to Five Million dollars (Cdn $5,000,000) additional coverage for up to three (3) years beginning with the commencement of Roche's next policy year. Purchaser shall ensure that New Roche subsribes for all such coverage. Such assumption of the premium by Vendors shall be made by compensation against any First EBIT Payment or, if insufficient, against any Second EBIT Payment. ITX shall include New Roche's directors and ofifcers in ITX's standard D&O policies to the same extent as ITX's directors and officers are covered thereby and ITX shall cause to be procured and paid for at its expense a seven (7) year extended reporting period on Roche's pre-existing D&O policies. -60- 14.23 Non-Ratification. Purchaser and, through its intervention, ITX ---------------- acknowledge that Roche, prior to the Closing Date was not generally subject to various United States Laws, including the Foreign Corrupt Practices Act, the Cuban Liberty and Democratic Solidarity Act and other anti-boycott and export control Laws. Neither ITX nor Roche will take any action in furtherance of any conduct undertaken by Roche prior to the Closing Date that would place either Party in potential violation of such Laws. ITX does not, by this Agreement nor by any future actions, intend to approve of any actions taken by Roche prior to the acquisition that would constitute ratification of conduct potentially violative of such Laws. 14.24 Releases. Vendors hereby fully and finally release Roche, Corporoche and -------- NewCo 1 from any and all adjustments to the purchase prices payable pursuant to the promissory notes related to the repurchase of shares of such companies pursuant to the Reorganization (other than any downward adjustments related to the purchase prices for shares based on the Pembroke Tax refund for the 1995 Tax year pursuant to Section 6.1). Purchaser shall be released and discharged by Vendors from and with respect to any further duty with respect to the sums referenced in the Convention de partage upon payment of such sums to Michel Labbe. 14.25 Inter-Company Agreements. ITX and New Roche shall promptly after the ------------------------ date hereof enter into an inter-company agreement on terms satisfactory to the Parties governing certain aspects of the relationship between the companies. New Roche and Roche Internationale shall enter into an inter-company agreement promptly after Closing coverning the terms on which CIDA and related work will be conducted by Roche International for the full economic benefit of New Roche. 14.26 Convention de partage. Vendors shall not amend Article 3 of the --------------------- Convention de partage among them of even date without the prior written consent of ITX. Vendors shall not amend the proportions allocated to them for receipt of the Purchase Price as set forth in the Convention de partage without first having notified ITX. 14.27 Interest. The payments in Sections 2.2 and 2.3 shall be made with all -------- accrued interest at the rate referred to in the promissory notes referenced in Section 11.2.4. IN WITNESS WHEREOF, the Parties have executed this Agreement on the date first above mentioned. IT Holdings Canada, Inc. Per: /s/ James M. Redwine /s/ Jean Beaudoin ------------------------ ------------------------------------- James M. Redwine Jean Beaudoin Assistant-Secretary /s/ Paul-Emile Belanger ------------------------------------- Paul-Emile Belanger -61- /s/ Daniel Bergeron ------------------------------------- Daniel Bergeron /s/ Pierre Bertrand ------------------------------------- Pierre Bertrand /s/ Christian Berube ------------------------------------- Christian Berube /s/ Robert Boutet ------------------------------------- Robert Boutet /s/ Pierre Brulotte ------------------------------------- Pierre Brulotte /s/ Jean Bundock ------------------------------------- Jean Bundock /s/ Marc-Yvan Cote ------------------------------------- Marc-Yvan Cote /s/ Marc Drouin ------------------------------------- Marc Drouin /s/ Serge Dussault ------------------------------------- Serge Dussault /s/ Jean-Pierre Fau ------------------------------------- Jean-Pierre Fau /s/ Andre Giguere ------------------------------------- Andre Giguere /s/ Michel Gilbert ------------------------------------- Michel Gilbert /s/ Sam Hammad ------------------------------------- Sam Hammad /s/ Michel Labbe ------------------------------------- Michel Labbe /s/ Jean-Guy Lajoie ------------------------------------- Jean-Guy Lajoie /s/ Jean-Pierre Lambert ------------------------------------- Jean-Pierre Lambert /s/ Benoit Lapierre ------------------------------------- Benoit Lapierre -62- /s/ Andre Lemieux ------------------------------------- Andre Lemieux /s/ Yves Lortie ------------------------------------- Yves Lortie /s/ Dany McCarvill ------------------------------------- Dany McCarvill /s/ France Michaud ------------------------------------- France Michaud /s/ Marc Morais ------------------------------------- Marc Morais /s/ Alain Ostiguy ------------------------------------- Alain Ostiguy /s/ Yves Petitclerc ------------------------------------- Yves Petitclerc /s/ Paul Picard ------------------------------------- Paul Picard /s/ Michel Porlier ------------------------------------- Michel Porlier /s/ Denis Potvin ------------------------------------- Denis Potvin /s/ Pierre Rochefort ------------------------------------- Pierre Rochefort /s/ Denis St-Cyr ------------------------------------- Denis St-Cyr /s/ Claude Tessier ------------------------------------- Claude Tessier /s/ Robert Topping ------------------------------------- Robert Topping /s/ Michel Tremblay ------------------------------------- Michel Tremblay /s/ Andre Vachon ------------------------------------- Andre Vachon -63- /s/ Claude Vezina ------------------------------------- Claude Vezina Gestion Pilac inc. By: /s/ Pierre Lacroix ------------------------------- Duly authorized representative Name: Pierre Lacroix ------------------------------- Title: President ------------------------------- -64- Intervention of The IT Group, Inc. ------------------ For valuable consideration, the receipt and adequacy of which is hereby acknowledged, The IT Group, Inc. hereby unconditionally and irrevocably guarantees to and in favour of Vendors (i) the truth of the representations and warranties of Purchaser contained in this Agreement, in any Schedule or in any certificate or other document delivered or given pursuant to this Agreement, and (ii) the timely performance and fulfillment by Purchaser of its obligations and covenants under this Agreement. The IT Group, Inc. hereby acknowledges and agrees that there is solidarity between the undersigned and Purchaser in respect of this guarantee. The IT Group, Inc. hereby waives any benefit of division and discussion. The IT Group, Inc. acknowledges that Vendors are relying on this guarantee in connection with the sale of the Purchased Shares under the Agreement and that Vendors would not have entered into the Agreement without such guarantee. DATED this 5th day of February, 1999. The IT Group, Inc. Per: /s/ James M. Redwine ------------------------------- James M. Redwine Senior Corporate Counsel and Assistant Secretary EX-10.(III)(25) 4 AMEND#7 TO IT CORP. RETIREMENT PLAN Exhibit 10(iii)(25) AMENDMENT NUMBER SEVEN IT CORPORATION RETIREMENT PLAN 1993 RESTATEMENT The IT Corporation Retirement Plan (1993 Restatement) shall be as set forth herein: A. Effective January 1, 1997, paragraph (c) of Section 2.11, "Compensation," shall be amended in its entirety to reflect the reference to the family aggregation rules and shall read as follows: (c) "Compensation" of any Employee taken into account under the Plan for any Plan Year shall not exceed $160,000, as that amount is adjusted by the Secretary of the Treasury at the same time and in the same manner as under Section 415(d) of the Code, except that the dollar increase in effect on January 1 of any calendar year is effective for Plan Years beginning in such calendar year. B. Effective January 1, 1993, Section 2.20 shall be amended to read as follows: 2.20 Eligible Employee. "Eligible Employee" shall mean any ----------------- individual who is employed by the Company except: (a) any Employee who is covered by a collective bargaining agreement to which the Company is a party if there is evidence that retirement benefits were the subject of good faith bargaining between the Company and the collective bargaining representative, unless the collective bargaining agreement provides for coverage under this Plan; (b) any Employee who is employed in any job classification or Company division which by action of the Board of Directors is excluded from coverage under this Plan; (c) any hourly employee who is employed on a Project Hourly Basis in accordance with the Company's payroll procedure; (d) any Leased Employee. Notwithstanding the foregoing, for purposes of applying the provisions of Article V, "Eligible Employee" shall have the meaning set forth in Section 5.3(b)(iii); and (e) any individual who is not treated by the Company or any Participating Company as a common law employee without regard to the characterization or recharacterization of such individual's status by any court or governmental agency. C. Effective January 1, 1997, paragraph (a) of Section 2.25, "Highly Compensated Employee," shall be amended in its entirety to read as follows: (a) "Highly Compensated Employee" shall mean any Employee who (i) was a Five Percent Owner during the Determination Year or the Look Back Year, or (ii) during the Look Back Year, received Compensation from the Company in excess of $80,000 (as adjusted from time to time under such regulations as may be issued by the Secretary of the Treasury) and was in the "top-paid group" of Employees. D. Effective January 1, 1997, paragraph (b)(vi) of Section 2.25, relating to the family aggregation rules and the definition of "Highly Compensated Employee," shall be deleted in its entirety. E. Effective December 12, 1994, Section 2.30, "Leave of Absence" shall be amended by the addition of paragraph (d) to provide as follows: (d) Effective as of December 12, 1994, notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. F. Effective February 1, 1997, Section 3.1(c) shall be amended in its entirety to read as follows: (c) Each Eligible Employee who is not eligible to participate in the Plan as specified in Section 3.1(a) or (b), above, shall become eligible to participate in the Plan (i) on the date he completes one (1) Year of Service, or (ii) after January 31, 1997, in the case making compensation deferrals under Article V hereof, his date of hire, and shall commence participation pursuant to Section 3.2 hereof. G. Effective January 1, 1999, the first sentence of Section 5.2(a) shall be amended to read as follows: (a) The amount of an individual's compensation that may be deferred subject to the election provided in Section 5.1 shall be a whole percentage of the individual's Compensation (while a Participant) not to exceed 15 percent. H. Effective January 1, 1997, paragraph (e) of Section 5.3, relating to the family aggregation rules and the "Limitation on Compensation Deferrals of Highly Compensated Employees," shall be deleted in its entirety. I. Effective January 1, 1997, paragraph (c) of Section 5.4, relating to the family aggregation rules and the "Provisions for Disposition of Excess Compensation Deferrals by Highly Compensated Employees," shall be deleted in its entirety. J. Effective for Plan Years beginning after December 31, 1998, Section 6.1(c) shall be eliminated. K. Effective July 1, 1995, Section 6.1(d) shall be amended to read as follows: 2 (d) A matching contribution for each Participant equal to 50 percent, or, after December 31, 1998, 100 percent of the contributions made by the Participant under Section 5.1 hereof that does not exceed four percent (4%) of such Participant's Compensation for a Plan Year (or portion thereof following the Participant's Participation Commencement Date) plus an additional amount to be determined by the Board in its discretion based on such factor(s) as the Board deems appropriate; all Participant matching contributions generally may be made monthly based on the Participant's contributions and Compensation for such month and to be allocated to Participants' respective Company Matching Contribution Accounts. L. Effective for Plan Years beginning after December 31, 1998, Section 6.1(e) shall be stricken: M. Effective January 1, 1997, paragraphs (i) and (ii) of Section 6.5(e), relating to the family aggregation rules and the "Limitation on Matching Contributions Made on Behalf of Highly Compensated Employees," shall be deleted in their entirety. N. Effective January 1, 1997, paragraph (c) of Section 6.6, relating to the family aggregation rules and the "Provisions for Reduction of Excess Matching Contributions Made on Behalf of Highly Compensated Employees," shall be deleted in its entirety. O. Effective December 12, 1994, Section 6 shall be amended by the addition of Section 6.7 to provide as follows: Section 6.7 Special Rules for Military Service. If an employee is ---------------------------------- absent from employment due to his service in the uniformed services of the United States and returns to employment within the time prescribed by, and under circumstances satisfying the applicable federal law (including the Uniformed Services Employment and Reemployment Rights Act of 1994), such Employee's period of uniformed service will not result in a Break in Service for all purposes under the Plan. Further, such an employee to the extent he is an otherwise eligible employee under the terms of the Plan, shall have the right to make up any Compensation Deferrals missed while in uniformed service, and the Employer shall credit said Employee's account with any Matching Contributions the Employee would have received. No Matching Contributions shall be credited to the Employee's account under this section until the Employee's make-up contributions are actually made. Further, all make-up contributions must be made within a period of time after returning to employment which does not exceed the lesser of (i) three times the period of uniformed service, or (ii) 5 years. The provisions of this Section 6.7 shall apply to all periods of uniformed service which occurred on or after December 12, 1994. 3 P. Effective January 1, 1999, Section 7.3 shall be stricken and Section 7.2 shall be amended in its entirety to read as follows: 7.2 Allocation of Company Matching Contribution. ------------------------------------------- The Company contribution under 6.1(d) hereof shall be allocated to Participants based on their respective Compensation and contribution during such Plan Year; provided that the additional discretionary contribution referenced in Section 6.1(d) hereof shall only be made to Eligible Participants based on their respective Compensation and contribution during such Plan Year. For purposes of this Section 7.2, "Eligible Participant" shall mean any Participant who is employed by the Company on the last day of the Plan Year and who has accrued at least 1000 Hours of Service during such Plan Year, except for any Participant who is not then employed by the Company or who has not accrued at least 1000 Hours of Service because of any of the following events occurring during such Plan Year: (i) Death, (ii) Disability; (iii) Normal or Early Retirement; (iv) Transfer to an Affiliated Company not participating in the Plan; and (v) Transfer of a Qualified Employee to a Joint Venture Employer that is not a Participating Joint Venture Employer (as such terms are defined in Article XX). "Eligible Participant" shall not include any individual employed on the last day of the Plan Year on a Project Hourly Basis (in accordance with the Company's payroll procedure). Q. Effective January 1, 1999, a new Section 7.5(e) shall be added to read as follows: (e) Notwithstanding any other provision hereof, the Committee may in its discretion direct that any or all Company Matching Contributions made in respect of Plan Years beginning after 1998 be made in or invested in the common stock of IT Group, Inc. or the Company. R. Effective January 1, 1998, Section 7.10(c) shall be amended by the addition of the following at the end thereof: 10. Gradient Employer contributions, subject to vesting. 11. Prior Plan Deferrals. 12. Prior Plan Matching Contributions, subject to vesting. 13. Prior Plan Employer Contributions, subject to vesting. 14. Prior Plan Qualified Non-Elective Contributions. 15. Prior Plan After-Tax Contributions. 16. Prior Plan Profit Sharing Contributions, subject to vesting. S. Section 7.10, "Loans," shall be amended by the addition of paragraph (f) to provide as follows: (f) Effective as of December 12, 1994, loan repayments will be suspended 4 under this Plan as provided under Section 414(u)(4) of the Code. T. Effective January 1, 1997, Section 9.6(b) shall be amended by the addition of the following sentence at the end thereof: Notwithstanding the provisions of this Section 9.6(b), a Participant may elect (with spousal consent) to waive the minimum 30 day written notice period prior to the Annuity Starting Date for the Qualified Joint and Survivor Annuity if such Annuity Starting Date begins more than 7 business days after the explanation is provided to the Participant. U. Effective January 1, 1997, Section 9.7(a) shall be amended in its entirety to read as follows: (a) Notwithstanding any other provision of this Plan, distribution of a Participant's benefit under the Plan shall be made no later than the Participant's Required Beginning Date, or, if such distribution is to be made over the life of such Participant or over the lives of such Participant and a Beneficiary (or over a period not extending beyond the life expectancy of such Participant and Beneficiary) then such distribution shall commence no later than the Participant's Required Beginning Date. Required Beginning Date shall mean April 1 of the calendar year following the later of the calendar year in which the Participant (A) attains age 70-1/2, or (B) retires; provided, however, the foregoing clause (B) shall not apply with respect to a Participant who is a Five Percent Owner (as defined in Section 416(i) of the Code) at any time during the five Plan Year period ending in the calendar year in which the Participant attains age 70-1/2. If the Participant attains age 70-1/2 and becomes a Five Percent Owner during any Plan Year subsequent to the five Plan Year period referenced above, the Required Beginning Date under this Subparagraph (i) shall be April 1 of the calendar year following the calendar year in which such subsequent Plan Year ends. Notwithstanding the foregoing, in-service distributions for Participants who are not Five Percent Owners shall also be permitted upon attainment of age 70-1/2, to the extent provided in this Section 5.6 for Five Percent Owners, but only for Participants who attain age 70-1/2 in Plan Years beginning prior to January 1, 1999, who voluntarily elect to receive such distributions. Once distributions have begun to a Five Percent Owner under this Section 9.7, they must continue to be distributed, even if the Participant ceases to be a Five Percent Owner in a subsequent Plan Year. V. Effective for Plan Years beginning on or after August 5, 1997, Section 9.8 shall be amended in its entirety to read as follows: 9.8 Mandatory Cash Out Rules and Consent Requirement. ------------------------------------------------ (a) Effective for Plan Years beginning after December 31, 1997, notwithstanding any other provision of this Article IX, if the present value of the 5 Participant's distribution does not exceed five thousand dollars ($5,000), the distribution shall be paid in a lump sum. However, no such lump sum shall be paid after distribution commences, unless the Participant and his Spouse (or where the Participant had died, the Surviving Spouse) consent in writing to such distribution. Similarly, if an amount distributable to an alternate payee (under Article XV hereof) is less than $5,000, such amount shall be distributed as soon as practicable following (i) 60 days after benefits are payable or (ii) receipt of a valid qualified domestic relations order (within the meaning of Code Section 414(p)), whichever is later. (b) If the value of a Participant's Distributable Benefit exceeds five thousand dollars ($5,000), no distribution of any portion of that benefit may be made without the written consent of the Participant (and his Spouse, if the Participant is married) prior to the date he attains Normal Retirement Age. Consent of the Spouse to earlier distribution must be made in the presence of a Plan representative or a notary public. (c) Death benefits payable to a Beneficiary receiving lump sum benefits shall be distributed no later than twelve months following the Participant's death. W. Effective January 1, 1999 Section 9.14 shall be amended in its entirety to read as follows: 9.14 In Service Withdrawals. ---------------------- A Participant may once per Plan Year make a withdrawal from his Accounts, other than his Compensation Deferral Accounts, as described in Section 9.14(a) hereof. In addition, if a Participant has withdrawn the maximum amount to be withdrawn under Section 9.14(a) hereof, he may also make one withdrawal per calendar quarter, in accordance with Sections 9.14(b)-(e) hereof, of amounts held in his Compensation Deferral Accounts (excluding any earnings on amounts in such accounts) upon incurring a Hardship as determined by the Committee in accordance with rules of uniform application which the Committee may from time to time prescribe. (a) A Participant may withdraw from his Accounts as follows: (i) A Participant may withdraw all or a part of his After-Tax Contributions Account from the Plan at any time. (ii) A Participant who has withdrawn all of his After-Tax Contributions Account may withdraw all or a part of his Rollover Contributions Account. (iii) A Participant who has withdrawn all of his After-Tax and Rollover Contributions Accounts and who has been a Participant in the Plan for at least five (5) years may withdraw all or a part of the vested portion of his Company Discretionary Contributions Account (including any such amounts attributable to prior or transferor plans). 6 (iv) A Participant who has withdrawn all of his After-Tax, Rollover, and the vested portion of his Company Discretionary Contributions Accounts and who has been a Participant in the Plan for at least five (5) years may withdraw all or a part of the vested portion of his Company Matching Contributions Account (including any such amounts attributable to prior or transferee plans). (v) A Participant who has withdrawn all his After-Tax, Rollover, the vested portions of his Company Discretionary and Company Matching Contributions Accounts and who has attained age 59 1/2 may withdraw all or a part of his Compensation Deferral Accounts (including any qualified non-elective contributions). (vi) A Participant who has withdrawn all of his After-Tax, Rollover, the vested portions of his Company Discretionary and Company Matching Contributions and Compensation Deferral Accounts and who has attained age 59 1/2 may withdraw all or a part of the vested portions of his Company Fixed Contributions Account, Special Allocation, and Pension Contributions (including any such amounts attributable to prior or transferee plans). (b) Except as provided in Section 9.14(a) hereof, no Participant may make a withdrawal prior to a determination by the Committee that such Participant has a Hardship (as defined in Paragraph (c) below) need and such withdrawal is necessary on account of such Hardship need as provided in this Section 9.14. Any determination of Hardship shall be in accordance with regulations promulgated under Section 401(k) of the Code. (c) "Hardship" shall mean a need created by an immediate and heavy financial need of the Participant, which need cannot be met by other sources reasonably available to the Participant, or the Participant's Spouse, children or dependents; for (i) expenses for medical care described in Section 213(d) of the Code previously incurred by the Participant, the Participant's Spouse, children, or dependents, or necessary for such persons to obtain medical care described in Code Section 213(d); (ii) costs directly related to the purchase (excluding mortgage, payments) of a principal residence for the Participant; (iii) payment of tuition and related educational fees for the next twelve (12) months of post-secondary education for the Participant, or the Participant's Spouse, children or dependents; or 7 (iv) payments necessary to prevent the eviction of the Participant from, or a foreclosure on the mortgage of, the Participant's principal residence. In addition to the above, a Hardship need may include any amounts necessary to pay any federal, state, or local income taxes or penalties anticipated to result from a Hardship distribution. (d) The existence of a Participant's Hardship and the amount required to meet the need created by the Hardship shall be determined by the Committee on the basis of facts and circumstances, and in accordance with the rules of uniform application which the Committee may from time to time prescribe. A distribution shall not be treated as necessary to satisfy a Hardship need of a participant to the extent the amount of distribution in excess of the amount required to relieve the Hardship need or to the extent that the Hardship need may be satisfied from other resources reasonably available to the Participant. A distribution generally may be treated as necessary on account of a Hardship need of a participant if the Committee reasonably relies on the Participant's written representations to the Committee, unless the Committee has actual knowledge to the contrary, that the Hardship need cannot be relieved: (i) through reimbursement or compensation by insurance or otherwise; (ii) by reasonable liquidation of assets, if such liquidation would not itself cause an immediate and heavy financial need; (iii) by the cessation of the Participant's contributions to the Plan; or (iv) by other distributions or non-taxable loans from plans of the Company or any other employer, or by borrowing from commercial sources on reasonable commercial terms. For purposes of determining a Hardship need, a participant's resources shall be deemed to include those assets of his Spouse and minor children that are reasonably available to the Participant. (e) A Participant may request a withdrawal by submitting a written request for such withdrawal in a form satisfactory to the Committee, together with any supporting documentation which the Committee in its sole discretion may require. The minimum amount that may be withdrawn at any one time pursuant to the provisions of this Section 9.14 is $1,000.00. The maximum amount subject to any withdrawal under this Section shall be determined as of the Valuation Date coinciding with or immediately preceding the Committee's determination authorizing the withdrawal. 8 X. Effective for Plan Years beginning on or after August 5, 1997, the reference to "$3,500" in Section 9.16(d) shall be replaced with "$5,000". Y. Effective for Plan Years beginning after December 31, 1999, Section 14.4 shall be amended by the addition of new Section 4.14(c) to read as follows: (c) Effective for Plan Years beginning after December 31, 1999, Section 4.14 shall be of no force or effect. Z. Effective July 1, 1998, a new Article XXIII shall be added to read as follows: ARTICLE XXIII SPECIAL PROVISIONS REGARDING EMPLOYEES TRANSFERRING FROM OHM CORPORATION AND ACCOUNTS TRANSFERRED FROM THE OHM CORPORATION RETIREMENT SAVINGS PLAN. 23.1 In General. The special provisions in this Article XXIII shall ---------- be effective as of July 1, 1998, and shall apply to any Eligible Employee who, prior to August 4, 1998, was employed by OHM Corporation. 23.2 Participation. Notwithstanding any other provision hereof, any ------------- Eligible Employee who on August 3, 1998, was employed by OHM Corporation shall not commence participation in this Plan until January 1, 1999. 23.3 Computation of Service. Eligible Employees under this Section ---------------------- 23.3 shall have Years of Service computed pursuant to Section 2.54 hereof. However, each Eligible Employee shall automatically receive credit for One Year of Service for the period beginning on his or her anniversary date occurring during 1998 and ending on December 31, 1998; without regard to actual Hours of Service performed. 23.4 Vesting. The nonforfeitable interest of any Eligible Employee ------- in his or her OHM Plan accounts shall, as of January 1, 1999, not in any manner be thereafter diminished. Further, any Eligible Employee with at least three Years of Service as of December 31, 1998, shall at all times have a fully vested and nonforfeitable interest in his or her interest in this Plan without regard to actual Years of Service performed. AA. Effective January 1, 1999, a new Article XXIV shall be added to read as follows: ARTICLE XXIV SPECIAL PROVISIONS REGARDING EMPLOYEES TRANSFERRING FROM FLUOR DANIEL GTI, INC. AND ACCOUNTS TRANSFERRED FROM THE FLUOR DANIEL GTI 401(k) RETIREMENT SAVINGS PLAN 9 24.1 In General. The special provisions on the Article XXIV shall be ---------- effective as of January 1, 1999, and shall apply to any Eligible Employee who, prior to January 1, 1999, was employed by Fluor Daniel GTI, Inc. 24.2. Eligibility. Employees from Fluor Daniel GTI, Inc. shall ----------- commence participation in this Plan on January 1, 1999, or, if later, the date or dates they satisfy this Plan's applicable eligibility criteria. 24.3. Vesting. The nonforfeitable interest of any Eligible Employee ------- in his or her GTI Plan accounts shall, as of January 1, 1999, not in any manner be thereafter diminished. Further, any Eligible Employee with at least three Years of Service as of December 31, 1998, shall at all times have a vested interest hereunder based on the vesting schedule in effect under the GTI Plan in effect as of December 31, 1998. 24.4. Separate Account Maintenance. For purposes of Code Section ---------------------------- 411(d)(6), accounts under the GTI Plan as of December 31, 1998 shall be separately maintained and be subject to all rights, features and options that they enjoyed under the GTI Plan as of December 31, 1998. With the exception of the aforementioned amendments and the renumbering of certain sections to reflect such amendments, in all other respects, the IT Corporation Retirement Plan shall remain unchanged. IN WITNESS WHEREOF, this instrument of amendment is executed this 31 ------ day of December, 1998. By: /s/ Anthony J. DeLuca ---------------------------- Anthony J. DeLuca 10 EX-10.(III)(41) 5 IT GROUP EXECUTIVE STOCK OWNERSHIP PROGRAM Exhibit 10(iii)(41) THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM Effective November 17, 1998 TABLE OF CONTENTS Page ---- ARTICLE 1 INTRODUCTION..................................................... 1 1.01 Purpose.......................................................... 1 1.02 Effective Date of the Program.................................... 1 1.03 Participation.................................................... 1 ARTICLE 2 DEFINITIONS...................................................... 1 2.01 Administrative Committee......................................... 1 2.02 Applicable Federal Rate.......................................... 2 2.03 Cause............................................................ 2 2.04 Change of Control................................................ 2 2.05 Common Stock..................................................... 2 2.06 Cumulative Convertible Participating Preferred Stock............. 2 2.07 Current Market Value............................................. 3 2.08 Disability Date.................................................. 3 2.09 Fair Market Value................................................ 3 2.10 Loan Period...................................................... 3 2.11 Participant...................................................... 3 2.12 Permanently Disabled............................................. 3 2.13 Preferred Stock.................................................. 4 2.14 Promissory Note.................................................. 4 2.15 Purchase Date.................................................... 4 2.16 Purchase Loan.................................................... 4 2.17 Required Shares.................................................. 4 2.18 Retirement Date.................................................. 4 2.19 Stock Incentive Plan............................................. 4 2.20 Termination Date................................................. 5 ARTICLE 3 STOCK OWNERSHIP GUIDELINES....................................... 5 3.01 Satisfaction of Ownership Guidelines............................. 5 3.02 Securities Counted for Ownership Guidelines...................... 5 ARTICLE 4 AVAILABILITY OF LOANS............................................ 5 ARTICLE 5 ELECTION TO PARTICIPATE IN THE PROGRAM; SHARES TO BE PURCHASED UNDER THE PROGRAM.......................................... 6 5.01 Election to Participate in the Program........................... 6 5.02 Shares to be Purchased Under the Program......................... 6 i ARTICLE 6 CORRESPONDING STOCK GRANT........................................ 6 6.01 General.......................................................... 6 6.02 Expiration of Vested and Unvested Grants in Certain Instances.... 6 ARTICLE 7 LOAN PROVISIONS.................................................. 7 7.01 General.......................................................... 7 7.02 Interest Payments................................................ 8 7.03 Principal Payments............................................... 8 7.04 Term of Purchase Loan............................................ 8 7.05 Acceleration of Purchase Loan Maturity........................... 8 7.06 Prepayment of the Purchase Loan.................................. 9 7.07 Event of Default................................................. 9 ARTICLE 8 PROGRAM ADMINISTRATION........................................... 9 ARTICLE 9 CHANGES IN THE OWNERSHIP GUIDELINES OR THE PROGRAM............... 9 ARTICLE 10 MISCELLANEOUS PROVISIONS....................................... 10 10.01 Not an ERISA Plan.............................................. 10 10.02 Employment Not Guaranteed...................................... 10 10.03 Applicable Law................................................. 10 10.04 Notice......................................................... 10 10.05 Prohibition Against Assignment................................. 10 10.06 No Transfer of Interest........................................ 11 10.07 Amendment or Termination of the Program........................ 11 10.08 Titles and Headings; Gender of Terms........................... 11 10.09 Severability................................................... 11 ii THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ ARTICLE 1 INTRODUCTION 1.01 Purpose The purpose of the Executive Stock Ownership Program (the "Program") is to provide loans to certain officers of The IT Group, Inc. (the "Company") or its affiliates, who are covered from time to time by and subject to the Stock Ownership Guidelines (respectively, the "Covered Employees" and the "Ownership Guidelines"), in order to assist the Covered Employees in complying with the applicable stock ownership requirements set forth in the Ownership Guidelines herein and to align senior executive and shareholder interests. All loans made pursuant to the Program shall be used by Covered Employees for the purpose of purchasing shares of Common Stock of the Company (the "IT Shares") to comply with the Ownership Guidelines. 1.02 Effective Date of the Program. Both the Ownership Guidelines and the Program are effective as of November 17, 1998 (the "Effective Date"). As of the Effective Date, no termination date has been established for the Ownership Guidelines or the Program. 1.03 Participation. Participation in this Program shall be limited to those Covered Employees who are selected from time to time by the Compensation Committee of the Board of Directors to participate in this Program. The participation in this Program by any such Covered Employee, and the extension of any Purchase Loan to any Covered Employee, shall be governed by the terms of this Program. ARTICLE 2 DEFINITIONS Capitalized terms used in this Program shall have the meanings ascribed to them in this Article 2, except that in the case of any capitalized term not specifically defined in this Article 2, such term shall have the meaning assigned to it in the text of this Program where such term first appears. 2.01 Administrative Committee. "Administrative Committee" shall mean those persons designated by the Company to administer the Program. 1 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ 2.02 Applicable Federal Rate. "Applicable Federal Rate" has the meaning defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended. 2.03 Cause. "Cause" shall mean (a) willful misconduct by Participant resulting in material harm to the Company or an affiliate (including harm to the Company and an affiliate's public reputation), (b) the breach by Participant of any of his covenants contained in any agreement with the Company or an affiliate, (c) Participant's conviction of, or Participant's entering of a guilty plea with respect to, a felony or (d) Participant's misappropriation of corporate funds. 2.04 Change of Control. "Change of Control" shall mean the first to occur of the following events: (a) any date upon which the directors of the Company who were nominated by the Board of Directors for election as directors and/or were elected by the holders of the Cumulative Convertible Participating Preferred Stock, cease to constitute a majority of the directors of the Company; (b) a reorganization, merger or consolidation of the Company, the consummation of which results in the outstanding securities of any class being exchanged for or converted into cash, property and/or securities not issued by the Company; (c) the acquisition of substantially all of the property and assets of the Company by any person or entity; (d) the dissolution or liquidation of the Company; or (e) the date of the first public announcement that any person or entity, together with all Affiliates and Associates (as capitalized terms are defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934) of such person or entity, shall have become the beneficial owner (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of voting securities of the Company representing 35% or more of the voting power of the Company; provided, however, that the terms "person" and "entity," as used in this clause (e), shall not include (x) the Company, any of its subsidiaries, The Carlyle Group and its Affiliates (y) any employee benefit plan of the Company or any of its subsidiaries, or (z) any entity holding voting securities of the Company for or pursuant to the terms of any such plan. 2.05 Common Stock. "Common Stock" shall mean the Company's common stock, $.01 par value per share. 2.06 Cumulative Convertible Participating Preferred Stock. "Cumulative Convertible Participating Preferred Stock" shall mean the Company's 6% Cumulative Convertible Participating preferred stock, par value $100 per share. 2 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ 2.07 Current Market Value. "Current Market Value" shall mean (i) if quotations are available, the closing sale price of the IT Shares on the preceding business day, as appearing in any regularly published reporting or quotation service; or (ii) if there is no closing sale price, any reasonable estimate of the market value of the IT Shares as of the close of business on the preceding business day; or (iii) the total cost to the Participant of the purchase of IT Shares under this Program, which may include commissions. 2.08 Disability Date. "Disability Date" shall mean the date on which an employee would become eligible for long-term disability benefits under the applicable employee long- term disability plan sponsored by the Company or its affiliates. 2.09 Fair Market Value. "Fair Market Value" for any given date (or in the event such date is not a day on which IT Shares are traded, the last business day prior to such date) shall mean the closing sale price of the IT Shares on such the preceding trading date, as reported as the New York Stock Exchange Composite Transactions for such day. 2.10 Loan Period. "Loan Period" shall mean the time period specified in a Promissory Note (as defined below) during which the principal may be outstanding on a Purchase Loan subject to extension by the Company or an affiliate. 2.11 Participant. "Participant" shall mean a Covered Employee who elects to participate in the Program and is currently employed by the Company or an affiliate. 2.12 Permanently Disabled. "Permanently Disabled" shall mean the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. A Participant shall not be deemed to be Permanently Disabled until proof of the existence thereof shall have been furnished to the Administrative Committee in such form and manner, and at such times, as the Administrative Committee may require. Any determination by the Administrative Committee that the Participant is or is not Permanently Disabled shall be final and binding upon the Company or an affiliate and Participant. 3 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ 2.13 Preferred Stock. "Preferred Stock" shall mean the 7% Cumulative Convertible Exchangeable preferred stock, par value $100 per share of the Company and the Cumulative Convertible Participating Preferred Stock. 2.14 Promissory Note. "Promissory Note" shall mean a full recourse promissory note evidencing a Purchase Loan, executed by a Participant for the benefit of the Company or an affiliate, a form of which is attached and incorporated by reference. 2.15 Purchase Date. "Purchase Date" shall mean the date on which IT Shares are purchased under the Program. 2.16 Purchase Loan. "Purchase Loan" shall mean the extension of credit by the Company or an affiliate to a Participant for the purpose of financing the purchase of IT Shares, if such purchase is for the purpose of compliance by the Participant, in whole or in part, with the Ownership Guidelines. The Purchase Loan shall be evidenced by the Loan Agreement (as defined below) and the Promissory Note. 2.17 Required Shares. "Required Shares" mean the specified number of IT Shares that a Covered Employee is required to own in order to comply with the stock ownership requirements of the Ownership Guidelines. 2.18 Retirement Date. "Retirement Date" shall mean the last day of a Participant's employment with the Company or any affiliate which also constitutes his or her "Normal Retirement Date" under the IT Corporation Retirement Plan. 2.19 Stock Incentive Plan. "Stock Incentive Plan" shall mean the International Technology Corporation 1996 Stock Incentive Plan, adopted effective November 20, 1996. 4 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ 2.20 Termination Date. "Termination Date" shall mean the last day of a Participant's employment by the Company or any affiliate, other than in the case of retirement on or after his or her Retirement Date, death, or disability of the Participant. ARTICLE 3 STOCK OWNERSHIP GUIDELINES 3.01 Satisfaction of Ownership Guidelines. The Ownership Guidelines require designated employees of the Company or an affiliate to own a specified number of securities of the Company. The level of such Required Shares is calculated according to a schedule based on the base salary of the Covered Employee. A Covered Employee is expected to comply with the applicable stock ownership requirements as set forth by the Compensation Committee of the Board of Directors. 3.02 Securities Counted for Ownership Guidelines. For purposes of determining whether a Covered Employee has achieved the Ownership Guidelines, the following will be counted as Company stock ownership: (i) shares of Common Stock or Preferred Stock held in the name of the Covered Employee, a family member or a broker's street account held for the benefit of the Covered Employee; (ii) IT Shares owned by the Covered Employee through the IT Employee Stock Purchase Program; (iii) IT shares held in the unitized IT stock fund of the IT Retirement Plan; (iv) unvested restricted stock issued by the Company or an affiliate; (v) shares of Common Stock or Preferred Stock held in an individual retirement account or mutual fund for which the Covered Employee has voting rights; or (vi) shares of Common Stock or Preferred Stock for which the Covered Employee can demonstrate beneficial ownership and voting rights. Notwithstanding the foregoing, unexercised stock options, whether or not vested, shall not count toward the satisfaction of the Ownership Guidelines. ARTICLE 4 AVAILABILITY OF LOANS Purchase Loans shall be made available under the Program for the entire period of time during which the Ownership Guidelines are in effect, subject to the Company's or an affiliate's right to interpret, change, amend, modify or terminate the Ownership Guidelines and Program as provided in Article 9 herein. Subject to the approval of the Company or an affiliate, a Participant may obtain more than one Purchase Loan during the term of the Program. Notwithstanding any other provision of this Program, the Company or any affiliate shall not be required to make a Purchase Loan to a Covered Employee if making such Purchase Loan would cause the Company or an affiliate to violate any covenant or other similar provision in any indenture, loan agreement, 5 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ or other agreement, or cause the Company or an affiliate to violate any applicable federal, state or local law. ARTICLE 5 ELECTION TO PARTICIPATE IN THE PROGRAM; SHARES TO BE PURCHASED UNDER THE PROGRAM 5.01 Election to Participate in the Program. All Covered Employees are eligible to become Participants, but they are not obligated, as a condition of employment or for any other purposes, to participate in the Program. A Covered Employee may elect to participate in the Program in order to finance all or a portion of the purchase of IT Shares required to be purchased by the Covered Employee to comply with the Ownership Guidelines. Each Covered Employee who so elects shall notify the Administrative Committee of his or her intention to participate in the Program and to be subject to the terms and provisions of the Program. 5.02 Shares to be Purchased Under the Program. Shares purchased under the Program may be purchased on behalf of the Participant on the open market by a broker selected by the Company or an affiliate. As a condition to receipt of a Purchase Loan and to effectuate the purchase of IT Shares under the Program, each Participant shall be required to execute and deliver to the Administrative Committee a Promissory Note and any other necessary document or form as may be required by law or as prescribed by the Administrative Committee. ARTICLE 6 CORRESPONDING STOCK GRANT 6.01 General For IT Shares purchased under the Program on behalf of a Participant, a grant shall be awarded under the Stock Incentive Plan to such Participant ("Grants"). Grants awarded in the form of an option will have an exercise price at the Fair Market Value on the date of such award. The Grant shall be subject to the performance-based vesting requirements set forth in the grant document or agreement. Grants which do not vest under these performance-based vesting requirements shall fully vest as of a date specified in the grant document or agreement and shall remain exercisable through a date specified in the grant document or agreement. 6.02 Expiration of Vested and Unvested Grants in Certain Instances Notwithstanding the foregoing, upon the occurrence of certain identified events, the vested and unvested Grants shall expire as follows: 6 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ (i) Termination of Employment of a Participant. In the event a ------------------------------------------ Participant's employment is terminated for Cause, all vested and unvested Grants shall expire immediately on the Termination Date. In the event a Participant terminates his or her employment with the Company and all affiliates voluntarily, all vested and unvested Grants shall expire immediately on the Termination Date. In the event a Participant's employment is terminated by the Company or an affiliate involuntarily (other than for Cause), all vested Grants shall expire six (6) months following the Termination Date and any unvested Grants shall be eligible for vesting for six (6) months following the Termination Date. Any Grant which has not vested during such six (6) months following the Termination Date shall expire. (ii) Retirement of a Participant. In the event a Participant's employment --------------------------- with the Company and all affiliates terminates on or after his or her Retirement Date, all vested Grants shall expire on the second anniversary of the Retirement Date. Any unvested Grants shall be eligible for vesting for twelve (12) months following the Retirement Date. Any Grant which has not vested during such twelve (12) months following the Retirement Date shall expire. (iii) Death or Disability of a Participant. In the event a Participant ------------------------------------ dies or becomes Permanently Disabled, all vested Grants shall expire at the end of the original term and any unvested Grant shall be eligible for vesting until the end of the original term. (iv) Change of Control. In the event of a Change of Control, all vested ----------------- Grants shall expire at the end of their original term and any unvested Grant shall become immediately vested on the date of such Change of Control and then expire at the end of the original term. ARTICLE 7 LOAN PROVISIONS 7.01 General Subject to approval by the Administrative Committee, the Company or an affiliate shall make available to each Participant a Purchase Loan, with full recourse, and the terms of which shall be governed by a loan agreement ("Loan Agreement") except as set forth herein. The Purchase Loan shall be in an amount of up to one hundred percent (100%) of the Current Market Value of the IT Shares purchased in order to comply with the requirements of the Ownership Guidelines. In the event that a Participant receives more than one Purchase Loan, all payments of interest and principal shall be applied to the first Purchase Loan received and, upon full 7 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ repayment of such Purchase Loan, applied to each additional Purchase Loan in order of receipt by the Participant. 7.02 Interest Payments The Purchase Loan shall bear interest at the Applicable Federal Rate on the commencement of the Loan Period compounded semiannually during the Loan Period and such interest payments shall be due at the end of the Loan Period of such Purchase Loan. 7.03 Principal Payments The principal amount of the Purchase Loan as specified in the Promissory Note shall be due at the end of the Loan Period of such Purchase Loan. 7.04 Term of Purchase Loan The Loan Period shall be for a term set forth in the applicable Loan Agreement. The obligations of each Participant under the Promissory Note shall be unconditional and absolute and, notwithstanding the generality of the foregoing, shall not be released, discharged or otherwise affected by any change in the existence, or structure of the Company or an affiliate, or a Change of Control, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Company or an affiliate, or the assets thereof, or the market value of the IT Shares, or any resulting release or discharge of any obligation of the Company or an affiliate, or the existence of any claim, set-off or other rights which any Participant may have at any time against the Company or an affiliate, or any other person, whether in connection with the Program or with any unrelated matter. 7.05 Acceleration of Purchase Loan Maturity (i) Termination of Employment of a Participant. In the event a ------------------------------------------ Participant's employment is terminated for Cause during the Loan Period, the outstanding interest and principal payments under the Purchase Loan shall become immediately due and payable on the Termination Date. In the event a Participant terminates his or her employment with the Company and all affiliates voluntarily during the Loan Period, any outstanding interest and principal payments under the Purchase Loan shall become immediately due and payable on the Termination Date. In the event a Participant's employment is terminated involuntarily (other than for Cause) by the Company or an affiliate during the Loan Period, any outstanding interest and principal payments under the Purchase Loan shall become due and payable no later than seven (7) months following the Termination Date. 8 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ (ii) Retirement of a Participant. In the event a Participant's employment --------------------------- terminates on or after his or her Retirement Date during the Loan Period, any outstanding balance (including accrued and unpaid interest) on the Purchase Loan shall become due and payable no later than thirteen (13) months following the Retirement Date. (iii) Death or Disability of a Participant. In the event a Participant ------------------------------------ dies or becomes Permanently Disabled during the Loan Period, any outstanding balance (including accrued and unpaid interest) on the Purchase Loan shall become due and payable no later than thirteen (13) months following the date of death or the Disability Date. 7.06 Prepayment of the Purchase Loan At the election of the Participant, he or she shall have the right to voluntarily prepay, without penalty, all or any portion of the amount due under the Promissory Note, at any time during the Loan Period. All prepayments shall first be applied to accrued interest on the Purchase Loan and then to the principal balance due on the Purchase Loan. 7.07 Event of Default The Participant's failure to pay when due any payment of interest or principal shall be deemed to be an event of default under the Promissory Note. Upon the occurrence of a default, the Participant shall pay all costs of collection, including but not limited to, reasonable attorney's fees, incurred by the Company or an affiliate, on account of any such collection, whether or not suit is filed hereon or on any instrument granting a security interest. ARTICLE 8 PROGRAM ADMINISTRATION An Administrative Committee consisting of one or more persons shall be designated by the Company. The Administrative Committee shall be responsible for overall administration of the Program, including recordkeeping and preparation of Purchase Loan documentation. ARTICLE 9 CHANGES IN THE OWNERSHIP GUIDELINES OR THE PROGRAM Subject to any required shareholder approval, the Company or an affiliate shall have the right to interpret, change, amend, modify or terminate the Ownership Guidelines or the Program at any time, except that the Company or an affiliate may not without the consent of the Participants, take any action that would adversely affect the rights or the obligations of the Participants under the Program in any material respect. 9 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ ARTICLE 10 MISCELLANEOUS PROVISIONS 10.01 Not an ERISA Plan This Program is restricted to key management employees selected by the Board of Directors and is not intended to constitute a "qualified plan" for federal income tax purposes and is not subject to the Employee Retirement Income Security Act of 1974, as amended. 10.02 Employment Not Guaranteed This Program is voluntary on the part of the Company or any affiliate, and the Program shall not be deemed to constitute an employment contract between the Company or any affiliate and any Participant, nor shall the adoption or existence of the Program or any provision contained in the Program be deemed to be a required condition of the employment of any Participant. Nothing contained in this Program shall be deemed to give any Participant the right to continued employment with the Company or any affiliate, and the Company or an affiliate may terminate any Participant at any time, in which case the Participant's rights arising under this Program shall be only those expressly provided under the terms of this Program. 10.03 Applicable Law The Program and related documents including, without limitation, the Loan Agreement and Promissory Note, shall be governed by and construed and enforced in accordance and with the laws of the State of Delaware, without regard to the application of the conflicts of law provisions thereof. 10.04 Notice All notices and other communications required or permitted to be given under the Program shall be in writing and shall be deemed to have been duly given if delivered personally or by inter-office mail as follows: (i) if to the Company, The IT Group, Inc., Mosside Boulevard, Monroeville, PA 15146-2792; (ii) if to a Participant, to the last home or business address of the Participant known to the sender. 10.05 Prohibition Against Assignment Except as otherwise expressly provided in this Program, the rights, interests and benefits of a Participant under this Program (a) may not be sold, assigned, transferred, pledged, hypothecated, gifted, bequeathed or otherwise disposed of to any other party by such Participant or any beneficiary, executor, administrator, heir, distributee or other person claiming under such Participant, and (b) shall not be subject to execution, attachment or similar process. Any attempted sale, assignment, transfer, pledge, hypothecation, gift, bequest or other disposition of 10 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ such rights, interests or benefits contrary to the foregoing provisions of this Section shall be null and void and without effect. 10.06 No Transfer of Interest. No provision of this Program shall be interpreted or construed (a) as transferring to any Participant or any other person or entity any direct or indirect ownership or other proprietary interest whatsoever in the Company or any affiliate or its stock or securities, or (b) as creating any partnership, joint venture or other joint business enterprise between any such person and the Company or any affiliate. The Company and each affiliate shall have and possess all title to and beneficial interest in, any and all funds or other property received by the Company or any affiliate in connection with the sale or other disposition of all or any portion of the Company's or any affiliate's assets and/or any funds or reserves maintained or held by the Company or any affiliate on account of any obligation as required under this Program, whether or not earmarked by the Company or any affiliate as a fund or reserve for such purpose; any such funds, other property or reserves shall be subject to the claims of the creditors of the Company or any affiliate, and the provisions of this Program are not intended to create, and shall not be interpreted as vesting in any Participant or other person, any right to or beneficial interest in any such funds, other property or reserves. 10.07 Amendment or Termination of the Program. The Compensation Committee of the Board of Directors may amend this Program from time to time in any respect that it deems appropriate or desirable, and the Committee may terminate this Program at any time; provided, however, that any such amendment or termination may not, without the written consent of a Participant, eliminate, reduce or otherwise adversely affect the rights of such Participant with respect to Purchase Loans and Grants made prior to the act of such amendment or termination, or, if earlier, the effective date of such amendment or termination. 10.08 Titles and Headings; Gender of Terms. Article and Section headings herein are for reference purposes only and shall not be deemed to be part of the substance of this Program or in any way to enlarge or limit the meaning or interpretation of any provision in this Program. Use in this Program of the masculine, feminine or neuter gender shall be deemed to include each of the omitted genders if the context so requires. 10.09 Severability. In the event that any provision of this Program is found to be invalid or otherwise unenforceable by a court or other tribunal of competent jurisdiction, such invalidity or unenforceability shall not be construed as rendering any other provision contained herein invalid 11 THE IT GROUP, INC. EXECUTIVE STOCK OWNERSHIP PROGRAM ================================================================================ or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein. IN WITNESS WHEREOF, the Company has caused this Program to be executed by its duly authorized officer, effective as provided in Section 1.02 hereof. THE IT GROUP, INC., a Delaware corporation By: /s/ Anthony J. DeLuca -------------------------------- Title: President ----------------------------- 12 EX-10.(III)(42) 6 IT GROUP EXECUTIVE BONUS PLAN Exhibit 10(iii)(42) THE IT GROUP, INC. EXECUTIVE BONUS PLAN ================================================================================ Effective November 17, 1998 TABLE OF CONTENTS Page ---- ARTICLE 1 INTRODUCTION....................................................1 1.01 Purpose................................................1 1.02 Effective Date and Term................................1 1.03 Participation..........................................1 ARTICLE 2 DEFINITIONS.....................................................1 2.01 Beneficiary............................................1 2.02 Board; Board of Directors..............................2 2.03 Bonus Payment..........................................2 2.04 Cause..................................................2 2.05 Change of Control......................................2 2.06 Change of Control Bonus................................2 2.07 Committee; Compensation Committee......................3 2.08 Common Stock...........................................3 2.09 Continued Service Bonus................................3 2.10 FICA...................................................3 2.11 Fiscal Year............................................3 2.12 Full-Time Employee.....................................3 2.13 Participant............................................3 2.14 Performance Bonus......................................3 2.15 Permanently Disabled...................................3 2.16 Retirement Date........................................4 2.17 Termination Date.......................................4 ARTICLE 3 ADMINISTRATION OF THE PLAN......................................4 ARTICLE 4 CONTINUED SERVICE BONUS.........................................4 4.01 Continued Service Bonus................................4 4.02 Separation from Service and Change of Control..........5 ARTICLE 5 PERFORMANCE BONUS...............................................6 5.01 Performance Bonus......................................6 5.02 Separation from Service................................6 ARTICLE 6 CHANGE OF CONTROL BONUS.........................................6 i ARTICLE 7 GROSS-UP PAYMENT................................................7 ARTICLE 8 GENERAL PROVISIONS..............................................7 8.01 Not an ERISA Plan......................................7 8.02 Employment Not Guaranteed..............................7 8.03 Applicable Law.........................................7 8.04 Notices................................................7 8.05 Prohibition Against Assignment.........................8 8.06 No Transfer of Interest................................8 8.07 Amendment or Termination of the Plan...................8 8.08 Titles and Headings; Gender of Terms...................8 8.09 Severability...........................................9 8.10 Violation of any Covenant or Law.......................9 8.11 Payments to Incapacitated Participant..................9 8.12 Designation of Beneficiary.............................9 ii THE IT GROUP, INC. EXECUTIVE BONUS PLAN ================================================================================ ARTICLE 1 INTRODUCTION 1.01 Purpose. The IT Group, Inc. Executive Bonus Plan (the "Plan"), is hereby established by the Compensation Committee of the Board of Directors of The IT Group, Inc. (the "Company") and its affiliates, to provide an additional incentive to certain key executives of the Company or its affiliates (any such executive shall be referred to hereinafter as a "Key Individual") to improve the Company's overall profitability and value on a sustainable long term basis. The Plan provides for a cash bonus based on years of service by a Key Individual, the future appreciation in the value of the Company as reflected in the value of the common stock of the Company ("Common Stock"), and any Change of Control, as specifically provided herein. 1.02 Effective Date and Term. This Plan is adopted effective as of November 17, 1998 (the "Effective Date"), and shall continue in effect until terminated by the Board of Directors (the "Plan Termination Date"). As of the Effective Date, no termination date has been established for this Plan. 1.03 Participation. Participation in this Plan shall be limited to those Key Individuals who are selected from time to time by the Committee to participate in this Plan. The participation in this Plan by any such Key Individual, and the payment of any Bonus Payments under this Plan to any such Key Individual, shall be governed by the terms of this Plan. ARTICLE 2 DEFINITIONS Capitalized terms used in this Plan shall have the meanings ascribed to them in this Article 2, except that in the case of any capitalized term not specifically defined in this Article 2, such term shall have the meaning assigned to it in the text of this Plan where such term first appears. 2.01 Beneficiary. "Beneficiary" shall mean, with respect to any Participant, the one or more persons and/or entities designated as such Participant's Beneficiary pursuant to Section 8.11 hereof. THE IT GROUP, INC. EXECUTIVE BONUS PLAN ================================================================================ 2.02 Board; Board of Directors. "Board" and "Board of Directors" each shall mean the Board of Directors of the Company. 2.03 Bonus Payment. "Bonus Payment" shall mean the amount payable as a Continued Service Bonus, a Performance Bonus, or a Change of Control Bonus, as defined herein. 2.04 Cause. "Cause" shall mean (a) willful misconduct by Participant resulting in material harm to the Company or an affiliate (including harm to the Company or an affiliate's public reputation), (b) the breach by Participant of any of his covenants contained in any agreement with the Company or an affiliate, (c) Participant's conviction of, or Participant's entering of a guilty plea with respect to, a felony or (d) Participant's misappropriation of corporate funds. 2.05 Change of Control. "Change of Control" shall mean the first to occur of the following events: (a) any date upon which the directors of the Company who were nominated by the Board of Directors for election as directors and/or were elected by the holders of the Cumulative Convertible Participating Preferred Stock cease to constitute a majority of the directors of the Company; (b) a reorganization, merger or consolidation of the Company, the consummation of which results in the outstanding securities of any class being exchanged for or converted into cash, property and/or securities not issued by the Company; (c) the acquisition of substantially all of the property and assets of the Company by any person or entity; (d) the dissolution or liquidation of the Company; or (e) the date of the first public announcement that any person or entity, together with all Affiliates and Associates (as capitalized terms are defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934) of such person or entity, shall have become the beneficial owner (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of voting securities of the Company representing 35% or more of the voting power of the Company; provided, however, that the terms "person" and "entity," as used in this clause (e), shall not include (x) the Company, any of its subsidiaries, The Carlyle Group and its Affiliates, (y) any employee benefit plan of the Company or any of its subsidiaries, or (z) any entity holding voting securities of the Company for or pursuant to the terms of any such plan. 2.06 Change of Control Bonus. "Change of Control Bonus" shall mean the cash bonus payment to which a Participant may become entitled pursuant to Article 6 and the terms of this Plan. 2 THE IT GROUP, INC. EXECUTIVE BONUS PLAN ================================================================================ 2.07 Committee; Compensation Committee. "Committee" and "Compensation Committee" each shall mean the Compensation Committee of the Board of Directors of the Company. 2.08 Common Stock. "Common Stock" shall mean the Company's common stock, $.01 par value per share. 2.09 Continued Service Bonus. "Continued Service Bonus" shall mean the cash bonus payment to which a Participant may become entitled pursuant to Article 4 and the terms of this Plan. 2.10 FICA. "FICA" shall mean the Federal Income Contributions Act. 2.11 Fiscal Year. "Fiscal Year" shall mean the Company's annual accounting period for tax and financial accounting purposes, which annual accounting period ends on the last Friday of each December. 2.12 Full-Time Employee. "Full-Time Employee" shall mean a person who is currently employed by the Company or an affiliate and completes at least 30 hours of employment each week. 2.13 Participant. "Participant" shall mean any Key Individual who is selected from time to time by the Board to participate in this Plan pursuant to Section 1.03 hereof and is currently employed by the Company or an affiliate. 2.14 Performance Bonus. "Performance Bonus" shall mean the cash bonus payment to which a Participant may become entitled pursuant to Article 5 and the terms of this Plan. 2.15 Permanently Disabled. "Permanently Disabled" shall mean the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period 3 THE IT GROUP, INC. EXECUTIVE BONUS PLAN ================================================================================ of not less than twelve (12) months. A Participant shall not be deemed to be Permanently Disabled until proof of the existence thereof shall have been furnished to the Administrative Committee in such form and manner, and at such times, as the Administrative Committee may require. Any determination by the Company or an affiliate that Participant is or is not Permanently Disabled shall be final and binding upon the Company or an affiliate and Participant. 2.16 Retirement Date. "Retirement Date" shall mean the last day of a Participant's employment with the Company or any affiliate which also constitutes his or her "Normal Retirement Date" under the IT Corporation Retirement Plan. 2.17 Termination Date. "Termination Date" shall mean the last day of a Participant's employment by the Company or an affiliate. ARTICLE 3 ADMINISTRATION OF THE PLAN This Plan shall be administered by the Compensation Committee. The Committee shall have full authority and power, to be exercised in its sole discretion, to make all determinations and/or decisions concerning the administration, application or interpretation of any provision of this Plan, and the Committee may adopt such rules and regulations as it may deem necessary, appropriate or helpful to carry out the purposes of this Plan. All determinations, decisions, interpretations, rules, regulations and other actions of the Committee concerning this Plan shall be final and shall be binding on all individuals and entities interested in this Plan (and any Beneficiary or other successor-in-interest to any such person or any such entity). ARTICLE 4 CONTINUED SERVICE BONUS 4.01 Continued Service Bonus. A Participant shall receive a Continued Service Bonus in an amount determined by the Committee and as set forth on a bonus agreement between the Participant and Company ("Bonus Agreement") for each anniversary of the Effective Date during the term of the Plan provided that such Participant is a Full-Time Employee on such anniversary date. 4 THE IT GROUP, INC. EXECUTIVE BONUS PLAN ================================================================================ 4.02 Separation from Service and Change of Control. Notwithstanding the foregoing, the occurrence of the following events will affect the participant's eligibility for a Continued Service Bonus as follows: (a) Termination of Employment for Cause; Voluntary Termination. A ---------------------------------------------------------- Participant shall not be eligible for any Continued Service Bonus under this Plan following a separation from service if such separation was due to termination by the Company or an affiliate for Cause or a voluntary termination by the Participant. (b) Termination Without Cause. In the event that a Participant's ------------------------- employment with the Company or an affiliate is terminated by either without Cause during the consecutive twelve-month period prior to an anniversary of the Effective Date (or such other date specified in the Participant's Bonus Agreement), the Termination Date for purposes of determining the Participant's eligibility for a Continued Service Bonus shall be deemed to have occurred six (6) months following the Participant's actual Termination Date. (c) Retirement of a Participant. In the event a Participant's --------------------------- employment terminates on or after his or her Retirement Date during the consecutive twelve-month period prior to an anniversary of the Effective Date (or such other date specified in the Participant's Bonus Agreement), such Participant shall be immediately eligible to receive any Continued Service Bonus for any outstanding anniversary or anniversaries of the Effective Date as if he or she had remained a Full-Time Employee through the last anniversary date on which a Continued Service Bonus is to be awarded. (d) Death or Disability of a Participant. In the event a Participant ------------------------------------ dies or becomes Permanently Disabled while employed by the Company or an affiliate during the consecutive twelve-month period prior to an anniversary of the Effective Date (or such other date specified in the Participant's Bonus Agreement), such Participant shall be immediately eligible to receive any Continued Service Bonus for any outstanding anniversary or anniversaries of the Effective Date (or such other date specified in the Participant's Bonus Agreement) as if he or she had remained a Full-Time Employee through the last anniversary date on which a Continued Service Bonus is to be awarded. (e) Change of Control. In the event a Change of Control occurs during ----------------- the term of this Plan and while the Participant is employed by the Company or an affiliate, a Participant shall be eligible for the balance of the total targeted Continued Service Bonus under the Plan as set forth in the Participant's Bonus Agreement. 5 THE IT GROUP, INC. EXECUTIVE BONUS PLAN ================================================================================ ARTICLE 5 PERFORMANCE BONUS 5.01 Performance Bonus. A Participant shall receive a Performance Bonus in an amount determined by the Committee and as set forth in the Participant's Bonus Agreement. 5.02 Separation from Service. Notwithstanding the foregoing, the occurrence of the following events will affect a Participant's eligibility for a Performance Bonus: (a) Termination of Employment for Cause; Voluntary Termination. A ---------------------------------------------------------- Participant shall not be eligible for any further Performance Bonus under this Plan if the Participant's separation from service was due to termination for Cause or voluntary termination. (b) Termination Without Cause. In the event that a Participant's ------------------------- employment with the Company or an affiliate is terminated without Cause, the Termination Date for the purposes of determining the Participant's eligibility for a Performance Bonus shall be deemed to have occurred six (6) months following the Participant's actual Termination Date. (c) Retirement of a Participant. In the event a Participant's --------------------------- employment terminates on or after his or her Retirement Date, the Termination Date for the purposes of determining the Participant's eligibility for a Performance Bonus shall be deemed to have occurred twelve (12) months following the Participant's actual Termination Date. (d) Death or Disability of a Participant. In the event a Participant ------------------------------------ dies or becomes Permanently Disabled, the Termination Date for the purposes of determining the Participant's eligibility for a Performance Bonus shall be deemed to have occurred twelve (12) months following the Participant's actual Termination Date. ARTICLE 6 CHANGE OF CONTROL BONUS In the event a Change of Control occurs during the term of this Plan, a Participant shall receive a Change of Control Bonus as set forth in his Bonus Agreement less any Continued Service Bonuses and Performance Bonuses actually received by the Participant prior to the Change of Control. 6 THE IT GROUP, INC. EXECUTIVE BONUS PLAN ================================================================================ ARTICLE 7 GROSS-UP PAYMENT A Participant who receives a Bonus Payment shall also receive a gross-up payment to offset his or her federal, state, and local income tax and FICA tax liability. The gross-up payment shall be equal to a Bonus Payment multiplied by a fraction, x/(1-x), where x equals the highest marginal combined effective federal, state, and local income tax rates imposed on a Bonus Payment, and reduced by any tax benefit associated with any interest expense deduction claimed by the Participant in the year of the receipt of such Bonus Payment. ARTICLE 8 GENERAL PROVISIONS 8.01 Not an ERISA Plan. This Plan is restricted to key management employees selected by the Board of Directors and is not intended to constitute a "qualified plan" for federal income tax purposes and is not subject to the Employee Retirement Income Security Act of 1974, as amended. 8.02 Employment Not Guaranteed. This Plan is voluntary on the part of the Company or any affiliate, and the Plan shall not be deemed to constitute an employment contract between the Company or any affiliate and any Participant, nor shall the adoption or existence of the Plan or any provision contained in the Plan be deemed to be a required condition of the employment of any Participant. Nothing contained in this Plan shall be deemed to give any Participant the right to continued employment with the Company or any affiliate, and the Company or an affiliate may terminate any Participant at any time, in which case the Participant's rights arising under this Plan shall be only those expressly provided under the terms of this Plan. 8.03 Applicable Law. This Plan shall be governed by and construed and enforced in accordance and with the laws of the State of Delaware, without regard to the application of the conflicts of law provisions thereof. 8.04 Notices. All notices and other communications required or permitted to be given under the Plan shall be in writing and shall be deemed to have been duly given if delivered personally or by inter-office mail as follows: (i) if to the Company, The IT Group, Inc., Mosside Boulevard, Monroeville, PA 15146-2792; (ii) if to a Participant, to the last home or business address of the Participant known to the sender. 7 THE IT GROUP, INC. EXECUTIVE BONUS PLAN ================================================================================ 8.05 Prohibition Against Assignment. Except as otherwise expressly provided in this Plan, the rights, interests and benefits of a Participant under this Plan (a) may not be sold, assigned, transferred, pledged, hypothecated, gifted, bequeathed or otherwise disposed of to any other party by such Participant or any Beneficiary, executor, administrator, heir, distributee or other person claiming under such Participant, and (b) shall not be subject to execution, attachment or similar process. Any attempted sale, assignment, transfer, pledge, hypothecation, gift, bequest or other disposition of such rights, interests or benefits contrary to the foregoing provisions of this Section shall be null and void and without effect. 8.06 No Transfer of Interest. No provision of this Plan shall be interpreted or construed (a) as transferring to any Participant or any other person or entity any direct or indirect ownership or other proprietary interest whatsoever in the Company or any affiliate or its stock or securities, or (b) as creating any partnership, joint venture or other joint business enterprise between any such person and the Company or any affiliate. The Company and each affiliate shall have and possess all title to, and beneficial interest in, any and all funds or other property received by the Company or any affiliate in connection with the sale or other disposition of all or any portion of the Company's or any affiliate's assets and/or any funds or reserves maintained or held by the Company or any affiliate on account of any obligation to pay the Bonus Payments as required under this Plan, whether or not earmarked by the Company or any affiliate as a fund or reserve for such purpose; any such funds, other property or reserves shall be subject to the claims of the creditors of the Company or any affiliate, and the provisions of this Plan are not intended to create, and shall not be interpreted as vesting, in any Participant, Beneficiary or other person, any right to or beneficial interest in any such funds, other properly or reserves. 8.07 Amendment or Termination of the Plan. The Compensation Committee may amend this Plan from time to time in any respect that it deems appropriate or desirable, and the Committee may terminate this Plan at any time; provided, however, that any such amendment or termination may not, without the written consent of a Participant, eliminate, reduce or otherwise adversely affect the rights of such Participant to receive payments under this Plan pursuant to Bonus Agreements entered into prior to the act of such amendment or termination, or, if earlier, the effective date of such amendment or termination. 8.08 Titles and Headings; Gender of Terms. Article and Section headings herein are for reference purposes only and shall not be deemed to be part of the substance of this Plan or in any way to enlarge or limit the meaning or 8 THE IT GROUP, INC. EXECUTIVE BONUS PLAN ================================================================================ interpretation of any provision in this Plan. Use in this Plan of the masculine, feminine or neuter gender shall be deemed to include each of the omitted genders if the context so requires. 8.09 Severability. In the event that any provision of this Plan is found to be invalid or otherwise unenforceable by a court or other tribunal of competent jurisdiction, such invalidity or unenforceability shall not be construed as rendering any other provision contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein. 8.10 Violation of any Covenant or Law. Notwithstanding any other provision of this Plan, the Company or any affiliate shall not be required to make a Bonus Payment to a Participant if making such Bonus Payment would cause the Company or an affiliate to violate any covenant or other similar provision in any indenture, loan agreement, or other agreement, or cause the Company or an affiliate to violate any applicable federal, state or local law. 8.11 Payments to Incapacitated Participant. In the event a Participant is under mental or physical incapacity at the time of any payment to be made to such Participant pursuant to this Plan, any such payment may be made to the conservator or other legally appointed personal representative having authority over and responsibility for the person or estate of such Participant, as the case may be, and for purposes of such payment references in this Plan to the Participant shall mean and refer to such conservator or other personal representative, whichever is applicable. In the absence of any lawfully appointed conservator or other personal representative of the person or estate of the Participant, any such payment may be made to any person or institution that has apparent responsibility for the person and/or estate of the Participant as determined by the Board. Any payment made in accordance with the provisions of this Section to a person or institution other than the Participant shall be deemed for all purposes of this Plan as the equivalent of a payment to such Participant, and the Company and its affiliates shall have no further obligation or responsibility with respect to such payment. 8.12 Designation of Beneficiary. A Participant shall be entitled to designate one or more persons or entities, in any combination, as his "Beneficiary" to receive any Plan payments to which such Participant is entitled in the event of the Participant's death during the term of this Plan. Any such designation shall be made in a written instrument filed with the Board. In the event that either (a) a Beneficiary designation is not on file at the date of a Participant's death, (b) no Beneficiary survives the Participant, or (c) the Beneficiary designated by a deceased Participant is not living 9 at the time any payment becomes payable under this Plan, then, for purposes of making any further payment of any unpaid Participation Payment (or any unpaid installment thereof), such Participant's Beneficiary shall be deemed to be the person or persons surviving him in the first of the following classes in which there is a survivor, share and share alike: (i) The Participant's surviving spouse. (ii) The Participant's children, except that if any of the children predecease the Participant but leave issue surviving, then such issue shall take by right of representation the share their parent would have taken if living. (iii) The Participant's estate. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officer, effective as provided in Section 1.02 hereof THE IT GROUP, INC. a Delaware corporation By: /s/ Anthony J. DeLuca ---------------------------------- Title: President ------------------------------- 10 EX-21.1 7 IT GROUP LIST OF SUBSIDIARY Exhibit 21.1 INTERNATIONAL TECHNOLOGY CORPORATION LIST OF SUBSIDIARY COMPANIES Beneco Enterprises, Inc. Chi Mei Entech Co., Ltd. Chi Mei International Technology Co. (Scientech), Ltd. GCAP Services, Inc. Gradient Corporation Groundwater Technology, Inc. GTI Investment Company Groundwater Technology Government Services, Inc. Groundwater Technology Overseas Corp. Fluor Daniel Environmental Services, Inc. IT International Investments, Inc. GTI Limited IT Environmental (Australia) PTY, Ltd. GTI Italia, S.R.I. International Technology Europe Ltd. IT Brownfields Services Corporation IT Corporation IT Corporation de Mexico, S.A. de C.V. IT Corporation Limited (formerly IT-McGill Limited) IT Corporation of North Carolina IT C&V Operations, Inc. IT E&C Operations, Inc. IT Environmental Programs, Inc. (formerly PEI Associates, Inc.) IT Europe Pollution Control Engineering, Ltd. (formerly IT-McGill Pollution Control Systems, Ltd.) IT Hanford, Inc. IT International Holdings, Inc. IT International Operations, Inc. IT Investment Holdings, Inc. IT Japan Services, Inc. IT Korea Services, Inc. IT Tulsa Holdings, Inc. (formerly IT-McGill Pollution Control Systems, Inc.) Jellinek, Schwartz & Connolly, Inc. (and its subsidiaries) Sielken, Inc. JSC International, Inc. JSC International, Ltd. KOHAP-IT, Ltd. LandBank, Inc. (and its subsidiaries and affiliates) LandBank Environmental Properties LLC Restoration Venture LLC Remediation Enterprises LLC Kato Road LLC LandBank Remediation Corp. Hercules LLC Northeast Restoration Company, LLC Empire State I, LLC Empire State II, LLC The Dorchester Group 37-02 College Point Boulevard, LLC OHM Corporation (Ohio) Environmental Financial Services Corp. OHM Environmental Resource Management Corp. OHM International, Inc. OHM Corporation (Nevada) Environmental Treatment & Technologies Corp. OHM Remediation Services Corp. OHM Savannah River Corp. OHM Energy Services Corp. OHM Remediation Services of Canada, Ltd. Alaska Remediation Services Corp. OH Mound Inc. Pacific Environmental Group, Inc. PHR Environmental Consultants, Inc. Universal Professional Insurance Company EX-23.1 8 CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8; No. 2-95647 and No. 33-11486) and in the related Prospectuses pertaining to The IT Group, Inc. 1983 Stock Incentive Plan, in the Registration Statement (Form S-8; No. 33-52974) and in the related Prospectus pertaining to The IT Group, Inc. 1991 Stock Option Plan, in the Registration Statement (Form S-8; No. 33-60861) relating to the shares of restricted stock to be issued under the Special Turnaround Plan, in the Registration Statement (Form S-8; No. 33-60881) relating to the additional shares under the 1991 Stock Incentive Plan, in the Registration Statement (Form S-8; No. 333-00651) relating to the shares issued under the IT Corporation Retirement Plan, in the Registration Statement (Form S-8; No. 333-27821) and in the related Prospectus pertaining to the 1996 Stock Incentive Plan, and in the Registration Statements (Form S-8; No. 333-26143 and No. 333-57065), and in the related Prospectus pertaining to the 1997 The IT Group, Inc. Non-Employee Director Stock Plan Director Fees, of our report dated February 15, 1999 with respect to the consolidated financial statements of The IT Group, Inc. included in this Annual Report (Form 10-K) for the nine months ended December 25, 1998. Ernst & Young LLP Pittsburgh, Pennsylvania March 17, 1999 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 25, 1998, ITS CONSOLIDATED STATEMENT OF OPERATION FOR THE NINE MONTHS ENDED DECEMBER 25, 1998 AND SCHEDULE II AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-25-1998 MAR-28-1998 DEC-25-1998 21,265 0 357,547 18,958 0 393,081 99,001 51,331 948,606 272,821 405,059 0 6,665 227 231,276 948,606 0 757,435 0 666,474 24,971 1,203 24,895 (733) 6,694 (7,427) 0 0 0 (7,427) (.63) (.63)
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