UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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OHM CORPORATION
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Notes:
[LOGO OF INTERNATIONAL
TECHNOLOGY CORPORATION] [LOGO OF OHM CORPORATION]
2790 MOSSIDE BOULEVARD 16406 U.S. ROUTE 224 EAST
MONROEVILLE, PENNSYLVANIA 15146 FINDLAY, OHIO 45840
May 20, 1998
The purpose of this Appendix (this "Appendix") to the Joint Proxy
Statement/Prospectus (the "Proxy Statement/Prospectus") of International
Technology Corporation ("ITC") and OHM Corporation ("OHM"), which this
Appendix accompanies, is to provide you with certain information regarding ITC
and OHM, which information is excerpted from certain reports filed by ITC and
OHM with the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended. To the extent there is more recent information
contained in the Proxy Statement/Prospectus, such information shall supersede
that found in this Appendix.
Sincerely,
/s/ Anthony J. DeLuca
Anthony J. DeLuca
Chief Executive Officer and President
International Technology Corporation
OHM Corporation
THE DATE OF THIS APPENDIX IS MAY 20, 1998.
APPENDIX DATED MAY 20, 1998
TO
JOINT PROXY STATEMENT/PROSPECTUS
OF
OHM CORPORATION
AND
INTERNATIONAL TECHNOLOGY CORPORATION
DATED MAY 11, 1998
TABLE OF CONTENTS
PAGE
----
OHM Corporation........................................................... 2
Business................................................................ 3
Properties.............................................................. 11
Legal Proceedings....................................................... 12
Management.............................................................. 13
Executive Compensation.................................................. 15
Certain Relationships and Related Transactions.......................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 24
Financial Statements and Supplementary Data............................. 34
International Technology Corporation...................................... 62
Business................................................................ 63
Properties.............................................................. 72
Legal Proceedings....................................................... 73
Management.............................................................. 73
Executive Compensation.................................................. 75
Certain Transactions.................................................... 82
Management's Discussion and Analysis of Results of Operations and
Financial Condition.................................................... 85
Financial Statements and Supplementary Data............................. 103
OHM CORPORATION
2
BUSINESS
OVERVIEW
OHM Corporation, an Ohio corporation, and its predecessors ("OHM"), is a
provider of technology-based, on-site hazardous waste remediation services in
the United States. OHM has been in the environmental services business since
1969. OHM has successfully completed approximately 32,000 projects involving
contaminated groundwater, soil and facilities.
OHM provides a wide range of environmental services, primarily to government
agencies and to large chemical, petroleum, transportation and industrial
companies. OHM has worked for the United States Environmental Protection
Agency ("EPA"), the Department of Defense ("DOD") (including the U.S. Army
Corps of Engineers ("USACE") and the U.S. Departments of the Air Force, Army
and Navy), the Department of Energy ("DOE"), a number of state and local
governments and a majority of the Fortune 100 industrial and service
companies. In addition to its technology-based, on-site remediation services,
OHM also offers a broad range of other services, including site assessment,
engineering, remedial design and incidental analytical testing. Service is
provided through 25 regional offices, nine mobile laboratories, and
approximately 2,700 pieces of mobile treatment and related field equipment.
Since the disposition by OHM in early 1993 of its interest in OHM Resource
Recovery Corp., the operator of a hazardous waste treatment and disposal
facility, OHM does not own or operate any hazardous waste disposal sites or
other off-site waste treatment or disposal facilities. OHM generally
coordinates through licensed subcontractors the transportation and disposal of
any hazardous waste which is not remediated on-site.
On May 30, 1995, pursuant to an Agreement and Plan of Reorganization, OHM,
through its wholly-owned subsidiary, OHM Remediation Services Corp. ("OHMR"),
acquired (the "Acquisition") in exchange for 9,668,000 shares of Common Stock
of OHM, par value $.10 per share ("Common Stock"), substantially all of the
assets and certain liabilities of the environmental remediation services
business of Rust International Inc. ("Rust"), a majority-owned subsidiary of
WMX Technologies, Inc. (n/k/a/ Waste Management, Inc. and referred to herein
as "WMX"). In connection with the Acquisition, OHM and WMX entered into a
Guaranty Agreement whereby, in exchange for a warrant (the "Warrants")
exercisable for five years to purchase 700,000 shares of Common Stock at a
price per share of $15.00, WMX agreed, until May 30, 2000, to guarantee
indebtedness of OHM in an amount not to exceed $62,000,000 which will increase
proportionately up to $75,000,000 upon issuance of shares under the warrant.
The Guaranty Agreement and related guarantees will terminate upon consummation
of the Merger described below. In addition, OHM entered into a Standstill and
Non-competition Agreement (the "Standstill Agreement") with WMX and its
affiliates. As contemplated by the Standstill Agreement, three designees of
WMX were elected to the Board of Directors of OHM. Key provisions of the
Standstill Agreement will terminate upon the occurrence of the Merger
described below.
On June 17, 1997, OHM acquired all of the issued and outstanding capital
stock of Beneco Enterprises, Inc., a Utah corporation ("Beneco"), from Bennie
Smith, Jr., Robert Newberry and Scott Doxey, for an aggregate purchase price
of $14,700,000. The purchase price was payable at closing as follows: (i)
$9,700,000 in cash and (ii) unsecured promissory notes in the aggregate
principal amount of $5,000,000. OHM has agreed to make an additional payment
in the year 2000 contingent upon the achievement of certain operating results
and other contractual conditions.
OHM has entered into an Agreement and Plan of Merger (the "Merger
Agreement"), dated January 15, 1998, by and among OHM, International
Technology Corporation ("Parent") and IT-Ohio, Inc. ("Purchaser"). Pursuant to
the Merger Agreement, on February 25, 1998 Purchaser, a wholly owned
subsidiary of Parent, completed a tender offer (the "Offer") for 13,933,000
shares of Common Stock (each, a "Share" and collectively, the "Shares") at a
price of $11.50 per Share, net to the tendering shareholder in cash. The Offer
was described in the Tender Offer Statement on Schedule 14D-1 filed by
Purchaser on January 16, 1998 with the Securities and Exchange Commission (the
"Commission").
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The Merger Agreement provides that, subject to the satisfaction or waiver of
certain conditions precedent (including the approval of the Merger Agreement
by holders of a majority of the outstanding Shares), Purchaser will merge with
and into OHM (the "Merger"), and OHM will be the surviving corporation in the
Merger, with the result that OHM will become a wholly owned subsidiary of
Parent. Based upon the preliminary results of the Offer and on the number of
shares of Common Stock outstanding on February 24, 1998, at the effective time
of the Merger, each remaining Share outstanding will be converted into the
right to receive approximately 1.077 shares of the common stock of Parent and
approximately $2.61 in cash.
James L. Kirk, Joseph R. Kirk, H. Wayne Huizenga and The Huizenga Family
Foundation, all shareholders of OHM, have entered into voting agreements
whereby they agree to vote their shares of Common Stock in favor of the
Merger.
Pursuant to the Merger Agreement and the Share Repurchase Agreement, dated
as of January 15, 1998 and as amended and restated as of February 11, 1998 and
as amended and restated as of February 17, 1998 (the "Repurchase Agreement"),
by and among OHM, Parent, WMX, Rust and Rust Remedial Services Holding Company
Inc., an affiliate of WMX, OHM repurchased from WMX and its affiliates
2,535,381 Shares for $11.50 per Share, concurrently with the payment for
Shares pursuant to the Offer (the "Repurchase"), and WMX and its affiliates
tendered 7,111,543 Shares in the Offer. Pursuant to the Repurchase Agreement,
WMX and its affiliates also agreed to vote all Shares held by them in favor of
the Merger. WMX also agreed to cancel, without payment of any separate
consideration, the Warrants and any rights it may have to purchase additional
shares of Common Stock.
OHM also has an approximately 40% interest in NSC Corporation ("NSC"), a
provider of asbestos abatement and specialty contracting services. Pursuant to
the Merger Agreement, OHM will pay a pro rata distribution (the "NSC
Distribution") to holders of record of the Shares as of the close of business
on February 24, 1998 of all of the shares of Common Stock, par value $0.01 per
share, of NSC held by OHM (the "NSC Shares"). The payment date for the NSC
Distribution is March 6, 1998, which is the earliest date on which the NSC
Distribution may be paid under OHM's Regulations. It is anticipated that the
NSC Distribution will be treated as a pro rata taxable redemption that
qualifies as a sale or exchange for tax purposes.
OHM'S ENVIRONMENTAL REMEDIATION SERVICES
OHM assists its clients by providing comprehensive on-site treatment of
toxic materials and hazardous wastes. By applying a broad range of biological,
chemical, physical, soil vapor extraction and thermal treatment technologies,
OHM performs on-site treatment and remediation services for the control,
detoxification, decontamination, and volume reduction of hazardous and toxic
material. Accordingly, OHM has designed a wide range of modular mobile
treatment equipment, which can be used on-site, either independently or in a
system, for removing, detoxifying, reducing the volume of, or stabilizing
contaminants. This equipment includes thermal destruction units, dewatering
presses, filters, separators, ion exchangers, stripping systems and mobile
process equipment which apply various physical, chemical and biological
technologies to remediate contaminants. Since 1970, OHM has completed
approximately 32,000 projects throughout the United States, cleaning up
hazardous wastes, removing toxic chemicals from groundwater and cleaning
facilities of contaminants.
OHM endeavors to offer clients an increasingly broad array of on-site
treatment services, either on a planned or emergency basis, from its 25
regional offices located throughout the country. OHM places its emphasis upon
planned work because of its more predictable resource requirements, and
because of its larger potential market. In 1997, planned projects accounted
for approximately 99% of OHM's revenue.
OHM believes that professional project management is a critical element in
limiting the significant risks and potential liabilities involved in
environmental remediation projects due to the presence of hazardous and toxic
substances. OHM has adopted a number of risk management policies and practices
including special employee training and health monitoring programs. OHM's
health and safety staff establish a safety plan for each project prior to the
initiation of work, monitor compliance with the plan and administer OHM's
medical monitoring program to staff involved. OHM believes that it has an
excellent overall health and safety record.
4
OHM believes that designing, developing and implementing solutions to
environmental hazards requires an interdisciplinary approach combining
practical field experience with remediation processes and technical skills in
fields such as chemistry, microbiology, hydrogeology, fluid mechanics,
thermodynamics, and geotechnical, biochemical and process engineering. OHM
employs scientific and engineering professionals in the environmental services
field who enhance OHM's ability to effectively participate in larger, more
technically complex remediation projects.
OHM has significant experience in the commercialization and practical field
application of new and existing technologies for the treatment of hazardous
wastes, with emphasis on the further development and application of existing
technologies.
GOVERNMENT OUTSOURCING MARKET
Through OHM's acquisition of Beneco, OHM has entered the government
outsourcing market for operations, maintenance and construction at federal
facilities. Beneco is a leading provider of project, program and construction
management services to the DOD, and state and local government agencies. The
Beneco acquisition is the first step to leveraging OHM's core competencies
into new, high growth service areas, specifically the outsourcing and
privatization trend occurring across federal, state and local levels of
government. Through Beneco, OHM may offer a service related business of a
recurring nature that is not dependent on regulatory enforcement.
FOCUS ON LARGER PROJECTS AND GOVERNMENT CONTRACTS
OHM pursues larger projects and term contracts as a method to achieve more
predictable revenue, more consistent utilization of equipment and personnel,
and greater leverage of sales and marketing costs. Historically, OHM relied
most heavily on private sector remediation projects in the Northeast and
Midwest that typically involved planned cleanups of sites that were
contaminated in the normal course of manufacturing activity and emergency
cleanups of oil or chemical spills. Contract values typically were less than
$1 million in size and less than one year in duration. OHM now targets more
complex, multi-million dollar, multi-year private sector and government site-
specific and term contracts. As a result of its shift in project focus, since
the beginning of 1991 OHM has been awarded a large number of multi-million
dollar government term contracts which, in some cases, may require several
years to complete. Although OHM still performs private sector remediation
projects, OHM currently derives a majority of its revenue from government term
contracts and these larger projects. Larger site-specific projects impose
heightened risks of loss in the event that actual costs are higher than those
estimated at the time of bid due to unanticipated problems, inefficient
project management, or disputes over the terms and specifications of the
contracted performance.
Since the beginning of 1991, OHM has been awarded a significant number of
government term contracts, and several large projects, with potential values
ranging from $10 million to $250 million and terms ranging from one to ten
years. Such government term contracts typically are performed by completing
remediation work under delivery orders, issued by the contracting government
entity, for a large number of small-to-medium-sized projects throughout the
geographic area covered by the contract. Such government term contracts do not
represent commitments with respect to the amount, if any, that will actually
be expended pursuant to such contracts, may generally be canceled, delayed or
modified at the sole option of the government, and are subject to annual
funding limitations and public sector budget constraints. Accordingly, such
government contracts represent the potential dollar value that may be expended
under such contracts; therefore, no assurance can be provided that such
amounts, if any, will be actually spent on any projects, or of the timing
thereof.
For the fiscal year ended December 31, 1997, 79% of OHM's revenue was
derived from federal, state and local government contracts. OHM expects that
the percentage of its revenue attributable to such government clients will
continue to represent a significant portion of its revenue. In addition to its
dependence on government contracts, OHM also faces the risks associated with
such contracting, which could include substantial civil and criminal fines and
penalties. As a result of its government contracting business, OHM is, has
been and may in
5
the future be subject to audits and investigations by government agencies. In
addition to potential damage to OHM's business reputation, the failure by OHM
to comply with the terms of its government contracts could also result in
OHM's suspension or debarment from future government contracts for a
significant period of time. The fines and penalties which could result from
noncompliance with appropriate standards and regulations, or OHM's suspension
or debarment, could have a material adverse effect on OHM's business,
particularly in light of the increasing importance to OHM of work for various
government agencies.
ENVIRONMENTAL CONTRACTOR RISKS
Although OHM believes that it generally benefits from increased
environmental regulations, and from enforcement of those regulations,
increased regulation and enforcement also create significant risks for OHM.
The assessment, remediation, analysis, handling and management of hazardous or
radioactive 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 violation of environmental laws and regulations, and
liabilities to customers and to third parties, including governmental
agencies, for damages arising from performing services for clients, which
could have a material adverse effect on OHM.
Potential Liabilities Arising Out of Environmental Laws and Regulations. All
facets of OHM's business are conducted in the context of a developing and
changing statutory and regulatory framework. OHM's operations and services are
affected by and subject to regulation by a number of federal agencies,
including the EPA, the Occupational Safety and Health Administration ("OSHA"),
and in limited occasions, the Nuclear Regulatory Commission, as well as
applicable state and local regulatory agencies. For a description of certain
applicable laws and regulations, see "Regulation."
Potential Liabilities Involving Clients and Third Parties. In performing
services for its clients, OHM could potentially be liable for breach of
contract, personal injury, property damage and negligence, including claims
for lack of timely performance and/or for failure to deliver the service
promised (including improper or negligent performance or design, failure to
meet specifications and breaches of express or implied warranties). The
damages available to a client, should it prevail in its claims, are
potentially large and could include consequential damages.
Environmental contractors, in connection with work performed for clients,
also potentially face liabilities to third parties from various claims,
including claims for property damage or personal injury stemming from a
release of hazardous substances or otherwise. Claims for damage to third
parties could arise in a number of ways, including through a sudden and
accidental release or discharge of contaminants or pollutants during the
performance of services, through the inability--despite reasonable care--of a
remedial plan to contain or correct an ongoing seepage or release of
pollutants, through the inadvertent exacerbation of an existing contamination
problem, or through reliance on reports prepared by OHM. Personal injury
claims could arise contemporaneously with performance of the work or long
after completion of the project as a result of alleged exposure to toxic
substances. In addition, increasing numbers of claimants assert that companies
performing environmental remediation should be held strictly liable (i.e.,
liable for damages regardless of whether its services were performed using
reasonable care) on the grounds that such services involved "abnormally
dangerous activities."
Clients frequently attempt to shift various liabilities arising out of
remediation of their own environmental problems to contractors through
contractual indemnities. Such provisions seek to require OHM to assume
liabilities for damage or injury to third parties and property and for
environmental fines and penalties. OHM has adopted risk management policies
designed to address these problems, but cannot assure their adequacy. In
addition, OHM generally coordinates through subcontractors the transportation
of any hazardous waste which is not remediated on-site to a licensed hazardous
waste disposal or incineration facility.
Moreover, during the past several years, the EPA and other governmental
agencies have constricted significantly the circumstances under which they
will indemnify contractors against liabilities incurred in connection with
remediation projects undertaken by contractors under contract with such
governmental agencies.
6
DEPENDENCE ON ENVIRONMENTAL REGULATION
Much of OHM's business is generated either directly or indirectly as a
result of federal and state laws, regulations and programs related to
environmental issues. Accordingly, a reduction in the number or scope of these
laws, regulations and programs, or changes in government policies regarding
the funding, implementation or enforcement of such laws, regulations and
programs, could have a material adverse effect on OHM's business. See
"Regulation."
MARKETS AND CUSTOMERS
OHM provides its services to a broad base of clients in both the private and
government sectors. Its private sector clients include large chemical,
petroleum, manufacturing, transportation, real estate, electronics,
automotive, aerospace and other industrial companies, as well as engineering
and consulting firms. OHM has worked for a majority of the Fortune 100
industrial companies. Historically, the majority of OHM's private sector
revenue was derived from projects with values typically less than $1 million
in size and less than one year in duration. Revenue from industrial clients
for 1997 was $112 million and constituted 21% of OHM's revenue.
In the government sector, the market for OHM's services primarily consists
of federal government agencies. OHM has been a prime contractor to the EPA
since 1984 under Emergency Response Cleanup Services ("ERCS") contracts
administered under the Superfund Removal Program. In addition, through site
specific and term contracts, OHM provides its services to the DOD, including
USACE, the U.S. Departments of the Navy, Air Force and Army, at DOE facilities
and to state and local governments. Revenue from government agencies in 1997
aggregated $415.1 million and accounted for 79% of revenue, of which the
Department of the Navy and the USACE accounted for approximately $158.9
million or 30% and $120.5 million or 23% of revenue, respectively.
SEASONALITY AND FLUCTUATION IN QUARTERLY RESULTS
The timing of OHM's revenue is dependent on its backlog, contract awards and
the performance requirements of each contract. OHM's revenue is also affected
by the timing of its clients' planned remediation activities which generally
increase during the third and fourth quarters. Because of this change in
demand, OHM's quarterly revenue can fluctuate, and revenue for the first and
second quarters of each year has historically been lower than for the third
and fourth quarters. Although OHM believes that the historical trend in
quarterly revenue for the third and fourth quarters of each year are generally
higher than the first and second quarters, there can be no assurance that this
will occur in future periods. Accordingly, quarterly or interim results should
not be considered indicative of results to be expected for any quarter or for
the full year.
COMPETITION
The environmental services industry is highly competitive with numerous
companies of various size, geographic presence and capabilities participating.
OHM believes that it has approximately a dozen principal competitors in the
environmental remediation sector of the environmental services industry and
numerous smaller competitors. OHM believes that the principal competitive
factors in its business are operational experience, technical proficiency,
breadth of services offered, local presence and price. In certain aspects of
OHM's environmental remediation business, substantial capital investment is
required for equipment. Certain of OHM's competitors have greater financial
resources, which could allow for greater investment in equipment and provide
better access to bonding and insurance markets to provide the financial
assurance instruments which are often required by clients. Additionally, the
relatively recent entry of several aerospace and defense contractors, as well
as large construction and engineering firms, into the environmental services
industry has increased the level of competition. OHM believes that the demand
for environmental services is still developing and expanding and, as a result,
many small and large firms will continue to be attracted to the industry.
7
INSURANCE
OHM maintains a comprehensive liability insurance program that is structured
to provide coverage for major and catastrophic losses while essentially self-
insuring losses that may occur in the ordinary course of business. OHM
contracts with primary and excess insurance carriers and generally retains
$250,000 to $500,000 of liability per occurrence through deductible programs,
self-insured retentions or through reinsurance provided by a wholly-owned
insurance captive which reinsures some of OHM's workers' compensation risks.
Although OHM believes its insurance program to be appropriate for the
management of its risks, its insurance policies may not fully cover risks
arising from OHM's 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 such insurance.
EMPLOYEES
OHM had approximately 2,800 employees at December 31, 1997. Five employees
of OHM were covered by collective bargaining agreements. OHM considers
relations with its employees to be satisfactory.
PATENTS
OHM currently owns two patents covering certain design features of equipment
employed in its on-site remediation business. The first relates to a
filtration system developed and used by OHM to remove pollutants from flowing
creeks and streams and the second, known as a Portable Method for
Decontaminating Earth, relates to a decontamination system used by OHM to
remove contaminants from the soil through a process, commonly known as soil
vapor extraction. OHM utilizes X*TRAX and LT*X to perform thermal desorption
services. The X*TRAX and LT*X systems are waste treatment processes that
thermally separate organic contaminants from soils or solids with subsequent
treatment of the organic vapor stream. Although OHM considers its patents to
be important, they are not a material factor in its business.
REGULATION
The environmental services business, including the remediation services
segment of the industry, has benefited from extensive federal and state
regulation of environmental matters. On the other hand, OHM's environmental
services are also subject to extensive federal and state legislation as well
as regulation by the EPA, the OSHA and applicable state and local regulatory
agencies. All facets of OHM's business are conducted in the context of a
rapidly developing and changing statutory and regulatory framework and an
aggressive enforcement and regulatory posture. The full impact of these laws
and regulations, and the enforcement thereof, on OHM's business is difficult
to predict, principally due to the complexity of the relatively new
legislation, new and changing regulations, and the impact of governmental and
economic pressures. 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.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA") addresses cleanup of sites at which there has been a release
or threatened release of hazardous substances or contaminants, including
certain radioactive substances, into the environment. CERCLA assigns liability
for costs of cleanup of such sites and for damage to natural resources to any
person who, currently or at the time of disposal of a hazardous substance,
owned or operated any facility at which hazardous substances were disposed of;
and to any person who by agreement or otherwise arranged for disposal or
treatment, or arranged with a transporter for transport for disposal or
treatment of hazardous substances owned or possessed by such person for
disposal or treatment by others; and to any person who accepted hazardous
substances for transport to disposal or treatment facilities or sites selected
by such persons from which there is a release or threatened release of
hazardous substances. CERCLA authorizes the federal government both to clean
up these sites itself
8
and to order persons responsible for the situation to do so. In addition,
under the authority of Superfund and its implementing regulations, detailed
requirements apply to the manner and degree of remediation of facilities and
sites where hazardous substances have been or are threatened to be released
into the environment. CERCLA created the Superfund to be used by the federal
government to pay for the cleanup efforts. Where the federal government
expends money for remedial activities, it may seek reimbursement from the
"potentially responsible parties." CERCLA imposes strict, joint and several
retroactive liability upon such parties. Increasingly, there are efforts to
expand the reach of CERCLA to make environmental contractors responsible for
cleanup costs by claiming that environmental contractors are owners or
operators of hazardous waste facilities or that they arranged for treatment,
transportation or disposal of hazardous substances. Several recent court
decisions have accepted these claims. Should OHM be held responsible under
CERCLA for damages caused while performing services or otherwise, it may be
forced to bear such liability by itself, notwithstanding the potential
availability of contribution or indemnity from other parties.
The statutory funding mechanism of CERCLA is comprised of contributions from
the general revenue and tax on petrochemical feedstocks. The CERCLA tax
expired December 31, 1995. However, an additional $1.5 billion was
appropriated for fiscal year 1998 and the authority to use the funds has been
extended through September 30, 1998. Additionally, EPA has a large amount of
appropriated, unobligated funds which are projected by the Congressional
Budget Office to be sufficient for EPA to continue operating at current levels
for approximately two years. In addition, under the Administration's current
budget proposal, an additional $650 million will become available whether or
not Superfund reauthorization legislation has been passed by Congress.
Bills to reauthorize Superfund have been introduced in both the Senate and
the House. Support for environmental programs remains strong in the Executive
Branch. President Clinton's fiscal year 1999 budget included increases in
funding for all EPA, Department of Defense and Department of Energy
environmental programs.
Despite the priority given by the Administration to reauthorization of
Superfund, and the history of Congress never to allow an actual lapse in the
tax, the perceived potential for this occurrence adversely impacts the
environmental industry due to resultant funding uncertainties. Additional
uncertainties arise from significant changes being considered for Superfund,
including shifting the current preference for permanent treatment to a wider
acceptance of containment and other engineering/institutional controls. This
change could lead to smaller volumes of waste being treated on-site, and the
potential to qualify for less stringent remedies could cause clients to delay
the initiation of remediation projects. However, many of the proposed changes
to Superfund are beneficial to the environmental remediation industry,
including doubling the dollar amount and time period in which emergency
removal actions take place, increasing contractor indemnification protections,
streamlining the study phase of the process to accelerate actual remediation,
and creating incentives for brownfield cleanups.
The Resource Conservation and Recovery Act of 1976, as amended in 1984
("RCRA"), is the principal federal statute governing hazardous waste
generation, treatment, storage and disposal. RCRA, or EPA-approved state
programs often more stringent, govern waste handling activities involving
wastes classified as "hazardous." Under RCRA, liability and stringent
operating requirements are imposed on a person who is either a "generator" or
"transporter" of hazardous wastes, or an "owner" or "operator" of a hazardous
waste treatment, storage or disposal facility. The EPA has issued regulations
under RCRA for hazardous waste generators, transporters and owners and
operators of hazardous waste treatment, storage or disposal facilities. These
regulations impose detailed operating, inspection, training, emergency
preparedness and response standards, and requirements for closure, continuing
financial responsibility, manifesting, recordkeeping and reporting. OHM's
clients remain responsible by law for the generation or transportation of
hazardous wastes or ownership or operation of hazardous waste treatment,
storage or disposal facilities. Although OHM does not believe its conduct in
performing environmental remediation services would cause it to be considered
liable as an owner or operator of a hazardous waste treatment, storage or
disposal facility, or a generator or transporter of hazardous wastes under
RCRA, RCRA and similar state statutes regulate OHM's practices for the
treatment, transportation and other handling of hazardous materials, and
substantial fines and penalties may be imposed for any violation of such
statutes and the regulations thereunder.
9
OHM's services are also utilized by its clients in complying with, and OHM's
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. In addition, many states have passed Superfund-
type legislation and other statutes, regulations and policies to cover more
detailed aspects of hazardous materials management.
OHM, through its on-site treatment capabilities and the use of
subcontractors, attempts to minimize its transportation of hazardous
substances and wastes. However, there are occasions, especially in connection
with its emergency response activities, when OHM does transport hazardous
substances and wastes. Such transportation activities are closely regulated by
the United States Department of Transportation, the Interstate Commerce
Commission, and transportation regulatory bodies in each state. The applicable
regulations include licensing requirements, truck safety requirements, weight
limitations and, in some areas, rate limitations and operating conditions.
BACKLOG AND POTENTIAL VALUE OF TERM CONTRACTS
The following table lists at the dates indicated (i) OHM's backlog, defined
as the unearned portion of OHM's existing contracts and unfilled orders, and
(ii) OHM's term contracts, defined as the potential value of government term
contracts (in thousands):
DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
Backlog.................................... $ 332,000 $ 375,000 $ 445,000
Term contracts............................. 1,509,000 1,401,000 1,531,000
---------- ---------- ----------
Total contract backlog................... $1,841,000 $1,776,000 $1,976,000
========== ========== ==========
Backlog. In accordance with industry practice, substantially all of OHM's
contracts in backlog may be terminated at the convenience of the client. In
addition, the amount of OHM's backlog is subject to changes in the scope of
services to be provided under any given contract. OHM estimates that
approximately 80% of the backlog at December 31, 1997 will be realized within
the next year.
Term Contracts. Term contracts typically are performed by completing
remediation work under delivery orders, issued by the contracting government
entity, for a large number of small-to-medium-sized projects throughout the
geographic area covered by the contract. OHM's government term contracts
generally may be canceled, delayed or modified at the sole option of the
government, and typically are subject to annual funding limitations and public
sector budget constraints. Accordingly, such government contracts represent
the potential dollar value that may be expended under such contracts, but
there is no assurance that such amounts, if any, will be actually spent on any
projects, or of the timing thereof.
NSC INVESTMENT
NSC is a provider of asbestos-abatement and other specialty contracting
services to a broad range of commercial, industrial and institutional clients
located throughout the United States. NSC provides asbestos-abatement services
through two of its wholly-owned subsidiaries, National Surface Cleaning, Inc.
and National Service Cleaning Corp.; demolition and dismantling services
through its wholly-owned subsidiary, Olshan Demolishing Management, Inc.
("ODMI"); and specialty coatings application and lead paint-abatement through
its wholly-owned subsidiary, NSC Specialty Coatings, Inc. In May 1993, OHM's
investment in NSC was reduced from 70% to 40% as a result of NSC's purchase of
the asbestos abatement division of The Brand Companies, Inc., an affiliate of
WMX, in exchange for its industrial cleaning and maintenance business and the
issuance of 4,010,000 shares of NSC common stock. In April 1995, NSC entered
into an agreement with Rust under which NSC, through ODMI, assumed the
management of Olshan Demolishing Company, a Rust subsidiary specializing in
demolition and dismantling, primarily in the industrial market. Rust owns
another 40% of NSC and the remaining 20% is publicly held.
10
An asbestos-abatement or demolition and dismantling program is focused on
meeting the needs of the facility owner or operator to manage properly the
financial, regulatory and safety-related risks associated with a demolition or
asbestos project. NSC's removal and demolition services require the
coordination of several processes: marketing, bidding and contracting, project
management, health and safety programs, and the actual asbestos removal or
dismantling and demolition. NSC management maintains administrative and
operational control over all phases of a project, from estimating and bidding
through project completion.
Although some of NSC's contracts are directly entered into with its clients
without a formal bidding process, NSC receives a significant portion of its
contracts through a bidding process. The majority of NSC's projects are
contracted on a fixed-price basis, while the remainder are contracted either
on a time and materials or a unit-price basis. All work is done in accordance
with applicable EPA and OSHA regulations and applicable state and local
regulations. NSC is also subject to the regulations of the Mine Safety and
Health Act when it conducts demolition and dismantling projects at mine
locations.
The market for asbestos abatement services is highly competitive. NSC
competes with large asbestos abatement firms, several of which provide
services on a regional basis. NSC also competes, to a lesser extent, with
smaller local and regional firms. While the demand for asbestos-abatement
services has stabilized, demand is still dependent on the fluctuation of
national and regional economies and the finite amount of asbestos remaining to
be removed, there can be no assurance that such demand will remain steady.
Through the diversification into the demolition, specialty coatings and lead
paint-abatement markets, NSC is seeking to provide a full range of specialty
contracting services to the performance-sensitive customer.
OHM has historically accounted for its investment in NSC on the equity
method. OHM now intends to divest its 40% share of NSC and recorded a write-
down of the investment in the second quarter of 1997.
NSC's Board of Directors declared and NSC paid a cash dividend of $602,000
to OHM for each of the years ended December 31, 1997, 1996 and 1995. While
NSC's Board of Directors has not established a policy concerning payment of
regular dividends, it has stated its intention to review annually the
feasibility of declaring additional dividends depending upon the results of
NSC's operations and the financial condition and cash needs of NSC.
Pursuant to the Merger Agreement, OHM will pay the NSC Distribution of NSC
Shares to holders of record of the Shares as of the close of business on
February 24, 1998. The payment date for the NSC Distribution is March 6, 1998,
which is the earliest date on which the NSC Distribution may be paid under
OHM's Regulations. It is anticipated that the NSC Distribution will be treated
as a pro rata taxable redemption that qualifies as a sale or exchange for tax
purposes.
PROPERTIES
OHM currently owns property in four states and leases property in 19 states
and the District of Columbia. The property owned by OHM includes approximately
26 acres in Findlay, Ohio, upon which are located OHM's 37,500 square foot
corporate headquarters, a 39,600 square foot laboratory and technical
facility, a 20,000 square foot support services facility, as well as its
fabrication, maintenance and remediation service center and training
facilities. OHM also owns remediation service centers in Covington, Georgia
(approximately ten acres of land and an 8,200 square foot building), Clermont,
Florida (approximately five acres of land and a 6,500 square foot building)
and Salt Lake City, Utah (approximately one third acre of land and a 6,097
square foot building).
OHM operates other offices and remediation service centers in the following
states: Alaska, Arizona, California, Colorado, the District of Columbia,
Florida, Georgia, Hawaii, Illinois, Iowa, Louisiana, Massachusetts, Minnesota,
Missouri, New Jersey, New York, Ohio, Pennsylvania, Tennessee, Texas, Utah,
Virginia and Washington. All of these offices and service center facilities
are leased. Under these leases, OHM is required to pay base rentals, real
estate taxes, utilities and other operating expenses. Annual rental payments
for the remediation service centers and office properties are approximately
$5,000,000.
11
LEGAL PROCEEDINGS
OHM is currently 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. OHM's work was substantially delayed and its
costs of performance were substantially increased as a result of conditions at
the site which OHM believes were materially different than as represented by
Occidental. Occidental's amended complaint seeks $8,806,000 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
$9,200,000 for damages arising from Occidental's breach of contract,
misrepresentation and failure to pay outstanding contract amounts. Management
believes that it has established adequate reserves should the resolution of
the above matter be lower than the amounts recorded and for other matters in
litigation or other claims and disputes.
OHM is in litigation with General Motors Corp. in the U.S. District Court
for the Northern District of New York. GM filed suit in January 1996 alleging
that OHM breached a contract between Hughes Environmental systems, Inc.
(HESI), a GM subsidiary, for work in 1994 for the remediation of 22,000 cubic
yards of PCB contaminated sediment in the St. Lawrence River in Massena. GM
seeks damages for $3.8 million. OHM in turn filed suit against HESI and ERM
Northeast, Inc. in U.S. District Court in Northern New York seeing $3.6
million in damages for breach of contract. The GM suit was later consolidated
with OHM's suit against HESI and ERM. GM alleges that OHM abandoned the
contract through inability to perform while OHM claims that performance was
impacted by conditions at the site that were not as represented.
In addition to the above, OHM is subject to a number of claims and lawsuits
in the ordinary course of its business. In the opinion of management, the
outcome of these actions, which are not clearly determinable at the present
time, are either adequately covered by insurance, or if not insured, will not,
in the aggregate, have a material adverse impact upon OHM's consolidated
financial position or the results of future operations.
In the course of OHM's business, there is always risk and uncertainty in
pursuing and defending claims, litigation and arbitration proceedings in the
course of OHM's remediation business and, notwithstanding the reserves
currently established, adverse future results in litigation or other
proceedings could have a material adverse impact upon OHM's consolidated
future results of operations or financial condition.
12
MANAGEMENT
DIRECTORS OF OHM
POSITIONS AND OTHER RELATIONSHIPS WITH OHM AND
NAME AGE BUSINESS EXPERIENCE
---- --- ----------------------------------------------
Herbert A. Getz........... 41 Director and member of the Compensation and
Stock Option Committee. Mr. Getz has been
Senior Vice President of WMX since May 1995
and General Counsel of WMX since August 1992.
Mr. Getz also served as Vice President from
May 1990 to May 1995 and as Secretary of WMX
since January 1988. Mr. Getz served as
Assistant General Counsel from December 1985
until August 1992. Mr. Getz has also held the
offices of Vice President, General Counsel and
Secretary of Waste Management, Inc., a
provider of solid waste management services,
from April 1989 until December 1993, and Vice
President and Secretary of Rust International
Inc. ("Rust"), a provider of engineering,
construction, environmental, infrastructure,
consulting services and other on-site
industrial and related services, from January
1993 to May 1994. He has also served as Vice
President and Secretary of Wheelabrator
Technologies Inc. ("WTI") a provider of
environmental products and services, from July
1995 until January 1997, as well as being the
General Counsel of WTI from November 1990
until May 1993. Mr. Getz is a director of NSC
Corporation.
Ivan W. Gorr.............. 67 Director and Chairman of the Audit Committee
and member of the Compensation and Stock
Option and Executive Committees. Mr. Gorr
retired as Chairman of the Board of Directors
and Chief Executive Officer of Cooper Tire &
Rubber Company of Findlay, Ohio, a
manufacturer of tires and other rubber
products. Mr. Gorr is a director of Amcast
Industrial Corporation, Arvin Industries,
Inc., The Fifth Third Bancorp and Borg-Warner
Automotive.
Dr. Charles D. Hollister.. 60 Director and member of the Audit Committee.
Since 1979, Dr. Hollister has been Senior
Scientist and Vice President of Woods Hole
Oceanographic Institution, Woods Hole,
Massachusetts, a non-profit oceanographic
research institution.
William P. Hulligan....... 53 Director and member of the Executive Committee.
Mr. Hulligan has served as Executive Vice
President of Waste Management, Inc. since
January 1996. Prior to this position, he was
President of the Midwest Group of Waste
Management, Inc., from March 1993 until
January 1996, and President of the East Group
of Waste Management, Inc. from 1992 until
March 1993. Mr. Hulligan is a director of
National Seal Company and NSC Corporation.
James L. Kirk(1).......... 47 Chairman of the Board of Directors, President
and Chief Executive Officer and Chairman of
the Executive Committee. Mr. Kirk has been
President and Chief Executive Officer of the
Company since July 1986 and, in addition, was
elected Chairman of the Board in January 1987.
He has served as Chairman of the Board and
President of OHM Remediation Services Corp., a
wholly owned subsidiary of the Company
("OHMR"), since April 1985. Mr. Kirk is a
founder of OHMR and has served in various
capacities as an officer and director of OHMR.
13
POSITIONS AND OTHER RELATIONSHIPS WITH OHM AND
NAME AGE BUSINESS EXPERIENCE
---- --- ----------------------------------------------
Joseph R. Kirk(1)....... 45 Executive Vice President and Director, positions
he has held since July 1986. Mr. Kirk served as
Vice Chairman of OHMR from April 1985 until
July 1986 and continues to serve as Executive
Vice President of OHMR. He is a founder of OHMR
and has served in various capacities as an
officer and director of OHMR.
James E. Koenig......... 49 Director and member of the Audit Committee. Mr.
Koenig was elected Executive Vice President of
WMX and President of Waste Management Shared
Services in February 1997. Prior to this
position, he was Senior Vice President of WMX
from May 1992 until February 1997, Chief
Financial Officer of WMX since 1989 and Vice
President and Treasurer of WMX since December
1986. Mr. Koenig served as Vice President,
Chief Financial Officer and Treasurer of WTI
from November 1990 to May 1993 and Vice
President, Chief Financial Officer and
Treasurer of Rust from January 1993 to August
1993. Mr. Koenig is a director of National Seal
Company, WTI and Waste Management
International, plc.
Richard W. Pogue........ 69 Director and member of the Executive Committee.
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
Associates, Inc., Rotek Incorporated and TRW
Inc.
Charles W. Schmidt...... 68 Director and Chairman of the Compensation and
Stock Option Committee and member of the
Executive Committee. Mr. Schmidt retired in
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. Mr. Schmidt also serves as a director
of the Massachusetts Financial Services Family
of Mutual Funds and Mohawk Paper Company.
- --------
(1) James L. Kirk and Joseph R. Kirk are brothers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, OHM's directors, executive
officers, and any persons holding more than ten percent of OHM's Common Stock
are required to report their initial ownership of OHM's Common Stock and any
subsequent changes in that ownership to the Commission. Specific due dates for
these reports have been established and OHM is required to disclose in its
Proxy Statement any failure to file by these dates. All of these filing
requirements were satisfied except that James L. Kirk failed to report a
September 26, 1997 sale of 25,900 shares in his September, 1997 Form 4, but
did report that sale in an amended Form 4 filed on February 10, 1998, and
Pamela K.M. Beall, Vice President, Treasurer and Assistant Secretary and Fred
H. Halvorsen, Vice President, Health and Safety, each filed one late Form 4
reporting an exercise of stock option.
14
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ended December 31, 1997,
1996 and 1995, the cash compensation paid by OHM and its subsidiaries, as well
as certain other compensation paid or accrued for those years, to each of the
five most highly compensated executive officers of OHM in 1997, including the
Chief Executive Officer of OHM, in all capacities in which they served:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
GRANTED (#)
---------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
-------------------- OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($)(2) (#)(3) ($)(4)
------------------ ---- ------- ------- ------------ ---------- ---------- ------------
James L. Kirk........... 1997 452,830 256,750 0 0 125,000 23,883
Chairman, President and 1996 376,747 0 44,841 351,750 68,279 17,568
Chief Executive Officer 1995 330,013 0 0 0 70,000 5,347
Michael A. Szomjassy.... 1997 281,363 155,995 0 0 50,000 41,748
Vice President, 1996 288,093 25,000 0 150,750 65,275 14,682
Eastern Operations 1995 256,266 0 0 0 25,000 5,184
Philip V. Petrocelli.... 1997 274,122 125,500 0 0 50,000 110,677
Vice President, 1996 264,040 65,476 0 143,375 100,489 76,528
Western Operations 1995 232,513 50,000 50,839 25,000 25,000 19,435
Philip O. Strawbridge... 1997 262,376 119,000 0 0 75,000 109,817
Vice President and 1996 187,321 0 0 108,875 22,967 47,305
Chief Financial Officer 1995 0 0 0 0 0 0
Robert J. Blackwell..... 1997 251,708 114,000 0 0 42,000 108,000
Vice President,
Marketing and 1996 225,349 28,125 25,505 125,625 66,092 36,621
Strategic Planning 1995 193,768 30,000 0 0 25,000 29,591
- --------
(1) Amounts in 1996 include $37,392 and 0 for financial planning services;
$2,126 and $3,377 for country club dues; and $5,323 and $11,845
representing earnings on the contributions made to the retirement deferral
accounts in accordance with OHM's Retirement and Incentive Compensation
Plan for Messrs. James L. Kirk and Robert J. Blackwell, respectively.
Amount in 1996 for Mr. Blackwell includes $7,583 for miscellaneous
perquisites and $2,700 for imputed interest. Amount in 1995 for Mr.
Petrocelli includes $43,938, $4,466, and $2,435 paid to him for
reimbursement of tax costs in connection with the relocation of his
principal residence, imputed interest and miscellaneous perquisites,
respectively.
(2) Represents 42,000, 18,000, 17,000, 13,000 and 15,000 shares of restricted
stock which were granted to Messrs. James L. Kirk, Szomjassy, Petrocelli,
Strawbridge and Blackwell, respectively, the value of which was $8.375 per
share as of December 31, 1996.
(3) Amounts in 1996 include 69,453, 31,135, and 38,092 stock options which
were granted to Messrs. Petrocelli, Szomjassy, and Blackwell,
respectively, on May 9, 1996 in exchange for the surrender of previously
granted options.
(4) Amounts in 1995 for Messrs. Petrocelli and Blackwell include $14,286 and
$25,000, respectively, in loans forgiven by OHM. Amount in 1996 for Mr.
Strawbridge includes $47,261 for a relocation expenses. Amount in 1996 for
Mr. Petrocelli includes $19,048 for a loan forgiven by OHM. Amounts in
1996 include matching contributions to each individual's Retirement and
Incentive Compensation Plan account of $17,568, $14,682, $57,480, and
$36,561, on behalf of Messrs. James L. Kirk, Szomjassy, Petrocelli, and
Blackwell, respectively. Amounts in 1997 for Messrs. Petrocelli,
Strawbridge, and Blackwell include
15
$14,285, $10,000 and $20,000, respectively, in loans forgiven by OHM. See
"Certain Relationships and Related Transactions--Transactions with
Management." Amounts in 1997 include matching contributions to each
individual's Retirement and Incentive Compensation Plan account of $22,347,
$35,320, $89,165, $92,600, and $79,931; and matching contributions to each
individual 401(k) account of $0, $5,712, $6,352, $6,352 and $6,352, on
behalf of Messrs. Kirk, Szomjassy, Petrocelli, Strawbridge, and Blackwell,
respectively. On December 30, 1997, pursuant to resolutions approved by the
Board of Directors, the vested portion of each individual's Retirement and
Incentive Compensation Plan account was distributed to Messrs. James L.
Kirk, Szomjassy, Petrocelli, Strawbridge, and Blackwell, in the amounts of
$109,896, $95,489, $312,464, $123,894, and $257,233, respectively.
STOCK OPTIONS
The following table sets forth information with respect to grants of options
pursuant to OHM's 1986 Stock Option Plan made to the executive officers named
in the Summary Compensation Table during the 1997 fiscal year.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION -------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- --------------- ----------- ---------- ----------- -------------
James L. Kirk........... 125,000 15.49 8.500 02/12/07 $668,200.54 $1,693,351.36
Philip O. Strawbridge... 75,000 9.29 8.500 02/12/07 $400,920.32 $1,018,010.82
Michael A. Szomjassy.... 50,000 6.20 8.500 02/12/07 $267,280.22 $ 677,340.55
Robert J. Blackwell..... 42,000 5.20 8.500 02/12/07 $224,515.38 $ 568,966.06
Philip V. Petrocelli.... 50,000 6.20 8.500 02/12/07 $267,280.22 $ 677,340.55
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the executives
named in the Summary Compensation Table concerning the exercise of options
during the last fiscal year and the value of unexercised options held as of
the end of the fiscal year.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
VALUE REALIZED NUMBER OF SECURITIES VALUE OF UNEXERCISED
(MARKET PRICE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES AT EXERCISE OPTIONS AT FY-END (#) AT FY-END ($)
ACQUIRED ON LESS EXERCISE ------------------------- -------------------------
NAME EXERCISE (#) PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ----------- ------------- ----------- -------------
James L. Kirk........... -- -- 249,070 214,209 21,000 14,000
Michael A. Szomjassy.... -- -- 110,558 89,717 7,500 5,000
Philip V. Petrocelli.... -- -- 89,901 85,558 7,500 5,000
Philip O. Strawbridge... -- -- 11,992 110,975 1,563 4,688
Robert J. Blackwell..... -- -- 49,530 83,562 7,500 5,000
Pursuant to the Merger Agreement, each holder of an option to purchase a
share of Company Common Stock was required to elect how their options would be
treated as a result of the Merger Agreement. Option-holders could elect that
each option, whether vested or unvested, exercisable or unexercisable, be
converted into the right to receive an amount in cash equal to the excess of
$11.50 over the exercise price per share subject to the option, multiplied by
the number of shares subject to the option.
16
Alternatively, option-holders could elect to receive an option to acquire,
on the same terms and conditions as were applicable to the option-holder's
existing option, a number of shares of Parent Common Stock equivalent to the
number of shares that could have been purchased under the option-holder's
option multiplied by 1.394 (rounded up to the nearest whole number of shares
of Parent Common Stock).
The exercise price under the new Parent options would be equal to the
exercise price for the shares under the existing Company options divided by
1.394 (rounded up to the nearest whole cent).
In the case of any Company option to which Section 422 of the Internal
Revenue Code of 1986, as amended applied, the option price, the number of
shares purchasable pursuant to such option and the terms and conditions of
exercise of such option was determined in accordance with the foregoing,
subject to such adjustments as were necessary in order to satisfy the
requirements of Section 424(a) of the Internal Revenue Code of 1986, as
amended (the "Code")
RETIREMENT AND INCENTIVE COMPENSATION PLAN
Effective January 1, 1996, the Board of Directors of OHM adopted the
Executive Retirement Plan and subsequently amended it on June 21, 1996 and
renamed the plan as the Retirement and Incentive Compensation Plan ("RICP").
The RICP is administered by the Compensation and Stock Option Committee. The
principal purpose of the RICP is to allow executive officers to defer current
federal income taxation of their compensation and, along with OHM's matching
contribution, accumulate moneys towards retirement in the absence of any
Company retirement plan, other than OHM's Retirement Saving Plan which
severely restricts officer participation due to certain Internal Revenue
Service limitations. Pursuant to the terms of the RICP, executive officers may
defer up to 50% of their compensation during any year, provided that such
executive officer may not defer more than 30% of his or her compensation
during any year to such individual's Retirement Deferral Account (as described
below). OHM matches 50% of the amounts deferred by the participant and
deposited into the Retirement Deferral Account and matches 100% of the amounts
deferred by the participant and deposited into the OHM Common Stock Deferral
Account. The participant's contribution, plus OHM match, remain unfunded by
OHM until paid to the participant at retirement or other termination of
employment. Any amounts deferred by the participant and deposited into the
Retirement Deferral Account, and Company matching contributions, are credited
monthly with interest at the prime rate and are increased yearly by the annual
increase in the S&P 500 index if such increase exceeds the interest credited
monthly to the participant during the calendar year. Any amounts deferred by
the participant and deposited into the OHM Common Stock Deferral Account, and
Company matching contributions, are credited monthly in units on the basis of
the average of the market value of OHM's Common Stock during the preceding
calendar month.
OHM CORPORATION RETIREMENT SAVINGS PLAN
OHM's Retirement Savings Plan (the "Retirement Plan") was established in
1986. Officers of OHM, together with substantially all full-time salaried
employees and certain other employees of OHM and its subsidiaries, are
eligible to participate in the Retirement Plan. Participants may make basic
contributions of up to a combination of 15% of their compensation, as defined
in the Retirement Plan, which qualify for deferred tax treatment under Section
401(k) of the Code. OHM makes matching contributions of 100% of the first two
percent of the participant's compensation contributed to the Retirement Plan
and 50% of the next four percent of the participant's compensation contributed
to the Retirement Plan. Matching contributions are allocated to the accounts
of participants in the Retirement Plan who have completed two years of
service. OHM also may, in its discretion, make profit sharing contributions to
the Retirement Plan which will be allocated to all eligible employees. All
participant contributions are invested at the direction of the participant,
and all profit sharing contributions are invested at the direction of the
Retirement Plan committee. Matching contributions are made in Company stock
and, upon allocation to a participant's account, may be reinvested at the
direction of the participant. Amounts attributable to OHM's matching
contributions vest upon the earlier of (i) the completion of two years of
service, or (ii) the participant's death, disability or attaining age 65 while
an employee. During 1997, an aggregate of $46,472 was contributed as matching
contributions under the Retirement Plan to the accounts of
17
all executive officers as a group. Matching contributions for the five most
highly compensated executed officers named are shown above under the heading
"Executive Compensation and Other Information, Summary of Cash and Certain
Other Compensation." OHM made no profit sharing contributions to the
retirement plan during 1997.
DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN
OHM recognizes the importance of attracting and retaining outstanding
individuals as directors and of stimulating the active interest of these
persons in the development and financial success of OHM. In addition, OHM
endorses the position that stock ownership arrangements are beneficial in
aligning Directors' and shareholders' interests in the enhancement of
shareholder value. The Board of Directors believes that the Directors' Non-
Qualified Stock Option Plan (the "Director Option Plan") is a significant
factor in furtherance of these objectives and intends, through the Director
Option Plan, to increase OHM's profits by providing such persons with
opportunities to acquire shares of the Common Stock of OHM on advantageous
terms.
Only Directors who are not employees of OHM and its subsidiaries are
eligible to participate in the Director Option Plan. The Director Option Plan
provides that the total number of shares that may be sold upon the exercise of
stock options shall not exceed 1,000,000 shares of Common Stock. The Director
Option Plan is of indefinite duration and will continue in effect until all
shares reserved for options thereunder have been sold or until earlier
termination of the Director Option Plan.
The Director Option Plan provides for automatic grants of options to
purchase shares of Common Stock of OHM to Directors of OHM who are not
employees of OHM or its subsidiaries. Under the Director Option Plan, each
person who was an incumbent non-employee Director of OHM received an option to
purchase 15,000 shares of Common Stock, as of August 6, 1992, the effective
date of the Director Option Plan, provided that the total number of shares
each optionee was eligible to receive was reduced by the number of shares of
Common Stock subject to prior option grants to such Director. Each person who
first becomes a non-employee Director of OHM after the effective date is
entitled to receive an option to purchase 15,000 shares of Common Stock as of
the date such person first became a non-employee Director. Each person who is
a non-employee Director of OHM is entitled to receive an option to purchase
5,000 shares of Common Stock immediately after each of OHM's annual meetings
of shareholders. An option is exercisable in full upon six months of
continuous service as a non-employee Director. Options granted under the
Director Option Plan are options that do not qualify under particular
provisions of the Code. The Director Option Plan is administered by employee
directors who are not eligible to participate in the Director Option Plan.
DIRECTORS' DEFERRED FEE PLAN
The Board of Directors has adopted the Directors' Deferred Fee Plan (the
"Deferred Fee Plan"), the purpose of which is to help solidify the common
interest of Directors and shareholders in enhancing the value of OHM's Common
Stock. It is also intended that the Deferred Fee Plan will assist in
attracting and retaining qualified individuals to serve as Directors. The
Deferred Fee Plan will give those Directors who are not also employees of OHM
an opportunity to defer current federal income taxation of all or a portion of
their annual retainer and meeting fees payable by OHM for their services as a
Director.
Under the terms of the Deferred Fee Plan, a Director may elect to have his
or her Director's fees credited to an account in either cash or units (an
accounting unit equal in value to one share of Common Stock). Deferred fees
that a Director elects to have credited in cash will be credited to the
Director's account as they become payable to the Director. A Director's
account to which fees have been credited in cash will earn interest annually
at the rate of interest payable on one-year U.S. Treasury Bills or such other
rate as the Committee designated by the Deferred Fee Plan may establish. In no
event, however, will the rate of interest be more than five percent higher
than the rate payable on such U.S. Treasury Bills. Deferred fees payable in
units will be credited, together with an amount equal to 10% of such deferred
fees, to a Director's account after the end of the fiscal year on the basis of
the average of the market values of the Common Stock on the last trading day
in each calendar month
18
during the year. Each account to which fees have been credited in units shall
be credited annually after the end of each fiscal year with additional units
equal in value to the amount of cash dividends paid by OHM during such year on
Common Stock equivalent to the average daily balance of units in such account
during the year. The maximum number of units that may be granted under the
Deferred Fee Plan during its term is 100,000 in the aggregate. The Deferred
Fee Plan is administered by a Committee consisting of the Chairman of the
Board (provided he is an employee-director) and two Company officers or
directors who are employee-directors appointed by the Chairman of the Board.
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Gorr, Getz and Schmidt are members of the Compensation and Stock
Option Committee of the Board of Directors of OHM. Mr. Getz is employed by
WMX, which beneficially owns 37.63% of OHM's Common Stock. WMX and its
affiliates and OHM are parties to various agreements, including the Guaranty
Agreement, the Warrant Agreement and the Standstill and Non-Competition
Agreement discussed below. See "Certain Relationships and Related
Transactions."
BOARD COMPENSATION AND STOCK OPTION COMMITTEE REPORT*
The primary function of the Compensation and Stock Option Committee is to
review and approve salaries and other benefits for executive officers of OHM,
to make recommendations to the Board of Directors with respect to the adoption
of employee benefit programs and to administer OHM's stock option plans and to
approve awards of stock options made under OHM's 1986 Stock Option Plan. The
Compensation and Stock Option Committee is composed of three Directors,
Messrs. Gorr, Getz and Schmidt, who are not executive officers of OHM. Set
forth below is a report of Messrs. Gorr, Getz and Schmidt in their capacity as
the Board's Compensation and Stock Option Committee addressing OHM's
compensation policies for 1996 as they affected Mr. James L. Kirk and the
other executive officers of OHM.
The Compensation and Stock Option Committee's executive compensation
policies are designed to provide levels of compensation that integrate pay
(considered in connection with grants of stock options under OHM's 1986 Stock
Option Plan) with OHM's annual and long-term performance goals, reward
individual achievement and attract and retain qualified executives, all in the
context of the highly competitive industry in which OHM operates.
Salaries for executive officers are determined periodically by evaluating
the performance of the individuals reviewed and their contributions to the
performance of OHM and particular business units, as applicable, their
responsibilities, experience, potential and period of service at their current
salary. Financial results as well as appropriate non-financial measures are
considered. Factors consistent with OHM's overall compensation policy and
strategy may also be considered. With respect to executive officers, OHM's
Management Incentive Plan provides bonus awards based upon OHM's achievement
of certain financial goals, and allows the Committee to grant discretionary
bonus awards for exemplary performance or to reward special achievements which
impact Company results. In its deliberations, the Committee takes into account
the recommendations of appropriate Company officials. See "1996 Management
Incentive Plan."
The Compensation and Stock Option Committee also endorses the position that
stock ownership by management and stock-based performance compensation
arrangements are beneficial in aligning management's and shareholders'
interest in the enhancement of shareholder value. The granting of stock
options pursuant to OHM's 1986 Stock Option Plan is also within the authority
of the Compensation and Stock Option Committee. In determining grants of stock
options to executive officers, the Compensation and Stock Option Committee has
followed policies substantially similar to those described above with respect
to compensation. James L. Kirk received grants of stock options covering
68,279 shares of Common Stock in 1996, exercisable in installments
- --------
* Note: This information is not incorporated by reference in any prior or
future Securities and Exchange Commission filings, directly or by reference
to the incorporation of proxy statements of OHM, unless such filing
specifically incorporates this information.
19
over a four-year period. The Compensation and Stock Option Committee
considers, in granting such options to Mr. Kirk, the view expressed above that
stock ownership by Mr. Kirk beneficially aligns his interests with the
interests of OHM's shareholders.
Mr. James L. Kirk's annual base salary of $450,000.00 was established in
February 1997.
Section 162(m) of the Internal Revenue Code of 1986, as amended, prohibits a
publicly held corporation, such as OHM, from claiming a deduction on its
federal income tax return for compensation in excess of $1,000,000 paid for a
given federal year to certain executives. Because of OHM's current
compensation levels, the Compensation Committee has developed no policies at
this time concerning Section 162(m).
IVAN W. GORR HERBERT A. GETZ CHARLES W. SCHMIDT
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
OHM provides Robert W. Kirk, a former officer and stockholder of OHM and
father of James L. Kirk and Joseph R. Kirk, with a pension arrangement
pursuant to which OHM is to make payments of $96,000 per year, subject to
further cost of living adjustments, for the remainder of his life and that of
his spouse if she survives him. During 1997, OHM made payments totaling
$117,955 to Robert W. Kirk under this pension arrangement.
OHM has entered into a five-year employment agreement with Mr. Joseph Kirk
during 1996, pursuant to which he will be entitled to a salary of $250,000
payable in the initial year, and decreasing $25,000 during each of the four
succeeding years. Under the agreement, Mr. Kirk is eligible to receive other
benefits and perquisites payable to senior employees.
In the normal course of business, OHM has purchased subcontractor services
on certain of its projects from Kirk Brothers Co., Inc. ("KBC") which totaled
$1,161,000, $2,265,000 and $615,000 for the years ended December 31, 1997,
1996 and 1995, respectively. The principal shareholders of KBC are directly
related to certain officers and directors of OHM.
During 1997, OHMR paid $471,593 to KBC. This amount represents payments made
to KBC for subcontract services.
OHMR leases a building with approximately 5,400 square feet for a monthly
rental of $2,500 on a month-to-month basis from The KDC Company ("KDC"), the
principal shareholders of which are James L. Kirk and Joseph R. Kirk. OHMR
utilizes the building, located near its headquarters in Findlay, Ohio, for the
storage of equipment and inventory and made rental payments to KDC aggregating
$20,000 during 1997 under this arrangement.
OHMR leases office and storage space from Findlay Machine and Tool, Inc.
("FMT"), of which Joseph R. Kirk is the principal shareholder pursuant to a
lease. The rate and other terms of the lease were approved by the Board of
Directors on November 7, 1995 and amended on March 6, 1996 and August 13,
1996. During 1997, OHMR made payments to FMT totaling $297,860 under the
lease.
In connection with the commencement of his employment, Mr. Philip V.
Petrocelli, Vice President, Western Operations, received a $100,000 interest
free loan to be forgiven in equal installments on the anniversary date of his
employment over seven consecutive years. The balance of the loan becomes due
and payable immediately in the event Mr. Petrocelli voluntarily leaves the
employment of OHM or is terminated for cause before August 30, 2000. During
1997, $14,286 of the principal balance was forgiven. As of December 31, 1997,
the aggregate principal amount outstanding was $38,095.
In November 1997, OHM entered into an agreement to purchase a new aircraft
for use in OHM's business. In connection with such agreement, OHM deposited
the sum of $100,000 with the seller of such aircraft. OHM
20
has determined not to complete the purchase of the aircraft. James L. Kirk
proposed that an entity in which he has a personal interest assume OHM's
obligations under the foregoing purchase agreement and reimburse OHM in the
amount of the deposit made.
OHM has been reimbursed by NSC for certain third party charges paid on NSC's
behalf, such as letter of credit fees, insurance and bonding costs and legal
fees. The costs charged to NSC for general liability and other insurance
coverages were $188,000, $1,774,000 and $981,000 for the years ended December
31, 1997, 1996 and 1995, respectively. In the normal course of business, NSC
has provided OHM with subcontract services on certain of its projects for
asbestos abatement and industrial maintenance services. The costs for such
services were $233,000, $40,000 and $212,000 for the years ended December 31,
1997, 1996 and 1995, respectively. OHM has provided remediation services to
NSC in the amount of $121,000 for the year ended December 31, 1996.
TRANSACTIONS WITH SHAREHOLDERS
In connection with the Reorganization Agreement (the "Reorganization
Agreement") entered into in connection with OHM's purchase of Rust
Environmental, Inc., OHM and Rust, the parent of Rust Environmental, Inc.,
entered into certain business agreements. First, Rust agreed that OHM would
provide all environmental remediation services under Rust's governmental Total
Environmental Restoration Contracts ("TERCs"), and a portion of all fees
earned under such contracts.
In the normal course of business, OHM has provided to WMX and its affiliates
certain subcontractor services on remediation and construction projects, the
cost of these services, in the aggregate, were $23,664,000, $12,959,000 and
$10,242,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. OHM has purchased from WMX and its affiliates, hazardous waste
disposal services, the cost of these services, in the aggregate, were
$6,868,000, $7,536,000 and $6,636,000 for the years ended December 31, 1997,
1996 and 1995, respectively. At December 31, 1997, 1996 and 1995, OHM has
$2,831,000, $6,873,000 and $3,871,000 of accounts receivable and $1,385,000,
$968,000 and $806,000 of accounts payable, respectively, recorded related to
such activities. In addition to the above, WMX paid $15,000,000 to OHM in
1996, which was related to final payments due under terms of the
Reorganization Agreement, as amended March 22, 1996.
Rust also agreed to maintain, at its cost, certain payment, performance and
surety bonds in connection with certain Rust projects acquired in connection
with the transaction, and to assist OHM in preparing documents and favorable
pricing from Rust and affiliated Company vendors.
THE GUARANTY AGREEMENT
In connection with the Reorganization Agreement, WMX, the majority
stockholder of Rust, and OHM entered into a Guaranty Agreement, which provides
that in exchange for a Warrant (described below), WMX guaranteed indebtedness
of OHM in an amount not to exceed $62,000,000. The guaranty amount may be
increased from time to time, up to an amount not to exceed $75,000,000 in the
event the Warrant is, in whole or in part, exercised by WMX or transferred to
a third party. On May 31, 1995, WMX guaranteed certain indebtedness under
OHM's Revolving Credit Agreement and OHM, in consideration thereof, executed a
Reimbursement Agreement in favor of WMX obligating OHM to reimburse WMX for
any payments by WMX under the Guaranty. The Guaranty Agreement and related
guarantees will terminate upon consummation of the Merger.
THE WARRANT AGREEMENT
In consideration for the Guaranty, OHM issued a Warrant to WMX which is
exercisable, in whole or in part, until May 31, 2000, for an aggregate of
700,000 shares of Common Stock (the "Warrant Shares") at an exercise price of
$15.00 per Warrant Share (the "Exercise Price"). The Warrant provides further
that the acquisition by WMX of any of the Warrant Shares upon exercise of all
or any portion of the Warrant is subject
21
to the ownership limitation on WMX and its affiliates (the "WMX Group") set
forth in the Standstill and Non-Competition Agreement (the "Standstill
Agreement") described below. The Warrant provides for certain adjustments to
the Exercise Price and/or the number of Warrant Shares purchasable upon
exercise in the event of a stock combination, stock split, a capital
reorganization or reclassification, a merger or consolidation, or a sale or
conveyance of all or substantially all of OHM's assets. In connection with the
Merger, WMX agreed to cancel without any separate consideration, the Warrant
Agreement and any rights it may have to purchase additional Common Stock
thereunder effective as of the repayment of OHM's obligations under the
Guaranty Agreement.
THE STANDSTILL AND NON-COMPETITION AGREEMENT
Pursuant to the Reorganization Agreement, OHM, WMX and Rust entered into a
Standstill Agreement providing that the WMX Group will not acquire any of
OHM's Common Stock or any of OHM's other securities entitled to vote generally
for the election of directors ("Voting Securities") other than pursuant to
exercise of the Warrant, or in acquisitions, including exercise of the
Warrant, that do not result in the aggregate ownership by the WMX Group of
more than 40% of OHM's Voting Securities, or such lesser percentage as may
exist from time to time as the result of voluntary dispositions by the WMX
Group (the "Ownership Limit").
Pursuant to the Standstill Agreement, no member of the WMX Group shall
acquire Voting Securities which would result in the WMX Group owning Voting
Securities beyond the Ownership Limit unless the acquisition is (i) made
pursuant to an offer for all of OHM's outstanding Voting Securities at the
same price, and (ii) is approved by either OHM's independent directors or
OHM's shareholders, other than the WMX Group and certain other shareholders,
pursuant to the Control Share Acquisition provisions of OHM's Amended and
Restated Articles of Incorporation. The Standstill Agreement also provides
that if the WMX Group's ownership level falls below 20% of the outstanding
Voting Securities, the WMX Group shall have an option to purchase from OHM
sufficient Voting Securities at fair market value to raise its ownership to
not more than 21% of the outstanding Voting Securities. The WMX Group,
pursuant to the Standstill Agreement, agrees, among other things, not to
solicit proxies in opposition to any matter recommended by a majority of OHM's
directors not representing WMX (the "Non-WMX Directors"), or to solicit a
tender offer or business combination.
As long as the WMX Group owns at least 20% of the Voting Securities, OHM
will include as nominees to the Board of Directors a number of WMX Group
designees proportionate to the WMX Group's ownership interest (to the lowest
corresponding whole directorship). Furthermore, so long as the WMX Group owns
at least 20% of the outstanding Voting Securities, WMX shall take all actions
in its control to include at least three independent Directors on OHM's Board
of Directors. The Standstill Agreement provides that the WMX Group shall vote
its Common Stock for OHM's nominees to the Board of Directors selected by a
majority of the Non-WMX Directors. The WMX Group shall vote on all other
matters (i) in accordance with the recommendations of the majority of the Non-
WMX Directors, or (ii) if no recommendation is made, in the same proportion as
other shareholders of OHM shall vote.
Pursuant to the Standstill Agreement, WMX, Rust and their respective wholly-
owned subsidiaries (the "WMX Affiliates") have agreed not to engage in the
business of providing field services for the on-site remediation of hazardous
substances in North America for seven years after the closing except as
otherwise provided in the Standstill Agreement. The Standstill Agreement also
provides that for so long as the WMX Group owns at least 20% of the
outstanding Voting Securities, (i) OHM shall be a preferred provider of
certain environmental remediation services to the WMX Affiliates, and (ii) the
WMX Affiliates shall be preferred providers of engineering, consulting and
design environmental and waste management services to OHM. Also, Rust will
provide OHM access to its engineering, consulting, design and project
management services personnel on the same terms and conditions as Rust
provides them to WMX Affiliates. Additionally, the Standstill Agreement
provides that the WMX Affiliates will contract with OHM for $20 million of
environmental remediation services prior to December 31, 1996, which was
extended to December 31, 1997. Key provisions of the Standstill Agreement will
terminate upon the occurrence of the Merger.
22
Pursuant to the Merger Agreement and the Repurchase Agreement, OHM
repurchased from WMX and its affiliates 2,535,381 Shares for $11.50 per share,
concurrently with the payment for Shares pursuant to the Offer (the
"Repurchase"), and WMX and its affiliates tendered 7,111,543 Shares in the
Offer. Pursuant to the Repurchase Agreement, WMX and its affiliates also
agreed to vote all Shares held by them in favor of the Merger. WMX also agreed
to cancel, without payment of any separate consideration, the Warrants and any
rights it may have to purchase additional shares of Common Stock.
OTHER SERVICES
In 1997, OHMR received from WMX and its affiliates $23,663,946 for
remediation and construction services performed by OHMR. OHMR paid $6,867,570
to WMX and its affiliates for engineering-related and disposal services under
the preferred provider provisions of the Standstill Agreement.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
OHM is a diversified services firm which provides a broad range of
outsourced services in two industry segments, environmental remediation and
project, program and construction management services, to government and
private sector clients located primarily in the United States. The timing of
OHM's revenue is dependent on its backlog, contract awards and the performance
requirements of each contract. OHM's revenue is also affected by the timing of
its clients' planned remediation activities which generally increase during
the third and fourth quarters. Because of this change in demand, OHM's
quarterly revenue can fluctuate, and revenue for the first and second quarters
of each year have historically been lower than for the third and fourth
quarters, although there can be no assurance that this will occur in future
years. Accordingly, quarterly or other interim results should not be
considered indicative of results to be expected for any quarter or full fiscal
year.
See "Business" for a description of the Merger, the Offer and the NSC
Distribution.
In connection with OHM's entry into the Merger Agreement and by resolution
of OHM's Board of Directors, OHM's 1986 Stock Option Plan and OHM's
Nonqualified Stock Option Plan for Directors were amended to immediately vest
each non-vested stock option issued under such plans and to give each of the
option holders the right to cancel their options in exchange for a cash
payment equal to the difference between $11.50 per share and the respective
exercise price of each option. In addition, OHM's Board of Directors took
action to allow holders of the restricted stock issued under OHM's Incentive
Stock Plan to tender such stock in the Offer. As a result of the above
actions, OHM will incur up to $9,400,000 of compensation expense during the
first quarter of 1998 if all of the stock option holders elect to receive the
cash payment for their outstanding options.
The consummation of the transactions contemplated by the Merger Agreement is
subject to the satisfaction of various conditions, including, without
limitation: (i) the approval by the stockholders of Parent for the issuance of
shares of Parent Common Stock pursuant to the Merger Agreement, and (ii) the
approval of the Merger Agreement and the Merger by the shareholders of OHM.
OHM received early termination of the waiting period required under the Hart-
Scott-Rodino Antitrust Improvements Act during January 1998. See "Business--
Overview."
The accompanying financial statements were prepared assuming OHM would
continue operations independently and do not anticipate adjustments which may
be required as a result of the Merger. The Merger will be accounted for using
the purchase method and as a result may impact the carrying value of certain
of OHM's assets and liabilities.
Effective June 1, 1997, OHM acquired all of the outstanding stock of Beneco
Enterprises, Inc. ("Beneco"), a Utah corporation, for an aggregate purchase
price of $14,700,000. The purchase price consisted of a $9,700,000 cash
payment and $5,000,000 of unsecured promissory notes. OHM has agreed to make
an additional payment in the year 2000 contingent upon the achievement of
certain operating results and other contractual conditions. Beneco is a
provider of project, program and construction management services to the
Department of Defense ("DOD") and other government agencies throughout the
United States. The acquisition of Beneco has been accounted for using the
purchase method and, accordingly, the acquired assets and assumed liabilities,
including goodwill, have been recorded at their estimated fair values as of
June 1, 1997. OHM's consolidated statements of operations include the results
of operations for Beneco since June 1, 1997. See "Note 2 to the Consolidated
Financial Statements." Also, see "Note 19 to the Consolidated Financial
Statements" for separate segment information pertaining to Beneco beginning
with the year ended December 31, 1997.
On May 30, 1995, OHM completed the acquisition of substantially all of the
assets and certain liabilities of the hazardous and nuclear waste remediation
service business (the "Division") of Rust in exchange for
24
9,668,000 shares of Common Stock of OHM, or approximately 37% of the
outstanding shares of OHM's Common Stock. In exchange for the Warrants WMX
provided OHM with a credit enhancement in the form of guarantees, issued from
time to time upon request of OHM, of up to $62,000,000 of OHM's indebtedness,
which will increase proportionately up to $75,000,000 upon issuance of shares
under the warrant. The acquisition of the Division has been accounted for
using the purchase method and, accordingly, the acquired assets and assumed
liabilities, including goodwill, have been recorded at their estimated fair
values as of May 30, 1995. See "Note 2 to the Consolidated Financial
Statements." OHM's consolidated financial statements include the results of
operations for the Division since May 30, 1995. See Item 1 and Item 13 for a
discussion of the Standstill Agreement.
TWELVE MONTHS ENDED DECEMBER 31, 1997 VS. TWELVE MONTHS ENDED DECEMBER 31,
1996
Revenue. The following table sets forth OHM's revenue by client type for the
twelve months ended December 31, 1997 and 1996 (in thousands, except
percentages):
1997 1996
------------ ------------
Federal, State and Local Government.............. $414,735 79% $426,256 77%
Industrial....................................... 111,956 21 124,728 23
-------- --- -------- ---
Total Revenue.................................. $526,691 100% $550,984 100%
======== === ======== ===
Total revenue for the year ended December 31, 1997, decreased 4% to
$526,691,000 from $550,984,000 in 1996. Such decrease in revenue is primarily
due to a decrease in environmental remediation revenues of $81,588,000 from
government and industrial sector clients, partially offset by revenue of
$57,295,000 from Beneco which was acquired effective June 1, 1997 and has been
included in the results of operations since such time. OHM derives a
substantial portion of its revenue from the government sector and believes
that such revenue will continue to be its primary source of revenue for the
foreseeable future. See "Business--Backlog and Potential Value of Term
Contracts" and "Environmental Matters and Government Contracting" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Revenue from government agencies for the twelve months ended December 31,
1997, decreased $11,521,000 or 3% from $426,256,000 in 1996. Revenues from
government agencies was negatively impacted by a decline in revenue from OHM's
environmental remediation services business, which was offset by the
acquisition of Beneco. The environmental remediation business experienced a
decrease in revenue from OHM's term contracts with the United States Air Force
("Air Force") and the United States Navy ("Navy"). In addition, OHM has
experienced a significant decrease in revenue from its site specific thermal
incineration project in Holbrook, Massachusetts with the United States Army
Corps of Engineers ("USACE") as the project nears its completion. Such
decreases were partially offset by an increase in revenue from OHM's term
contracts with the USACE and various state and local governments. OHM expects
to continue to receive funding under its federal contracts in the foreseeable
future and is experiencing a significant amount of proposal activity for new
contracts with the various DOD agencies, as well as the Department of Energy
("DOE"). However, no assurance can be given that OHM will be awarded any new
contracts with the DOD or DOE. In addition, reductions by Congress in future
environmental remediation budgets of government agencies may have a material
adverse impact upon future revenue from such agencies and the funding of OHM's
government term contracts included in contract backlog.
OHM experienced a $12,772,000 or 10% decrease in revenue from industrial
clients for the year ended December 31, 1997 as compared to 1996. OHM believes
that demand for its services from the industrial sector has been negatively
impacted due to anticipated changes in the Superfund law pending its
reauthorization as well as current economic conditions in certain industry and
geographic sectors. Although OHM cannot predict the impact upon the
environmental industry of the failure of Congress to reauthorize the Superfund
law, further delays in Superfund reauthorization will continue to have a
material adverse impact upon the demand for OHM's services in the form of
project delays as clients and potential clients wait for and anticipate
changes in these
25
regulations. The result of decreased demand from the industrial sector has
increased the competitive pressures on the contracts available for bid from
the industrial market. OHM has been very selective in bidding industrial
contracts and has established specific minimum criteria on profitability and
risk in determining whether or not to compete for any given contract. OHM
expects the current market conditions to continue in the industrial sector
into the foreseeable future.
Revenue from the environmental remediation industry segment for the year
ended December 31, 1997, decreased 15% to $469,396,000 from $550,984,000 in
1996. The revenue from the project, program, and construction management
services industry segment of $57,295,000 is not comparable to 1996 due to the
acquisition of Beneco effective June 1, 1997 and the inclusion in OHM's
results of operations only since that date. Revenue from government agencies
for environmental remediation for the year ended December 31, 1997, decreased
16% to $357,440,000 from $426,256,000 in 1996. OHM's revenue from industrial
clients is from the environmental remediation segment as no industrial revenue
is provided by the project, program, and construction management services
industry segment. Such decreases in total revenue as well as from government
and industrial sector clients for the environmental remediation industry
segment are explained above.
Cost of Services and Gross Profit. Cost of services for the year ended
December 31, 1997 decreased 5% to $454,556,000 from $478,924,000 in 1996. Cost
of services as a percentage of revenue decreased to 86% for the year ended
December 31, 1997 from 87% for 1996. Gross profit increased $75,000 to
$72,135,000 in 1997 from $72,060,000 in 1996. Gross profit as a percentage of
revenue increased to 14% for the year ended December 31, 1997 from 13% in
1996. OHM's cost of services and gross profit during 1997 was favorably
impacted by the following: (i) actions taken by OHM to lessen the use of
subcontractors on its government cost reimbursable projects as the amount of
mark-up OHM receives on subcontractors is minimal, (ii) cost reduction actions
taken during the second quarter of 1997 to reduce the indirect cost of
services through the consolidation of certain of OHM's operational and
laboratory functions, and (iii) the acquisition of Beneco, which contributed
$8,853,000 of gross profit (15% as a percent of Beneco's revenue). Such
improvements were partially offset by decreased gross profit from competitive
market conditions on projects performed for the industrial sector.
Cost of services for the environmental remediation industry segment for the
year ended December 31, 1997, decreased 15% to $406,114,000 from $478,924,000
in 1996. Cost of services as a percentage of revenue was 87% for the
environmental remediation industry segment for both years. Cost of services
for the project, program, and construction management services industry
segment was $48,442,000 or 85% of revenue for the year ended December 31,
1997. Gross profit for the environmental remediation industry segment
decreased 12% to $63,282,000 for the year ended December 31, 1997, from
$72,060,000 in 1996 and as a percentage of revenue remained the same at 13%
for the years ended December 31, 1997, and 1996. Gross profit for the project,
program and construction management services industry segment was $8,853,000
or 15% of revenue for the year ended December 31, 1997.
Claims Settlement Costs and Other. During the second quarter of 1997, OHM
settled litigation and received an unfavorable binding arbitration decision
that established a need to write-down claims receivable previously recorded by
OHM. These actions together with a thorough analysis by management of other
claims, litigation and the related receivables and a decision by management to
establish reserves for the consolidation of certain laboratory and operational
functions resulted in OHM recording a $22,726,000 (net of $15,151,000 income
tax benefit), charge during the second quarter of 1997. All of the charge
relates to the environmental remediation industry segment.
The following discussion details the various elements of the charge:
Separation and Recovery Systems, Inc. ("SRS"). In June 1997, OHM received an
unfavorable binding arbitration decision in a dispute between OHM and SRS.
SRS's subcontract with OHM to provide thermal desorption treatment services at
the Hilton Davis chemical site in Cincinnati, Ohio was terminated by OHM in
the second quarter of 1996 due to failure to perform. OHM subsequently
attempted to perform the treatment process with the SRS equipment and was
unsuccessful. The inability of SRS to perform caused OHM to incur
26
significant expense to complete the required treatment process. OHM's total
claim in arbitration against SRS for the resulting expense of failed
performance was $18,500,000 and included deferred cost of $9,814,000 recorded
by OHM as a receivable from SRS. In addition to not collecting the receivable,
the arbitration decision required OHM to pay SRS $2,400,000 in damages for
their counterclaim for wrongful termination. OHM also established a loss
reserve of $2,800,000 to complete the treatment effort required as a result of
the above. Prior to the arbitration decision OHM had concluded that it was not
probable that a loss had occurred based on the opinion of counsel,
consequently the write-off was taken in the same period that the decision was
rendered.
Citgo Petroleum Corporation ("Citgo"). In June 1997, OHM settled litigation
with Citgo and Occidental Oil & Gas (Oxy) relating to a project which was
performed by OHM for Citgo at its Lake Charles, Louisiana refinery in 1993 and
1994. This litigation resulted from OHM filing a request for equitable
adjustment in April 1994 based on deficient project specifications provided by
Citgo, the subsequent lawsuit filed by Citgo in April 1994 and the
counterclaims filed by OHM in July 1994. In 1995 Citgo and OHM brought
separate actions against Oxy as a third party with previous involvement at the
site. Extensive discovery by all parties prior to a scheduled trial in 1997
led to settlement discussions in the second quarter of 1997. Under the terms
of the settlement with Citgo and Oxy, OHM received a cash payment of
$14,346,000 against outstanding receivables of $22,609,000 resulting in a
write-off of accounts receivable of $8,263,000. Prior to accepting the
settlement offer, OHM had concluded that it was not probable that a loss had
occurred based on the opinion of legal counsel that there existed a reasonable
basis to support OHM's claim in litigation. The settlement and resulting write
down of accounts receivable occurred after management completed its assessment
of the litigation, the determination of the maximum amount of settlement that
could be obtained and its review of the disadvantages of continuing litigation
which would divert the attention of company management and resources.
Other Litigation and Accounts Receivable. In addition to the aforementioned
disputes, OHM made a decision to resolve other significant legal matters
involving outstanding accounts receivable. In June 1997, OHM settled
outstanding litigation with B&V Construction, Inc. ("B&V") for $1,550,000
pertaining to a dispute involving subcontracted services at a General Motors
project in Flint, Michigan during late 1994. Payment to B&V was made in July
1997. Accounts receivable involving disputes primarily related to two
additional contracts were also written down to facilitate settlement. These
decisions resulted from management's analysis of the unfavorable SRS
arbitration decision and the protracted Citgo litigation and subsequent
settlement and concluded that the risk associated with continued pursuit of
legal remedies was not acceptable and the further diversion of management's
attention to effect favorable outcomes was not appropriate. Prior to that
time, OHM had concluded that it was not probable that a loss had occurred
based on the opinion of counsel.
Litigation Costs. As a result of the above discussed legal matters and the
significant expense of resolving such matters, OHM has accrued $2,100,000 for
the expenses of the litigation such as attorney's fees. This accrual includes
costs associated with those matters included in the special charge discussed
above including those that expect to be settled. OHM concluded that due to the
timing of the settlements discussed above, the related expense of settlement
should also be accrued.
27
Region Reorganization, Laboratory Closure & Severance. In May 1997,
management of OHM made a decision to consolidate certain regional operations,
close certain offices and cease commercial laboratory operations. These
decisions were made as part of a comprehensive plan completed in the second
quarter of 1997 to restructure operations of OHM. Thus, resulting expense was
recognized as a special charge at that time. Employees of OHM were notified of
the reduction in force at that time and substantially all of the reserve
requiring a cash settlement was paid prior to the end of 1997. The components
of this special charge were:
(IN THOUSANDS)
Cash items: $1,500
Severance................................................... 1,139
Lease termination and facility closure...................... 1,139
Other....................................................... 388
------
Subtotal.................................................. 3,027
Non cash items:
Fixed assets................................................ 773
------
$3,800
======
The following table summarizes the detailed components of the charge:
TAX NET
CHARGE BENEFIT LOSS
------- ------- -------
(IN THOUSANDS)
SRS Settlement and Project Loss Accrual................ $15,014 $ 6,006 $ 9,008
Citgo Settlement (Net of $14.3 million)................ 8,263 3,305 4,958
Other Litigations and Accounts Receivable.............. 8,700 3,480 5,220
Litigation Costs....................................... 2,100 840 1,260
Region Reorganization & Other.......................... 3,800 1,520 2,280
------- ------- -------
Total Claims Settlement & Other........................ $37,877 $15,151 $22,726
======= ======= =======
Provision for bad debts. OHM's provision for bad debts, excluding items
recorded as a part of the claims settlement costs, was $2,900,000 and
$5,343,000 for the years ended December 31, 1997 and 1996, respectively. The
provision was higher in 1996 primarily due to settlement of rate variances for
government cost plus contracts. The provision for bad debts pertains to the
environmental remediation industry segment. The provision for bad debts with
respect to claims settlements is discussed in Claims Settlement Costs and
Other above.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SGA") expenses for the year ended December 31, 1997 decreased
2% to $43,160,000 from $43,907,000 in 1996. SGA expense as a percentage of
revenue was 8% for both the years ended December 31, 1997 and 1996. SGA
expense was favorably impacted during 1997 by the consolidation of certain
operational functions during the second quarter of 1997. During 1997 and 1996,
OHM made substantial investments in personnel and systems in support of its
government contracts and related compliance issues. Such investments will
continue in light of OHM's dependence on federal government contracts.
SGA expense for the environmental remediation industry segment for the year
ended December 31, 1997, decreased 5% to $41,690,000 from $43,907,000 in 1996
and as a percent of revenue increased slightly to 9% for the year ended
December 31, 1997, from 8% in 1996. SGA expense for the project, program, and
construction management services industry segment was $1,470,000 or 3% of
revenue for the year ended December 31, 1997.
Interest expense. Interest expense, net of investment income, decreased 31%
to $4,797,000 for the year ended December 31, 1997 from $6,963,000 for 1996.
The decrease in interest expense is a result of a decrease in the average
borrowings outstanding under OHM's revolving credit agreement during 1997 when
compared to 1996. Such decrease is primarily the result of OHM utilizing lease
lines of credit for purchases and financing of
28
certain of its operational equipment as well as improvements made in OHM's
cash management procedures and systems which decreased its working capital
investment. OHM's average borrowings outstanding was $9,397,000 and
$36,159,000 for the year ended December 31, 1997 and 1996, respectively. The
average interest rate was 6.9% and 6.2% for the years ended December 31, 1997
and 1996, respectively.
Equity in Net Earnings of Affiliate. During the second quarter of 1997, OHM
wrote down its investment in NSC to the expected net realizable value based on
its plans to sell its 40% share of NSC. As a result, OHM recorded a
$12,089,000 (net of $2,860,000 income tax benefit) charge to earnings. OHM
accounts for the investment in 40% of the outstanding stock of NSC Corporation
on the equity method. Although NSC's stock had traded below the per share
carrying value of the recorded investment for some time prior to June 1997,
OHM believed this decline was temporary because NSC had continued to report
net income, positive cash flow from operations, and continued to pay
dividends. In the second quarter of 1997, OHM made the decision to sell its
investment in NSC. OHM concluded in the second quarter of 1997 that as a
result of its decision to sell its investment in NSC, it should record an
impairment loss. This loss was calculated to be $14.9 million before tax which
represents the difference between OHM's carrying amount of its investment per
share ($5.83) and the fair market value per share of NSC's stock on the day
that OHM decided to sell ($2.10) times the 4,010,000 shares held by OHM.
OHM recognized a loss on its share of the equity in net loss of NSC for
1997, primarily during the third and fourth quarters of 1997. Such loss
resulted from losses on certain projects, the writedown of certain equipment
and the recognition of non-recurring charges by NSC.
Net (loss) Income. Net loss for the year ended December 31, 1997 was
$23,933,000 or $0.88 per share compared to net income of $11,515,000 or $0.43
per share in 1996. The decrease in net income is primarily due to the
settlement of claims and the write-down of OHM's investment in NSC, partially
offset by other factors discussed above.
TWELVE MONTHS ENDED DECEMBER 31, 1996 VS. TWELVE MONTHS ENDED DECEMBER 31,
1995
Revenue. The following table sets forth OHM's revenue by client type for the
twelve months ended December 31, 1996 and 1995 (in thousands, except
percentages):
1996 1995
------------ ------------
Federal, State, and Local Government............. $426,256 77% $349,052 76%
Industrial....................................... 124,728 23 108,873 24
-------- --- -------- ---
Total Revenue.................................. $550,984 100% $457,925 100%
======== === ======== ===
Total revenue for the year ended December 31, 1996, increased 20% to
$550,984,000 from $457,925,000 in 1995. Such improvement resulted primarily
from increased revenue from federal government agencies. In addition, revenue
from industrial sector clients was favorably impacted by the acquisition of
the Division, which was included for a full year in 1996 compared to only
seven months of 1995.
Revenue from government agencies for the twelve months ended December 31,
1996 increased $77,204,000 or 22% from $349,052,000 in 1995. This improvement
resulted primarily from an increase in revenue from OHM's term contracts with
the Air Force, the USACE, the DOE and the Navy. Such increases were partially
offset by a decrease in revenue from state and local governments and the
Environmental Protection Agency ("EPA") during 1996. The federal government
shutdown during the first quarter of 1996 negatively impacted OHM's revenue
from the EPA and delayed delivery orders issued under OHM's existing federal
term contracts.
OHM experienced a $15,855,000 or 15% increase in revenue from industrial
clients for the year ended December 31, 1996 as compared to 1995. Such
increase is primarily a result of the acquisition of the Division during May
1995. OHM believes that revenue growth from the industrial sector has been
negatively impacted due to anticipated changes in the Superfund law pending
its reauthorization as well as current economic conditions in certain industry
and geographic sectors.
29
Cost of Services and Gross Profit. Cost of services for the year ended
December 31, 1996 increased 22% to $478,924,000 from $393,149,000 in 1995
primarily due to increased revenue. Cost of services as a percentage of
revenue increased to 87% for the year ended December 31, 1996 from 86% for
1995.
Gross profit increased 11% to $72,060,000 in 1996 from $64,776,000 in 1995.
The increase in gross profit is primarily due to increased revenues. Gross
profit as a percentage of revenue decreased to 13% for the year ended December
31, 1996 from 14% in 1995. OHM's gross profit on its fixed-price contracts has
been negatively impacted by competitive market conditions and, during the
first quarter of 1996, by the severe winter weather in the Midwest and
Northeast regions of the country. In addition, OHM has experienced a decrease
in the overall gross margin it has received on its government projects as a
result of the nature of the projects that have been awarded to OHM under its
term contracts which has required an increase in the use of subcontracted
services and materials over levels historically experienced. Under the terms
of such contracts, OHM receives minimal markups on such subcontracted services
and materials.
Selling, General and Administrative Expenses. SGA expense increased 4% to
$43,907,000 from $42,292,000 in 1995. SGA expenses for the year ended December
31, 1995 included a $3,854,000 pre-tax, $2,312,000 after-tax, charge for
integration costs related to the acquisition of the Division. The charge was
primarily for severance and relocation costs for certain of OHM's personnel
and the closing of certain of OHM's offices as a result of combining the
operations of the Division and OHM. Without such charge, SGA expenses
increased 19% primarily as a result of the acquisition of the Division and the
growth in revenue. In addition, OHM has made a substantial investment in
personnel and systems in support of its government contracts and related
compliance issues. SGA expense as a percent of revenue was 8% for the twelve
months ended December 31, 1996 and 1995, exclusive of the integration charge
recorded in 1995.
Interest expense. Interest expense, net of investment income, decreased 27%
to $6,963,000 for the year ended December 31, 1996 from $9,564,000 for 1995.
The decrease in interest expense was a result of a decrease in the average
borrowings outstanding, as well as interest rates charged, under OHM's
revolving credit agreement during 1996 compared to 1995. The decrease in
interest rates charged under the revolving credit agreement primarily is a
result of the WMX guarantee of OHM's debt in exchange for the warrant
described above. Upon successful completion of the aforementioned merger with
IT-Ohio, Inc., such debt guarantee will be terminated. OHM's average
borrowings outstanding was $36,159,000 and $56,549,000 for the year ended
December 31, 1996 and 1995, respectively. The average interest rate was 6.2%
and 7.6% for the years ended December 31, 1996 and 1995, respectively.
Investment income for the twelve months ended December 31, 1995 included
income earned on certain outstanding receivables guaranteed by Rust pursuant
to the agreement for the acquisition of the Division. Such receivables were
paid to OHM on September 30, 1995.
Equity in Net Earnings of Affiliate. OHM's equity interest in NSC's net
earnings increased $461,000 to $748,000 in 1996 from $287,000 in 1995. The
twelve months ended December 31, 1995 was negatively impacted by the
settlement of claims with certain clients of NSC as well as increases in
insurance reserves. NSC has experienced a decrease in revenues from asbestos
abatement contracts for the twelve months ended December 31, 1996 compared to
1995. Such decrease in revenue was more than offset by increases in revenue
from its specialty contractor services subsidiary, Olshan Demolishing
Management, Inc. The asbestos abatement industry in general continues to
experience competitive pressures in the marketplace which have negatively
impacted the gross margin on NSC's projects.
Net Income. Net income for the year ended December 31, 1996 was $11,515,000
or $0.43 per share compared to $6,807,000 or $0.30 per share in 1995. The
improvement in net income is primarily due to increased revenue, the
integration charge recorded during 1995, decreased interest expense as well as
the other factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On May 31, 1995, OHM entered into a $150,000,000 revolving credit agreement
with a group of banks (the "Bank Group") to provide letters of credit and cash
borrowings. The agreement has a five year term and is
30
scheduled to expire on May 30, 2000. WMX has issued a guarantee of up to
$62,000,000 outstanding under the credit agreement in favor of the Bank Group.
Upon successful completion of the Merger, such debt guarantee will be
terminated. See "Note 2 to the Consolidated Financial Statements." Under the
terms of the agreement the entire credit facility can be used for either cash
borrowings or letters of credit. Cash borrowings bear interest at either the
prime rate plus a percentage up to 0.625% or, at OHM's option, the Eurodollar
market rate plus a percentage ranging from 0.325% to 1.625%. The percentage
over the prime rate or the Eurodollar market rate is based on the aggregate
amount borrowed under the facility, the presence of the guarantee, and OHM's
financial performance as measured by an interest coverage ratio and a total
funded debt ratio. The agreement provides the participating banks with a
security interest in OHM's equipment, inventories, accounts receivables,
general intangibles and in OHM's investment in the common stock of NSC as well
as OHM's other subsidiaries. The agreement also imposes, among other
covenants, a minimum tangible net worth covenant, a restriction on all of
OHM's retained earnings including the declaration and payment of cash
dividends and a restriction on the ratio of total funded debt to earnings
before income taxes, depreciation and amortization. OHM had no cash borrowing
under the revolving credit facility at December 31, 1997 and 1996. Aggregate
letters of credit outstanding at December 31, 1997 and 1996 were $13,300,000
and $12,223,000, respectively.
During 1997 and 1996, OHM entered into agreements for the sale and leaseback
of certain of OHM's (environmental remediation industry segment) thermal
destruction units located at various project sites. Total proceeds from such
agreements were $32,450,000 and resulted in a gain of $8,431,000 over the net
book value of the equipment at the time of the sale and leaseback. The gain is
being amortized over the life of the sale and leaseback agreements, which have
maximum terms of four to five years.
Capital expenditures for the years ended December 31, 1997, 1996, and 1995
were $18,036,000, $23,279,000, and $14,276,000, respectively. OHM's capital
expenditures are primarily related to the purchase of heavy construction
equipment the fabrication of custom equipment by OHM for the execution of
remediation projects and the installation of computer systems and related
equipment for the environmental remediation industry segment. Capital
expenditures for fiscal year 1998 are expected to range between $10,000,000
and $15,000,000 for the environmental remediation industry segment. OHM's
long-term capital expenditure requirements are dependent upon the type and
size of future remediation projects awarded to OHM.
OHM believes that the government sector will continue to be its primary
source of revenue for the foreseeable future in light of its contract backlog
with federal government agencies for both of OHM's industry segments. Revenue
from government agencies historically has required greater working capital,
the major component of which is accounts receivable, than revenue from
industrial sector clients. In addition, OHM is bidding on a number of large,
long-term contract opportunities which, if awarded to OHM, would also increase
working capital needs and capital expenditures. OHM believes it will be able
to finance its working capital needs and capital expenditures in the short
term through a combination of cash flows from operations, borrowing under its
revolving credit facility, proceeds from permitted asset sales and other
external sources.
OHM's identified long-term capital needs consist of payments due upon the
maturity of OHM's Revolving Credit Facility in 2000 and sinking fund payments
which commenced in 1996 of 7.5% of the principal amount as well as payments
due upon maturity of its Convertible Debentures in 2006. OHM has purchased and
retired $10,736,000 of the outstanding Convertible Debentures during 1995 and
1996, sufficient to meet its annual sinking fund obligations through October
1, 1997, as well as a portion of the sinking fund obligation due October 1,
1998. OHM believes that it will be able to refinance the remaining
indebtedness as necessary. See "Note 7 to the Consolidated Financial
Statements."
INFLATION
Historically, inflation has not been a significant factor to OHM or to the
cost of its operations.
31
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements No. 130, "Reporting Comprehensive Income," and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Statement No. 130 requires separate reporting of certain items, already
disclosed by OHM, affecting shareholders' equity outside of those included in
arriving at net earnings. Statement No. 131, effective for fiscal 1999,
establishes requirements for reporting information about operating segments in
annual and interim statements. This statement may require a change in OHM's
financial reporting, however, the extent of this change, if any, has not been
determined.
DEFERRED TAX ASSETS
OHM has recorded a valuation allowance for its deferred tax assets, which
almost exclusively relate to the environmental remediation industry segment,
to the extent that OHM believes such deferred tax assets more likely than not
will not be realized. With respect to deferred tax assets for which a
valuation allowance has not been established, OHM believes it will realize the
benefit of these assets through the reversal of taxable temporary differences
and future income. OHM believes that the future taxable income of
approximately $67,000,000 necessary to realize the deferred tax assets is more
likely than not to occur because of its substantial backlog and term contracts
from which OHM has historically realized sufficient margin to produce
consolidated net income. The principal uncertainty of realization of the
deferred tax assets is OHM's ability to convert its backlog to revenue and
margin. See "Business--Backlog and Potential Value of Term Contracts" and
"Environmental Matters and Government Contracting" in Management's Discussion
and Analysis of Financial Condition and Results of Operations. OHM evaluates
the realizability of its deferred tax assets quarterly and assesses the need
for any change in the valuation allowance. See "Note 9 to the Consolidated
Financial Statements."
IMPACT OF YEAR 2000
Some of OHM's older computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognizes a date using "00" as year 1900
rather than the year 2000. This could cause 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.
OHM has completed an assessment and will have to modify or replace portions
of its software. OHM believes the cost to modify or replace such software will
be minimal and will not have a material adverse impact upon OHM's future
results of operations or financial condition.
ENVIRONMENTAL MATTERS AND GOVERNMENT CONTRACTING
Although OHM believes that it generally benefits from increased
environmental regulations and from enforcement of those regulations, increased
regulation and enforcement also create significant risks for OHM. 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 liabilities to
customers and to third parties for damages arising from performing services
for clients, which could have a material adverse effect on OHM.
OHM does not believe there are currently any material environmental
liabilities which should be recorded or disclosed in its financial statements.
OHM 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.
32
Because of its dependence on government contracts, OHM 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, OHM 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 OHM's government contracts or appropriate standards and
regulations, or OHM's suspension or debarment from future government
contracting, could have a material adverse effect on OHM's business.
33
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following index sets forth the location in this Appendix of the
Consolidated Financial Statements and supplementary quarterly financial data of
OHM and its subsidiaries for the years ended December 31, 1997, 1996 and 1995.
PAGE
----
Consolidated Balance Sheets................................................ 35
Consolidated Statements of Operations...................................... 36
Consolidated Statements of Changes in Shareholders' Equity................. 37
Consolidated Statements of Cash Flows...................................... 38
Notes to Consolidated Financial Statements................................. 39
Report of Independent Auditors............................................. 61
34
OHM CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT SHARE
DATA)
ASSETS
------
Current Assets:
Cash and cash equivalents................................... $ 31,784 $ 14,002
Accounts receivable......................................... 70,627 85,461
Costs and estimated earnings on contracts in process in
excess of billings......................................... 47,774 56,303
Materials and supply inventory, at cost..................... 13,285 13,899
Prepaid expenses and other assets........................... 15,111 20,558
Deferred income taxes....................................... 11,166 10,513
Refundable income taxes..................................... 259 493
-------- --------
190,006 201,229
-------- --------
Property and Equipment, net.................................. 56,610 70,521
Other Noncurrent Assets:
Investment in affiliated company............................. 5,637 23,185
Intangible assets relating to acquired businesses, net....... 46,364 33,534
Deferred debt issuance and financing costs................... 1,114 1,412
Deferred income taxes........................................ 15,725 3,563
Other assets................................................. 1,587 3,093
-------- --------
70,427 64,787
-------- --------
Total Assets............................................... $317,043 $336,537
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable............................................ $ 72,692 $ 69,230
Billings on contracts in process in excess of costs and
estimated earnings......................................... 1,530 897
Accrued compensation and related taxes...................... 8,646 6,528
Federal, state and local taxes.............................. 86 150
Other accrued liabilities................................... 17,769 21,477
Current notes payable....................................... 5,000 --
Current portion of noncurrent liabilities................... 3,064 5,321
-------- --------
108,787 103,603
-------- --------
Noncurrent Liabilities:
Long-term debt.............................................. 50,041 52,972
Deferred gain from sale leaseback of equipment.............. 2,890 4,484
Capital leases.............................................. 65 32
Pension agreement........................................... 1,100 874
-------- --------
54,096 58,362
-------- --------
Commitments and Contingencies -- --
Shareholders' Equity:
Preferred stock, $10.00 par value, 2,000,000 shares
authorized; none issued and outstanding.................... -- --
Common stock, $.10 par value, 50,000,000 shares authorized;
shares issued: 1997--27,425,046; 1996--26,992,140.......... 2,742 2,699
Additional paid-in capital.................................. 142,453 138,989
Retained earnings........................................... 8,965 32,884
-------- --------
154,160 174,572
-------- --------
Total Liabilities and Shareholders' Equity................. $317,043 $336,537
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
35
OHM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Revenue......................................... $526,691 $550,984 $457,925
Cost of services................................ 454,556 478,924 393,149
-------- -------- --------
Gross Profit.................................... 72,135 72,060 64,776
Claims settlement costs and other, excluding bad
debts.......................................... 15,919 -- --
Provision for bad debts:
Claims settlement............................. 21,958 -- --
Other......................................... 2,900 5,343 2,931
Selling, general and administrative expenses.... 43,160 43,907 42,292
-------- -------- --------
Operating (loss) income......................... (11,802) 22,810 19,553
-------- -------- --------
Other (income) expenses:
Investment income............................. (389) (124) (849)
Interest expense.............................. 5,186 7,087 10,413
Equity in net earnings of affiliate........... 1,997 (748) (287)
Write-down of investment in NSC Corporation... 14,949 -- --
Miscellaneous (income) expenses............... 878 (296) (72)
-------- -------- --------
22,621 5,919 9,205
-------- -------- --------
(Loss) income before income taxes (benefit)..... (34,423) 16,891 10,348
Income taxes (benefit).......................... (10,490) 5,376 3,541
-------- -------- --------
Net (loss) income............................... $(23,933) $ 11,515 $ 6,807
======== ======== ========
Net (loss) income per common share.............. $ (0.88) $ 0.43 $ 0.31
======== ======== ========
Weighted-average common shares.................. 27,210 26,820 22,211
======== ======== ========
Net (loss) income per common share--assuming
dilution....................................... $ (0.88) $ 0.43 $ 0.30
======== ======== ========
Adjusted weighted-average common shares--
assuming dilution.............................. 27,210 26,840 22,413
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
36
OHM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
----------------- ADDITIONAL CUMULATIVE
NUMBER OF PAID-IN RETAINED TRANSLATION TREASURY
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS STOCK
---------- ------ ---------- -------- ----------- --------
Balance at January 1,
1995................... 15,848,089 $1,584 $ 63,294 $14,656 $(58) $(2,556)
Proceeds from sale of
1,000,000 shares common
stock, less issuance
expenses of $25,000.... 1,000,000 100 9,875
Shares issued for the
acquisition of the
Division............... 9,668,000 967 61,149
Issuance of common stock
warrants............... 1,372
Stock options exercised,
211,624 shares reissued
from treasury.......... (861) 2,556
Shares issued for stock
options................ 37,921 4 776
Shares issued for 401(k)
plan funding........... 93,067 9 823
Deferred translation
adjustments............ (5)
Net income.............. 6,807
---------- ------ -------- ------- ---- -------
Balance at December 31,
1995................... 26,647,077 2,664 136,428 21,463 (63) --
Shares issued for 401(k)
plan funding........... 345,063 35 2,561
Deferred translation
adjustments............ (31)
Net income.............. 11,515
---------- ------ -------- ------- ---- -------
Balance at December 31,
1996................... 26,992,140 2,699 138,989 32,978 (94) --
Shares issued for 401(k)
plan funding........... 326,711 32 2,658
Shares issued for stock
options................ 106,195 11 806
Deferred translation
adjustments............ 14
Net income (loss)....... (23,933)
---------- ------ -------- ------- ---- -------
Balance at December 31,
1997................... 27,425,046 $2,742 $142,453 $ 9,045 $(80) $ --
========== ====== ======== ======= ==== =======
The accompanying notes are an integral part of these consolidated financial
statements.
37
OHM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................... $(23,933) $ 11,515 $ 6,807
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization................. 13,131 19,963 10,652
Deferred income taxes......................... (10,490) 5,335 3,483
(Gain) loss on sale of property and
equipment.................................... (1,705) (206) 423
Equity in net loss (earnings) of affiliate,
net of dividends received.................... 2,599 (147) 314
Writedown of investment in affiliated
company...................................... 14,949 -- --
Deferred translation adjustments and other.... (568) (1,305) (1,881)
Changes in current assets and liabilities:
Accounts receivable........................... 19,034 13,622 10,049
Costs and estimated earnings on contracts in
process in excess of billings................ 8,529 11,972 (10,278)
Materials and supply inventory................ 614 (2,068) (1,732)
Prepaid expenses and other assets............. 6,324 (8,125) (206)
Refundable income taxes and other............. 234 (92) (196)
Accounts payable.............................. (1,864) 2,949 3,907
Billings on contracts in process in excess of
costs and estimated earnings................. 633 (490) (1,019)
Accrued compensation and related taxes........ 1,638 (512) 476
Federal, state and local income taxes......... (64) (50) 98
Other accrued liabilities..................... (7,504) (11,286) (4,416)
-------- -------- --------
Net cash flows provided by operating
activities................................. 24,696 44,407 19,397
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............. (18,036) (23,279) (14,276)
Proceeds from sale of property and equipment.... 1,908 4,612 3,813
Proceeds from sale and leaseback of equipment... 21,800 12,850 --
Cash (used) acquired from purchase of business,
net of acquisition costs....................... (7,092) -- 13,527
Decrease (increase) in receivable from
affiliated company............................. -- 15,000 (6,695)
Increase in other noncurrent assets............. (1,090) (1,140) (589)
-------- -------- --------
Net cash (used in) provided by investing
activities................................. (2,510) 8,043 (4,220)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt...................... 8 204 2,209
Payments on long-term debt and capital leases... (7,802) (10,230) (8,691)
Proceeds from borrowing under revolving credit
agreement...................................... 187,554 202,300 159,900
Payments on revolving credit agreement.......... (187,554) (244,400) (175,500)
Proceeds from private placement of common
stock.......................................... -- -- 9,975
Common Stock issued for 401(k) funding and
stock options.................................. 3,507 2,597 1,612
Payments on pension agreement................... (117) (124) (102)
Reissuance of treasury stock.................... -- -- 1,695
-------- -------- --------
Net cash (used in) financing activities..... (4,404) (49,653) (8,902)
-------- -------- --------
Net increase in cash and cash equivalents... 17,782 2,797 6,275
Cash and cash equivalents at beginning of year... 14,002 11,205 4,930
-------- -------- --------
Cash and cash equivalents at end of year......... $ 31,784 $ 14,002 $ 11,205
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
38
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation. The accompanying
consolidated financial statements include the accounts of OHM Corporation (the
"Company") and its subsidiaries. OHM's investment in 40% of the outstanding
common stock of NSC Corporation ("NSC") is carried on the equity basis. See
"Note 17--Special Charges" and "Note 20--Subsequent Events" regarding
disposition of the NSC investment. All material intercompany transactions and
balances among the consolidated group have been eliminated in consolidation.
The 1997 financial statements have been restated to continue to apply the
equity method of accounting for its investment in NSC. OHM previously had
concluded in the second quarter of 1997 that it no longer had the ability to
exercise significant influence over the operating and financial policies of
NSC after OHM announced its intention to sell its investment in NSC. As a
result, OHM wrote down its investment in NSC to its fair value (see "Note 17--
Special Charges"), discontinued reporting its share of NSC's profits and
losses in OHM's results of operations in accordance with the equity method of
accounting, and because of the change in circumstances started accounting for
its investment in NSC under FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Based on discussions with the SEC
staff, OHM concluded that it should continue to apply the equity method of
accounting for its investment in NSC. The effect of this restatement was to
decrease 1997 net income by $2,736,000 or $0.10 per share.
Recent Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statements No. 130, "Reporting Comprehensive
Income," and Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information." Statement No. 130 requires separate reporting of
certain items, already disclosed by OHM, affecting shareholders' equity
outside of those included in arriving at net earnings. Statement No. 131,
effective for fiscal 1999, establishes requirements for reporting information
about operating segments in annual and interim statements. This statement may
require a change in OHM's financial reporting, however, the extent of this
change, if any, has not been determined.
Use of Estimates. The preparation of the accompanying consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and the accompanying notes.
Actual results could differ from those estimates.
Risks and Uncertainties. OHM 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 customers and to third parties for damages arising from
performing services for clients, which could have a material adverse effect on
OHM. Although OHM believes that it generally benefits from increased
environmental regulations, and from enforcement of those regulations,
increased regulation and enforcement also create significant risks for OHM.
OHM does not believe there are currently any material environmental
liabilities which should be recorded or disclosed in its financial statements.
OHM 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.
39
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OHM's revenue from government agencies accounted for 79%, 77% and 76% of
revenue for the years ended December 31, 1997, 1996 and 1995, respectively.
Because of its dependence on government contracts, OHM 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, OHM 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 OHM's government contracts or appropriate standards and
regulations, or OHM's suspension or debarment from future government
contracting, could have a material adverse effect on OHM's business. The
dependence on government contracts will also continue to subject OHM 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 OHM's consolidated
financial statements. See "Note 2--Acquisitions" and "Note 15--Litigation and
Contingencies."
Stock-Based Compensation. OHM 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. OHM accounts
for stock compensation arrangements in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and accordingly,
recognizes no compensation expense for the stock compensation arrangements.
OHM has no intention of changing this accounting practice. 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 "Note 13--Stock Option
Plan."
Revenue and Cost Recognition. OHM primarily derives its revenue from
providing environmental services under cost plus fee, time and materials,
fixed price and unit price contracts. OHM records revenue and related income
from its contracts in process using the percentage-of-completion method of
accounting based on the costs incurred relative to total estimated costs.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. For the year ended December 31,
1997, OHM recorded a loss of $15,014,000 on its contract at the Hilton-Davis
project in Cincinnati, Ohio. See "Note 17--Special Charges" for further
discussion of the nature and timing of the loss recorded. Changes in project
performance, project conditions and estimated profitability may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. An amount equal to contract costs attributable to
claims is included in revenue when realization is probable and the amount can
be reliably estimated. Back charges to subcontractors are recorded as
receivables to the extent considered collectible. Contract costs include all
direct labor, material, per diem, subcontract and other direct and indirect
project costs related to contract performance. Certain precontract costs are
capitalized and deferred to be amortized on a straight line basis over the
life of the contract by OHM when OHM concludes that their recoverability from
the contract to which they relate is probable. Revenue derived from non-
contract activities is recorded when the services are performed.
Property and Equipment. Property and equipment are carried at cost and
include expenditures which substantially increase the useful lives of the
assets. Maintenance, repairs and minor renewals are expensed as incurred.
Depreciation and amortization, including amortization of assets under capital
leases, are provided on a specific item basis net of salvage value over the
estimated useful lives of the respective assets, using the straight-line
method.
Capitalized Interest. Interest expense incurred on capital expenditures for
assets constructed by OHM is capitalized and is included in the cost of such
assets. Total interest expense incurred by OHM was $6,104,000, $8,085,000 and
$11,205,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Total interest capitalized was $918,000, $998,000 and $792,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
40
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets. Intangible assets consist principally of goodwill and
other intangible assets resulting primarily from acquisitions accounted for
using the purchase method of accounting. Goodwill and other intangible assets
are recorded at the amounts and amortized using the straight-line method over
the lives set forth in the following table:
DECEMBER 31,
---------------
1997 1996 USEFUL LIVES
------- ------- ------------
(IN THOUSANDS)
Goodwill........................................ $45,655 $33,498 40 Years
Proprietary processes........................... 0 36 10 Years
Assembled workforce............................. 397 0 7 Years
Trade name...................................... 311 0 5 Years
------- -------
$46,363 $33,534
======= =======
The carrying value of goodwill is reviewed if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will
not be recoverable, as determined based on the undiscounted cash flows of the
entity acquired over the remaining amortization period, OHM's carrying value
of the goodwill will be reduced by the estimated shortfall of cash flows. The
accumulated amortization of intangible assets, including goodwill, relating to
acquired businesses, was $3,061,000 and $1,938,000 at December 31, 1997 and
1996, respectively.
Insurance Programs. OHM maintains a comprehensive liability insurance
program that is structured to provide coverage for major and catastrophic
losses while essentially self-insuring losses that may occur in the ordinary
course of business. OHM contracts with primary and excess insurance carriers
and generally retains $250,000 to $500,000 of liability per occurrence through
deductible programs, self-insured retentions or through reinsurance provided
by a wholly-owned insurance captive which reinsures some of OHM's workers'
compensation risks. Provisions for losses expected under these programs are
recorded based upon OHM's estimates of the aggregate liability for claims
incurred, including claims incurred but not reported. Such estimates utilize
certain actuarial assumptions followed in the industry. OHM incurred expense
of $5,659,000, $6,949,000 and $4,047,000 for each of the years ended December
31, 1997, 1996 and 1995 respectively.
Legal Expenses. OHM regularly reviews known litigation matters with counsel
and makes a reasonable estimate of its exposure to not only the impact of
settlements, but also the related expenses, such as attorney's fees. OHM
accrues such cost as necessary based on this analysis.
Income Taxes. OHM accounts for income taxes under the liability method
pursuant to Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (SFAS No. 109). Under the liability method, deferred tax
assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Statement of Cash Flows. OHM considers all short-term deposits and highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. Cash paid for income taxes for the years ended
December 31, 1997, 1996 and 1995 was $603,000, $482,000 and $986,000,
respectively. Cash paid for interest was $6,159,000, $8,137,000 and
$10,937,000 for each of the years ended December 31, 1997, 1996 and 1995,
respectively.
With respect to non-cash investing and financing activities, OHM acquired
$2,564,000, $1,870,000 and $29,000 of fixed assets under financial obligations
for the years ended December 31, 1997, 1996 and 1995,
41
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively. In addition, OHM issued $5,000,000 of unsecured promissory notes
in connection with an acquisition in fiscal 1997 and 9,668,000 shares of its
common stock in fiscal 1995 for an acquisition. See Note 2--Acquisitions.
Net Income (Loss) Per Share. In February 1997, the Financial Accounting
Standards Board issued Statement No. 128, Earnings per Share, which was
required to be adopted on December 31, 1997. OHM has changed the method used
to compute earnings per share and restated all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options is excluded. Shares of common stock issuable upon conversion of
the 8% Convertible Subordinated Debentures due 2006 were antidilutive in each
of the years presented; therefore, they were excluded from the calculation of
net income per share. See Note 11--Earnings Per Share.
Reclassification. Certain amounts presented for the years ended December 31,
1996 and 1995 have been reclassified to conform to the 1997 presentation.
NOTE 2--ACQUISITIONS
Effective June 1, 1997, OHM acquired all of the outstanding stock of Beneco
Enterprises, Inc., a Utah corporation (Beneco), for an aggregate purchase
price of $14,700,000. The purchase price was paid as follows: (i) $9,700,000
(excluding the $2,608,000 of cash acquired as part of Beneco--net cash paid
$7,092,000) in cash and (ii) unsecured promissory notes in the aggregate of
$5,000,000, bearing interest at 7.25%, due and payable June 17, 1998. OHM has
agreed to make an additional payment in the year 2000 contingent upon the
achievement of certain operating results and other contractual conditions.
Beneco is a provider of project, program and construction management services
to the Department of Defense and other government agencies throughout the
United States.
The estimated fair value of the assets acquired and liabilities assumed at
the date of the acquisition of Beneco are as follows (in thousands):
Current assets....................................................... $8,208
Property and equipment............................................... 615
Goodwill............................................................. 13,179
Other intangibles.................................................... 774
Current liabilities.................................................. 8,024
On May 30, 1995, OHM completed the acquisition of substantially all of the
assets and certain liabilities of the hazardous and nuclear waste remediation
service business (the Division) of Rust International Inc. (Rust) in exchange
for 9,668,000 shares of common stock of OHM, or approximately 37% of the
outstanding shares of OHM's common stock. Such shares issued to Rust are
subject to a number of restrictions set forth in a Standstill and Non-
competition Agreement that was entered into pursuant to the Agreement and Plan
of Reorganization dated December 5, 1994, as amended (the Reorganization
Agreement), among OHM, Rust and certain of their subsidiaries. In addition to
the net assets of the Division, OHM received $16,636,000 in cash pursuant to
provisions of the Reorganization Agreement that provided for an adjustment
based on the average per share price of OHM's common stock for a 20 trading
day period prior to closing. Also, under terms of the Reorganization
Agreement, as amended on March 22, 1996, OHM received an additional
$15,000,000 on March 25, 1996, which reduced goodwill. For purposes of
calculating the consideration given by OHM for the Division, such 20 trading
day average per share price of $11.25 was used, adjusted to reflect a 40%
discount for the restricted nature of the common stock issued. Consideration
for the Division aggregated $65,259,000, which includes $3,143,000 of direct
costs related to the acquisition.
42
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In exchange for a warrant to purchase up to 700,000 shares of OHM's common
stock at an exercise price of $15.00 per share during the five years following
the closing date, Rust's parent company, WMX Technologies, Inc. ("WMX"), will
provide OHM with a credit enhancement in the form of guarantees, issued from
time to time upon request of OHM, of up to $62,000,000 of OHM's indebtedness,
which will increase proportionately up to $75,000,000 upon issuance of shares
under the warrant. See "Note 19--Subsequent Events".
The acquisitions of Beneco and the Division have been accounted for using
the purchase method and, accordingly, the acquired assets and assumed
liabilities, including goodwill, have been recorded at their estimated fair
values as of June 1, 1997 for Beneco and May 30, 1995 for the Division. OHM's
consolidated financial statements for the twelve months ended December 31,
1997 include the results of Beneco since June 1, 1997. The following table
sets forth the unaudited combined pro forma results of operations of OHM for
the twelve months ended December 31, 1997 and 1996, giving effect to the
acquisition of Beneco as if such acquisition had occurred on January 1, 1996.
OHM's consolidated financial statements also include the results of operations
for the Division since May 30, 1995. The following table sets forth the
unaudited combined pro forma results of operations for the year ended December
31, 1995 giving effect to the acquisition of the Division as if such
acquisition had occurred on January 1, 1995.
PRO FORMA YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue............................. $ 555,271 $ 622,814 $ 520,465
Net income (loss)................... (24,895) 13,050 8,142
Net income (loss) per share......... $ (0.92) $ 0.49 $ 0.31
The combined pro forma results of operations for the years ended December
31, 1997, 1996 and 1995 are based upon certain assumptions and estimates which
OHM believes are reasonable. The combined pro forma results of operations may
not be indicative of the operating results that actually would have been
reported had the transactions been consummated on January 1, 1996 for Beneco
and January 1, 1995 for the Division, nor are they necessarily indicative of
results which will be reported in the future.
NOTE 3--ACCOUNTS RECEIVABLE AND COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN
PROCESS
Accounts receivable are summarized as follows:
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
Accounts billed and due currently........................ $ 43,982 $ 45,573
Unbilled receivables..................................... 37,827 59,649
Retainage................................................ 4,265 5,167
86,074 110,389
Allowance for uncollectible accounts..................... (15,447) (24,928)
$ 70,627 $ 85,461
-------- --------
43
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The consolidated balance sheets include the following amounts:
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
Costs incurred on contracts in process................. $306,314 $442,923
Estimated earnings..................................... 63,128 90,442
-------- --------
369,442 533,365
Less billings to date.................................. (323,198) (477,959)
-------- --------
$ 46,244 $ 55,406
======== ========
Costs and estimated earnings on contracts in process in
excess of billings.................................... $ 47,774 $ 56,303
Billings on contracts in process in excess of costs and
estimated earnings.................................... (1,530) (897)
-------- --------
$46,244 $ 55,406
-------- --------
Unbilled receivables and costs and estimated earnings on contracts in
process typically represent: (i) amounts earned under OHM's contracts but not
yet billable to clients according to contract terms, which usually consider
passage of time, achievement of certain project milestones or completion of
the project; and (ii) amounts equal to contract costs attributable to claims
included in revenue. In addition, unbilled receivables and costs and estimated
earnings on contracts in process include amounts relating to contracts with
federal government agencies which require services performed by OHM's
subcontractors to be paid prior to billing. OHM reasonably expects to collect
the accounts receivable and the costs and estimated earnings on contracts in
process in excess of billings net of the allowance for uncollectible accounts
within one year. Amounts subject to uncertainty include certain claims and
other similar items for which an allowance for uncollectible accounts has been
established. See "Note 15--Litigation and Contingencies" and "Note 17--Special
Charges" for further discussion of principal items comprising the allowance.
OHM provides a broad range of environmental and hazardous waste remediation
services to industrial, federal government agencies, and state and local
government agencies located primarily in the United States and Canada. OHM's
industrial, federal government, and state and local government clients
constituted 38%, 58%, and 4%, respectively, of total accounts receivable and
costs and estimated earnings on contracts in process at December 31, 1997.
NOTE 4--PROPERTY AND EQUIPMENT
DECEMBER 31,
----------------
1997 1996 USEFUL LIVES
------- ------- ------------
(IN THOUSANDS)
Land........................................ $ 284 $ 257 --
Buildings and improvements.................. 21,798 21,698 1-40 Years
Machinery and equipment..................... 72,326 89,831 3-15 Years
Construction in progress.................... 1,823 8,385 --
------- -------
96,231 120,171
Less accumulated depreciation and
amortization............................... (39,621) (49,650)
------- -------
$56,610 $70,521
------- -------
44
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--INVESTMENT IN AFFILIATED COMPANY
The combined summarized financial information of OHM's 40% owned asbestos
abatement and specialty contracting subsidiary, NSC, is set forth below:
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Current assets.............................................. $34,906 $41,123
Noncurrent assets........................................... 39,583 44,102
Total assets................................................ 74,489 85,225
Current liabilities......................................... 18,080 19,969
Noncurrent liabilities...................................... 5,253 7,610
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Revenue......................................... $115,955 $129,043 $124,529
Gross profit.................................... 11,027 22,589 19,447
Operating (loss) income......................... (7,785) 4,361 1,859
Net (loss) income............................... (4,994) 1,861 715
Company's interest in net (loss) income......... (1,997) 748 287
During the second quarter of 1997, OHM wrote down its investment in NSC to
the expected net realizable value based on its plans to sell its 40% share of
NSC. As a result, OHM recorded a $12,089,000 (net of $2,860,000 income tax
benefit) charge to earnings. OHM accounts for the investment in 40% of the
outstanding stock of NSC Corporation on the equity method. Although NSC's
stock had traded below the per share carrying value of the recorded investment
for some time prior to June 1997, OHM believed this decline was temporary
because NSC had continued to report net income, positive cash flow from
operations, and continued to pay dividends. In the second quarter of 1997, OHM
made the decision to sell its investment in NSC. OHM concluded in the second
quarter of 1997 that as a result of its decision to sell its investment in
NSC, it should record an impairment loss. This loss was calculated to be $14.9
million before tax which represents the difference between OHM's carrying
amount of its investment per share ($5.83) and the fair market value per share
of NSC's stock on the day that OHM decided to sell ($2.10) times the 4,010,000
shares held by OHM. See "Note 20--Subsequent Events". OHM received cash
dividends from NSC aggregating $602,000 for each of the years ended December
31, 1997, 1996, and 1995.
NOTE 6--OTHER ACCRUED LIABILITIES
Other accrued liabilities are summarized as follows:
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Reserve for loss projects................................... $ 4,328 $ 5,839
Reserve for legal settlements............................... 2,694 5,490
Reserve for self-insurance.................................. 4,360 4,212
Accrued insurance........................................... 2,411 2,601
Other....................................................... 3,976 3,335
------- -------
$17,769 $21,477
======= =======
45
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--LONG-TERM DEBT
The long-term debt of OHM is summarized below:
DECEMBER 31,
----------------
1997 1996
------- -------
(IN THOUSANDS)
8% Convertible Subordinated Debentures due October 1,
2006................................................... $46,764 $46,764
Notes payable to financial institutions................. 2,806 8,434
Notes payable........................................... 3,494 3,066
------- -------
53,064 58,264
Less current portion.................................... (3,023) (5,292)
------- -------
$50,041 $52,972
======= =======
The convertible subordinated debentures are convertible into 41.67 shares of
common stock per $1,000 unit with interest payable semiannually on April 1 and
October 1, and are redeemable at the option of OHM. 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. OHM purchased and retired $5,736,000 and $5,000,000 of the
outstanding debentures during 1996 and 1995, respectively. The fair value of
the convertible subordinated debentures, based on a quoted market price,
approximates $45,325,000 at December 31, 1997. The amortization of debt
issuance costs related to the convertible subordinated debentures was $88,000,
$97,000 and $108,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
On May 31, 1995, OHM entered into a $150,000,000 revolving credit agreement
with a group of banks (the "Bank Group") to provide letters of credit and cash
borrowings. There were no cash borrowings outstanding at December 31, 1997 or
1996. The agreement has a five year term and is scheduled to expire on May 30,
2000. WMX has issued a guarantee of up to $62,000,000 outstanding under the
credit agreement in favor of the Bank Group. See "Note 2--Acquisition." Under
the terms of the agreement the entire credit facility can be used for either
cash borrowings or letters of credit subject to certain covenants. Cash
borrowings bear interest at either the prime rate plus a percentage up to
0.625% or, at OHM's option, the Eurodollar market rate plus a percentage
ranging from 0.325% to 1.625%. The percentage over the prime rate or the
Eurodollar market is based on the aggregate amount borrowed under the
facility, the presence of the WMX guarantee, and OHM's financial performance
as measured by an interest coverage ratio and a total funded debt ratio. The
arrangement provides the participating banks and WMX with a security interest
in OHM's equipment, inventories, accounts receivables, general intangibles and
in OHM's investment in the common stock of NSC as well as OHM's other
subsidiaries. The agreement also imposes, among other covenants, a minimum
tangible net worth covenant, a restriction on all of OHM's retained earnings
including the declaration and payment of cash dividends and a restriction on
the ratio of total funded debt to earnings before income taxes, depreciation
and amortization. OHM had $13,300,000 and $12,223,000 of letters of credit
outstanding under its revolving credit facility at December 31, 1997 and 1996,
respectively.
Notes payable to financial institutions consist of a $2,806,000 note payable
bearing interest at 8.58% payable in quarterly installments of $356,000 with
the final payment of $957,000 due in August 1999. The above agreement provides
the respective financial institution with a security interest in the equipment
financed with the proceeds from such note.
Notes payable include: (i) a $143,000 interest bearing note at a rate of
9.50% payable in equal monthly installments of $48,000, due in April 1998,
(ii) a $66,000 interest bearing note at a rate of 9.22% payable in equal
monthly installments of $13,000, due in June 1998, (iii), a $79,000 interest
bearing note at a rate of 7.50%
46
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
payable in equal monthly installments of $8,000, due in December 1998, (iv) a
$717,000 interest bearing note at a rate of 8.67% payable in equal monthly
installments of $48,000, due in July 1999, (v) a $72,000 interest bearing note
at a rate of 8.70% payable in equal installments of $5,000, due in June 1999,
(vi) a $187,000 interest bearing note at a rate of 7.51% payable in equal
monthly installments of $8,000, due in July 1999, (vii) a $1,637,000 interest
bearing note at a rate of 8.50% payable in equal monthly installments of
$61,000, due in May 2000 and (viii) a $593,000 interest bearing note at a rate
of 7.96% payable in equal monthly installments of $20,000, due in October
2000.
Current Notes payable include $5,000,000 of unsecured promissory notes
bearing interest of 7.25% due June 17, 1998 to the former shareholders of
Beneco.
The aggregate maturity of long term debt, including annual mandatory sinking
fund payments for the convertible subordinated debentures, for the five years
ending December 31 is: 1998, $5,226,000; 1999, $7,099,000; 2000, $4,804,000;
2001, $4,313,000; 2002, $4,313,000; 2003 and thereafter $27,309,000. The
aggregate maturity of the required mandatory sinking fund payments for the
convertible subordinated debentures for the five years ending December 31 is:
1998, $2,203,000; 1999, $4,313,000; 2000, $4,313,000; 2001, $4,313,000; 2002,
$4,313,000; 2003 and thereafter, $27,309,000.
NOTE 8--LEASES
Future minimum lease payments under noncancelable operating leases total
$15,744,000, $13,264,000, $10,659,000, $7,532,000 and $3,308,000 for the years
ended December 31, 1998, 1999, 2000, 2001 and 2002, respectively. Lease
payments under noncancelable operating leases subsequent to the year ended
December 31, 2002 aggregate $6,510,000.
In addition to the above, OHM has entered into agreements for the sale and
leaseback of certain of OHM's thermal destruction units located at various
project sites. The leases are for one or two years with annual renewals at the
option of OHM with a maximum term of four or five years each. The leases call
for rental payments which total $8,002,000, $8,106,000, $8,106,000, $5,696,000
and $1,223,000 for the years ended December 31, 1998, 1999, 2000, 2001 and
2002, respectively, with required early termination payments of up to
$19,986,000, $19,561,000, $12,710,000 or $4,269,000 in the event that some or
all of the leases are canceled on or before expiration of the full lease terms
in 1998, 1999, 2000 or 2001, respectively. The leases are classified as
operating leases in accordance with Statement of Financial Accounting
Standards No. 13, "Accounting for Leases". For the year ended December 31,
1997, the total cost and accumulated depreciation of $29,701,000 and
$13,080,000, respectively, were removed from the accounts and total gains
realized on the sales of $2,979,000 were deferred. For the year ended December
31, 1996, the total cost and accumulated depreciation of $11,579,000 and
$4,181,000, respectively, were removed from the accounts and total gain
realized on the sale of $5,452,000 was deferred. The deferred gains are being
amortized to income as adjustments to lease expense over the terms of the
leases.
Rental expense under operating leases totaled $23,177,000, $14,029,000 and
$8,858,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 9--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
47
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of OHM's deferred tax liabilities and assets as of
December 31, 1997 and 1996 are as follows:
DECEMBER 31,
----------------
1997 1996
------- -------
(IN THOUSANDS)
Long-term deferred tax liabilities:
Property and equipment................................. $ 9,410 $10,470
Intangible assets...................................... 1,726 1,131
Investments............................................ 8 2,784
------- -------
Total long-term deferred tax liabilities............. 11,144 14,385
Long-term deferred tax assets:
Net operating loss ("NOL") carryforwards............... 22,505 7,571
Intangible assets...................................... 1,446 1,840
Research and development tax credits................... 7,307 5,832
Other tax credit carryforwards......................... 2,421 2,431
Other, net............................................. 1,837 3,474
------- -------
Total long-term deferred tax assets.................. 35,516 21,148
Valuation allowance for long-term deferred tax assets.. (8,808) (3,358)
------- -------
Total long-term deferred tax assets + net of
valuation allowance................................. 26,708 17,790
------- -------
Net long-term deferred tax assets + domestic
operations............................................ 15,564 3,405
Foreign tax NOL carryforwards.......................... 167 167
Valuation allowance for foreign deferred tax assets.... (6) (9)
------- -------
Net long-term deferred tax assets.................... $15,725 $ 3,563
======= =======
Current deferred tax liabilities:
Revenue recognition.................................... $ 2,779 $ --
Prepaid expenses....................................... 1,047 1,095
Tax reserves........................................... 55 366
------- -------
Total current deferred tax liabilities............... 3,881 1,461
Current deferred tax assets:
Bad debt reserves...................................... 5,941 9,722
Project accruals....................................... 4,282 8,709
NOL carryforwards...................................... 5,787 1,950
Other, net............................................. 3,193 1,196
------- -------
Total current deferred tax assets.................... 19,203 21,577
Valuation allowance for current deferred tax assets.... (4,156) (9,603)
------- -------
Total current deferred tax assets + net of valuation
allowance........................................... 15,047 11,974
------- -------
Net current deferred tax assets...................... $11,166 $10,513
======= =======
48
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net foreign long-term deferred tax assets of $161,000 and $158,000 at
December 31, 1997 and 1996, respectively, are attributable to the foreign
operations of OHM and cannot be offset with the net long-term deferred tax
liabilities resulting from OHM's domestic operations. The provisions for income
taxes (benefit) consist of the following:
YEARS ENDED DECEMBER
31,
-----------------------
1997 1996 1995
-------- ------ ------
(IN THOUSANDS)
Current:
Federal............................................ $ -- $ -- $ --
State.............................................. -- 41 58
-------- ------ ------
-- 41 58
Deferred:
Federal............................................ (9,477) 4,569 3,036
State.............................................. (1,013) 766 447
-------- ------ ------
(10,490) 5,335 3,483
-------- ------ ------
$(10,490) $5,376 $3,541
======== ====== ======
The reasons for differences between the provisions for income taxes and the
amount computed by applying the statutory federal income tax rate to income
(loss) from operations before income taxes are as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Federal statutory rate.................... 34.0 % 34.0 % 34.0 %
Add (deduct):
State income taxes, net of federal
benefit................................ 3.2 4.8 3.2
Research and development tax credits.... 4.3 (8.6) (4.5)
Goodwill................................ (1.3) 2.4 1.2
Write-down of investment in NSC
Corporation............................ (7.0) -- --
Equity in net earnings of affiliates.... (2.3) (1.2) (0.8)
Other, net.............................. (0.4) 0.4 1.1
-------- -------- --------
30.5 % 31.8 % 34.2 %
======== ======== ========
49
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net operating loss, capital loss and tax credit carryforward amounts and
their respective expiration dates for income tax purposes are as follows (in
thousands):
EXPIRATION
AMOUNT DATE
------- ----------
Net operating losses: $ 2,473 2006
17,268 2010
53,467 2012
-------
$73,208
=======
State net operating losses in excess of federal: $ 389 1998
72 1999
2,942 2006
2,235 2007
2,165 2008
2,848 2009
3,769 2010
-------
$14,420
=======
Research and development tax credits: $ 261 2002
413 2003
331 2004
610 2005
556 2006
969 2007
715 2008
1,121 2009
225 2010
985 2011
1,121 2012
-------
$ 7,307
=======
Alternative minimum tax credits: $ 1,218 Indefinite
=======
Miscellaneous credits: $ 190 1998
41 1999
106 2000
121 2001
24 2005
-------
$ 482
=======
Foreign tax net operating loss.......................... $ 427 1998
=======
NOTE 10--RELATED PARTY TRANSACTIONS
OHM has a policy whereby transactions with directors, executive officers and
related parties require the approval of a disinterested majority of the Board
of Directors.
OHM has been reimbursed by NSC for certain third party charges paid on NSC's
behalf, such as letter of credit fees, insurance and bonding costs and legal
fees. The costs charged to NSC for general liability and other
50
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
insurance coverages were $188,000, $1,774,000 and $981,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. In the normal course of
business, NSC has provided OHM with subcontract services on certain of its
projects for asbestos abatement and industrial maintenance services. The costs
for such services were $233,000, $40,000 and $212,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. OHM has provided remediation
services to NSC in the amount of $121,000 for the year ended
December 31, 1996.
In the normal course of business, OHM has provided to WMX and its affiliates
certain subcontractor services on remediation and construction projects, the
cost of these services, in the aggregate, were $23,664,000, $12,959,000 and
$10,242,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. OHM has purchased from WMX and its affiliates, hazardous waste
disposal services, the cost of these services, in the aggregate, were
$6,868,000, $7,536,000 and $6,636,000 for the years ended December 31, 1997,
1996 and 1995, respectively. At December 31, 1997, 1996 and 1995, OHM has
$2,831,000, $6,873,000 and $3,871,000 of accounts receivable and $1,385,000,
$968,000 and $806,000 of accounts payable, respectively, recorded related to
such activities. In addition to the above, WMX paid $15,000,000 to OHM in
1996, which was related to final payments due under terms of the
Reorganization Agreement, as amended March 22, 1996.
OHM rents certain buildings and contracts certain services from The KDC
Company and Findlay Machine and Tool, Inc. Such expenses totaled $318,000,
$348,000 and $94,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The principal shareholders of the companies are officers and
directors of OHM.
OHM has purchased general contractor services and equipment from Alvada
Construction, Inc. which totaled $7,000, $957,000 and $226,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. The principal
shareholder of OHM is directly related to certain officers and directors of
OHM.
In the normal course of business, OHM has purchased subcontractor services
on certain of its projects from Kirk Brothers Co., Inc. which totaled
$1,161,000, $2,265,000 and $615,000 for the years ended December 31, 1997,
1996 and 1995, respectively. The principal shareholders of OHM are directly
related to certain officers and directors of OHM.
During 1985, OHM executed a pension agreement with a former officer,
directly related to certain directors of OHM, for an annual pension commencing
on June 1, 1990, of $96,000, subject to cost of living adjustments, for the
remainder of his life and that of his spouse if she survives him. OHM made
pension payments totaling $118,000, $124,000 and $102,000 pursuant to this
agreement during the years ended December 31, 1997, 1996 and 1995,
respectively.
51
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NUMERATOR
Net income (loss)............... $(23,933) $11,515 $ 6,807 $(7,616) $ 4,407
-------- ------- ------- ------- -------
DENOMINATOR
Denominator for basic earnings
per share-- weighted-average
shares......................... 27,210 26,820 22,211 15,582 12,250
Effect of dilutive employee
stock options.................. -- 20 202 -- 204
-------- ------- ------- ------- -------
Denominator for diluted earnings
per share-- adjusted weighted-
average shares and assumed
conversions.................... 27,210 26,840 22,413 15,582 12,454
-------- ------- ------- ------- -------
Net (loss) income per common
share.......................... $ (0.88) $ 0.43 $ 0.31 $ (0.49) $ 0.36
-------- ------- ------- ------- -------
Net (loss) income per common
share--assuming dilution....... $ (0.88) $ 0.43 $ 0.30 $(0.49) $ 0.35
-------- ------- ------- ------- -------
See "Note 20--Subsequent Events" for additional disclosure regarding
employee stock options, warrants and repurchase of outstanding shares.
NOTE 12--CAPITAL STOCK
OHM has authorized 2,000,000 shares of preferred stock at a $10.00 par
value. No shares of preferred stock had been issued at December 31, 1997. The
rights and preferences of the preferred stock will be fixed by the Board of
Directors at the time such shares are issued. The preferred stock, when
issued, will have dividend and liquidation preferences over those of the
common shareholders.
On March 28, 1995, OHM sold to H. Wayne Huizenga and an affiliated family
foundation 1,000,000 shares of its common stock and options for an aggregate
purchase price of $10,000,000, less issuance expenses of $25,000. The options
are exercisable over five years for the purchase of 620,000 shares of common
stock upon payment of $10.00 per share and 380,000 shares of common stock upon
payment of $12.00 per share. See "Note 20--Subsequent Events."
NOTE 13--STOCK OPTION PLANS
OHM has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of OHM's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
OHM's 1986 Incentive Stock Option Plan ("1986 Plan") as amended by vote of
the shareholders at the 1994 and 1996 Annual Meetings, has authorized the
grant of options to officers and key employees for up to 3,850,000 shares of
OHM's common stock. All options granted have 10 year terms and vest and become
fully exercisable at the end of up to 6 years of continued employment. The
number of shares available for grants of additional options under the 1986
Plan were 666,441 and 1,161,674 at December 31, 1997 and 1996, respectively.
52
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 6, 1992, OHM's Board of Directors approved a stock option plan for
the Board of Directors (the "Directors' Plan"), which was subsequently
approved by OHM's shareholders at the 1993 Annual Meeting. The Directors'
Stock Option Plan provides for the immediate grant to each non-employee
director a stock option for 15,000 shares of OHM's common stock, less the
number of shares held by any such director under the 1986 Stock Option Plan.
Additionally, the Directors' Plan provides for additional grants of stock
options for 5,000 shares of OHM's common stock, at prices not less than the
fair value, to each non-employee director annually. Options granted under the
Directors' Plan may not be exercised for a period of six months following the
date of grant and terminate up to eleven years after the date of grant or
eighteen months after the holder ceases to be a member of the Board of
Directors, whichever occurs earlier. The total number of shares available for
grants of additional options under the Directors' Plan at December 31, 1997
and 1996 was 785,000 and 805,000, respectively.
On August 15, 1996, the Board of Directors of OHM approved the OHM
Corporation Incentive Stock Plan ("ISP") which permits the Board to grant
shares of common stock of OHM to officers of OHM under restrictions set forth
with the grant. Shares issued under the ISP are subject to substantial risk of
forfeiture within the meaning of Section 83 of the Internal Revenue Code of
1986. There have been 105,000 shares of common stock issued under the ISP with
a vesting date of August 15, 2001 for 100% of the shares. Total expense
recognized for the year ended December 31, 1997 in connection with shares
issued under this plan is $226,844.
See "Note 20--Subsequent Events" for disclosure of disposition of shares in
the aforementioned plans.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if OHM had accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model. The following assumptions were used in the
valuation, and no dividends were assumed:
1997 1996 1995
----- ----- -----
Average expected life (years)......................... 6 7 7
Expected volatility................................... 0.41 0.46 0.46
Risk free interest rate............................... 6% 6% 6%
Weighted average fair value of options granted during
the year............................................. $3.83 $4.20 $5.40
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 transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because OHM'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.
For purposes of pro forma disclosures of net income and earnings per share,
the estimated fair value of the options is amortized to expense over the
options' vesting period. OHM's pro forma information follows:
PRO FORMA YEARS ENDED
DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net (loss) income.................................. $(25,020) $10,901 $6,428
Net (loss) income per share........................ $ (0.92) $ 0.41 $ 0.29
53
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the stock option activity:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- --------------
1986 PLAN
Outstanding at January 1, 1995.................... 1,765,350 $ 9.41
Granted......................................... 632,750 9.89
Exercised....................................... (249,545) 7.74
Canceled........................................ (134,735) 9.81
----------
Outstanding at December 31, 1995.................. 2,013,820 9.74
Granted......................................... 1,097,569 8.33
Exercised....................................... -- --
Canceled........................................ (1,004,399) 11.06
----------
Outstanding at December 31, 1996.................. 2,106,990 8.38
Granted......................................... 807,000 8.20
Exercised....................................... (106,195) 7.69
Canceled........................................ (311,767) 8.28
----------
Outstanding at December 31, 1997.................. 2,496,028 8.36
==========
Exercisable at December 31, 1996.................. 1,037,008 8.44
==========
Exercisable at December 31, 1997.................. 1,221,738 8.54
==========
DIRECTORS' PLAN
Outstanding at January 1, 1995.................... 85,000 $10.16
Granted......................................... 65,000 11.83
----------
Outstanding at December 31, 1995.................. 150,000 10.88
Granted......................................... 60,000 7.94
Canceled........................................ (15,000) 10.50
----------
Outstanding at December 31, 1996.................. 195,000 10.01
Granted......................................... 35,000 7.50
Canceled........................................ (15,000) 11.75
----------
Outstanding at December 31, 1997.................. 215,000 9.48
==========
Exercisable at December 31, 1996.................. 180,000 10.20
==========
Exercisable at December 31, 1997.................. 215,000 9.48
==========
Exercise prices for options outstanding as of December 31, 1997 for the 1986
Plan and the Director's Plan ranged from $6.38 to $11.88 and $7.38 to $15.63,
respectively. The weighted-average remaining contractual life of those options
is 7.2 and 7.5 years, respectively.
NOTE 14--RETIREMENT AND PROFIT-SHARING PLANS
OHM has a Retirement Savings Plan (the "Plan") which allows each of its
eligible employees to make contributions, up to a certain limit, to the Plan
on a tax-deferred basis under Section 401(k) of the Internal Revenue Code of
1986, as amended. Eligible employees are those who are employed full-time, are
over twenty-one years of age, and have one year of service with OHM. OHM may,
at its discretion, make matching
54
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contributions and profit sharing contributions to the Plan out of its profits
for the plan year. OHM made matching contributions of $2,718,000, $2,691,000
and $1,643,000 to the Plan for the years ended December 31, 1997, 1996 and
1995, respectively.
Effective January 1, 1996, the Board of Directors of OHM approved the
Retirement and Incentive Compensation Plan ("RICP") which provides eligible
employees an election to defer a specified percentage of their cash
compensation. The obligations of OHM under the RICP will be unsecured general
obligations to pay the deferred compensation under the terms of the RICP.
Participants may elect under the plan to invest deferrals in an OHM Common
Stock Deferral Account for which contributions will be treated as if such
amounts had been used to purchase shares of OHM's stock and not as actual
purchases of OHM's stock. At the discretion of the compensation committee of
the Board of Directors, contributions to the plan will be matched by OHM and
all amounts invested in the plan will earn interest at the prime rate
published by the Wall Street Journal if not invested in the OHM Common Stock
Deferral Account.
OHM's contributions to the plan, for both the match and the earnings on
amounts invested are expensed as incurred including market value appreciation
in the OHM Common Stock Deferral Account. A monthly average per share price of
OHM common stock is used to calculate the contributions to the Stock Deferral
Account. No dividends have been declared on the common stock. Total expense
was $564,000 and $154,000 for the years ended December 31, 1997 and 1996,
respectively.
NOTE 15--LITIGATION AND CONTINGENCIES
OHM is currently 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. OHM's work was substantially delayed and its
costs of performance were substantially increased as a result of conditions at
the site which OHM believes were materially different than as represented by
Occidental. In December 1994, Occidental filed suit against OHM. Occidental's
amended complaint seeks $8,806,000 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 $9,200,000 for damages arising
from Occidental's breach of contract, misrepresentation and failure to pay
outstanding contract amounts.
OHM is in litigation with General Motors Corp. In the U.S. District Court
for the Northern District of New York. GM filed suit in January 1996 alleging
that OHM breached a contract between Hughes Environmental Systems, Inc.
(HESI), a GM subsidiary, for work in 1994 for the remediation of 22,000 cubic
yards of PCB contaminated sediment in the St. Lawrence River in Massena. GM
seeks damages for $3.8 million. OHM in turn filed suit against HESI and ERM
Northeast, Inc. In U.S. District Court in Northern New York seeking
$3.6 million in damages for breach of contract. The GM suit was later
consolidated with OHM's suit against HESI and ERM. GM alleges that OHM
abandoned the contract through inability to perform while OHM claims that
performance was impacted by conditions at the site that were not as
represented.
Litigation and claims involving OHM relate primarily to the collection of
outstanding accounts receivable of OHM. OHM regularly evaluates the need to
establish accounts receivable reserves for such litigation and claims. Total
accounts receivable reserves for such litigation and claims were $7,665,000
and $17,596,000 for the years ended December 31, 1997 and 1996, respectively.
In addition, OHM has established a general litigation reserve of $2,015,000
and $3,494,000 for the years ended December 31, 1997 and 1996, respectively to
cover litigation and claims costs as well as other matters not impacting
accounts receivable.
Management believes that it has established adequate reserves should the
resolution of the above matter be lower than the amounts recorded and for
other matters in litigation or other claims and disputes. There is,
55
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
however, always risk and uncertainty in pursuing and defending litigation and
arbitration proceedings in the course of OHM's remediation business and,
notwithstanding the reserves currently established, adverse future results in
litigation or other proceedings could have a material adverse impact upon
OHM's consolidated future results of operations or financial condition. In
addition to the above, OHM is subject to a number of claims and lawsuits in
the ordinary course of its business. In the opinion of management, the outcome
of these actions, which are not clearly determinable at the present time, are
either adequately covered by insurance, or if not insured, will not, in the
aggregate, have a material adverse impact upon OHM's consolidated financial
position or the results of future operations.
NOTE 16--MAJOR CUSTOMERS
Revenue from federal government agencies accounted for 72%, 72% and 71% of
total revenue from continuing operations for the years ended December 31,
1997, 1996 and 1995, respectively. Revenue from state and local government
agencies accounted for 7%, 5% and 5% of total revenue from continuing
operations for the years ended December 31, 1997, 1996 and 1995, respectively.
There were no industrial customers which accounted for more than 10% of total
revenue for the years ended December 31, 1997, 1996 and 1995.
NOTE 17--SPECIAL CHARGES
During the second quarter of 1997, OHM settled litigation and received an
unfavorable binding arbitration decision that established a need to write-down
claims receivable previously recorded by OHM. These actions together with a
thorough analysis by management of other claims, litigation and the related
receivables and a decision by management to establish reserves for the
consolidation of certain laboratory and operational functions resulted in OHM
recording a $22,726,000 (net of $15,151,000 income tax benefit), charge during
the second quarter of 1997.
The following discussion details the various elements of the charge:
Separation and Recovery Systems, Inc. ("SRS"). In June 1997, OHM received an
unfavorable binding arbitration decision in a dispute between OHM and SRS.
SRS's subcontract with OHM to provide thermal desorption treatment services at
the Hilton Davis chemical site in Cincinnati, Ohio was terminated by OHM in
the second quarter of 1996 due to failure to perform. OHM subsequently
attempted to perform the treatment process with the SRS equipment and was
unsuccessful. The inability of SRS to perform caused OHM to incur significant
expense to complete the required treatment process. OHM's total claim in
arbitration against SRS for the resulting expense of failed performance was
$18,500,000 and included deferred cost of $9,814,000 recorded by OHM as a
receivable from SRS. In addition to not collecting the receivable, the
arbitration decision required OHM to pay SRS $2,400,000 in damages for their
counterclaim for wrongful termination. OHM also established a loss reserve of
$2,800,000 to complete the treatment effort required as a result of the above.
Prior to the arbitration decision OHM had concluded that it was not probable
that a loss had occurred based on the opinion of counsel, consequently the
write-off was taken in the same period that the decision was rendered.
Citgo Petroleum Corporation ("Citgo"). In June 1997, OHM settled litigation
with Citgo and Occidental Oil & Gas (Oxy) relating to a project which was
performed by OHM for Citgo at its Lake Charles, Louisiana refinery in 1993 and
1994. This litigation resulted from OHM filing a request for equitable
adjustment in April 1994 based on deficient project specifications provided by
Citgo, the subsequent lawsuit filed by Citgo in April 1994 and the
counterclaims filed by OHM in July 1994. In 1995 Citgo and OHM brought
separate actions against Oxy as a third party with previous involvement at the
site. Extensive discovery by all parties prior to a scheduled trial in 1997
led to settlement discussions in the second quarter of 1997. Under the terms
of the settlement with Citgo and Oxy, OHM received a cash payment of
$14,346,000 against outstanding receivables of $22,609,000
56
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
resulting in a write-off of accounts receivable of $8,263,000. Prior to
accepting the settlement offer, OHM had concluded that it was not probable
that a loss had occurred based on the opinion of legal counsel that there
existed a reasonable basis to support OHM's claim in litigation. The
settlement and resulting write down of accounts receivable occurred after
management completed its assessment of the litigation, the determination of
the maximum amount of settlement that could be obtained and its review of the
disadvantages of continuing litigation which would divert the attention of
company management and resources.
Other Litigation and Accounts Receivable. In addition to the aforementioned
disputes, OHM made a decision to resolve other significant legal matters
involving outstanding accounts receivable. In June 1997, OHM settled
outstanding litigation with B&V Construction, Inc. ("B&V") for $1,550,000
pertaining to a dispute involving subcontracted services at a General Motors
project in Flint, Michigan during late 1994. Payment to B&V was made in July
1997. Accounts receivable involving disputes primarily related to two
additional contracts were also written down to facilitate settlement. These
decisions resulted from management's analysis of the unfavorable SRS
arbitration decision and the protracted Citgo litigation and subsequent
settlement and concluded that the risk associated with continued pursuit of
legal remedies was not acceptable and the further diversion of management's
attention to effect favorable outcomes was not appropriate. Prior to that
time, OHM had concluded that it was not probable that a loss had occurred
based on the opinion of counsel.
Litigation Costs. As a result of the above discussed legal matters and the
significant expense of resolving such matters, OHM has accrued $2,100,000 for
the expenses of the litigation such as attorney's fees. This accrual includes
costs associated with those matters included in the special charge discussed
above including those that expect to be settled. OHM concluded that due to the
timing of the settlements discussed above, the related expense of settlement
should also be accrued.
Region Reorganization, Laboratory Closure & Severance. In May 1997,
management of OHM made a decision to consolidate certain regional operations,
close certain offices and cease commercial laboratory operations. These
decisions were made as part of a comprehensive plan completed in the second
quarter of 1997 to restructure operations of OHM. Thus, resulting expense was
recognized as a special charge at that time. Employees of OHM were notified of
the reduction in force at that time and substantially all of the reserve
requiring a cash settlement was paid prior to the end of 1997. The components
of this special charge were:
(IN THOUSANDS)
Cash items:
Severance................................................... $1,500
Lease termination and facility closure...................... 1,139
Other....................................................... 388
------
Subtotal.................................................. 3,027
Non cash items:
Fixed Assets................................................ 773
------
Total..................................................... $3,800
======
NSC Divestiture. During its second quarter of 1997, OHM decided to sell its
40% share of NSC Corporation. As a result, OHM recorded a $12,089,000 (net of
$2,860,000 income tax benefit), charge during the second quarter of 1997, to
reduce the carrying value of its NSC investment to reflect the likely value to
be realized given OHM's current intentions. See "Note 5--Investment in
Affiliated Company" and "Note 20--Subsequent Events".
57
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the detailed components of the charge:
TAX NET
CHARGE BENEFIT LOSS
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
SRS Settlement and Project Loss Accrual............. $15,014 $ 6,006 $ 9,008
Citgo Settlement (Net of $14.3 million)............. 8,263 3,305 4,958
Other Litigation and Accounts Receivable............ 8,700 3,480 5,220
Litigation Costs.................................... 2,100 840 1,260
Region Reorganization & Other....................... 3,800 1,520 2,280
------- ------- -------
Total Claims Settlement & Other..................... 37,877 15,151 22,726
Total Write-down of Investment in NSC............... 14,949 2,860 12,089
------- ------- -------
Total Charge........................................ $52,826 $18,011 $34,815
======= ======= =======
OHM's consolidated statement of operations for the year ended December 31,
1995 includes a $2,312,000 (net of $1,542,000 income tax benefit) charge for
integration costs related to the acquisition of the Division. The charge was
recorded as a selling, general and administrative expense and was primarily
for severance and relocation costs for certain of OHM's personnel and the
closing of certain of OHM's offices as a result of combining the operations of
the Division and OHM.
NOTE 18--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth OHM's condensed consolidated statements of
operations by quarter for 1997 and 1996.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
1997
----
Revenue............................... $108,498 $129,313 $143,656 $145,224
Gross profit.......................... 13,851 17,874 20,909 19,501
Selling, general and administrative
expenses............................. 10,409 49,368 11,972 12,188
Operating income (loss)............... 3,442 (31,494) 8,937 7,313
Net income (loss)(1).................. $ 1,438 $(31,609) $ 4,062 $ 2,176
======== ======== ======== ========
Basic and diluted net income (loss)
per share............................ $ 0.05 $ (1.16) $ 0.15 $ 0.08
======== ======== ======== ========
1996
----
Revenue............................... $118,963 $129,177 $158,272 $144,572
Gross profit.......................... 15,030 17,560 20,638 18,832
Selling, general and administrative
expenses............................. 11,176 11,943 13,124 13,007
Operating income...................... 3,854 5,617 7,514 5,825
Net income............................ $ 1,330 $ 2,379 $ 3,996 $ 3,810
======== ======== ======== ========
Basic and diluted net income per
share................................ $ 0.05 $ 0.09 $ 0.15 $ 0.14
======== ======== ======== ========
- --------
(1) During the second quarter of 1997, OHM recorded a $34,815,000 charge (net
of income tax benefit of $18,011,000) or $1.28 per share, charge for the
settlement and write-down of certain claims and litigation, establishment
of reserves for the consolidation of certain laboratory and operational
functions, and the reduction of the carrying value of its NSC investment.
58
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--SEGMENT INFORMATION
OHM operates in two industry segments. The first includes environmental and
hazardous waste remediation services. The second, which consists solely of
Beneco Enterprises, Inc., includes project, program and construction
management services. Both segments provide services to primarily federal
government agencies such as the Department of Defense.
ENVIRONMENTAL CONSTRUCTION
REMEDIATION MANAGEMENT CONSOLIDATED
------------- ------------ ------------
(IN THOUSANDS)
1997
----
Net sales....................... $469,396 $57,295 $526,691
Operating income................ (19,185) 7,383 (11,802)
Assets employed at year end..... 285,694 31,349 317,043
Depreciation and amortization... 16,233 37 16,270
Capital Expenditures............ 17,891 145 18,036
Prior to the acquisition of Beneco in 1997, OHM operated in only one
segment, Environmental Remediation. There were no intersegment sales. The
operating loss in the Environmental Remediation segment for 1997 is due to the
special charges recorded in the second quarter, all of which related to that
segment. See "Note 17--Special Charges."
NOTE 20--SUBSEQUENT EVENTS (UNAUDITED)
OHM has entered into an Agreement and Plan of Merger (the "Merger
Agreement"), dated January 15, 1998, by and among OHM, International
Technology Corporation ("Parent") and IT-Ohio, Inc. ("Purchaser"). Pursuant to
the Merger Agreement, on February 25, 1998 Purchaser, a wholly owned
subsidiary of Parent, completed a tender offer (the "Offer") for 13,933,000
shares of Common Stock (each, a "Share" and collectively, the "Shares") by
purchasing such Shares at a price of $11.50 per Share, net to the tendering
shareholder in cash. The Offer was described in the Tender Offer Statement on
Schedule 14D-1 filed by Purchaser on January 16, 1998 with the Securities and
Exchange Commission (the "Commission").
The Merger Agreement provides that, subject to the satisfaction or waiver of
certain conditions precedent (including the approval of the Merger Agreement
by holders of a majority of the outstanding Shares), Purchaser will merge with
and into OHM (the "Merger"), and OHM will be the surviving corporation in the
Merger, with the result that OHM will become a wholly owned subsidiary of
Parent. Based upon the preliminary results of the Offer and on the number of
shares of Common Stock outstanding on February 24, 1998, at the effective time
of the Merger, each remaining Share outstanding will be converted into the
right to receive approximately 1.077 shares of the common stock of Parent and
approximately $2.61 in cash.
James L. Kirk, Joseph R. Kirk, H. Wayne Huizenga and The Huizenga Family
Foundation, all shareholders of OHM, have entered into voting agreements
whereby they agree to vote their shares of Common Stock in favor of the
Merger.
Pursuant to the Merger Agreement and the Share Repurchase Agreement, dated
as of January 15, 1998 and as amended and restated as of February 11, 1998 and
as amended and restated as of February 17, 1998 (the "Repurchase Agreement"),
by and among OHM, Parent, WMX, Rust and Rust Remedial Services Holding Company
Inc., an affiliate of WMX, OHM repurchased from WMX and its affiliates
2,535,381 Shares for $11.50 per Share, concurrently with the payment for
Shares pursuant to the Offer (the "Repurchase"), and WMX and its affiliates
tendered 7,111,543 Shares in the Offer. Pursuant to the Repurchase Agreement,
WMX and its
59
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
affiliates also agreed to vote all Shares held by them in favor of the Merger.
WMX also agreed to cancel, without payment of any separate consideration, the
Warrants and any rights it may have to purchase additional shares of Common
Stock. In addition, the Guaranty Agreement and related guarantees as well as
key provisions of the Standstill Agreement will terminate upon consummation of
the Merger.
OHM also has an approximately 40% interest in NSC Corporation ("NSC"), a
provider of asbestos abatement and specialty contracting services. Pursuant to
the Merger Agreement, OHM will pay a pro rata distribution (the "NSC
Distribution") to holders of record of the Shares as of the close of business
on February 24, 1998, of all of the shares of Common Stock, par value $0.01
per share, of NSC held by OHM (the "NSC Shares"). The payment date for the NSC
Distribution is March 6, 1998, which is the earliest date on which the NSC
Distribution may be paid under OHM's Regulations. It is anticipated that the
NSC Distribution will be treated as a pro rata taxable redemption that
qualifies as a sale or exchange for tax purposes.
In connection with OHM's entry into the Merger Agreement and by resolution
of OHM's Board of Directors, OHM's 1986 Stock Option Plan and OHM's
Nonqualified Stock Option Plan for Directors were amended to immediately vest
each non-vested stock option issued under such plans and to give each of the
option holders the right to cancel their options in exchange for a cash
payment equal to the difference between $11.50 per share and the respective
exercise price of each option. In addition, OHM's Board of Directors took
action to allow holders of the restricted stock issued under OHM's Incentive
Stock Plan to tender such stock in the Offer. As a result of the above
actions, OHM will incur up to $9,400,000 of compensation expense during the
first quarter of 1998 if all of the stock option holders elect to receive the
cash payment for their outstanding options. In addition, pursuant to that
certain letter agreement, dated as of January 15, 1998, by and between H.
Wayne Huizenga and OHM, all of the outstanding options held by H. Wayne
Huizenga were canceled as of February 25, 1998 in consideration of $1,500,000.
The consummation of the transactions contemplated by the Merger Agreement is
subject to the satisfaction of various conditions, including, without
limitation: (i) the approval by the stockholders of Parent for the issuance of
shares of Parent Common Stock pursuant to the Merger Agreement, and (ii) the
approval of the Merger Agreement and the Merger by the shareholders of OHM.
OHM received early termination of the waiting period required under the Hart-
Scott-Rodino Antitrust Improvements Act during January 1998.
The accompanying financial statements were prepared assuming OHM would
continue operations independently and do not anticipate adjustments which may
be required as a result of the Merger. The Merger will be accounted for using
the purchase method and as a result may impact the carrying value of certain
of OHM's assets and liabilities.
60
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
OHM Corporation
We have audited the accompanying consolidated balance sheets of OHM
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These 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 OHM Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Columbus, Ohio
February 12, 1998, except
for Note 1, as to which
the date is May 4, 1998
61
INTERNATIONAL TECHNOLOGY CORPORATION
62
BUSINESS
GENERAL
International Technology Corporation, a Delaware corporation ("ITC"),
provides a wide range of environmental management services and technologies
including the assessment, engineering, and remediation of situations involving
hazardous materials and pollution prevention and minimization. ITC was
incorporated in 1983; the earliest antecedent of ITC commenced operations in
California in 1926.
ITC's services are provided to a broad array of governmental and commercial
entities predominantly in the U.S. market. Additionally, ITC pursues selected
international business opportunities. ITC's business strategy is to provide
its environmental services on a full-service basis, particularly by focusing
on its capabilities to manage complex environmental issues from the initial
assessment of the level and extent of contamination through the design,
engineering and execution of a solution which minimizes the client's total
cost. In recent years, ITC has worked on several hundred Superfund sites for
various governmental and commercial clients.
Demand for ITC's services is heavily influenced by the level of enforcement
of environmental laws and regulations, funding levels for government projects
and spending patterns of commercial clients. During the 1990's, spending by
commercial clients has slowed primarily due to reduced implementation and
enforcement activities by governmental regulatory agencies and an uncertain
regulatory climate. The operations of ITC are performed subject to a
comprehensive federal, state, and local environmental regulatory structure.
(See Business--Operations--Regulations.) This regulatory structure is a
primary driver of business opportunities for ITC. The lapse of the Superfund
(see Business--Operations--Regulations--Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA)) and uncertainty concerning
the form of the future reauthorization of the Superfund and potential changes
in other regulations have dampened demand for ITC's services.
In recent years, ITC's revenues have been derived primarily from its
business with federal, state and local governmental clients. Revenues
attributable to contracts with governmental agencies accounted for 67%, 69%
and 71% of total revenues in fiscal years 1997, 1996 and 1995, respectively.
(See Business--Operations--Customers--Federal, State and Local Governmental
Clients.) ITC expects that revenues attributable to federal, state and local
governmental agency contracts, particularly those with the U.S. Department of
Defense (DOD) and the U.S. Department of Energy (DOE), will continue to
represent a substantial but declining percentage of total revenues in the near
term. Efforts to constrain the federal budget deficit have reduced the level
of spending on environmental restoration by the DOD, the DOE and other federal
governmental agencies. Additionally, the delay in the authorization of the
1996 federal budget reduced ITC's revenues in late-fiscal year 1996 and early-
fiscal year 1997 due to the failure of the DOD to fund ITC's delivery order
contracts as previously expected. (See Management's Discussion and Analysis of
Results of Operations and Financial Condition--Results of Operations--
Continuing Operations--Revenues.)
At the November 20, 1996 Annual Meeting of Stockholders, ITC's shareholders
voted to approve an investment by The Carlyle Group, a major Washington, D.C.-
based investment bank (the Carlyle Investment). ITC issued to Carlyle 45,000
shares of Convertible Preferred Stock having a liquidation preference of
$1,000 per share, and warrants to purchase 1,250,000 shares of ITC common
stock at $11.39 per share. The $40,609,000 net proceeds to ITC (after related
offering costs of $4,391,000) will be used by ITC to finance business
acquisitions, as well as for working capital and general corporate purposes
(see Notes to Consolidated Financial Statements--Preferred stock--Carlyle
Investment).
Using the proceeds of the Carlyle Investment, ITC expects to further grow
and diversify its business through acquisitions. In November 1996, ITC
acquired a 50.1% interest in a Taiwanese wastewater treatment design/build
firm (see Business--Operations--International) and, in May 1997, ITC acquired
a consulting firm specializing in historical investigation of environmental
issues. (See Business--Operations--Consulting and Ventures.) These recent
acquisitions are illustrative of ITC's strategy of directing its growth and
diversification toward economically-driven, value-added services which are
complementary to ITC's existing services and which are synergistic when
combined with ITC's market position and infrastructure.
63
BACKGROUND
Hazardous materials management and remediation, as well as air and water
pollution control, are widely acknowledged as significant national priorities.
As of March 1997, the U.S. Environmental Protection Agency (USEPA) had
designated approximately 1,372 sites as Superfund locations with significant
concentrations of hazardous materials, although only approximately 25% of
these sites have been remediated. In addition, there are a large number of
small commercial and governmental sites that will require cleanup. The
assessment, decontamination and remediation of hazardous sites are governed by
complex environmental and occupational safety and health regulations
administered by numerous federal, state and local agencies.
Many of ITC's clients, both governmental and commercial, continue to require
a full-service solution, in which a single supplier manages the entire process
from identification and assessment through remediation. Successful remediation
of hazardous sites requires a multidisciplinary approach, since such sites
typically involve a variety of waste which affects air, soil and/or water.
Depending on the circumstances, the required skills may include analytical
chemistry, risk assessment, computer modeling, ambient air monitoring, process
and design engineering, and construction/remediation. The application of these
disciplines to solve client problems requires substantial operational
knowledge, and ITC believes that it is well-positioned to solve client
problems in a practical, cost-effective manner because of the combination of
its technical capabilities and experience. Additionally, ITC's technical
expertise and operational experience are sought by other firms for project-
specific teaming and joint venture relationships, thereby allowing ITC access
to an increased number of large scale governmental and commercial programs.
Over the past several years, the environmental management and hazardous
waste remediation industry has been characterized by an increasing number of
well-capitalized competitors, reduced government enforcement of environmental
regulations and regulatory uncertainty. This has resulted in reduced
commercial spending on environmental cleanup and intense pricing competition
for hazardous waste cleanup projects. Lower demand in the private sector
during the 1990's has been offset to some extent by new major project
opportunities in the public sector, primarily major cleanup projects at DOD
and DOE installations, which require a broad range of project management and
field execution skills, limiting the number of potential bidders. As a result
of the changes impacting the industry, consolidation has occurred through
downsizing and mergers. ITC's strategy is to be a strong competitor for the
major project opportunities offered by the DOD and DOE, to continue to
actively serve the commercial market, to expand and diversify into
economically-driven, value-added services and to achieve economies of scale by
participating in the ongoing consolidation in the industry using the proceeds
of the Carlyle Investment. (See Management's Discussion and Analysis of
Results of Operations and Financial Condition--Liquidity and Capital
Resources.)
OPERATIONS
General
ITC's operations are managed through two divisions, an Engineering and
Construction division and a Consulting and Ventures division. The Engineering
and Construction division manages projects of all sizes, while the Consulting
and Ventures division provides specialized consulting services and focuses on
new value-added business initiatives. ITC provides these capabilities anywhere
in the United States as well as internationally through appropriate resources
located in ITC's 43 offices and through certain international affiliates (see
International).
Engineering and Construction
The major part of ITC's business is the management of complex hazardous
waste remediation projects involving the assessment, planning and execution of
the decontamination and restoration of property, plant and equipment that have
been contaminated by hazardous substances. These projects include the cleanup
of land disposal sites where hazardous or toxic substances have been disposed
and pose a threat to the surrounding environment; rivers, streams and
groundwater contaminated by chemical substances and buildings, production
facilities and storage sites contaminated with hazardous chemical and/or
radioactive materials. These projects
64
require considerable strategic environmental management, technical engineering
and analytical effort to determine 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 as well as strong project management and construction
and remediation skills to execute the ultimate remediation projects in the
field. ITC is involved in all areas of the United States and in selected areas
internationally in the assessment or cleanup phases of site remedial action
projects.
ITC provides full-service capabilities for these projects, primarily in the
areas of DOD and DOE delivery order program management, engineering and design
services, remedial construction, mobile treatment, and
decontamination/decommissioning capabilities. In the area of remedial
construction, ITC offers diverse services, such as excavation and isolation,
installation of subsurface recovery systems, thermal treatment solutions,
bioremediation approaches, chemical treatment, soil washing, fixation or
stabilization, facility or site closures, solidification, landfill cell
construction, and slurry wall and cap installation. The full-service strategy
supports ITC's marketing efforts toward developing partnering arrangements
with clients in which ITC is the primary supplier of all client environmental
management services and assists clients to innovatively reduce total
environmental costs.
Consulting and Ventures
ITC 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.
ITC has expanded its air quality business in response to its clients' needs.
ITC provides services related to pollution prevention engineering, control
technology specification, permit preparation, emergency release management,
emission sampling and monitoring, leak detection in industrial facilities and
overall air quality management.
Additionally, ITC performs a variety of consulting services for clients to
help them comply with environmental and/or health and safety regulations. ITC
also provides assistance to these clients in developing corporate policies and
procedures in areas such as pollution prevention and waste minimization that
integrate environmental regulations into their business decisions.
ITC has been strategically broadening its capability through business
initiatives which address the trend toward economically-driven, value-added
environmental solutions. In March 1996, ITC acquired Gradient Corporation, a
prominent environmental risk assessment firm. Additionally, during fiscal year
1997, ITC made a 19% investment in LandBank, Inc., a firm pursuing the
brownfields remediation market, a market involving economically-driven cleanup
of impaired properties for future real estate development. As well as being an
investor in LandBank, ITC will be LandBank's preferred contractor, both for
site assessment and remediation activities. In May 1997, ITC purchased PHR
Environmental Consultants, Inc., a California-based consulting firm which
assists business entities to more economically confront potential or existing
environmental liabilities through an interdisciplinary investigative approach
of science, history and information.
International
In November 1996, ITC made a 50.1% majority investment in Chi Mei
Scientech/Entech, a Taiwan-based wastewater treatment design/build firm, which
will now do business as Chi Mei International Technology. ITC intends to use
this investment as a stepping stone to project opportunities and other
business expansion possibilities in the Far East. ITC has entered into a joint
venture agreement with a major Mexican engineering and construction firm. This
joint venture has performed several projects and is currently seeking permits
to operate a treatment facility using ITC's incineration capabilities near
Mexico City. ITC has also entered into a joint venture with a major Korean
engineering and construction firm to pursue, among other things, a major
incineration project. (See Management's Discussion and Analysis--Results of
Operations--Continuing Operations--Revenues.)
65
Customers
ITC's services are provided to a broad range of federal, state and local
governmental and commercial clients in the U.S. market. During the 1990's, ITC
experienced a significant shift in revenues from the commercial sector to the
governmental sector, although that trend reversed slightly beginning in fiscal
year 1996.
Federal, State and Local Governmental Clients
Due to its technical expertise, project management experience and full-
service capabilities, ITC has successfully bid on and executed contracts with
federal and other governmental agencies for the performance of various CERCLA
and RCRA activities. (See Business--Operations--Regulations.) ITC's
governmental contracts are often multi-year, indefinite delivery order
programs (IDOs). These programs provide spending budget estimates for which
the client expects to define the scope by working closely with ITC's program
management and technical staff. As projects are defined, the work is awarded
to ITC on a sole source basis. Government contracts are typically subject to
annual funding limitations and public sector budgeting constraints. Some of
these contracts provide a maximum contractual amount of services that may be
performed by ITC with the specific services authorized from time to time by
the government agency through a series of task orders under the master
contract. ITC may be asked to perform services for the full amount of an IDO
or for amounts greater or less than the full amount. IDOs generated
approximately 27% of ITC's revenues in fiscal year 1997. The programs with
federal government agencies typically involve a competitive bidding process
pursuant to federal procurement policies involving several bidders and result
in a period of contract negotiation after a successful bidder is selected.
Although ITC generally serves as the prime contractor on its contracts or as a
part of a joint venture which is the prime contractor, ITC serves as a
subcontractor to other prime contractors on some federal government programs.
As has become typical in the environmental industry, ITC has entered into
joint venture or teaming arrangements with competitors when bidding on certain
of the largest, most complex contracts, to provide the breadth of technical
expertise and, at times, bonding capacity required for the project.
The following table shows, for the last three years, ITC's revenues
attributable to federal, state and local governmental contracts as a
percentage of ITC's consolidated revenues:
YEAR ENDED
-----------------------------
MARCH 28, MARCH 29, MARCH 31,
1997 1996 1995
--------- --------- ---------
Source
Federal government:
DOD............................................. 42% 51% 47%
DOE............................................. 14 11 12
Other federal agencies.......................... 3 3 4
--- --- ---
59 65 63
State and local governments..................... 8 4 8
--- --- ---
Total......................................... 67% 69% 71%
=== === ===
Commercial Clients
ITC serves numerous commercial clients including chemical, petroleum and
other manufacturing firms, utilities, real estate and transportation service
companies, and law firms. A substantial portion of ITC's commercial work
represents new contracts awarded by existing clients. No single commercial
client accounted for 10% or more of ITC's consolidated revenues in fiscal
years 1997, 1996 or 1995. There is a growing trend in ITC's work for
commercial clients toward strategic environmental management services and
economically-driven solutions to environmental issues (see Business--
Operations--Consulting and Ventures).
66
Competition
The environmental management industry is very competitive and requires
professional personnel with technical and project management skills. ITC
believes that the principal competitive factors in all areas of its business
are operational experience, technical proficiency, breadth of services
offered, local presence and, often most importantly, price.
ITC faces competition from a diverse array of small and large organizations
including national or regional environmental management firms; national,
regional and local architectural, engineering and construction firms;
environmental management divisions or subsidiaries of international
engineering, construction and systems companies; and hazardous waste
generators which have developed in-house capabilities. Major competitors in
consulting, engineering and design include Bechtel, CH2M Hill, Dames and
Moore, Earth Technology, ERM Group, Fluor Daniel, Jacobs Engineering, and Roy
F. Weston. Major competitors in remediation include Bechtel, Fluor Daniel,
Foster Wheeler, Groundwater Technology, Jacobs Engineering, Morrison-Knudsen,
OHM and Sevenson.
Increased competition, combined with changes in client procurement
procedures, has resulted in market trends over the past several years toward
lower contract margins, a client preference for fixed-price or unit-price
contracts and unfavorable changes in contract terms and conditions in areas
such as indemnification of the client by ITC of liabilities for damage or
injury to third parties and property and for environmental fines and
penalties. Additionally, certain of ITC's competitors benefit from certain
economies of scale and have better access to bonding and insurance markets at
a lower cost. The entry of large systems contractors and international
engineering and construction firms into the environmental management industry
has increased the level of competition for major federal governmental
contracts and programs, which have been the primary source of ITC's revenue
over the past several years. Over the past several years, there has been
consolidation in the industry as certain of the larger corporations have
acquired smaller firms which, although reducing the number of industry
competitors to some degree, has increased the number of stronger competitors.
Technology Development
ITC's Technology Development program focuses on innovative applications of
new and existing technologies and methods, principally through client
projects. The ITC technology development program is directed in three primary
areas: 1) continued improvements to technologies developed in-house through
applications on client projects, 2) the evaluation and implementation of
technologies developed outside ITC which present commercial opportunities for
ITC, and 3) improvements to third party technologies for enhanced client
value. Additionally, ITC continues to defend and expand its patent position in
thermal treatment technology, bioremediation and various soil cleaning
processes.
Through ITC's technology development program, ITC has continued to advance
the development and implementation of its bioremediation programs. Clean
closure of numerous sites have been accomplished using naturally occurring
organisms in the patented BIOFAST system. Recent patents for vapor phase
nutrient delivery have successfully demonstrated the ability to expand the
range of applicability to nutrient deficient soils. Advances in the
understanding and monitoring of natural attenuation processes have resulted in
approval from federal and state agencies for selection of natural attenuation
as the clean-up option of choice for an increasing number of sites including
contaminants such as gasoline, fuel oil, and chlorinated solvents. ITC is
participating in a client funded program for the applications testing and
commercialization of an innovative bioremediation technology using naturally
occurring organisms for the remediation of metals contaminated soils. This
innovative approach will provide a new cost effective option to the current
practice of excavation and disposal of metals contaminated soils.
Under license from a third party, ITC has completed the largest installation
to date of the "barrier wall and reactive gate technology." Contaminated
groundwater at the site collects against the down gradient barrier wall and is
funneled to the reactive gate where the contaminants decompose by reaction
with the reactive media in the gate.
67
ITC continues to enhance the applicability of a licensed method to identify
and treat a specific class of toxic substances inherent in wastewater
discharges from the oil industry. Pilot-scale testing at a client refinery is
providing a direct comparison of the new technology capabilities to existing,
carbon treatment cost and effectiveness.
ITC has entered into the first option year of the contract for operation of
the USEPA Test & Evaluation Facility in Cincinnati, Ohio. This RCRA Part B
permitted, USEPA facility is also available for private party sponsored
technology evaluations, provides treatability testing and process development
services on contaminated waste waters, sludges, and soils. Unique
accomplishments this year include the development, construction, and field
startup of systems for the production of "safe drinking water" at three sites
in the Peoples Republic of China and one in the state of Vera Cruz, Mexico
under the federally funded United States Technology for International
Environmental Solutions program.
This year ITC has also improved its position in the development and
commercialization of environmental information management technology. ITC has
received extensive patent coverage for the ManageIT system which is used for
the management and tracking of Hazardous Waste at client sites. Through the
use of its proprietary ITC Environment Management System (ITEMS) and related
systems, ITC has become a leading user of advanced data base management
technology to serve its clients' needs. ITC uses various information
management capabilities developed by many vendors, in addition to its
proprietary systems, in implementing environmental information management
systems for its clients.
Regulations
ITC and its clients are subject to extensive and evolving environmental laws
and regulations which affect the demand for many of the services offered by
ITC (see Business--Operations--Environmental Contractor Risks) and create
certain significant risks and potential opportunities for ITC in providing its
services. Regulatory changes may also affect ITC's inactive disposal sites in
Northern California. (See Notes to Consolidated Financial Statements--
Discontinued operations.)
Within the past three years, a number of significant changes to existing
environmental legislation have been proposed. Some of the proposed changes
originated in legislation commonly referred to as the Republican Party's
"Contract With America." Many of the proposed changes have been stalled in the
Congress. The proposals would overhaul the government regulatory process,
requiring regulatory risk assessments and cost-benefit analyses, and reducing
requirements for reporting to the government. Although the impact of these
proposed changes upon ITC's business cannot yet be fully predicted, the
proposed changes in regulations and reduced enforcement of current
environmental laws appear to have decreased the demand for certain of ITC's
services, as customers anticipate and adjust to the potential changes. ITC
believes that it generally has benefited from increased environmental
regulations affecting business, and from more active enforcement of those
regulations. However, proposed changes could also result in increased demand
for certain of ITC's services if regulatory changes decrease the cost of
remediation projects or result in more funds being spent for actual
remediation. The ultimate impact of the proposed changes will depend upon a
number of factors, including the overall strength of the U.S. economy and
customers' views on the cost-effectiveness of remedies available under the
changed regulations.
The principal environmental legislation affecting ITC and its clients is
described below:
National Environmental Policy Act of 1969 (NEPA). Under NEPA, all federal
agencies must consider environmental factors in their decision making. Among
other things, NEPA established guidelines and requirements for environmental
assessments and mitigation measures for a variety of projects involving
government approval or financing, including development and construction of
power plants and transmission lines, pipelines, highways, landfills, mines,
reservoirs and residential and commercial developments.
68
Resource Conservation and Recovery Act of 1976 (RCRA). RCRA regulates the
treatment, storage and disposal of hazardous and solid wastes. The 1984
Hazardous and Solid Waste Amendments to RCRA (HSWA) expanded RCRA's scope by
providing for the regulation of additional wastes as hazardous and imposing
restrictions on land disposal of certain wastes, prescribing more stringent
management standards for hazardous waste disposal sites, setting standards for
underground storage tank (UST) management and providing for corrective action
procedures. Under RCRA, liability and stringent management standards are
imposed on generators or transporters of hazardous waste or owners or
operators of waste treatment, storage or disposal facilities.
RCRA's standards for waste treatment, storage and disposal facilities apply
to hazardous waste incinerators. Changes in these standards and related
changes in CERCLA have impacted the market for ITC's mobile, on-site
incineration services using the Hybrid Thermal Treatment System (HTTS )
technology. In 1994, the USEPA issued a new policy under RCRA which, while
affirming incineration as an allowable remedy under CERCLA, called for
additional procedures and studies to be conducted before incineration may be
selected as a remedy, or which may result in the deselection of incineration
as a remedy, at a Superfund site. Additionally, in 1996, the USEPA finalized
its policy of favoring waste minimization over combustion/incineration and of
increasing regulatory burdens upon combustion and incineration facilities,
whether fixed-based or on-site. Furthermore, incineration as a remediation
remedy continues to be the subject of considerable public opposition and
controversy. ITC believes that the heightened scrutiny and higher cost of, and
public opposition to, incineration as a remedial option has led to delays and
added costs in permitting ITC's HTTS units for use on projects, and has also
caused the USEPA and/or private parties to prefer other remedies in Superfund
remediations. Such actions may have an adverse impact on ITC's business. (See
Management's Discussion and Analysis of Results of Operations and Financial
Condition--Results of Operations--Continuing Operations--Revenues.)
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA). CERCLA addresses cleanup of sites at which there have been or may be
releases or threatened releases of hazardous substances into the environment.
CERCLA assigns liability for costs of cleanup and damage to natural resources
to any person who, currently or at the time of disposal of a hazardous
substance, owned or operated any facility at which hazardous substances were
released; to any person who arranged for disposal, treatment, or
transportation of hazardous substances by others; and to certain persons who
accepted hazardous substances for transport to facilities or sites from which
there is a release or threatened release of hazardous substances. CERCLA
authorizes the federal government either to clean up these sites itself or to
order persons responsible for the situation to do so. CERCLA created the
Superfund to be used by the federal government to pay for certain cleanup
efforts. Where the federal government expends money for remedial activities,
it must seek reimbursement from the potentially responsible parties (PRPs).
CERCLA generally imposes strict, joint and several retroactive liability upon
such parties. CERCLA was amended in 1986 by the Superfund Amendments and
Reauthorization Act (SARA), which authorized increased federal expenditures
and imposed more stringent cleanup standards and accelerated timetables. SARA
also contained provisions which expanded the enforcement powers of the USEPA.
While CERCLA's Superfund taxing authority originally expired in December
1995, and CERCLA's authority to expend funds originally expired in September
1994, Congress has extended the USEPA's authority to tax and use funds on an
interim basis through September 30, 1997. Moreover, the Congressional Budget
Office projects that the USEPA has enough appropriated but unobligated funds
to allow USEPA to operate at current levels for approximately two years after
September 30, 1997, should CERCLA's taxing authority not be reauthorized by
then.
ITC believes that failure of Congress to reauthorize CERCLA, and proposed
substantial changes in and continuing uncertainty concerning the details of
the legislation, cleanup standards, and remedy selection, have resulted in
project delays and/or the failure of clients to initiate or proceed with
projects. A number of changes to CERCLA have been previously proposed as a
part of the reauthorizing legislation. Amendments to repeal CERCLA's
retroactive liability provisions have been introduced. It has also been
proposed that CERCLA's preference for permanent treatment remedies such as
incineration be changed to favor confinement and
69
containment remedies. (See the discussion of the Resource Conservation and
Recovery Act of 1976 (RCRA) immediately above.) Standards for acceptable
cleanups have also been the subject of proposals for change. Although several
bills to reauthorize CERCLA have been introduced in this session of Congress,
including some which propose to maintain or increase previous funding levels,
controversy over the details of the legislation indicate that there is no
clarity when CERCLA may be reauthorized, what changes would be included in any
reauthorization, or what funding levels might be.
In response to Congressional and private sector pressure and, in part, to
avoid more sweeping legislative changes, the USEPA has attempted to relax
regulatory requirements and enforcement. For example, the USEPA 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. While ITC believes such programs offer
additional opportunities, the ultimate impact of such programs cannot yet be
predicted.
Clean Air Act and 1990 Amendments. The Clean Air Act requires compliance
with National Ambient Air Quality Standards for specific pollutants and
empowers the USEPA 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, they established emissions allowances for sulfur and nitrogen oxides,
established strict requirements applicable to emissions of air toxins,
established a facility-wide operating permit program for all major sources of
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.
Although the USEPA has recently proposed a significant tightening of
regulations regarding ozone standards and particulate emissions, which might
eventually increase demand for ITC's air quality services, the proposals have
met with substantial opposition and their ultimate fate remains uncertain.
Other Federal and State Environmental Laws. ITC's services are also utilized
by its clients in complying with, and ITC's 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. In addition, many states 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, site cleanup and wastewater discharge.
In addition, many states that passed Superfund-type legislation and other
environmental regulations are now reviewing and relaxing those laws and
regulations because of their alleged adverse impact upon business and
competitiveness.
Environmental Contractor Risks
Although ITC believes that it generally benefits from increased
environmental regulations affecting business, and from enforcement of those
regulations, increased regulation, enforcement and private litigation also
create significant risks for ITC. These risks include potentially large civil
and criminal liabilities from violations of environmental laws and regulations
and liabilities to customers and to third parties for damages arising from
performing services for clients. ITC's failure to observe such laws and/or the
terms and conditions of licenses and permits it holds could adversely impact
ITC's ability to carry on one or more of its businesses as presently
constituted.
Liabilities Arising out of Environmental Laws and Regulations
All facets of ITC's business are conducted in the context of an extensive
and rapidly changing statutory and regulatory framework. ITC's operations and
services are affected by and subject to regulation by a number of federal and
other agencies. There have also been efforts by litigants to expand the reach
of CERCLA and RCRA
70
to make contractor firms responsible for cleanup costs through claims that
environmental contractors are owners or operators of hazardous waste
facilities or that they arranged for treatment, transportation or disposal of
hazardous substances. While a few decided CERCLA cases have shielded cleanup
contractors from strict liability, no clear direction has emerged from the
cases decided to-date.
Potential Liabilities Involving Customers and Third Parties
In performing services for its customers, ITC could potentially be liable
for breach of contract, personal injury, property damage, negligence and other
causes of action. The damages available to a customer, should it prevail in
its claims, are potentially large and could include consequential damages.
Many of those contracting for environmental management services,
particularly those involving large scale remediations, seek to shift to
contractors the risk of completing the project in the event the contamination
is either more extensive or difficult to resolve than originally anticipated.
In the competitive market in which environmental management services are
offered, customer pressure has increased significantly for contractors to
accept greater risk of performance, liability for damage or injury to third
parties or property, and liability for fines and penalties. ITC has from time
to time been involved in claims and litigation involving disputes over such
issues. (See Notes to Consolidated Financial Statements--Motco litigation
settlement.)
Environmental management contractors, in connection with work performed for
customers, also potentially face liabilities to third parties from various
claims including claims for property damage or personal injury stemming from a
release of toxic substances or otherwise which could arise long after
completion of the project.
Over the past several years, the USEPA 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. While future Congressional action to broaden the availability of
indemnification is possible, there is no assurance that Congress will change
federal government indemnification policies.
Government Contracting Risk
As a major provider of services to governmental agencies, ITC also faces the
risks associated with government contracting, which include substantial civil
and criminal fines and penalties. Government contracting requirements are
complex, highly technical and subject to varying interpretations. As a result
of its government contracting business, ITC has been, is, and expects in the
future to be, the subject of audits and investigations by governmental
agencies. (See Notes to Consolidated Financial Statements--Commitments and
contingencies--Helen Kramer contract.) In addition to the potential damage to
ITC's business reputation, the failure to comply with the terms of one or more
of its government contracts could also result in ITC's suspension or debarment
from future government contract projects for a significant period of time.
Insurance and Risk Management
ITC has adopted a range of insurance and risk management programs designed
to reduce potential liabilities, including insurance policies, programs to
seek indemnity where possible in its contracts, other contract administration
procedures, and employee health, safety, training, and environmental
monitoring programs. In addition, as a result of the substantial increase over
the past several years in the percentage of ITC's revenues derived from work
for governmental agencies, ITC has developed a company-wide government
contracts compliance program. ITC cannot assure the adequacy of the program
and compliance failure could have a material adverse effect on ITC's business.
ITC's insurance program includes $70,000,000 per fiscal year of excess
liability policies, insuring claims in excess of a $5,000,000 retention level
for each of commercial general liability, product liability and automotive
liability. With respect to the $5,000,000 retention level for each of such
coverages, ITC's captive insurance
71
company (the Captive) generally is obligated to indemnify ITC's insurance
carriers against liabilities and costs of defense, subject to certain
limitations. Letters of credit are provided to support the indemnity
commitment; at present, the aggregate amount of such letters of credit is
approximately $3,500,000. From a risk management perspective, the policies
reinsured by the Captive are, in effect, a self-insurance layer.
ITC also has other insurance policies with various retentions or deductibles
for the management of its risk including but not limited to all risk property
coverage, workers' compensation, employer's liability, employment practices
liability, consultants' environmental liability (including errors and
omissions) and directors' and officers' liability insurance coverage.
Although ITC believes its program to be appropriate for the management of
its risk, its insurance policies may not fully cover risks arising from ITC's
operations. The exclusion of certain pollution and other liabilities, such as
punitive damages, from some insurance policies, or losses in excess of the
coverage, may cause all or a portion of one or more losses not to be covered
by such insurance.
DISCONTINUED OPERATIONS
In December 1987, ITC'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. These operations included the handling and transportation of
clients' wastes and their treatment and/or disposal at Company or third party-
owned facilities. In June 1989, ITC completed the sale of ITC's active
treatment and disposal operations in Imperial Valley and at Bakersfield,
California, as well as its transportation business. ITC's four inactive
treatment, storage and disposal facilities located in Northern California were
not included in this transaction. Substantial progress has been made to date
toward the closure of these facilities, with two of these facilities closed
and the others in the process of closure.
There are substantial financial implications related to the discontinued
operations. For further information regarding ITC's discontinued operations,
see Notes to Consolidated Financial Statements--Discontinued operations and
Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources.
EMPLOYEES
At March 28, 1997, ITC employed 2,083 regular employees. Of these employees,
203 were in sales, corporate office and group administration and the remainder
were in operations. ITC's professional and technical employees engage in
disciplines which include chemical and civil engineering, geology,
hydrology/hydrogeology and computer/data processing. Over 445 of ITC's
employees hold advanced degrees.
At March 28, 1997, none of ITC's employees were represented by labor unions
under collective bargaining agreements. ITC employs union labor from time to
time on a project-specific basis. ITC considers its relations with its
employees to be good.
PROPERTIES
ITC owns or leases property in 25 states, the District of Columbia and the
United Kingdom. Excluding its discontinued operations, ITC owns approximately
50 acres and leases approximately 675,000 square feet of property for various
uses, including regional and project offices, technology and process
development laboratories, equipment yards and a corporate office. Management
considers the facilities adequate for the present and anticipated activities
of ITC.
Additionally, ITC owns approximately 2,821 acres related to its discontinued
operations, principally in Northern California, of which approximately 500
acres have been used for hazardous waste disposal facilities and approximately
2,200 are adjacent to those facilities, but were never used for waste
disposal.
72
ITC has announced the relocation and consolidation of its Torrance,
California corporate headquarters into its largest operations office in
Monroeville (Pittsburgh), Pennsylvania. This process will be completed by the
end of June 1997. ITC expects to realize certain cost savings from this
consolidation. (See Management's Discussion and Analysis--Results of
Operations--Continuing Operations--Restructuring charge).
LEGAL PROCEEDINGS
CONTINUING OPERATIONS LEGAL PROCEEDINGS
See Notes to Consolidated Financial Statements--Commitments and
Contingencies--Contingencies for information regarding the legal proceedings
related to the continuing operations of the Company.
DISCONTINUED OPERATIONS LEGAL PROCEEDINGS
See Notes to Consolidated Financial Statements--Discontinued Operations for
information regarding the legal proceedings that relate to the transportation,
treatment and disposal discontinued operations of the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF ITC
The following table sets forth the name, business or residence address,
principal occupation or employment at the present time and during the last
five years, and the name of any corporation or other organization in which
such employment is conducted or was conducted of each executive officer or
director of ITC. Except as otherwise indicated, all of the persons listed
below are citizens of the United States of America. Each occupation set forth
opposite a person's name, unless otherwise indicated, refers to employment
with ITC. Unless otherwise indicated, the principal business address of each
director or executive officer is 2790 Mosside Boulevard, Monroeville,
Pennsylvania 15146-2792. Directors of ITC are indicated with an asterisk.
NAME, CITIZENSHIP AND PRESENT OCCUPATION OR MATERIAL POSITIONS HELD
CURRENT BUSINESS ADDRESS EMPLOYMENT DURING THE PAST FIVE YEARS
------------------------ --------------------- --------------------------
*Anthony J. DeLuca...... Chief Executive Officer and Chief Executive Officer
President. Director since 1996 and President from July
1997 to the present;
President and acting
Chief Executive Officer
from July 1996 to July
1997; Senior Vice
President and Chief
Financial Officer from
March 1990 to July
1997.
*E. Martin Gibson....... Chairman of the Board of Chairman of the Board of
Directors. Director since 1994 Directors from April
1995 to November 1996;
Chairman of Corning
Life Sciences, Inc.
from 1992 to December
1994.
*James C. McGill........ Director and Private Investor. Director from 1990 to
Director since 1990 the present; Private
investor for the last 5
years.
*Daniel A. D'Aniello.... Managing Director of Carlyle. Managing Director of
Director since 1996. Carlyle from 1987 to
the present.
*Philip B. Dolan........ Vice President of Carlyle. Vice President of
Director since 1996 Carlyle from 1989 to
the present.
73
NAME, CITIZENSHIP AND PRESENT OCCUPATION OR MATERIAL POSITIONS HELD
CURRENT BUSINESS ADDRESS EMPLOYMENT DURING THE PAST FIVE YEARS
------------------------ --------------------- --------------------------
*Admiral James David
Watkins................ President of the Joint President of JOI from
Oceanographic Institutions, 1993 to the present;
Inc. ("JOI"). Director since President of Consortium
1996 Oceanographic Research
and Education from 1994
to the present;
Secretary of Energy
under President Bush
from 1989 to 1993.
*Robert F. Pugliese..... Special Counsel to Eckert Special Counsel to
Seamans Cherin & Mellott Eckert from 1993 to the
("Eckert"). Director since present.
1996.
Franklin E. Coffman..... Senior Vice President, DOE Senior Vice President,
Programs, Corporate Business DOE Programs, Corporate
Development Business Development
from July 1996 to the
present; Senior Vice
President, Government
and Commercial Program
Development from March
1995 to July 1996; Vice
President, Government
Programs from October
1984 to March 1995.
James R. Mahoney........ Senior Vice President, Senior Vice President,
Consulting and Ventures and Consulting and Ventures
Corporate Development from July 1996 through
the present; Senior
Vice President,
Technical Operations
and Corporate
Development from March
1995 to July 1996;
Senior Vice President,
Corporate Development
and Sales from April
1992 to March 1995.
Raymond J. Pompe........ Senior Vice President, Senior Vice President,
Engineering and Construction Engineering and
Construction from July
1996 to the present,
Senior Vice President,
Project Operations from
March 1995 to July
1996; Vice President,
Construction and
Remediation from 1988
to March 1995.
James G. Kirk........... Vice President, General Counsel Vice President, General
and Secretary Counsel and Secretary
from September 1996 to
the present; General
Counsel, Eastern
Operations from 1991 to
September 1996.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual, long-term compensation and other
compensation for services in all capacities to ITC for the fiscal years 1997,
1996 and 1995 of those persons who were, as of March 28, 1997, the Chief
Executive Officer, or who had served as Chief Executive Officer at any time
during the 1997 fiscal year and the other four most highly compensated
executive officers of ITC (the "Named Officers").
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------- --------------------------
OTHER ANNUAL RESTRICTED SECURITIES
NAME AND PRINCIPAL COMPENSATION STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($)(3) ($)(4) AWARDS($)(5) OPTIONS(#)(6) COMPENSATION($)(7)
------------------ ---- --------- ----------- ------------ ------------ ------------- ------------------
Anthony J. DeLuca(1).... 1997 $307,981 $ 50,000 -- $ 0 26,333 $37,614
Chief Executive 1996 270,400 12,776 -- 296,875 0 17,732
Officer and President 1995 270,400 108,160 -- 173,550 19,250 16,519
Franklin E. Coffman..... 1997 $194,000 $ 19,400 -- $ 0 15,233 $15,356
Senior Vice President, 1996 192,346 8,201 -- 0 0 26,923
DOE Programs, 1995 183,999 55,200 -- 155,888 8,750 27,529
Corporate Business
Development
James R. Mahoney........ 1997 $260,000 $ 26,000 -- $ 0 16,333 $27,060
Senior Vice President, 1996 260,000 12,285 -- 118,750 0 28,579
Consulting and Ventures 1995 256,925 104,000 -- 172,163 19,250 20,330
and Corporate
Development
Raymond J. Pompe........ 1997 $248,075 $ 26,500 -- $ 0 16,417 $18,270
Senior Vice President, 1996 206,691 9,923 -- 118,750 0 16,250
Engineering and 1995 192,992 57,000 -- 156,498 8,750 11,328
Construction
James G. Kirk........... 1997 $150,625 $ 10,000 -- $ 0 4,667 $ 8,352
Vice President, General 1996 140,500 28,319 -- 0 0 7,168
Counsel and Secretary 1995 140,500 28,100 -- 0 1,325 5,681
Robert B. Sheh(2)....... 1997 $112,500 $ 0 -- $ 0 0 $ 5,077
President and 1996 450,000 26,578 -- 475,000 0 52,100
Chief Executive Officer 1995 450,000 225,000 -- 74,993 37,500 34,519
- --------
(1) On July 22, 1997, Mr. DeLuca was named Chief Executive Officer and
President of ITC. As of July 1, 1996, Mr. DeLuca was named President and
Acting Chief Executive Officer and a director of ITC. Prior to that time
Mr. DeLuca served as Senior Vice President and Chief Financial Officer of
ITC.
(2) Mr. Sheh resigned as President and Chief Executive Officer and a director
of ITC as of July 1, 1996, but will be treated as an employee of ITC
through June 26, 1998. See "Certain Transactions--Sheh Agreements."
(3) Bonus amounts are reported in the fiscal year they are earned or accrued,
even though some or all of the actual cash payment may be made in the next
fiscal year. For fiscal year 1997, each Named Officer who received a
"Bonus" also received a grant of stock options in fiscal year 1998 for
achieving the performance objectives set forth in the 1997 Management
Incentive Plan. Such stock options are reported in this table under
Securities Underlying Options in 1997. The amount reported for Mr. Kirk in
1996 includes a special, one-time cash payment of $25,000 for his efforts
in resolving the Motco litigation. Certain Named Officers also received an
award of restricted stock in fiscal year 1996 attributable to the fiscal
year 1995 incentive compensation plan. The value of such restricted stock
awards is reported in this table under Restricted Stock Awards in 1995.
The total value of bonuses, including the aforementioned restricted stock
awards, earned in fiscal year 1995, by each of the Named Officers are as
follows: Mr. DeLuca, $144,210; Mr. Coffman, $73,588; Mr. Mahoney,
$138,663; Mr. Pompe, $75,998; and Mr. Sheh, $299,993.
(4) The dollar value of perquisites and other personal benefits, if any, for
each of the Named Officers was less than the reporting thresholds
established by the SEC.
75
(5) 12,500 shares of restricted stock were awarded to each of Messrs. DeLuca,
Coffman, Mahoney and Pompe on March 2, 1995, with a fair market value of
$11.00 per share on the date of grant. The shares vest in 20% increments
over five years provided that Messrs. Mahoney, DeLuca and Pompe remain
employed by ITC on the vesting dates. In lieu of cash, certain Named
Officers received awards of restricted stock in connection with a fiscal
year 1995 incentive compensation plan. A total of 14,646 shares of
restricted stock were awarded to the Named Officers on July 5, 1995 with a
fair market value of $12.50 per share. The shares awarded were as follows:
Mr. DeLuca, 2,884 shares; Mr. Coffman, 1,471 shares; Mr. Mahoney, 2,773
shares; Mr. Pompe, 1,159 shares; and Mr. Sheh, 5,999 shares. The
restrictions on the shares will lapse three years from the date of award
provided that each Named Officer remains employed by ITC at that date. On
March 28, 1996, the following number of restricted shares were issued to
the Named Officers, with a fair market value of $9.50 per share on the
date of grant: Mr. Sheh, 50,000 shares (which shares were returned to ITC
pursuant to Mr. Sheh's separation agreement with ITC (see "Certain
Transactions--Sheh Agreements")); Mr. DeLuca, 31,250 shares; Mr. Mahoney,
12,500 shares; and Mr. Pompe, 12,500 shares. The restrictions on the
shares will lapse upon the earlier of: (i) attainment of an average $16.00
or greater price of ITC's Common Stock for any period of sixty consecutive
calendar days; (ii) four years from the date of issuance of the restricted
shares; or (iii) upon death, disability or retirement of the holder or a
change of control (as defined).
(6) For fiscal year 1997, each Named Officer who received a "Bonus" also
received a grant of non-qualified stock options in fiscal year 1998 for
achieving the performance objectives set forth in the 1997 Management
Incentive Plan. The options vest in 25% increments over four years
beginning one year from the date of grant, expire ten years after grant
and were issued at an exercise price equal to the fair market value of the
Common Stock on the date of grant. The number of option shares granted to
the Named Officers in fiscal year 1998 are as follows: Mr. DeLuca, 8,333
shares; Mr. Coffman, 3,233 shares; Mr. Mahoney, 4,333 shares; Mr. Pompe,
4,417 shares; and Mr. Kirk, 1,667 shares.
(7) For 1997, the amounts shown for Messrs. DeLuca, Coffman, Mahoney, Pompe
and Kirk represent $5,255, $4,596, $4,860, $5,897 and $991, respectively,
of life insurance premiums in excess of $50,000. Although required to be
reported as income, the Named Officers, as do all salaried employees, pay
the cost for all life insurance premiums for coverage in excess of one
times their salary in calendar year 1997 and one and one-half times their
salary in calendar year 1996. In addition, the amounts shown include:
ITC's contribution to ITC's Retirement Plan, a defined contribution plan,
for ITC's fixed and 401(k) Company matching contributions for Messrs.
DeLuca, Coffman, Mahoney, Pompe, Kirk and Sheh in the amounts of $4,500,
$7,500, $7,500, $7,500, $7,361 and $1,702, respectively; ITC's
contribution to ITC's Restoration Plan, a non-qualified supplemental
retirement plan, to Messrs. DeLuca, Coffman, Mahoney, Pompe and Sheh as
follows: $7,300, $3,260, $4,700, $4,873 and $3,375, respectively; $10,000
for partial principal forgiveness on a relocation loan to purchase a
residence for Mr. Mahoney; $17,508 in accrued but unused paid time off for
Mr. DeLuca; and $3,052 in reimbursed relocation expenses for Mr. DeLuca.
For 1996, the amounts shown include: $5,798, $6,157, $5,990, $5,706, $819
and $20,034 for Messrs. DeLuca, Coffman, Mahoney, Pompe, Kirk and Sheh,
respectively, for life insurance premiums in excess of $50,000; ITC's
contribution to ITC's Retirement Plan for ITC's fixed, discretionary
profit sharing and 401(k) Company matching contribution for Messrs.
DeLuca, Coffman, Mahoney, Pompe, Kirk and Sheh of $6,459, $7,058, $7,498,
$7,209, $6,349 and $9,003, respectively; a contribution to ITC's
Restoration Plan for Messrs. DeLuca, Coffman, Mahoney, Pompe and Sheh of
$5,475, $2,515, $5,091, $3,334 and $13,063, respectively; $10,000 for
partial principal forgiveness of a relocation loan to purchase a principal
residence for each of Messrs. Mahoney and Sheh; and $11,192 for accrued
but unused paid time off for Mr. Coffman. For 1995: the amounts shown for
Messrs. DeLuca, Coffman, Mahoney, Pompe, Kirk and Sheh include life
insurance premiums in excess of $50,000 in the amount of $4,711, $6,071,
$3,731, $4,711, $764 and $17,947, respectively; ITC's contribution to
ITC's Retirement Plan for Messrs. DeLuca, Coffman, Mahoney, Pompe, Kirk
and Sheh in the respective amounts of $6,608, $7,304, $6,599, $6,617,
$4,918 and $6,572; $10,000 for partial principal forgiveness of a
relocation loan to purchase a principal residence for each of
Messrs. Mahoney and Sheh; and $5,200 and $14,154, respectively, for
Messrs. DeLuca and Coffman for accrued but unused vacation.
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STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information related to grants of stock options
to the Named Officers pursuant to ITC's Stock Incentive Plans during the
fiscal year ended March 28, 1997. No stock appreciation rights ("SARs") were
granted during the last fiscal year.
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTION EMPLOYEES IN PRICE (PER EXPIRATION PRESENT
NAME GRANTED(#)(1) FISCAL YEAR SHARE)(2) DATE VALUE(3)
---- ------------- ------------- ---------- ---------- ----------
Franklin E. Coffman..... 12,000 7.0 $8.625 2/25/07 $64,920
Anthony J. DeLuca....... 18,000 10.5 $8.625 2/25/07 $97,380
James G. Kirk........... 3,000 1.7 $8.625 2/25/07 $16,230
James R. Mahoney........ 12,000 7.0 $8.625 2/25/07 $64,920
Raymond J. Pompe........ 12,000 7.0 $8.625 2/25/07 $64,920
- --------
(1) All options granted in fiscal year 1997 vest in 25% increments over four
years beginning one year from the date of grant. Full vesting occurs on
the fourth anniversary date and expires ten years after grant. Options
become 100% vested and are exercisable for two years after retirement from
ITC.
(2) The exercise price on options granted is the fair market value of the
Common Stock on the date of grant.
(3) When calculating the present value of options granted in 1997, ITC used
the Black-Scholes option pricing model to obtain a calculated present
value of $5.41 share. ITC assumed a volatility of 0.462, a risk free
interest rate of 6.55% and assumed that the shares would be exercised
evenly throughout the four-year vesting schedule. In addition, ITC took a
3% discount for each year in the vesting period to account for the risk of
forfeiture in the event that the executive terminates employment with ITC.
The valuation is not intended to forecast possible future appreciation, if
any, of the Common Stock. The real value of the option depends on the
actual performance of ITC's Common Stock during the applicable period.
AGGREGATED OPTION EXERCISES DURING LAST FISCAL YEAR AND OPTION VALUES AT END
OF LAST FISCAL YEAR
The following table provides information with respect to the exercise of
stock options during the fiscal year ended March 28, 1997 by the Named
Officers, and with respect to unexercised "in-the-money" stock options
outstanding as of March 28, 1997. In-the-money stock options are options for
which the exercise price is less than the market price of the underlying stock
at the end of the fiscal year. No executive officer or any other employee of
ITC held or exercised any SARs at any time during fiscal year 1997.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED AT
OPTIONS AT FISCAL YEAR END IN-THE-MONEY OPTIONS
SHARES (IN SHARES) FISCAL YEAR END($)(2)
ACQUIRED VALUE ---------------------------- -------------------------
NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE(3) EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ---------------- ----------- -------------
Anthony J. DeLuca....... 0 $ 0 32,999 31,501 $ 0 $ 0
Franklin E. Coffman..... 0 0 9,999 17,251 0 0
James G. Kirk........... 0 0 1,208 3,117 0 0
James R. Mahoney........ 0 0 27,499 25,001 0 0
Raymond J. Pompe........ 0 0 10,749 19,501 0 0
Robert B. Sheh(1)....... 0 0 90,625 21,875 0 0
- --------
(1) Mr. Sheh resigned as President and Chief Executive Officer and a director
of ITC as of July 1, 1996, but will be treated as an employee of ITC
through June 26, 1998. See "Certain Transactions--Sheh Agreements."
(2) Represents the difference between the $6.875 fair market value of ITC's
Common Stock on March 28, 1997 (represented by the closing market price on
March 27, 1997), minus the exercise price of the options.
77
(3) Messrs. DeLuca, Mahoney and Pompe's options with respect to 2,500 shares,
2,000 shares and 2,000 shares, respectively, have vested as a result of
the passage of time but may not be exercised unless ITC's stock price
increases to certain predetermined levels. Because this condition has not
been satisfied and the options therefore are not vested, such options are
not included in the foregoing "Beneficial Ownership of Shares" table.
1997 MANAGEMENT INCENTIVE PLAN
Pursuant to ITC's 1997 Management Incentive Plan, $500,000 in cash and
83,333 shares of stock options were reserved to reward key associates if pre-
established performance targets for the second half of the fiscal year were
achieved. Payments and stock option grants under the Plan were dependent upon
achieving three targets: 1) a required level of pre-tax operating income, 2)
an improvement in the collection of accounts receivable (days sales
outstanding) and 3) individual performance goals. The plan was administered by
the Compensation Committee. Target incentive awards ranging from 10% to 50% of
participants' salary were reduced pro-rata to reflect the one-half year
performance period and the grant of stock options supplemental to the payment
of cash awards. Individual incentive awards and stock option grants may have
been increased or decreased from their targets depending upon individual
performance. Cash incentive awards in the aggregate of $499,705 and 80,221
shares of stock options in the aggregate were awarded to the 90 plan
participants. The total incentive awards earned and shares of stock options
granted to the Named Officers were as follows:
CASH STOCK OPTION
NAMED OFFICER BONUS SHARES
------------- ------- ------------
Anthony J. DeLuca....................................... $50,000 8,333
Franklin E. Coffman..................................... 19,400 3,233
James G. Kirk........................................... 10,000 1,667
James R. Mahoney........................................ 26,000 4,333
Raymond J. Pompe........................................ 26,500 4,417
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is composed of three
non-employee directors. The Compensation Committee reviews management
compensation levels and evaluates management performance and related matters.
The Compensation Committee also administers ITC's various management incentive
plans, including the 1996 Stock Incentive Plan. This report relates to the
fiscal year ended March 28, 1997.
The Compensation Committee retains the services of nationally known
independent consulting firms specializing in executive compensation issues to
assist it in performing its functions. The Compensation Committee reviews
surveys and other materials describing the compensation practices of companies
from which ITC recruits and with which it competes for management talent,
including (i) large engineering-companies, (ii) environmental services
companies, including some that are and some that are not in the peer group
index in the Five-Year Stock Price Performance Graph included in this Proxy
Statement and (iii) other companies in general industry of similar size. The
Committee considers this information and other factors in its deliberations on
management compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is a former or current officer or
associate of ITC or its subsidiaries and there are no Compensation Committee
interlocks.
78
COMPENSATION PROGRAM OBJECTIVES
In fiscal year 1997, following the Investment and management changes, the
Compensation Committee initiated a review of the Management Compensation
Program. On the basis of that review, the Committee adopted a revised
compensation strategy and plans and programs that are designed to attract,
retain and motivate key management and to align the financial interests of
ITC's executive officers with those of its stockholders.
The revised compensation strategy is designed to better align management and
stockholder interests by placing a larger percentage of an executive officer's
compensation "at risk" in the form of annual and long-term incentives, which
at target levels, are generally intended to provide about 60% of total
compensation, and moving base salaries from the sixtieth to the fiftieth
percentile of competitive practice. In addition, a larger portion of
management's incentive compensation, both annual and long-term incentive, will
be linked to the value of ITC's common stock. It is anticipated that this
change will be implemented over three to five years.
ITC's Management Compensation Program is designed to provide:
(i) Base salaries that are competitive with those of engineering,
environmental services and general industry companies;
(ii) Competitive total annual cash compensation, delivered through annual
incentive compensation that varies in a consistent and predictable manner
with the financial performance of ITC; and
(iii) Long-term incentive compensation that focuses management on
building stockholder value through the attainment of longer-term financial
and strategic goals, and encourages management stock ownership.
In the design and administration of the Management Compensation Program, ITC
attempts to achieve an appropriate balance among the various elements of
compensation, each of which is discussed, in addition to the Committee's
actions, in greater detail below.
BASE SALARY
As a guideline, the base salary for Company management is targeted at from
the fiftieth to the sixtieth percentile level of comparable engineering and
environmental services companies and other companies of similar size. This was
done to attract and retain key talent in this highly competitive industry.
ITC's salary plan for executive officers is approved, on an annual basis, by
the Compensation Committee and takes into account individual performance,
ITC's overall financial performance and competitive practice. Annual
performance reviews and formal merit increase guidelines determine individual
salary increases.
The Compensation Committee completed its annual review of officer pay levels
in fiscal year 1997. The Committee granted salary increases to only three
Named Officers: Mr. DeLuca, to reflect his promotion to President and Acting
Chief Executive Officer; Mr. Kirk, to reflect his promotion to Vice President,
General Counsel and Secretary; and Mr. Pompe, to reflect his increased
responsibilities related to an organizational realignment. The salaries of the
other two Named Officers were deemed to be within competitive norms.
TOTAL ANNUAL CASH COMPENSATION (BASE SALARY PLUS ANNUAL INCENTIVE)
As a guideline, total annual cash compensation is set at between the
fiftieth percentile and upper-quartile of comparable engineering and
environmental services and general industry companies when annual objectives
and targets are achieved. Upper-quartile cash compensation can be earned only
if business results significantly exceed Company objectives.
MANAGEMENT INCENTIVE PLAN
The Management Incentive "Bonus" Plan (the "MIP") is designed to reward
executive officers and other key employees, on an annual basis, for their
contributions to the achievement of corporate and business
79
unit/division objectives and for individual performance. Each eligible
participant has a target incentive award that generally is expressed as a
percentage of the participant's base salary for such fiscal year. The
aggregate target incentive awards of all participants cannot exceed the size
of an incentive fund, the dollar amount of which is determined by the
Compensation Committee. The incentive fund, approved by the Committee, is
directly linked to ITC's annual budget objectives, which are approved by the
Board of Directors. If ITC's performance exceeds budget, the maximum incentive
award payable to participants is in the range of 150% of the target. Company
objectives are expressed in terms of specific financial targets that are
established as part of the annual budgeting process, which includes a review
of the performance of a comparable group of environmental services,
engineering and remediation companies.
In light of the management changes that occurred during fiscal year 1997,
the performance period under the MIP included only the last two quarters of
the fiscal year. The target incentive awards adopted under the MIP were
intended to provide an incentive to key management to improve the financial
performance of ITC. The Committee selected operating income and collection of
accounts receivable, as measured by days' sales outstanding ("DSO") as the key
financial measures, for fiscal year 1997. Specific financial targets
associated with these measures were established for the performance period.
Annualized target incentive awards ranged from 10% of salary for certain key
employees to 50% of salary for the Chief Executive Officer, prorated for the
two-quarter performance period. Incentive awards begin to be earned when ITC
reaches a threshold level of operating income. Any incentive award funds
accrued are distributed at the end of the fiscal year, contingent on the
performance of the individual and the individual's business unit. For fiscal
year 1997, shares of nonqualified stock options (NQSOs) were granted in
recognition of achieving performance goals and to encourage a sharp focus on
stock price appreciation.
Financial targets were achieved in the last two quarters of the 1997 fiscal
year. The distribution of all incentive awards was determined, at the
Compensation Committee's discretion, on the basis of an assessment of Company
and individual performance in relation to pre-established objectives. The
total incentive awards earned and shares of stock options granted to the Named
Officers under the MIP for fiscal 1997 were as follows: Mr. DeLuca, $50,000
paid in cash and 8,333 shares of NQSOs; Mr. Coffman, $19,400 paid in cash and
3,233 shares of NQSOs; Mr. Kirk, $10,000 paid in cash and 1,667 shares of
NQSOs; Mr. Mahoney, $26,000 paid in cash and 4,333 shares of NQSOs; and Mr.
Pompe, $26,500 paid in cash and 4,417 shares of NQSOs.
TOTAL DIRECT COMPENSATION (TOTAL ANNUAL CASH COMPENSATION PLUS THE ANNUALIZED
VALUE OF LONG-TERM INCENTIVES)
As a guideline, total direct compensation for executive officers, through
long-term incentive awards under the 1996 Plan, is set at between the fiftieth
percentile and the upper quartile of comparable engineering, environmental
services and general industry companies, when ITC's long-term goals to
increase stockholder value are achieved or exceeded.
LONG-TERM INCENTIVE COMPENSATION PROGRAM
In fiscal year 1997, the Compensation Committee adopted the 1996 Stock
Incentive Plan (the "1996 Plan") to ensure that ITC has a long-term incentive
program that is competitive with those of comparable engineering,
environmental services and general industry companies and to enable ITC to
attract, motivate and retain key management talent. The 1996 Plan was approved
by the Board of Directors and ITC's stockholders.
The 1996 Plan authorizes the granting of various stock and cash-based
incentive awards to officers and key employees of ITC and its subsidiaries.
The 1996 Plan provides the Compensation Committee the flexibility to make
longer-term incentive awards in a variety of forms to better align the long-
term interests of ITC's management with those of its stockholders.
In fiscal year 1997, the Compensation Committee considered the desirability
of granting stock-based awards to officers and other key employees under the
1996 Plan and, on the recommendation of management, granted
80
stock options to selected employees. In determining the grant of awards to
officers and other key employees, the Compensation Committee considered, among
other things, the ability of the individual to influence stockholder value,
personal performance and prior option grants. The following grants of
nonqualified stock options were made to the five Named Officers during fiscal
year 1997: Mr. DeLuca, 18,000 shares; Mr. Coffman, 12,000 shares; Mr. Kirk,
3,000 shares; Mr. Mahoney, 12,000 shares; and Mr. Pompe, 12,000 shares.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
On his election as President and Acting Chief Executive Officer, Mr.
DeLuca's salary for fiscal year 1997 was increased to $320,000. The Committee
assessed the competitiveness of Mr. DeLuca's salary for fiscal year 1997 using
several compensation data sources. Mr. DeLuca's salary was found to be below
the fiftieth percentile of salaries paid by engineering and environmental
services companies. Mr. DeLuca earned an incentive award of $50,000 and was
granted 8,333 shares of stock options at an exercise price equal to the fair
market value of ITC's stock on the date of grant and which vest at 25% per
year under the 1997 Management Incentive Plan, which reflected the achievement
of ITC's pretax income goals and Mr. DeLuca's individual performance in
relation to pre-established goals, including execution of ITC's acquisition
and diversification strategy. To recognize Mr. DeLuca's contribution to ITC in
fiscal 1997, to improve the alignment of his interests with those of
stockholders and to encourage him to remain with ITC, ITC granted Mr. DeLuca
18,000 stock options at an exercise price equal to the fair market value of
ITC's stock on the date of grant and which vest at 25% per year. As a further
inducement to increase his ownership position in ITC and increase the
alignment of his interests with those of stockholders, Mr. DeLuca, under the
terms specified in his employment agreement, purchased an aggregate of 12,600
shares of ITC's stock at prices of $9.75 and $9.50 per share. The purchases
occurred on December 5 and December 6, 1996 and were made with the proceeds of
a Company-provided loan in the amount of $125,000, which bears interest at the
rate of 8.25% per year and is repayable on the earlier of Mr. DeLuca's
termination of employment or November 19, 1999. Under the terms of the loan
the Compensation Committee may elect to forgive a certain portion of the loan
principal and interest if certain targets are met or exceeded.
SECTION 162(m) OF THE INTERNAL REVENUE CODE
As of January 1, 1994, the Internal Revenue Code of 1986 (the "Code") was
amended to eliminate the deductibility of certain compensation in excess of $1
million. Compensation awarded under a "performance-based" compensation program
that was approved by stockholders is exempted from the deduction limitation.
The Compensation Committee considered the effect of Section 162(m) of the Code
on ITC's compensation programs and adopted the 1996 Stock Incentive Plan,
which qualifies as a "performance-based" compensation program under the Code.
ITC intends to adopt "performance-based" compensation programs in the future
as may be required. However, the Compensation Committee believes that its
primary responsibility is to provide compensation programs that attract,
retain and reward executive talent in a manner that is in the best interests
of both ITC and its stockholders. Accordingly, the Compensation Committee will
consider tax-deductibility levels, but will not necessarily be limited by this
consideration as it determines ITC's executive compensation strategy.
THE COMPENSATION COMMITTEE
Philip B. Dolan, Chairman
Daniel A. D'Aniello
James David Watkins
81
CERTAIN TRANSACTIONS
Employment Agreements. In connection with the Carlyle Investment, Anthony J.
DeLuca, Franklin E. Coffman, James R. Mahoney and Raymond J. Pompe each
entered into an employment agreement with ITC effective upon the closing of
the Investment for a term of three years, unless terminated. The employment
agreements of each of Messrs. DeLuca and Mahoney replace in their entirety
their respective prior severance benefit agreements with ITC.
The employment agreements provide for initial base salaries at the rates in
effect at the time of the closing of the Investment, namely $320,000 in the
case of Mr. DeLuca, $194,000 in the case of Mr. Coffman, $260,000 in the case
of Mr. Mahoney and $265,000 in the case of Mr. Pompe. Salaries are 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.
ITC 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 will be
at the discretion of the Compensation Committee but will generally target
long-term incentive opportunities. ITC will have "good reason" to terminate
Messrs. DeLuca, Coffman, Mahoney or Pompe if such persons fail to meet certain
management forecasts for two consecutive fiscal years. The agreements provide
for severance payments under certain circumstances.
ITC has provided loans to Messrs. DeLuca, Mahoney and Pompe to allow them to
make substantial purchases of ITC's Common Stock in the open market. 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
November and December, 1996, Mr. DeLuca purchased 12,600 shares of Common
Stock and each of Messrs. Coffman, Mahoney and Pompe purchased 7,700, 10,300
and 10,595 shares of Common Stock, respectively. In connection with the short-
term compensation plan described above, ITC 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 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, Coffman, Mahoney and Pompe are bound by non-compete provisions with
ITC if any of them terminates his employment by resignation.
Sheh Agreements. In connection with his employment as Chief Executive
Officer, Mr. Sheh and ITC entered into an agreement dated July 15, 1992. The
agreement was intended to specify annual stock option grants and a minimum
level of base pay for Mr. Sheh, as well as to address certain other matters.
Pursuant to the agreement, Mr. Sheh's annual base salary was $450,000 subject
to merit increases and the agreement provides the opportunity to participate
in ITC's Incentive Bonus Plan with a bonus of up to 50% of base salary at
target levels. Pursuant to the agreement, Mr. Sheh received stock options
covering 62,500 shares of Common Stock upon joining ITC and was entitled to
receive a minimum specified number of stock options during the first three
years of his employment. The agreement provided for certain insurance and
other benefits. The agreement also provided that if Mr. Sheh was terminated
for "cause," he would be entitled to receive one year of base salary and
bonuses.
Mr. Sheh resigned as President and Chief Executive Officer and a director of
ITC as of July 1, 1996. Pursuant to the terms of an agreement between ITC and
Mr. Sheh, Mr. Sheh will continue to be treated as an employee of ITC until
June 26, 1998, but has no further duties or responsibilities to ITC. Pursuant
to the agreement, until June 26, 1998, Mr. Sheh will continue to be paid
$450,000 per annum and will receive a car
82
allowance of $5,850 per annum. Mr. Sheh also received a one-time payment of
$40,300 for accrued but unused vacation. Additionally, a relocation loan made
by ITC to Mr. Sheh with an outstanding principal amount of $150,000 was
forgiven. Mr. Sheh will retain a club membership in his name for which ITC
previously paid admission and membership fees. Mr. Sheh remained eligible for
certain insurance benefits and certain other benefits until January 1, 1997,
the date on which Mr. Sheh became eligible for such benefits as a full-time
employee of another company. Under the agreement, 5,999 shares of restricted
Common Stock awarded to Mr. Sheh in July 1995 will become fully vested on June
26, 1998, and options to purchase a total of 112,500 shares of Common Stock
will continue to vest in accordance with the terms of the applicable stock
option agreements and will become fully vested on April 27, 1998. Finally,
50,000 shares of restricted stock awarded to Mr. Sheh in March 1996 were
returned to ITC.
Relocation Loans. In certain circumstances, ITC 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 secured by the principal residence of the
individual. Mr. James R. Mahoney, Senior Vice President, entered into a
relocation loan arrangement with ITC with an original principal amount of
$200,000 and secured by a deed of trust on his personal residence. The loan
will remain interest free so long as Mr. Mahoney remains 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 scheduled to be forgiven by ITC, provided
Mr. Mahoney remains employed by ITC. The loan to Mr. Mahoney is due and
payable on December 31, 2000. Additionally, Mr. Mahoney has agreed to repay
the remaining 50% of the original principal amount in installments related to
the issuance of awards under ITC's incentive compensation plan. During the
fiscal year ended March 28, 1997, (i) Mr. Mahoney repaid $10,000 of the loan,
and (ii) the maximum amount owed by Mr. Mahoney to ITC under the loan was
$140,000. As of March 28, 1997, the principal amount outstanding for Mr.
Mahoney's loan was $122,451. The principal amount outstanding will be repaid
upon completion of the sale of Mr. Mahoney's California residence and a new
loan may be granted Mr. Mahoney to purchase a residence in the Washington,
D.C. area in connection with ITC's relocation of its corporate headquarters as
described below.
In connection with the relocation and consolidation of ITC's corporate
headquarters from Torrance, California to Pittsburgh, Pennsylvania, and other
relocations occurring at approximately the same time, ITC is offering
relocation assistance to a limited number of officers and key employees.
Relocation assistance packages offered to these individuals involve three
elements: 1) reimbursement of specific 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 to provide relief from otherwise non-reimbursable
expenses and as an incentive to move. Amounts paid to reimburse out-of-pocket
expenses are "grossed-up" for tax purposes. The loans offered to relocating
associates have ten year terms, are secured by the residence purchased, and do
not bear interest as long as the associate stays with ITC. Five percent of the
loan principal is required to be repaid annually by the associate and 5% will
be forgiven annually by ITC for each year the associate remains with ITC. The
loans are also due upon the sale of the residence purchased. Mr. DeLuca and
Mr. Mahoney have been offered and they have stated their intention to accept,
if necessary, relocation loans on such terms in amounts of the lesser of 20%
of the purchase price of their respective residences or $100,000. Mr. DeLuca
and Mr. Mahoney will each receive a mobility allowance of 30% of salary in
connection with their relocations to Pittsburgh and Washington, D.C.,
respectively. ITC expects that consolidation of the corporate headquarters
will result in an annual cost savings which ITC expects will result in a
"payback" of all relocation expenses in less than two years.
Carlyle Financial Advisory Fees. In connection with the Investment, ITC
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 ITC. ITC paid no investment banking
fees to Carlyle during fiscal year 1997.
83
Indemnification. The General Corporation Law of the State of Delaware, the
state of incorporation of ITC, and the Bylaws of ITC 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 ITC are covered under policies of directors' and
officers' liability insurance. The directors and all officers serving ITC 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 ITC.
Additionally, in 1987 ITC's Certificate of Incorporation was amended with
the approval of stockholders to provide that its directors are not to be
liable to ITC or its stockholders for monetary damages for breach of fiduciary
duty to the fullest extent permitted by law. This provision is intended to
allow ITC'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 agreements provide that ITC 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
agreements or the related transactions or arising by reason of or resulting
from the breach of any representation, warranty, covenant or agreement of ITC
contained in the Investment agreements for the period for which such
representation or warranty survives; provided, however, that ITC does not have
any liability to indemnify Carlyle with respect to Losses arising from the bad
faith or gross negligence of the Carlyle indemnified party.
The Investment agreements also provide that Carlyle will indemnify, defend
and hold harmless ITC, 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 agreements for the period for which such representation or
warranty survives; provided, however, that Carlyle does not have any liability
to indemnify ITC with respect to Losses arising from the bad faith or gross
negligence of ITC 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.
84
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
FOR QUARTER ENDED DECEMBER 26, 1997
RESULTS OF OPERATIONS
Overview
ITC provides a full range of technology-driven, value-added consulting,
engineering and construction capabilities through a network of more than 40
offices in the U.S. and selected international locations. ITC's services
include information management, risk assessment, air quality management,
pollution prevention and waste minimization, construction and remediation,
land-use planning, decontamination and decommissioning, design/build,
wastewater treatment, historical research and investigation, environmental
consulting, engineering services and facility operation and maintenance. ITC's
business strategy is to be a global provider of environmental solutions to
both the government and private industry clients. As part of this strategy,
ITC entered into a definitive agreement to acquire OHM Corporation on January,
15 1998. The acquisition, if successfully consummated, is expected to be
completed in April 1998 and will create a company with projected annual
revenues of approximately $1.0 billion and backlog of $3.0 billion (see
Financial Condition). ITC has also diversified through several acquisitions of
specialized companies primarily serving targeted commercial markets.
Revenues
ITC reported revenues of $105,157,000 in the third quarter of fiscal year
1998, an increase of 13.7% or $12,644,000 when compared to revenues of
$92,513,000 in the third quarter of fiscal year 1997. Revenues for the first
three quarters of fiscal year 1998 were $306,178,000, an increase of 14.9% or
$39,759,000 from the reported revenues of $266,419,000 for the corresponding
period of the prior fiscal year. This improvement is primarily due to strong
revenue growth from the Department of Defense (DOD) business as well as
continued growth from targeted commercial industries and revenues generated
from recent business acquisitions. Overall, revenue levels from ITC's federal
government contracts have gradually improved during these comparative periods
as strong improvement in DOD activity was partially offset by the completion
of contracts funded by other federal government agencies including the
Department of Energy (DOE).
ITC's revenues attributable to U.S. federal, state and local governmental
contracts as a percentage of ITC's consolidated revenues for the third fiscal
quarter and the three fiscal quarters ended December 26, 1997 and December 27,
1996 are outlined in the table below:
THREE FISCAL QUARTERS
FISCAL QUARTER ENDED ENDED
------------------------- -------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
SOURCE 1997 1996 1997 1997
------ ------------ ------------ ------------ ------------
Federal government:
U.S. Department of
Defense (DOD)........ 46% 41% 45% 43%
U.S. Department of
Energy (DOE)......... 8 14 9 14
Other federal
agencies............. 1 4 2 4
--- --- --- ---
55 59 56 61
State and local
governments............ 5 8 6 7
--- --- --- ---
Total................... 60% 67% 62% 68%
=== === === ===
During the third quarter of fiscal year 1998, DOD revenues of $47,915,000
were $9,492,000 higher than the third quarter of the prior year and for the
first three quarters of fiscal year 1998, DOD revenues were $22,044,000 higher
than the corresponding period of the prior fiscal year. This increase is
primarily due to increased funding of ITC's DOD indefinite delivery order
programs during fiscal year 1998 in comparison to reduced funding in late
fiscal year 1996 and early fiscal year 1997 when disputes over the federal
budget approval caused delays in
85
government-sponsored cleanup programs. ITC expects to continue to derive a
substantial portion of its revenues from the DOD indefinite delivery order
contracts, which are primarily related to remedial action work. The increase
in the DOD revenues was partially offset by lower DOE revenues due to the
completion of contracts funded by the DOE last year. DOE revenues in the third
quarter and the first three quarters of fiscal year 1998 decreased by
$4,134,000 and $9,411,000, respectively, when compared to the corresponding
periods of fiscal year 1997. Management believes future revenues from the DOE
will increase due to an expected transition by the DOE from study and design
to field remediation. Recent evidence of ITC's efforts to benefit from this
transition is the award in October 1997 of a $122 million project to perform
the excavation, pretreatment and thermal drying of an estimated one million
tons of contaminated materials for the DOE's Fernald Environmental Management
Project.
ITC's revenues from commercial clients in the third quarter of fiscal year
1998 were $42,051,000, an increase of $11,469,000 or 38% when compared to
revenues of $30,582,000 that were reported during the third quarter of the
prior fiscal year. Of this $11,469,000 revenue increase, 57% was attributable
to targeted commercial industry opportunities and 43% was generated from
business acquisitions. Commercial revenues for the first three quarters of
fiscal year 1998 were $115,812,000, an increase of $30,739,000 or 36% when
compared to revenues of $85,073,000 that were reported during the
corresponding period of the prior fiscal year. Of this $30,739,000 revenue
increase, 58% was from targeted commercial industry opportunities and 42% was
from business acquisitions.
Revenue growth from the commercial sector (excluding recent acquisitions)
could be restricted in the near term partly due to increased emphasis on lower
cost solutions and partly due to delaying certain work until final
Congressional action is taken on the reauthorization of Comprehensive
Environmental Response, Compensation and Liability Act (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 have led commercial
clients to delay projects as well. Contemplated changes in regulations could
further decrease the demand for certain of ITC's services, as customers
anticipate and adjust to the new regulations. However, legislative or
regulatory changes could also result in increased demand for certain of ITC's
services if such changes decrease the cost of remediation projects or result
in more funds being spent for actual remediation. The ultimate impact of any
such changes will depend upon a number of factors, including the overall
strength of the U.S. economy and customers' views on the cost effectiveness of
the remedies available.
A portion of ITC's revenues (approximately 4% in the first three quarters of
fiscal year 1998) were derived from a large thermal remediation contract
utilizing ITC's Hybrid Thermal Treatment System (HTTS) incineration
technology. Incineration as a remedy under the CERCLA continues to come under
legislative and regulatory pressures as well as commercial pressures due to
its relatively high cost. If ITC is unable to permit and use thermal treatment
on future remediation projects in the United States due to either regulatory
or market factors, ITC would have to find alternative uses for its HTTS
equipment, such as foreign installations. ITC has been aggressively pursuing
opportunities outside the United States to deploy the HTTS equipment and
related technology. ITC has entered into two project specific joint ventures
with international partners and has dedicated personnel pursuing and
evaluating several other potential projects. If the joint venture and project
opportunities are not executed and additional contracts are not won, there
could be a negative effect to ITC. At December 26, 1997, ITC's HTTS equipment
had a net book value of approximately $10,100,000 and this equipment is
currently idle.
ITC's total contract backlog at December 26, 1997 was approximately
$1,390,000,000, of which approximately $936,000,000 is future project work ITC
estimates it will receive (based on historical experience) under existing
governmental indefinite delivery order (IDO) programs which provide for a
general undefined scope of work. Revenues from backlog and IDO contracts are
expected to be earned over the next one to five years. Continued funding of
existing IDO backlog could be negatively impacted in the future due to
reductions in current and future federal government environmental restoration
budgets.
86
Gross Margin
Gross margin percentage for the third quarter of fiscal year 1998 increased
to 11.2% of revenues from 10.5% of revenues for the corresponding period of
the prior fiscal year. Gross margins have improved in fiscal year 1998 as
management continues to carefully monitor overhead costs and as a result of
spreading fixed overhead costs over higher revenue levels. In the near term,
ITC expects to maintain the improved gross margin levels achieved due to the
organizational streamlining initiated in the second quarter of fiscal year
1997. ITC's ability to maintain or improve its gross margins is heavily
dependent on increasing utilization of professional staff, properly executing
projects, and successfully bidding new contracts at adequate margin levels.
For the first three quarters of fiscal year 1998, gross margin of 11.3% of
revenues increased from the 10.0% of revenues in the corresponding period of
the prior year, generally for the same reasons noted above related to the
third quarter.
Selling, General and Administrative Expenses
For the third fiscal quarter ended December 26, 1997, selling, general and
administrative expenses of $6,844,000 were $782,000 lower than the third
quarter of the prior fiscal year. Selling, general and administrative expenses
of $21,182,000 for the first three quarters of fiscal year 1998 were
$4,157,000 lower than the level for the corresponding period of the prior
fiscal year. Selling, general and administrative expenses declined during both
the third quarter and the first three quarters of fiscal year 1998 primarily
due to the favorable impact of the corporate restructuring initiated in the
second quarter of fiscal year 1997 and the relocation of ITC's corporate
headquarters which resulted in reduced lease expense and labor cost as ITC
integrated and consolidated management and corporate functions into ITC's
largest facility.
Special Charges
In December 1997, ITC 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 the joint venture of ITC and Davy International at
the Helen Kramer Superfund project. On December 26, 1997, the joint venture
received a $14,500,000 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 $4,300,000 to the
Government to resolve related civil claims by the Government. ITC's share of
the joint venture results is 60%, accordingly, ITC received net cash of
$6,000,000, its proportionate share of the settlement. In December 1997, ITC
recorded a non-cash pre-tax charge of $3,943,000 related to this matter.
The special charges that occurred in the first quarter of fiscal 1998
resulted from the relocation of ITC'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 ITC's largest
operations office and brought ITC closer to its lenders and largest
shareholders which are located in the Eastern United States. As a result of
this relocation, ITC incurred a pre-tax charge of $2,811,000. In May 1997, ITC
incurred a non-cash pre-tax charge of $1,800,000 to sell its California based
small projects remediation services business.
In conjunction with the corporate restructuring which was initiated in the
second quarter of fiscal year 1997, ITC incurred a pre-tax restructuring
charge of $8,403,000. The restructuring charge included $3,400,000 of costs
for severance, $4,100,000 of costs for closing and reducing the size of a
number of ITC's offices, and $900,000 of costs for other related items. At
December 26, 1997, $1,483,000 of the charge remained to be paid.
Interest, Net
For the third quarter and first nine months of fiscal year 1998, net
interest expense represented 1.2% and 1.1% of revenues respectively, compared
to 1.6% and 1.5% of revenues, respectively, for the third quarter and
87
first nine months of fiscal year 1997. The lower net interest expense level
compared to a year ago is due principally to an increased level of cash and
cash equivalents, as a result of the Carlyle Investment and working capital
management which generated increased interest income.
Income Taxes
For the third quarter ended December 26, 1997, ITC recorded an income tax
provision of $1,586,000, reflecting an effective income tax rate of 43% on
income excluding special charges of $3,943,000 incurred in the third quarter.
For the three fiscal quarters ended December 26, 1997, ITC recorded an income
tax provision of $4,316,000, reflecting a 43% tax rate on income excluding
special charges of $8,554,000 incurred in the first three quarters of fiscal
year 1998. The income tax benefit related to the special charges was offset by
an increase in ITC's deferred tax valuation allowance based on the tax
attributes of the special charges and ITC'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.
For the third fiscal quarter and the three fiscal quarters ended December
27, 1996, ITC had effective income tax benefit rates of 43% and 41%
respectively, excluding special charges of $8,403,000 incurred in the second
quarter ending September 27, 1996. The related income tax benefit from the
special charge in the second quarter was offset by an increase in ITC's
deferred tax valuation allowance of $3,168,000.
Based upon a net deferred tax asset of $27,121,000 (net of a valuation
allowance of $11,297,000) at December 26, 1997, and assuming a net 38% federal
and state effective tax rate, the level of future earnings necessary to fully
realize the deferred tax asset would be approximately $71,000,000. Because of
ITC's position in the industry, recent restructuring, existing backlog and
acquisition strategies, management expects that its future taxable income and
the use of tax-planning strategies (principally the matching of any future
capital gains and losses during the relevant carryforward or carryback period)
will more likely than not allow ITC to fully realize its deferred tax asset of
$27,121,000. ITC evaluates the adequacy of the valuation allowance and the
realizability of the deferred tax asset on an ongoing basis.
Dividends
The reported dividends for the third quarter and the first three quarters of
fiscal year 1998 were $1,539,000 and $4,609,000, respectively. The reported
dividends include imputed dividends of $352,000 and $1,625,000, respectively,
which are not payable in cash. The decrease in cash dividends for the third
quarter and the three quarters of fiscal year 1998 of $151,000 and $454,000,
respectively, is due to the conversion to common stock by some holders of
ITC's 7% Convertible Preferred Stock during the third quarter of fiscal year
1997. ITC's dividends are summarized below:
THREE FISCAL QUARTERS
FISCAL QUARTER ENDED ENDED
------------------------- -------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
DIVIDEND SUMMARY 1997 1996 1997 1996
---------------- ------------ ------------ ------------ ------------
Cash 7% Preferred....... $ 899,000 $1,050,000 $2,696,000 $3,150,000
Non-cash 6% Preferred
Imputed............... 352,000 245,000 1,625,000 245,000
In-kind common 3%
stock dividend....... 288,000 -- 288,000 --
---------- ---------- ---------- ----------
Total............... $1,539,000 $1,295,000 $4,609,000 $3,395,000
Commencing with November 21, 1997, the 6% Preferred Stock outstanding
accrues a 3% in-kind stock dividend for one year during which the statement of
operations will also include an imputed dividend expense at a rate of
approximately 3% per annum. This additional imputed dividend of approximately
3% will never be paid in cash and simply represents the amortization of the
fair market value adjustment recorded at the date of issuance. After November
21, 1998, the outstanding 6% Preferred Stock is entitled to a 6% cumulative
cash dividend payable quarterly.
88
FINANCIAL CONDITION
Working capital at December 26, 1997 was $99,890,000 which is a decrease of
$10,815,000 from March 28, 1997. The current ratio at December 26, 1997 was
2.17:1 which compares to 2.21:1 at March 28, 1997.
Cash used by operating activities, including cash outflows related to
discontinued operations, for the first three quarters of fiscal year 1998
totaled $12,867,000 compared to $13,913,000 provided by operating activities
in the corresponding nine-month period of the prior fiscal year primarily due
to an increase in accounts receivable resulting from the increase in revenues
in the current year. Cash (used for) provided by operating activities,
excluding cash flows related to discontinued operations, are $(8,635,000) and
$25,822,000 for the three fiscal quarters ended December 26, 1997 and December
27, 1996, respectively. Cash outflows related to discontinued operations for
the three fiscal quarters ended December 26, 1997 and December 27, 1996 were
$12,932,000 and $11,909,000, respectively and relate to previously accrued
closure and post-closure costs for permitting and construction to close
inactive treatment and disposal sites and payments made related to matters
where ITC has been named as a potentially responsible party on certain sites.
These activities are more fully described in the section on Transportation,
Treatment and Disposal Discontinued Operations. Capital expenditures of
$2,540,000 for the current three fiscal quarters were approximately the same
as the prior fiscal year; and management believes capital expenditures for the
remainder of fiscal year 1998 will be approximately the same as the amount
spent during fiscal year 1997, excluding any business acquisitions. During the
first three quarters of fiscal year 1998, ITC has acquired two companies.
These include the May 1997 acquisition of PHR Environmental Consultants, Inc.,
a company that provides environmental historical research and investigation,
for an initial payment and related expenses of $1,271,000 and the September
1997 acquisition of Pacific Environmental Group (PEG), a leading provider of a
broad range of environmental consulting and engineering services to major oil
companies for an initial payment and related expenses of $4,200,000. In
addition, ITC sold its California based remediation services business and
received an initial payment of $2,800,000 in May 1997. On December 23, 1997,
ITC purchased two Environmental Protection Agency (EPA) contracts for
approximately $2,000,000. These five year contracts are valued at
approximately $94 million and involve a broad range of remedial action work.
On January 15, 1998 ITC signed a definitive agreement (the "Agreement") to
acquire OHM Corporation (OHM), a leading diversified environmental services
firm, for a total purchase price of approximately $365 million including the
assumption of OHM debt.
On January 16, 1998, ITC initiated the Offer to Purchase ("Tender Offer")
for cash 13,933,000 shares of OHM common stock. According to the terms of the
Agreement, assuming successful completion of the merger, OHM shareholders will
receive $11.50 per share, comprised of $8.00 in cash and 0.42 shares of ITC
common stock (valued at $3.50 assuming a per share price of $8.25 for ITC's
shares). Concurrently with the purchase of shares in the Tender Offer, OHM
will repurchase from one of its principal shareholders, a number of shares
equal to approximately 19 percent of OHM's outstanding shares. Assuming the
Tender Offer to purchase 13,933,000 shares (50.6%) of OHM common stock is
successful, on February 17, 1998, ITC will own approximately 63% of OHM and
will be entitled to elect a majority of OHM's Board of Directors. ITC will
then consolidate OHM and record an approximate 37% minority interest in OHM.
Upon completion of the proposed transaction (which is expected in mid-April
1998), OHM will then be merged with a wholly-owned subsidiary of ITC in which
each of the remaining outstanding shares of OHM not acquired through the
Tender Offer will be converted into 1.394 shares of ITC common stock at which
time ITC will own and consolidate 100% of OHM.
ITC will execute the Tender Offer with a $240 million credit facility, (the
"Tender Offer Credit Facilities") which will be used to fund the Tender Offer
and for acquisitions and working capital. In addition, the Tender Offer Credit
Facility will be used to refinance ITC's existing $65 million principal amount
of senior notes. During the fourth quarter of fiscal year 1998, ITC will incur
a $8.7 million pre-tax charge as an extraordinary item as a result of the
refinancing and early extinguishment of ITC's $65 million senior notes. This
$8.7 million pre-tax charge will include an approximate $5.1 million payment
to the lenders of the $65 million senior notes as a prepayment penalty (Make-
Whole Provision) and a $3.6 million non-cash charge to write off the related
89
unamortized debt issue costs. ITC expects to take substantial special charges
in connection with the integration of OHM during fiscal year 1999. ITC
believes substantial cost synergies will be achieved as a result of the
acquisition and related integration plan.
The Tender Offer Credit Facility will be secured by a security interest in
substantially all of the assets of ITC and its subsidiaries (including the
shares of OHM Common Stock acquired by ITC upon completion of the Tender Offer
but excluding the assets of OHM and its subsidiaries). Loans made under the
Tender Offer Credit Facilities bear interest at a rate equal to LIBOR plus
2.50% per annum (or Citibank's base rate plus 1.50% per annum) for a period of
four months from the tender offer funding date. If the loans continue to be
outstanding on that date, the rate will increase by 1.00% per annum, and will
increase by an additional 0.50% per annum on the corresponding date in each of
the six succeeding months, if the loans are still outstanding on those dates.
The loans made under the Tender Offer Credit Facilities will not amortize, and
will be payable in full at their maturity at the earlier of the Merger Credit
Facilities (as defined below) funding date or 18 months.
To complete the merger, ITC will effect a $425 million refinancing (the
"Merger Credit Facilities"). This new credit facility will replace ITC's
Tender Offer Credit Facilities and OHM debt.
The Merger Credit Facilities will consist of an eight year amortizing term
loan of up to $225 million and a six-year revolving credit facility of up to
$200 million. (The terms of the commitments provide that the lenders, at their
option, may reallocate up to $50.0 million from the revolving credit facility
to the term loan.) The proceeds of loans made under the Merger Credit
Facilities will be used to finance the cash consideration to be paid in the
Merger, to pay related expenses and costs, to refinance ITC's loans
outstanding under the Tender Offer Credit Facility and OHM's loans outstanding
under its existing credit facility (under which approximately $60.2 million
was outstanding as of February 9, 1998), to provide working capital for ITC
and its subsidiaries (including OHM and its subsidiaries), and for general
corporate purposes of ITC and its subsidiaries. The Merger Credit Facilities
will be secured by a security interest in substantially all of the assets of
ITC and its subsidiaries (including the assets of OHM and its subsidiaries).
The term loans made under the Merger Credit Facilities will bear interest at a
rate equal to LIBOR plus 2.50% per annum (or Citibank's base rate plus 1.50%
per annum), and revolving loans made under the Merger Credit Facilities will
bear interest at a rate equal to LIBOR plus 2.00% per annum (or Citibank's
base rate plus 1.00% per annum), through the date that is six months after
completion of the Merger, with adjustments thereafter based on the ratio of
ITC's consolidated total debt to consolidated earnings before interest, taxes,
depreciation and amortization. The term loan made under the Merger Credit
Facilities will amortize on a quarterly basis in aggregate annual installments
of $2.25 million for the first six years after the Merger, with the remainder
payable in eight equal quarterly installments in the seventh and eighth years
after the Merger. ITC will also be required to prepay portions of the term
loans under the Merger Credit Facilities with the net proceeds of any asset
sales and certain debt and equity financings, and with a portion of ITC's
consolidated excess cash flow annually. The Credit Facilities include certain
representations, warranties, covenants, and other conditions customary for
facilities of this type.
At the completion of the OHM merger, if successfully consummated, ITC will
have sufficient availability under the Merger Credit Facilities to meet
currently foreseeable needs. As a result, management believes its current
liquidity position is sufficient to meet foreseeable requirements, as well as
to fund expansion and diversification of ITC's business through both internal
growth and acquisitions.
The transaction is subject to a number of conditions, including approvals
related to the merger by the shareholders of both companies, and other
customary conditions and regulatory approvals, including termination or
expiration of the waiting period under the Hart-Scott Rodino Act which
occurred on January 26, 1998.
On January 21, 1998 ITC announced the acquisition of Jellinek, Schwartz &
Connolly (JSC), a company providing economically driven, science-based
environmental consulting and advocacy services to clients in the areas of
chemical product registration, environmental regulatory strategy, and risk
management for an initial payment of approximately $5,200,000.
90
ITC's shareholder agreements relating to Quanterra (an environmental
analytical services business 81% owned by an affiliate of Corning Incorporated
and 19% owned by ITC) contain certain provisions which have affected and, in
the future, could affect liquidity. ITC is not committed to make, and does not
presently intend to make, additional contributions to Quanterra, but it has
the option to make future pro rata contributions to maintain its 19% interest.
Although Quanterra has experienced net losses in the past three years, the
level of net loss has decreased over the past several quarters, and Quanterra
has recently produced break-even operations and positive operating cash flow.
ITC will continue to evaluate the ultimate recoverability of its investment in
Quanterra (which is carried at $16,300,000 on the December 26, 1997 condensed
consolidated balance sheet) on an ongoing basis and will recognize any
impairment in value should it occur.
On October 25, 1995, ITC executed a combined $125,000,000 financing which
includes $65,000,000 of senior secured notes with a group of major insurance
companies and a $60,000,000 syndicated bank revolving credit facility. The
financing package, which is subject to a borrowing base, financial ratio and
net worth covenants, is secured by the accounts receivable and certain fixed
assets of ITC. The senior secured notes have an eight-year final maturity with
no principal payments until the sixth year, and the bank line has a term of
five years. ITC is presently in compliance with its covenants and has no
outstanding cash advances under the credit line at December 26, 1997. As of
that date, ITC's borrowing base under its combined financing package allowed
for additional borrowing under the line of credit of up to $18,582,000. As
noted above, these facilities are to be replaced upon completion of the merger
with OHM.
In aggregate, at December 26, 1997, letters of credit totaling approximately
$12,900,000 relating to ITC's insurance program and bonding requirements were
outstanding against ITC's bank line of credit. In October 1997, letters of
credit outstanding for financial assurance were reduced from $2,700,000 to
zero.
During fiscal year 1998, ITC expanded its bonding capacity by $85,000,000 to
a new total of $220,000,000, of which approximately $95,000,000 is currently
being utilized. ITC's bonding lines generally require 3-7% collateral in the
form of letters of credit.
At the November 20, 1996 Annual Meeting of Stockholders, ITC's shareholders
voted to approve the Carlyle Investment. ITC issued to Carlyle 45,000 shares
of Convertible Preferred Stock having a liquidation preference of $1,000 per
share, and warrants to purchase 1,250,000 shares of ITC common stock at $11.39
per share. The $40,609,000 net proceeds to ITC (after related offering costs
of $4,391,000) is being used by ITC to finance business acquisitions, as well
as for working capital and general corporate purposes (see Note 8 to the
Condensed Consolidated Financial Statements for additional information
regarding the Carlyle Investment).
ITC continues to have significant cash requirements, including working
capital, capital expenditures, expenditures for the closure of its inactive
disposal sites and PRP matters (see Transportation, Treatment and Disposal
Discontinued Operations below), interest, preferred dividend obligations and
contingent liabilities. Management believes that through its existing
financing package and the Merger Credit Facilities discussed previously, ITC's
liquidity position is expected to be sufficient to meet foreseeable
requirements.
Transportation, Treatment and Disposal Discontinued Operations
With regard to ITC's transportation, treatment and disposal discontinued
operations, ITC has previously completed closure of its Montezuma Hills and
Benson Ridge facilities and is pursuing closure of its inactive Panoche and
Vine Hill Complex facilities. On November 17, 1995, the California EPA,
Department of Toxic Substances Control (DTSC) approved the final closure plan
and post-closure plan for the Vine Hill Complex facility. The approved final
closure plan provides for solidification and capping of waste sludges and
installation of underground barriers and groundwater control systems.
Substantial remediation has already been completed over both the past two
years since approval of the plan and over the prior several years based upon
interim approvals by DTSC, and the closure is expected to be completed in
fiscal year 1999.
On June 28, 1996, DTSC released a Draft Environmental Impact Report (DEIR)
and Draft Closure Plan for public comment for the Panoche facility. The DEIR
evaluated ITC's preferred closure plan as well as several
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alternative plans and stated that ITC's preferred closure plan was
environmentally superior. The alternative plans involve excavation and on-site
relocation of substantial quantities of waste materials in addition to
landfill capping and groundwater controls which are common to all
alternatives. If implemented, the alternative plans would extend the closure
construction schedule and increase the cost of closure. The DEIR and Draft
Closure Plan were subject to a 90-day comment period which ended September 30,
1996, during which interested parties presented comments including some
supporting alternative plans. Although in December 1997, DTSC certified the
final EIR, which determined that ITC's plan was the environmentally superior
alternative, the DTSC continues to consider comments on the closure plans from
ITC, and from other interested parties supporting alternative plans, and it is
uncertain what plan or hybrid of plans DTSC may ultimately approve. While
approval of the final closure plan continues to be delayed, ITC now expects a
plan and all necessary permits to be approved in the fourth quarter of fiscal
year 1998. Closure construction for ITC's preferred plan is scheduled to be
completed within three years of approval of the plan. If DTSC were to approve
an alternative plan or fail to timely approve any plan or if implementation of
any plan is delayed by litigation or appeals, ITC's cost to close the site
would increase, which could have a material adverse impact on the consolidated
financial condition, liquidity and results of operations of ITC. As a part of
the site closure, ITC has requested permission, and the DTSC has agreed, to
allow ITC to excavate drums buried in a portion of the facility. The drums are
the alleged source of low levels of contaminants which have migrated through
groundwater underneath a portion of municipally-owned land adjacent to the
facility.
Closure construction was completed for the Montezuma Hills and Benson Ridge
facilities in December 1991 and December 1992, respectively. Upon completion
of closure construction, ITC is required to perform post-closure monitoring
and maintenance of its disposal facilities for at least 30 years. Operation of
the facilities in the closure and post-closure periods is subject to numerous
federal, state and local regulations. ITC may be required to perform
unexpected remediation work at the facilities in the future or to pay
penalties for alleged noncompliance with regulatory permit conditions.
Regulations of the DTSC and the United States Environmental Protection
Agency (USEPA) require that owners and operators of hazardous waste treatment,
storage and disposal facilities provide financial assurance for closure and
post-closure costs of those facilities. ITC provided such financial assurance
equal to its estimate of closure and post-closure costs (which could be
subject to increases at later dates as a result of regulatory requirements).
At December 26, 1997, financial assurance was comprised of a corporate
guarantee of approximately $18,000,000 and a trust fund containing
approximately $16,000,000, and purchased annuities which will mature over the
next 30 years to pay for estimates of post-closure costs. In October 1997,
certain letters of credit also utilized in support of these costs were reduced
to zero.
Closure and post-closure costs are incurred over a significant number of
years and are subject to a number of variables including, among others,
completion of negotiations regarding specific site closure and post-closure
plans with DTSC, USEPA, the California State Water Resources Control Board,
the California Air Resources Board, Regional Water Quality Control Boards
(RWQCBs), Air Quality Management Districts, various other state authorities
and certain applicable local regulatory agencies. Such closure costs are
comprised principally of engineering, design and construction costs and of
caretaker and monitoring costs during closure. ITC has estimated the impact of
closure and post-closure costs in the provision for loss on disposition of
transportation, treatment and disposal discontinued operations; however,
closure and post-closure costs could be higher than estimated if regulatory
agencies were to require closure and/or post-closure procedures significantly
different from those in the plans developed by ITC or if there are additional
delays in the closure plan approval process. Revisions to the closure
procedures could also result in impairment of the residual land values
attributed to certain of the sites.
The carrying value of the long-term assets of transportation, treatment and
disposal discontinued operations of $40,048,000 at December 26, 1997 is
principally comprised of residual land at the inactive disposal facilities and
assumes that sales will occur at market prices estimated by ITC based on
certain assumptions (entitlements, development agreements, etc.), taking into
account market value information provided by independent real estate
appraisers. ITC had previously formulated development plans and an agreement
with a developer for some of
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this property as part of a larger development in the local area. The
entitlement process was delayed pending approval of ITC's closure plan for its
adjacent disposal facility and local community review of growth strategy. This
review recommended strategies for limiting growth in the area. These growth-
limiting recommendations have now been incorporated in a draft general plan
and environmental impact report which have been released for public comments
during a period ending in March 1998. Ultimately, if development plans are
materially restricted or acceptable entitlements are unobtainable, the
carrying value of this property could be significantly impaired. In regard to
any of the residual land, there is no assurance as to the timing of sales or
ITC's ability to ultimately liquidate the land for the sale prices assumed.
Consequently, 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.
In June 1986, USEPA notified a number of entities, including ITC, that they
were PRPs under CERCLA with respect to the Operating Industries, Inc. (OII)
Superfund site in Monterey Park, California, and as such, faced joint and
several liabilities for the cost to investigate and clean up this site.
Subsequently, USEPA alleged that ITC had generated approximately 2% by volume
of the hazardous wastes disposed of at the site, and ITC was also served with
lawsuits brought by members of a group of PRPs (the Steering Committee). ITC
has not been named as a defendant in any of the several personal injury and
property damage lawsuits brought by area residents.
In October 1995, ITC and the USEPA agreed to a settlement of ITC's alleged
liability for response costs incurred by the USEPA pursuant to the first three
partial consent decrees entered into in connection with the OII site pursuant
to which ITC paid $5,400,000 to the USEPA. While resolving ITC's alleged
liability for response costs incurred by the USEPA pursuant to the first three
partial consent decrees, the settlement does not include a release of
liability for future or final OII remedies. In September 1996, the USEPA
released a final record of decision selecting the final remedy for the site.
Response costs for the final remedy are estimated by USEPA to be approximately
$161,800,000. ITC believes that this estimate does not take into account the
benefits of certain work to be performed under the previous consent decrees
and therefore substantially overstates the remaining cost.
In April 1996, ITC reached a settlement of the lawsuits with the Steering
Committee, pursuant to which ITC paid $250,000 in settlement of the Steering
Committee's claims. ITC and the Steering Committee also agreed, as a part of
the settlement, to cooperate and share on a pro-rata basis certain response
and other defense costs with respect to certain groundwater cleanup actions
which may be a part of the final remedy for the site. ITC and the Steering
Committee have not agreed to share all costs related to the final remedy at
the site, inasmuch as the Steering Committee claims that pursuant to earlier
consent decrees it is excused from paying for or performing certain actions
which may be required as a part of any final remedy. ITC does not agree with
these claims. ITC's agreement with the Steering Committee to cooperate and
share costs may be terminated voluntarily by either party, including in the
event of a dispute as to the parties' respective obligations to pay for or
perform the final remedy for the site.
In October 1997 ITC and other PRPs at the site received special notice from
the USEPA requesting that within 60 days ITC and other PRPs submit a good
faith offer to pay for or perform the final remedy at the site and to satisfy
USEPA's demand for reimbursement of approximately $28,900,000 in oversight
costs. ITC reviewed the USEPA's request and submitted a proposal to work
cooperatively with interested parties to perform the final remedy.
Should the costs of the final remedy be greater than expected, or should ITC
be forced to assume a disproportionate share of the costs of the final remedy
(whether because of differences in the protections obtained by the Steering
Committee and ITC under the various consent decrees to which Steering
Committee members and ITC are subject, or otherwise), the cost to ITC of
concluding this matter could materially increase.
In September 1987, ITC was served with a Remedial Action Order (RAO) issued
by the DTSC, concerning the GBF Pittsburg landfill site near Antioch,
California, a site which had been proposed by the USEPA to be added to the
National Priorities List under CERCLA. ITC and 17 other firms and individuals
were characterized
93
as responsible parties in the RAO and directed to undertake investigation and
potential remediation of the site which consists of two contiguous parcels.
From the 1960's through 1974, a predecessor to IT Corporation operated a
portion of one parcel as a liquid hazardous waste site. The activity ceased in
1974, and ITC's predecessor's facility was closed pursuant to a closure plan
approved by the appropriate RWQCB. Both of the parcels were then operated by
other parties as a municipal and industrial waste site (overlying the former
liquid hazardous waste site) and, until 1992, continued to accept municipal
waste. Water quality samples from monitoring wells in the vicinity of the site
were analyzed by the property owner in August 1986 and indicated the presence
of volatile organics and heavy metals along the periphery of the site.
Additional PRPs, consisting primarily of known waste generators, were
subsequently served with an amended RAO by the DTSC. ITC and these other PRPs
(the PRP group) further investigated the nature and extent of any subsurface
contamination beneath the site and beyond its borders. The PRP group submitted
Remedial Investigation and Feasibility Study (RI/FS) reports which were
accepted by the DTSC. The studies indicate that groundwater quality impact is
not affecting drinking water supplies and is not attributable solely to the
portion of the site previously operated by ITC's predecessor.
In July 1993, ITC, along with the other PRPs at the site, was issued a
revised RAO and Imminent and Substantial Endangerment Order that restated
previous RAOs and directed all previously named PRPs to undertake specific
additional tasks including the closure of the municipal landfill.
After a period of public review and comment, in June 1997, the DTSC
completed and released a final Remedial Action Plan (RAP) selecting DTSC's
preferred alternative of actively pumping and treating groundwater from both
the alleged source points of contamination and the edge of the allegedly
contaminated groundwater plume emanating from the site, which DTSC estimated
to cost between $18,000,000 and $33,000,000, depending upon whether certain
options for discharge of produced waters are available. The PRP group
continues to believe that its preferred alternative of natural attenuation and
continued limited site monitoring, which was estimated to cost approximately
$4,000,000, is appropriate. As part of the RAP, the DTSC also advised the PRP
group of its position that both the group and the current owner/operators are
responsible for paying the future closure and post-closure costs of the
overlying municipal landfill, which have been estimated at approximately
$4,000,000.
ITC and the PRP group initiated litigation (Members of the GBF/Pittsburg
Landfill(s) Respondents Group, etc., et al, v. State of California
Environmental Protection Agency Contra Costa County, California Superior Court
Case No. C97-02936) challenging the final RAP, and the ultimate outcome of the
litigation and any other available remedies cannot be predicted at this time.
The PRP group has also filed an application with the appropriate RWQCB for
designation of the site as a containment zone which, if approved, would
facilitate the PRP group's preferred remedial alternative. The DTSC has
advised the PRP group that if, at some point, the RWQCB designates all or part
of the site as a containment zone, DTSC will work with the PRPs to either
amend or modify the final RAP as appropriate. The DTSC also advised, in
response to the Respondents Group's legal challenge to the RAP, that
compliance with remedial design and other requirements of the RAP would be
deferred until at least April, 1998, to allow the RWQCB time to evaluate the
Respondents Group containment zone application.
In the final RAP the DTSC also assigned ITC and the other members of the PRP
group collective responsibility for 50% of the site's response costs. Although
the DTSC's allocation of responsibility is not binding except in very limited
circumstances, the PRP group continues to believe that the current
owner/operators should pay a larger portion of the site's response costs and
ITC is attempting to continue to cooperate with the generators and other
members of the PRP group to affect an appropriate allocation of responsibility
for site costs.
The PRP group has initiated litigation (Members of the GBF/Pittsburg
Landfill(s) Respondents Group, etc., et al, v. Contra Costa Waste Service,
etc., et al. U.S. District Court, N. Dist. Cal., Case No. C96-03147SI) against
94
the current owner/operators of the site and other non-cooperating PRPs to
cause them to bear their proportionate share of site remedial costs. The
current owner/operators of the site have not cooperated with the PRP group in
its efforts to study and characterize the site, except for limited cooperation
which was offered shortly after the September 1987 RAO and, currently, with
respect to DTSC's attempts to cause the selection of its preferred remedial
alternative. The current owner/operators also demanded and the outcome of the
litigation cannot be determined at this time. Failure of the PRP group to
affect 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 ITC of remediating
the site, which could have a material adverse effect on ITC's consolidated
financial condition, liquidity and results of operations.
In March 1995, ITC was notified by the DTSC that it was among 13 companies
identified as potentially responsible for costs associated with investigation
and cleanup of the Environmental Protection Corporation (EPC) site known as
the Eastside Facility near Bakersfield, California. The DTSC notice letter
states that ITC is believed to have arranged for disposal of hazardous
substances at the Eastside Facility during the period between 1972 and 1985
when it was permitted and operated as a land treatment facility.
ITC transported various waste streams both generated by ITC and on behalf of
its customers to the Eastside Facility at various times during those
facilities' operations and it was a minority shareholder in EPC for a period
of its operations. In January 1996, the PRP group for the Eastside Facility
(of which ITC is a member) and the DTSC entered into an agreement for the
performance of a RI/FS for the site, as well as for cost sharing for the RI/FS
among the group and the DTSC. ITC is cooperating with other group members to
perform the work outlined in the agreement. Because of the early stage of the
matter, the potential costs associated with the remediation of the Eastside
Facility will not be reasonably estimable until completion of the RI/FS.
ITC, 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. ITC 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 ITC'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 ITC 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 ITC.
ITC has initiated claims against a number of its past insurers 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 ITC
and ITC expects them to continue to contest the claims. ITC 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.
95
FOR THE FISCAL YEAR ENDED MARCH 28, 1997
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
OVERVIEW
ITC's services are provided to a broad array of governmental and commercial
entities predominantly in the U.S. market. Additionally, ITC pursues selected
international business opportunities on a project-specific basis and has made
an investment in a Taiwan-based company (see Revenues). ITC's business
strategy is to provide its environmental services on a full-service basis,
particularly by focusing on its capabilities to manage complex environmental
issues from the initial assessment of the level and extent of contamination
through the design, engineering and execution of a solution which minimizes
the client's total cost.
In 1996, ITC changed its fiscal year to consist of four thirteen-week fiscal
quarters with the fourth quarter ending on the last Friday of March.
Previously, the fiscal year ended on March 31 of each year.
REVENUES
Revenues for fiscal year 1997 declined by 9.4% compared to a decline of 5.6%
in fiscal year 1996. This decline in revenues generally reflected weak demand
in both the governmental and commercial markets ITC serves as well as a change
in ITC's approach to the market in de-emphasizing smaller lower-value projects
(see Restructuring Charge). During the fourth quarter of fiscal year 1997,
however, ITC experienced an 8% increase in revenues to $95,712,000 from
$88,579,000 in the fourth quarter of fiscal year 1996, principally due to
consistent funding of DOD programs which had been subject to reduced funding
in late fiscal year 1996 and early fiscal year 1997 as a result of delays in
the authorization of the federal budget.
Although revenue growth in ITC's core business is expected to be modest in
the near future due to the difficult industry-wide conditions, ITC is actively
seeking revenue growth and diversification through business acquisitions (see
Liquidity and Capital Resources). ITC took an initial step in this strategy by
making a 50.1% majority investment in a Taiwan-based wastewater treatment
design/build firm in November 1996. Additionally, in May 1997, ITC acquired
PHR Environmental Consulting, Inc., a small consulting firm specializing in
environmental and historical investigation.
Revenues for fiscal year 1996 of $400,042,000 were $23,930,000 lower than
the $423,972,000 of revenues for fiscal year 1995. Effective with the
inception of operations for Quanterra in the second quarter of fiscal year
1995, ITC ceased recording any analytical services revenue. However, since a
portion of analytical services revenue historically was derived from ITC's
other operations, additional revenue is now being recorded related to
analytical services subcontracts performed by Quanterra (see Quanterra) for
ITC, similar to other third party subcontracts. After excluding fiscal year
1996 and 1995 analytical services revenues other than those provided to ITC's
other operations, revenues for ITC declined 3.8% for fiscal year 1996,
primarily due to the slowdown of awards of federal governmental contract
delivery orders caused by the delayed authorization of the federal government
budget.
A substantial percentage of ITC's revenues during the three years ended
March 28, 1997 was earned through executing governmental contracts for various
federal, state and local agencies. Revenues from governmental contracts
accounted for 67% of ITC's revenues in fiscal year 1997, compared to 69% and
71% in fiscal years 1996 and 1995, respectively. See the table in Business--
Operations--Customers--Federal, State and Local Governmental Clients for an
analysis of ITC's revenues attributable to federal, state and local
governmental contracts. Federal governmental revenues are derived principally
from work performed for the DOD and, to a lesser extent, the DOE. ITC expects
to increase its revenues from the DOE over time due to an expected transition
by the DOE over the next several years to emphasize remediation over studies
combined with ITC's favorable experience in winning and executing similar work
for the DOD and ITC's experience with DOE related to its past performance of
DOE studies. In the near term, ITC expects that the percentage of total
revenues from the execution of federal, state and local governmental contracts
will continue to be substantial.
96
Although increasing slightly as a percentage of total revenues, reflecting
management efforts to reduce ITC's reliance on government contracts, ITC's
revenues from commercial clients declined slightly in fiscal year 1997
compared to fiscal year 1996. ITC believes this is partly due to increased
emphasis by commercial clients on cost-effective solutions and partly due to
commercial clients delaying certain work until final Congressional action is
taken on the reauthorization of CERCLA. ITC is focusing more on providing
value-added consulting service and on negotiating partnering arrangements with
clients in an effort to provide commercial clients with more cost-effective
solutions. As for CERCLA, it is uncertain when reauthorization will occur or
what the details of the legislation, including retroactive liability, cleanup
standards, and remedy selection, may include. Uncertainty regarding possible
rollbacks of environmental regulation and/or reduced enforcement have led
commercial clients to delay projects as well. Contemplated changes in
regulations could decrease the demand for certain of ITC's services, as
customers anticipate and adjust to the new regulations. However, legislative
or regulatory changes could also result in increased demand for certain of
ITC's services if such changes decrease the cost of remediation projects or
result in more funds being spent for actual remediation. The ultimate impact
of any such changes will depend upon a number of factors, including the
overall strength of the U.S. economy and customers' views on the cost
effectiveness of the remedies available.
Revenues derived from large, complex thermal remediation contracts utilizing
ITC's HTTS thermal treatment technology were approximately 10%, 11% and 11% of
revenues in fiscal years 1997, 1996 and 1995, respectively. Incineration as a
remedy under CERCLA continues to come under legislative and regulatory
pressures. Because of this issue and the relatively higher cost of
incineration, there are very few potential project opportunities in the United
States and ITC has been forced to seek alternative uses for its HTTS
equipment. ITC is actively pursuing foreign opportunities which utilize the
HTTS equipment. If alternative uses, such as foreign installations, cannot be
found or are uneconomical, there could be a negative effect to ITC due to
impairment of HTTS assets as well as lost project opportunities. At March 28,
1997, the net book value of ITC's HTTS equipment was approximately
$11,200,000. ITC's backlog of contracts which utilize HTTS equipment was
approximately $10,000,000 at March 28, 1997 with such backlog to be performed
early in fiscal year 1998.
ITC's total funded and unfunded backlog at March 28, 1997 was approximately
$1,198,000,000 ($975,000,000 at March 29, 1996) including approximately
$280,000,000 of contracted backlog scheduled to be completed during fiscal
year 1998 and between $40,000,000 and $60,000,000 of additional project work
expected to be defined and performed in fiscal year 1998 under existing
governmental IDO contracts. Backlog revenues are expected to be earned
primarily over the next one to five years, with a substantial portion of the
backlog consisting of governmental contracts, many of which are subject to
annual funding and definition of project scope. The backlog amounts at March
28, 1997 and March 29, 1996 include $785,000,000 and $598,000,000,
respectively, of future work ITC estimates it will receive (based on
historical experience) under existing IDO programs. In accordance with
industry practices, substantially all of ITC's contracts are subject to
cancellation, delay or modification by the customer.
ITC's backlog at any given time is subject to changes in scope of services
required by the contracts leading to increases or decreases in backlog
amounts. These contracts subject to such scope changes have led to a number of
contract claims requiring negotiations with clients in the ordinary course of
business. (See Notes to Consolidated Financial Statements--Summary of
significant accounting policies--Contract accounting and accounts receivable.)
GROSS MARGIN
Gross margins were 10.5%, 14.5% and 14.6% of revenues in fiscal years 1997,
1996 and 1995, respectively. In the current year, gross margin was adversely
impacted by lower pricing due to competitive industry conditions and by the
continued shift in revenue mix toward larger projects and programs which
involve more subcontracting and carry a lower margin on revenues. Gross margin
percentage of 11.3% of revenues for the last six months of fiscal year 1997
improved from the 9.7% of revenues for the first half as overhead costs were
reduced due to organizational streamlining resulting from the recent corporate
restructuring (see Restructuring Charge). In the near term, ITC expects to
continue to experience the improved gross margins of the past six
97
months. ITC's ability to maintain or improve its gross margins is heavily
dependent on increasing utilization of professional staff, properly executing
projects, and successfully bidding new contracts at adequate margin levels.
Excluding a $5,300,000 provision for major litigation in fiscal year 1995
(see Notes to Consolidated Financial Statements--Commitments and
contingencies--Central Garden), gross margin would have declined from 15.9% of
revenues in fiscal year 1995 to 14.5% in fiscal year 1996, primarily because
of the combination of the declining level of revenues, lower pricing due to
competitive industry conditions and a shift in revenue mix toward lower margin
subcontracted work.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were 9.2%, 9.5% and 10.0% of
revenues in fiscal years 1997, 1996 and 1995, respectively. Selling, general
and administrative expenses of $33,431,000 in fiscal year 1997 were $4,694,000
or 12.3% lower than the fiscal year 1996 level primarily due to the impact of
the corporate restructuring (see Restructuring Charge) initiated in the second
fiscal quarter of 1997. Selling, general and administrative expenses declined
from 10.2% in the first half of fiscal 1997 to 8.4% in the second half
primarily due to this corporate restructuring. Fiscal year 1996 selling,
general and administrative expenses of $38,125,000 represented a decrease of
$4,351,000 or 10.2% from the prior year level, due to cost containment
measures resulting from continued management attention to expenses.
RESTRUCTURING CHARGE
In conjunction with the corporate restructuring to position ITC for growth
and diversification which was initiated in the second quarter of fiscal year
1997, ITC incurred a pre-tax restructuring charge of $8,403,000. The
restructuring charge included $3,400,000 of costs for severance, $4,100,000 of
costs for closing and reducing the size of a number of ITC's offices, and
$900,000 of costs for other related items. At March 28, 1997, $3,720,000 of
the charge remained to be paid over the next eight years. The restructuring
charge was taken in conjunction with an organizational realignment which is
expected to enable ITC to operate in a more efficient and client-focused
manner on an ongoing basis.
Additionally, during the first quarter of fiscal year 1998, ITC will be
relocating its corporate headquarters from Torrance, California to Monroeville
(Pittsburgh), Pennsylvania where ITC's largest office is located. Beginning in
the second quarter of fiscal year 1998, this will result in reduced lease
expenses as well as labor cost savings due to the consolidation of certain
functions, and travel cost savings, since much of ITC's business, as well as
its lenders and largest shareholders, are located in the eastern United
States. The move is anticipated to result in a charge in the range of
$2,000,000 to $3,000,000. ITC also anticipates it may take a smaller charge in
connection with the sale in the first quarter of fiscal year 1998 of its
California remediation services business pursuant to a change in ITC's
approach to the market.
QUANTERRA
In June 1994, ITC and an affiliate of Corning Incorporated combined the two
companies' environmental analytical services businesses into a 50%/50%
jointly-owned company (Quanterra), which was recapitalized effective December
29, 1995, with ITC retaining a 19% ownership interest. (See Liquidity and
Capital Resources and Notes to Consolidated Financial Statements--Quanterra.)
ITC's 50% investment in Quanterra was accounted for under the equity method
through December 29, 1995, and the remaining 19% investment is now accounted
for under the cost method. In the nine months ended March 31, 1995, the
initial period of Quanterra's operations, ITC reported equity in net loss of
Quanterra of $9,827,000 (including a $9,264,000 charge for integration) and,
in the six months ended September 29, 1995, ITC reported equity in net loss of
Quanterra of $1,821,000. In the quarter ended December 29, 1995, ITC reported
equity in net loss of Quanterra of $24,595,000, principally related to the
recapitalization of Quanterra noted above. The events that led to the other
than temporary decline in the value of ITC's investment in Quanterra occurred
in December 1995 when it became evident that Quanterra's net loss would
increase significantly in comparison to the September 1995 quarterly results
and it
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became apparent that Quanterra would require additional capital from its
owners to meet its liquidity needs in 1996. These two events led to the
recapitalization transaction and ITC's loss recognition.
OTHER INCOME (EXPENSE)
In fiscal year 1996, ITC reported in other income a pre-tax gain of
$1,090,000, related to the settlement of certain litigation concerning the
Motco project. (See Notes to Consolidated Financial Statements--Motco
litigation settlement.) This gain represented the settlement proceeds of
$41,100,000 in cash, net of the previously recorded $31,200,000 claim amount,
$8,000,000 of costs related to certain equipment specifically constructed for
the Motco project which has been idle since ceasing work on the project, and
legal and other expenses.
In fiscal year 1995, ITC recorded a charge of $3,800,000 to provide for
potential settlement and defense costs related to certain class action
shareholder litigation. ITC paid approximately this amount in cash in fiscal
year 1997 when the class action lawsuit was formally settled.
INTEREST, NET
Net interest expense was 1.5%, 1.6% and 1.7% of revenues in fiscal years
1997, 1996 and 1995, respectively. The following table shows net interest
expense for the three fiscal years ended March 28, 1997.
YEAR ENDED
-----------------------------
MARCH 28, MARCH 29, MARCH 31,
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Interest incurred.............................. $ 7,168 $7,014 $8,065
Capitalized interest........................... -- -- (484)
Interest income................................ (1,908) (569) (471)
------- ------ ------
Interest, net.................................. $ 5,260 $6,445 $7,110
======= ====== ======
During fiscal year 1997, the level of debt outstanding was relatively
unchanged from the prior year end level as ITC's refinancing was completed in
October 1995 and the related initial principal payments are not due until 2001
on ITC's outstanding $65,000,000 senior secured notes. Accordingly, interest
incurred in fiscal year 1997 was $154,000 or 2.2% higher than the
corresponding amount for fiscal year 1996. Interest income of $1,908,000 was
$1,339,000 higher than the $569,000 in fiscal year 1996 due to the full-year
investment in cash equivalents of the excess proceeds of the October 1995
refinancing (as discussed immediately below) and an increased level of
investment in cash equivalents beginning in November 1996 from the proceeds of
the Carlyle Investment (see Notes to Consolidated Financial Statements--
Preferred stock--Carlyle Investment).
In fiscal year 1996, the decline in interest incurred is due principally to
lower levels of outstanding debt during the second half of the fiscal year.
This resulted from debt paid down out of the $41,100,000 proceeds of the Motco
settlement. (See Notes to Consolidated Financial Statements--Motco litigation
settlement.) This decline in debt was partially offset by the refinancing of
ITC's senior notes in October 1995 through a $65,000,000 private placement,
which exceeded the $50,000,000 of debt being refinanced. These excess proceeds
were invested in cash equivalents which generated interest income over the
remainder of the year. There was no capitalized interest in fiscal year 1996
due to the completion of ITC's major company-wide management information
systems project in fiscal year 1995, on which interest had been capitalized.
INCOME TAXES
For fiscal year 1997, in which ITC reported a loss from continuing
operations before income taxes of $8,956,000, ITC recorded an income tax
benefit of $179,000 which included a $4,602,000 tax charge resulting from the
adjustment of ITC's deferred tax asset valuation allowance based on ITC's
assessment of the uncertainty as to when it will generate a sufficient level
of future earnings to realize the deferred tax asset created
99
by the restructuring charge (see Restructuring Charge). ITC's effective income
tax benefit rate is 2%, which is less then the 34% federal statutory rate
primarily due to the above tax charge, state income taxes and nondeductible
expenses (See Notes to Consolidated Financial Statements--Income taxes).
For fiscal year 1996, in which ITC reported a loss from continuing
operations before income taxes of $11,744,000, ITC recorded an income tax
benefit of $12,290,000 which included a $7,781,000 tax benefit resulting from
the adjustment of ITC's deferred tax asset valuation allowance based on ITC's
reassessment of its ability to generate a sufficient level of future earnings
to realize a substantial portion of ITC's related deferred tax asset.
For fiscal year 1995, in which ITC reported a loss from continuing
operations before income taxes of $1,297,000, ITC recorded a $2,383,000 income
tax provision from continuing operations due to the nondeductibility of
certain expenses, including a significant portion of the charge for
integration related to the formation of Quanterra. (See Notes to Consolidated
Financial Statements--Quanterra.)
ITC's future tax rate is subject to the full realization of its deferred tax
asset of $32,116,000 (net of a valuation allowance of $9,741,000). Realization
of the tax asset is expected by management to occur principally as closure
expenditures related to ITC's inactive disposal sites over the next several
years are deductible in the years the expenditures are made and upon the
ultimate tax disposition of ITC's interest in Quanterra, but is subject to ITC
having a sufficient level of taxable income and taxable capital gains. Because
of ITC's position in the industry, recent restructuring, existing backlog and
acquisition strategies, management expects that its future taxable income and
the use of tax-planning strategies (principally the matching of any future
capital gains and losses during the relevant carryforward or carryback period)
will more likely than not allow ITC to fully realize its deferred tax asset.
ITC evaluates the adequacy of the valuation allowance and the realizability of
the deferred tax asset on an ongoing basis.
DIVIDENDS
Dividends for fiscal year 1997 include cash dividends of $4,050,000
($4,200,000 in fiscal years 1996 and 1995) on ITC's outstanding depositary
shares (each representing 1/100 of a share of ITC's 7% Convertible
Exchangeable Preferred Stock) and a non-cash imputed dividend of $866,000 on
the newly issued Cumulative Convertible Participating Preferred Stock
(Convertible Preferred Stock) purchased by Carlyle. (See Notes to Consolidated
Financial Statements--Preferred stock--Carlyle Investment.) During the first
two years ended November 21, 1998 in which the Convertible Preferred Stock is
outstanding and the stated annual dividends are 0% and a stock dividend of 3%,
respectively, dividends will be calculated and presented in the statement of
operations at a rate of approximately 6% per annum. The additional imputed
dividend of approximately 6% in the first year and 3% in the second year will
never be paid in cash or stock.
LOSS FROM CONTINUING OPERATIONS
ITC recorded losses from continuing operations of $13,693,000, $3,654,000
and $7,880,000 for fiscal years 1997, 1996 and 1995, respectively. As
discussed above, operating income for each of the years was more than offset
by the equity in net loss of Quanterra and certain special charges. (See Gross
Margin, Restructuring Charge, Quanterra, and Other Income (Expense).)
DISCONTINUED OPERATIONS
In fiscal year 1995, ITC increased its provision for loss on disposition of
its discontinued transportation, treatment and disposal business by
$10,603,000 (net of income tax benefit of $6,397,000). This increased
provision primarily related to delays in the regulatory approval process at
ITC's inactive disposal facilities located in Northern California, an
additional accrual for estimated costs related to certain waste disposal sites
where ITC has been named as a PRP, increased closure construction costs due to
plan revisions and to additional costs experienced due to the unusually heavy
rainfall experienced in Northern California in January through
100
March 1995. For Further Information Regarding ITC's Discontinued Operations,
See Notes to Consolidated Financial Statements--Discontinued Operations.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $21,531,000 or 24.1%, to $110,705,000 at March
28, 1997 from $89,174,000 at March 29, 1996. The current ratio at March 28,
1997 was 2.21:1 which compares to 2.13:1 at March 29, 1996.
Cash provided by operating activities for fiscal year 1997 totaled
$24,795,000, a $10,614,000 increase from the $14,181,000 of cash provided by
operating activities in the prior fiscal year principally due to the
improvement in receivables management. ITC has revised its cash flows from
operating activities to include cash outflows related to discontinued
operations of $14,041,000, $11,704,000 and $11,324,000 in fiscal years 1997,
1996 and 1995, respectively. These cash outflows related to discontinued
operations relate to previously accrued closure and post-closure costs for
permitting and construction to close inactive treatment and disposal sites and
payments made related to matters where ITC has been named as a potentially
responsible party on certain sites. For further information on these
activities, see Notes to Consolidated Financial Statements--Discontinued
operations. Cash flows from operating activities, excluding cash flows related
to discontinued operations, are $38,836,000, $25,885,000 and $13,575,000 in
fiscal years 1997, 1996 and 1995, respectively. Capital expenditures were
$3,361,000, $4,696,000 and $10,533,000 for fiscal years 1997, 1996 and 1995,
respectively. During fiscal year 1997, capital expenditures decreased as ITC's
decline in revenues reduced the need for new equipment. Management believes
capital expenditures in fiscal year 1998 will remain stable or increase
slightly from those of fiscal year 1997, excluding any business acquisitions
or strategic investments which might be made by ITC. (See below and Business
Operations--General.) ITC does not expect to pay significant cash income taxes
over the next several years due to its net operating loss carryforwards. (See
Notes to Consolidated Financial Statements--Income taxes and Results of
Operations--Continuing Operations--Income Taxes.)
Long-term debt of $65,874,000 at March 28, 1997 was essentially unchanged
from the $65,611,000 at March 29, 1996. (See Notes to Consolidated Financial
Statements--Long-term debt.) ITC's ratio of debt (including current portion)
to equity declined over the past three years to 0.42:1 at March 28, 1997 from
0.47:1 and 0.56:1 at March 29, 1996 and March 31, 1995, respectively.
With regard to the transportation, treatment and disposal discontinued
operations, a number of items could potentially affect the liquidity and
capital resources of ITC, including changes in closure and post-closure costs,
realization of excess and residual land values, demonstration of financial
assurance and resolution of other regulatory and legal contingencies. (See
Notes to Consolidated Financial Statements--Discontinued operations.)
ITC's shareholder agreements relating to Quanterra (an environmental
analytical services business 81% owned by an affiliate of Corning Incorporated
and 19% owned by ITC) contain certain provisions which have affected and, in
the future, could affect liquidity. ITC was required by these agreements to
contribute $2,500,000 to Quanterra in October 1995 and an additional
$2,500,000 to Quanterra in January 1996. In connection with a recapitalization
of Quanterra in January 1996, ITC committed an additional $2,500,000 to
Quanterra, of which $475,000 was paid in each of March, April and July 1996
and $1,075,000 was paid in December 1996, completing the commitment.
Additionally, in the current fiscal year, ITC made a one-time $1,300,000
contribution to Quanterra in the form of work performed related to the
decommissioning/closure of a Quanterra laboratory facility. ITC is not
committed to make, and does not presently intend to make, additional
contributions to Quanterra, but it has the option to make future pro rata
contributions to maintain its 19% interest. Although Quanterra has experienced
net losses in the past several years, the level of net loss has decreased over
the past several quarters, and Quanterra has recently neared break-even
operations. ITC will continue to evaluate the ultimate recoverability of its
investment in Quanterra (which is carried at $16,300,000 on the March 28, 1997
consolidated balance sheet) on an ongoing basis and will recognize any
impairment in value should it occur. (See Notes to Consolidated Financial
Statements--Quanterra.)
101
On October 25, 1995, ITC executed a combined $125,000,000 financing which
includes $65,000,000 of senior secured notes with a group of major insurance
companies and a $60,000,000 syndicated bank revolving credit facility. The
financing package, which is subject to a borrowing base, is secured by the
accounts receivable and certain fixed assets of ITC. The senior secured notes
have an eight-year final maturity with no principal payments until the sixth
year, and the bank line has a term of five years.
In aggregate, at March 28, 1997, letters of credit totaling approximately
$20,000,000 related to ITC's insurance program, financial assurance and
bonding requirements were outstanding against ITC's $60,000,000 bank line of
credit. ITC had no outstanding cash advances under the line at March 28, 1997.
As of that date, ITC's borrowing base under its combined financing package
allowed for additional letters of credit or borrowings under the line of
credit of up to $580,000. At certain times (but not at March 28, 1997), ITC
has been required to maintain cash on deposit with its credit providers, due
to ITC's borrowing base being insufficient to cover the collateral required
for the $65,000,000 senior notes and any outstanding letters of credit,
primarily as a result of reduced accounts receivable, which are the principal
component of the borrowing base. At March 28, 1997, ITC had invested cash of
approximately $73,000,000.
ITC has total bonding capacity of $135,000,000 at present, of which
approximately $94,000,000 is currently being utilized. ITC's bonding lines
generally require 5-10% collateral in the form of letters of credit.
At the November 20, 1996 Annual Meeting of Stockholders, ITC's shareholders
voted to approve the Carlyle Investment. ITC issued to Carlyle 45,000 shares
of Convertible Preferred Stock having a liquidation preference of $1,000 per
share, and warrants to purchase 1,250,000 shares of ITC common stock at $11.39
per share. The $40,609,000 net proceeds to ITC (after related offering costs
of $4,391,000) will be used by ITC to finance business acquisitions, as well
as for working capital and general corporate purposes (see Notes to
Consolidated Financial Statements--Preferred stock--Carlyle Investment).
ITC continues to have significant cash requirements, including expenditures
for the closure of its inactive disposal sites and PRP matters (see Notes to
Consolidated Financial Statements--Discontinued operations), interest,
preferred dividend obligations and contingent liabilities. ITC's liquidity
position is expected to be sufficient to meet the foreseeable requirements, as
well as to fund expansion and diversification of ITC's business through both
internal growth and acquisitions.
102
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following index sets forth the location in this Appendix of the Condensed
Consolidated Financial Statements for the quarter ended December 26, 1997 and
the Consolidated Financial Statements for the fiscal year ended March 28, 1997
of ITC and its subsidiaries.
PAGE
----
FOR THE QUARTER ENDED DECEMBER 26, 1997
Condensed Consolidated Balance Sheets...................................... 104
Condensed Consolidated Statements of Operations............................ 105
Condensed Consolidated Statements of Cash Flows............................ 106
Notes to Condensed Consolidated Financial Statements....................... 107
FOR THE YEAR ENDED MARCH 28, 1997
Report of Ernst & Young LLP, Independent Auditors.......................... 111
Consolidated Balance Sheets................................................ 112
Consolidated Statements of Operations...................................... 113
Consolidated Statements of Stockholders' Equity............................ 114
Consolidated Statements of Cash Flows...................................... 115
Notes to Consolidated Financial Statements................................. 116
103
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 26, MARCH 28,
1997 1997
------------ ---------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents............................. $ 54,128 $ 78,897
Receivables, net...................................... 115,518 108,207
Prepaid expenses and other current assets............. 5,588 4,077
Deferred income taxes................................. 10,370 11,324
-------- --------
Total current assets................................ 185,604 202,505
Property, plant and equipment, at cost:
Land and land improvements............................ 695 1,330
Buildings and leasehold improvements.................. 7,403 9,232
Machinery and equipment............................... 132,357 140,630
-------- --------
140,455 151,192
Less accumulated depreciation and amortization........ 101,320 106,891
-------- --------
Net property, plant and equipment..................... 39,135 44,301
Investment in Quanterra................................. 16,300 16,300
Other assets............................................ 43,410 39,377
Long-term assets of discontinued operations............. 40,048 40,048
-------- --------
Total assets........................................ $324,497 $342,531
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable...................................... $ 38,735 $ 29,571
Accrued liabilities................................... 29,699 32,640
Billings in excess of revenues........................ 1,978 7,227
Short-term debt, including current portion of long-
term debt............................................ 4,134 5,343
Net current liabilities of discontinued operations.... 11,168 17,019
-------- --------
Total current liabilities........................... 85,714 91,800
Long-term debt.......................................... 65,650 65,874
Long-term accrued liabilities of discontinued
operations, net........................................ 2,349 9,280
Other long-term accrued liabilities..................... 7,321 6,724
Commitments and contingencies
Stockholders' equity:
Preferred stock, $100 par value; 180,000 shares
authorized:
7% cumulative convertible exchangeable, 20,556 shares
issued and outstanding.............................. 2,056 2,056
6% cumulative convertible participating, 45,000
shares issued and outstanding....................... 4,382 4,204
Common stock, $.01 par value; 50,000,000 shares
authorized;
9,733,288 and 9,738,375 shares issued and
outstanding, respectively........................... 97 97
Treasury stock at cost, 8,078 and 6,208 shares,
respectively......................................... (74) (74)
Additional paid-in capital............................ 246,074 244,287
Deficit............................................... (89,072) (81,717)
-------- --------
Total stockholders' equity.......................... 163,463 168,853
-------- --------
Total liabilities and stockholders' equity.......... $324,497 $342,531
======== ========
See accompanying notes
104
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE FISCAL
FISCAL QUARTER ENDED QUARTERS ENDED
------------------------- -------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED)
Revenues................... $105,157 $92,513 $306,178 $266,419
Cost and expenses:
Cost of revenues......... 93,387 82,790 271,572 239,778
Selling, general and
administrative
expenses................ 6,844 7,626 21,182 25,339
Special charges.......... 3,943 -- 8,554 8,403
-------- ------- -------- --------
Operating income (loss).... 983 2,097 4,870 (7,101)
Interest, net.............. (1,237) (1,446) (3,386) (4,105)
-------- ------- -------- --------
Income (loss) before income
taxes..................... (254) 651 1,484 (11,206)
(Provision) benefit for
income taxes.............. (1,586) (280) (4,316) 1,146
-------- ------- -------- --------
Net income (loss).......... (1,840) 371 (2,832) (10,060)
Less preferred stock
dividends................. (1,539) (1,295) (4,609) (3,395)
-------- ------- -------- --------
Net loss applicable to
common stock.............. $ (3,379) $ (924) $ (7,441) $(13,455)
======== ======= ======== ========
Basic loss per common
share..................... $ (.35) $ (.10) $ (.76) $ (1.48)
======== ======= ======== ========
See accompanying notes
105
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE FISCAL QUARTERS
ENDED
-------------------------
DECEMBER 26, DECEMBER 27,
1997 1996
------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $ (2,832) $(10,060)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................... 7,528 11,208
Loss on disposal of remediation business......... 1,800 --
Loss on Helen Kramer claim....................... 3,943 --
Minority interest in subsidiary.................. 124 (27)
Deferred income taxes............................ 3,988 (1,472)
Changes in assets and liabilities, net of effects
from acquisitions and dispositions of business
(Increase) decrease in receivables, net.......... (10,377) 18,292
(Increase) decrease in prepaid expenses and other
current assets.................................. (1,577) 697
Increase in accounts payable..................... 6,683 5,410
Decrease in accrued liabilities.................. (3,637) (378)
(Decrease) increase in billings in excess of
revenues........................................ (5,266) 1,175
(Decrease) increase in other long-term accrued
liabilities..................................... (312) 977
Decrease in liabilities of discontinued
operations...................................... (12,932) (11,909)
-------- --------
Net cash (used for) provided by operating
activities........................................ (12,867) 13,913
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of remediation business.. 2,800 --
Acquisition of businesses, net of cash acquired.... (5,417) (1,455)
Capital expenditures............................... (2,540) (2,602)
Investment in Quanterra............................ -- (3,325)
Cash on deposit as collateral...................... (500) --
Other, net......................................... (2,412) 770
-------- --------
Net cash used for investing activities............. (8,069) (6,612)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term borrowings................. (2,036) (106)
Long-term borrowings............................... -- 281
Net proceeds from preferred stock and warrants
issued to Carlyle................................. -- 41,000
Dividends paid on preferred stock.................. (1,797) (3,150)
Issuances of common stock.......................... -- 1
-------- --------
Net cash (used for) provided by financing
activities........................................ (3,833) 38,026
-------- --------
Net (decrease) increase in cash and cash
equivalents......................................... (24,769) 45,327
Cash and cash equivalents at beginning of period..... 78,897 24,493
-------- --------
Cash and cash equivalents at end of period........... $ 54,128 $ 69,820
======== ========
See accompanying notes
106
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements included herein have been
prepared by ITC, without audit, and include all adjustments of a normal,
recurring nature which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the fiscal quarter ended
December 26, 1997, pursuant to the rules of the Securities and Exchange
Commission. ITC's fiscal year includes four thirteen-week fiscal quarters with
the fourth quarter ending on the last Friday in March. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations although ITC believes that
the disclosures in such financial statements are adequate to make the
information presented not misleading.
These condensed consolidated financial statements should be read in
conjunction with ITC's annual report on Form 10-K, as amended, for the fiscal
year ended March 28, 1997. The results of operations for the fiscal period
ended December 26, 1997 are not necessarily indicative of the results for the
full fiscal year.
2. On January 15, 1998, ITC signed a definitive agreement (the "Agreement")
to acquire OHM Corporation (OHM), a leading diversified environmental services
firm, for a total purchase price of approximately $365 million including the
assumption of OHM debt. On January 16, 1998, ITC initiated the Offer to
Purchase ("Tender Offer") for cash 13,933,000 shares of OHM common stock.
According to the terms of the Agreement, assuming successful completion of the
merger, OHM shareholders will receive $11.50 per share, comprised of $8.00 in
cash and 0.42 shares of ITC common stock (valued at $3.50 assuming a per share
price of $8.25 for ITC's shares). Concurrently with the purchase of shares in
the Tender Offer, OHM will repurchase from one of its principal shareholders,
a number of shares equal to approximately 19 percent of OHM's outstanding
shares. Assuming the Tender Offer to purchase 13,933,000 shares (50.6%) of OHM
common stock is successful, on February 17, 1998, ITC will own approximately
63% of OHM and will be entitled to elect a majority of OHM's Board of
Directors. ITC will then consolidate OHM and record an approximate 37%
minority interest in OHM. Upon the completion of the proposed transaction
(which is expected in mid-April 1998), OHM will then be merged with a wholly-
owned subsidiary of ITC in which each of the remaining outstanding shares of
OHM not acquired through the Tender Offer will be converted into 1.394 shares
of ITC common stock at which time ITC will own and consolidate 100% of OHM.
ITC will execute the Tender Offer with a $240 million credit facility, which
will be used to fund the Tender Offer, refinance ITC's existing $65 million
principal amount of senior notes and for acquisitions and working capital. To
complete the merger, ITC will effect a $425 million refinancing which will
refinance the Tender Offer loan and OHM's debt.
OHM is a public company that trades on the New York Stock Exchange under the
symbol OHM. OHM had revenue of $381 million and a net loss of $25.3 million or
$(0.93) loss per share, including a special charge of $38 million for the nine
months ended September 30, 1997.
The transaction is subject to a number of conditions, including approvals
related to the merger by the shareholders of both companies, and other
customary conditions and regulatory approvals. Early termination of the
waiting period under the Hart-Scott Rodino Act was granted on January 26,
1998.
3. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS No.128), Earnings per Share, which was required to be
adopted on public company financial statements issued subsequent to December
15, 1997 and was implemented by ITC in the fiscal quarter ended December 26,
1997. Under SFAS No. 128, earnings per share for all prior periods are
required to be restated to comply with the provisions of the new statement.
Under SFAS No. 128, basic earnings (loss) per common share is computed by
dividing net income (loss), adjusted for preferred stock dividends, by the
weighted average number of common shares outstanding for the period. For all
periods presented, the computation of diluted earnings (loss) per share,
assuming conversion into
107
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common shares of ITC's convertible preferred stock, common stock warrants,
contingently issuable shares and common stock equivalents, which are stock
options, is antidilutive. The adoption of SFAS No. 128 had no effect on the
basic and diluted earnings (loss) per common share for the periods presented.
The weighted average number of common shares outstanding during the period
used in the calculation of basic earnings (loss) per common share follows:
AVERAGE
FISCAL QUARTER ENDED COMMON SHARES OUTSTANDING
-------------------- -------------------------
December 26, 1997 9,734,233
December 27, 1996 9,048,249
AVERAGE
THREE FISCAL QUARTERS ENDED COMMON SHARES OUTSTANDING
--------------------------- -------------------------
December 26, 1997 9,738,568
December 27, 1996 9,099,726
4. In December 1987, ITC's Board of Directors adopted a strategic
restructuring program which included a formal plan to divest the
transportation, treatment and disposal operations through the sale of some
facilities and closure of certain other facilities. As of December 26, 1997,
two of ITC's inactive disposal sites have been formally closed and the other
two are in the process of closure. In connection with the plan of divestiture,
from December 1987 through March 31, 1995, ITC has recorded provisions for
loss on disposition of transportation, treatment and disposal discontinued
operations (including the initial provision and three subsequent adjustments)
in the amount of $160,192,000, net of income tax benefits of $32,879,000. The
adjustments principally related to a write-off of the contingent purchase
price from the earlier sale of certain assets, increased closure costs
principally due to delays in the regulatory approval process, and costs
related to certain waste disposal sites where ITC has been named a potentially
responsible party (PRP). At December 26, 1997, ITC's condensed consolidated
balance sheet included accrued liabilities of $13,517,000 to complete the
closure and related post-closure of its inactive disposal sites and related
matters, net of certain trust fund and annuity investments which are legally
restricted by trust agreements with the California EPA Department of Toxic
Substance Control to closure and post-closure use.
The provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and
estimates. The adequacy of the provision for loss has been currently evaluated
in light of developments since the adoption of the divestiture plan and
management believes the provision, as adjusted, is reasonable; however, the
ultimate effect of the divestiture on the consolidated financial condition of
ITC is dependent upon future events, the outcome of which cannot be determined
at this time. Outcomes significantly different from those used to estimate the
provision for loss could result in a material adverse effect on the
consolidated financial condition, liquidity and results of operations of ITC.
5. For information regarding legal proceedings of ITC's continuing
operations, please see the note "Commitments and contingencies" in the Notes
to Consolidated Financial Statements in ITC's Annual Report on Form 10-K, as
amended, for the fiscal year ended March 28, 1997; current developments
regarding material continuing operations' legal proceedings are discussed in
Note 6 below and in Part II of this filing. See Management's Discussion and
Analysis of Results of Operations and Financial Condition--Financial
Condition--Transportation, Treatment and Disposal Discontinued Operations for
information regarding the current developments in legal proceedings of the
discontinued operations of ITC.
6. In December 1997, ITC 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 the joint venture of ITC and Davy International at
the Helen Kramer Superfund project. On December 26, 1997, the joint venture
received a $14,500,000 payment from
108
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $4,300,000 to the Government to resolve related civil
claims by the Government. ITC's share of the joint venture results is 60%,
accordingly, ITC received net cash of $6,000,000, its proportionate share of
the settlement. In December 1997, ITC recorded a non-cash pre-tax charge of
$3,943,000 as the cash received was less than the unbilled and billed
receivables related to this project which totaled approximately $9,200,000 and
$700,000, respectively.
The special charges that occurred in the first quarter of fiscal 1998
resulted from the relocation of ITC'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 ITC's largest
operations office and closer to its lenders and largest shareholders which are
located in the Eastern United States. As a result of this relocation, ITC
incurred a pre-tax charge of $2,811,000. In May 1997, ITC incurred a non-cash
pre-tax charge of $1,800,000 to sell its California based small projects
remediation services business.
In conjunction with the corporate restructuring which was initiated in the
second quarter of fiscal year 1997, ITC incurred a pre-tax restructuring
charge of $8,403,000. The restructuring charge included $3,400,000 of costs
for severance, $4,100,000 of costs for closing and reducing the size of a
number of ITC's offices, and $900,000 of costs for other related items. As
part of the plan of termination, ITC laid-off 133 employees and paid over
$2,460,000 in termination benefits. In addition, ITC approved a plan to close
5 leased facilities and reduce the size of 11 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 7 years. At December 26, 1997, $1,483,000 of
the charge remained to be paid.
7. For fiscal year 1998, ITC adopted SOP 96-1, Environmental Remediation
Liabilities, which provides new guidance for the recognition, measurement and
disclosure of environmental remediation liabilities. The adoption of SOP 96-1
had no material effect on ITC's financial condition, liquidity and results of
operations. ITC accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are
generally not discounted to their present value.
8. At the November 20, 1996 Annual Meeting of Stockholders, ITC's
shareholders voted to approve a $45,000,000 investment (the Carlyle
Investment) by The Carlyle Group (Carlyle), a Washington, D.C. based merchant
banking firm. The Carlyle Investment consists of 45,000 shares of 6%
Cumulative Convertible Participating Preferred Stock, par value $100 per share
(Convertible Preferred Stock) and warrants to purchase 1,250,000 shares of ITC
common stock, par value $.01 per share. The net proceeds to ITC (after related
offering costs of $4,000,000) from the Carlyle Investment were $41,000,000.
The Convertible Preferred Stock and warrants may at any time, at the option
of Carlyle, be converted into ITC common shares. The conversion price of the
Convertible Preferred Stock is $7.59 per share and the exercise price of the
warrants is $11.39 per share. Carlyle presently owns approximately 38% of the
voting power of ITC, and assuming the conversion of all of the Convertible
Preferred Stock into Common Stock and the exercise of all of the warrants,
Carlyle would own approximately 43% of the voting power of ITC. The terms of
the Convertible Preferred Stock provide that, to November 20, 2001, the
holders of the Convertible Preferred Stock have the right to elect a majority
of the Board of Directors of ITC, provided that Carlyle continues to own at
least 20% of the voting power of ITC.
The Convertible Preferred Stock ranks, as to dividends and liquidation, pari
passu to ITC's 7% Preferred Stock and prior to ITC's common stock. The
Convertible Preferred Stock is entitled to cumulative annual
109
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
dividends. No dividends were payable in the first year. Dividends will be paid
quarterly in kind for the second year at the rate of 3% per annum. Thereafter,
dividends will be paid quarterly in cash at the rate of 6% per annum. The
Convertible Preferred Stock is entitled to a liquidation preference of $1,000
per share. ITC 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.
9. Included in accounts receivable at December 26, 1997 are billed
receivables, unbilled receivables and retention in the amounts of
$102,725,000, $6,107,000 and $7,661,000, respectively. Billed receivables,
unbilled receivables and retention from the U.S. Government as of December 26,
1997 were $50,026,000, $651,000 and $3,409,000, respectively. At March 28,
1997, billed receivables, unbilled receivables and retention were $89,975,000,
$12,305,000 and $7,982,000, respectively. Billed receivables, unbilled
receivables and retention from the U.S. Government as of March 28, 1997 were
$42,501,000, $9,162,000 and $4,105,000, respectively.
Unbilled receivables typically represent amounts earned under ITC'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. Included in unbilled
receivables at March 28, 1997 is approximately $9,200,000 of claims related to
the Helen Kramer project, which was subject to a governmental investigation.
ITC settled this claim in December 1997 as described in Note 6.
10. The cost of property, plant and equipment is depreciated using primarily
the straight-line method over the following useful lives of the individual
assets: buildings-20 to 30 years, land improvements-3 to 20 years, and
machinery and equipment-5 to 10 years including salvage value. The Hybrid
Thermal Treatment System(R) (HTTS(R)) transportable incineration units are
depreciated over the shorter of in-production operating days or on an 8-year
straight-line basis (idle basis) to salvage value. The HTTS units are
currently idle and continue to be depreciated as described. Amortization of
leasehold improvements is provided using the straight-line method over the
term of the respective lease.
11. For the third quarter ended December 26, 1997, ITC recorded an income
tax provision of $1,586,000, reflecting an effective income tax rate of 43% on
income excluding special charges of $3,943,000 incurred in the third quarter.
For the three fiscal quarters ended December 26, 1997, ITC recorded an income
tax provision of $4,316,000, reflecting a 43% tax rate on income excluding
special charges of $8,554,000 incurred in the first three quarters of fiscal
year 1998. The income tax benefit related to the special charges was offset by
an increase in ITC's deferred tax valuation allowance based on the tax
attributes of the special charges and ITC'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.
For the third fiscal quarter and the three fiscal quarters ended December
27, 1996, ITC had effective income tax benefit rates of 43% and 41%
respectively, excluding special charges of $8,403,000 incurred in the second
quarter ending September 27, 1996.
Based upon a net deferred tax asset of $27,121,000 (net of a valuation
allowance of $11,297,000) at December 26, 1997, and assuming a net 38% federal
and state effective tax rate, the level of future earnings necessary to fully
realize the deferred tax asset would be approximately $71,000,000. ITC
evaluates the adequacy of the valuation allowance and the realizability of the
deferred tax asset on an ongoing basis. Because of ITC's position in the
industry, recent restructuring, existing backlog and acquisition strategies,
management expects that its future taxable income and the use of tax-planning
strategies (principally the matching of any future capital gains and losses
during the relevant carryforward or carryback period) will more likely than
not allow ITC to fully realize its deferred tax asset of $27,121,000.
110
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
International Technology Corporation
We have audited the accompanying consolidated balance sheets of
International Technology Corporation as of March 28, 1997 and March 29, 1996
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended March 28, 1997.
Our audits also included the financial statement schedule listed in the index
at Item 8. These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of International Technology Corporation at March 28, 1997 and March 29, 1996
and the consolidated results of operations and cash flows for each of the
three years in the period ended March 28, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Los Angeles, California
May 13, 1997
111
INTERNATIONAL TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 28, MARCH 29,
1997 1996
--------- ---------
(IN THOUSANDS)
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $ 78,897 $ 24,493
Accounts receivable, less allowance for doubtful
accounts of $2,055,000 in 1997 and $2,943,000 in
1996.................................................. 108,207 126,832
Prepaid expenses and other current assets.............. 4,077 4,315
Deferred income taxes.................................. 11,324 12,149
-------- --------
Total current assets................................ 202,505 167,789
Property, plant and equipment, at cost:
Land and land improvements............................. 1,330 1,783
Buildings and leasehold improvements................... 9,232 10,961
Machinery and equipment................................ 140,630 144,218
-------- --------
151,192 156,962
Less accumulated depreciation and amortization........ 106,891 101,201
-------- --------
Net property, plant and equipment................... 44,301 55,761
Cost in excess of net assets of acquired businesses...... 9,363 8,770
Investment in Quanterra.................................. 16,300 12,975
Other assets............................................. 9,222 7,987
Deferred income taxes.................................... 20,792 20,327
Long-term assets of discontinued operations.............. 40,048 41,705
-------- --------
Total assets........................................ $342,531 $315,314
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable....................................... $ 29,571 $ 27,091
Accrued wages and related liabilities.................. 18,852 16,363
Billings in excess of revenues......................... 7,227 2,044
Other accrued liabilities.............................. 13,788 15,794
Short-term debt, including current portion of long-term
debt.................................................. 5,343 97
Net current liabilities of discontinued operations..... 17,019 17,226
-------- --------
Total current liabilities........................... 91,800 78,615
Long-term debt........................................... 65,874 65,611
Long-term accrued liabilities of discontinued operations,
net..................................................... 9,280 24,771
Other long-term accrued liabilities...................... 5,904 5,452
Minority interest........................................ 820 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $100 par value; 180,000 shares
authorized:
7% cumulative convertible exchangeable, 20,556 and
24,000 shares issued and outstanding, respectively... 2,056 2,400
6% cumulative convertible participating, 45,000 shares
issued and outstanding............................... 4,204 --
Common stock, $.01 par value; 50,000,000 shares
authorized; 9,744,583 and 9,149,552 shares issued and
outstanding, respectively............................ 97 91
Treasury stock at cost, 6,208 and 6,953 shares,
respectively.......................................... (74) (84)
Additional paid-in capital............................. 244,287 206,465
Deficit................................................ (81,717) (68,007)
-------- --------
Total stockholders' equity.......................... 168,853 140,865
-------- --------
Total liabilities and stockholders' equity.......... $342,531 $315,314
======== ========
See accompanying notes to consolidated financial statements.
112
INTERNATIONAL TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
----------------------------
MARCH MARCH MARCH
28, 1997 29, 1996 31, 1995
-------- -------- --------
Revenues......................................... $362,131 $400,042 $423,972
Cost and expenses:
Cost of revenues............................... 323,993 341,890 362,056
Selling, general and administrative expenses... 33,431 38,125 42,476
Restructuring charge........................... 8,403 -- --
-------- -------- --------
Operating income (loss).......................... (3,696) 20,027 19,440
Equity in net loss of Quanterra, including loss
on recapitalization in 1996 and integration
charge in 1995.................................. -- (26,416) (9,827)
Other income (expense)........................... -- 1,090 (3,800)
Interest, net.................................... (5,260) (6,445) (7,110)
-------- -------- --------
Loss from continuing operations before income
taxes........................................... (8,956) (11,744) (1,297)
Benefit (provision) for income taxes............. 179 12,290 (2,383)
-------- -------- --------
Income (loss) from continuing operations......... (8,777) 546 (3,680)
Discontinued operations (net of income taxes):
Loss from disposition.......................... -- -- (10,603)
-------- -------- --------
Net income (loss)................................ (8,777) 546 (14,283)
Less preferred stock dividends................... (4,916) (4,200) (4,200)
-------- -------- --------
Net loss applicable to common stock.............. $(13,693) $ (3,654) $(18,483)
======== ======== ========
Net loss per share:
Continuing operations (net of preferred stock
dividends).................................... $ (1.48) $ (.41) $ (.89)
Discontinued operations:
From disposition............................... -- -- (1.19)
-------- -------- --------
$ (1.48) $ (.41) $ (2.08)
======== ======== ========
See accompanying notes to consolidated financial statements.
113
INTERNATIONAL TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED MARCH 28, 1997
(IN THOUSANDS)
7%
CUMULATIVE 6% CUMULATIVE
CONVERTIBLE CONVERTIBLE
EXCHANGEABLE PARTICIPATING PARTICIPATING
PREFERRED PREFERRED COMMON TREASURY PAID-IN
STOCK STOCK STOCK STOCK CAPITAL DEFICIT TOTALS
------------ ------------- ------ -------- ------------- -------- --------
Balance at March 31,
1994................... $2,400 $ -- $88 $ -- $203,930 $(45,870) $160,548
Issuances of common
stock.................. -- -- -- -- 556 -- 556
Issuance of warrant and
common stock related to
the formation of
Quanterra.............. -- -- 1 -- 3,299 -- 3,300
Dividends paid on
preferred stock........ -- -- -- -- -- (4,200) (4,200)
Net loss................ -- -- -- -- -- (14,283) (14,283)
------ ------ --- ----- -------- -------- --------
Balance at March 31,
1995................... 2,400 -- 89 -- 207,785 (64,353) 145,921
Repurchase of common
stock.................. -- -- -- (740) -- -- (740)
Restricted stock awards,
net.................... -- -- 2 656 238 -- 896
Retirement of warrant
and common stock
resulting from the
recapitalization of
Quanterra.............. -- -- (1) -- (2,399) -- (2,400)
Issuances of common
stock.................. -- -- 1 -- 841 -- 842
Dividends paid on
preferred stock........ -- -- -- -- -- (4,200) (4,200)
Net income.............. -- -- -- -- -- 546 546
------ ------ --- ----- -------- -------- --------
Balance at March 29,
1996................... 2,400 -- 91 (84) 206,465 (68,007) 140,865
Net proceeds from
preferred stock and
warrants issued to
Carlyle................ -- 4,117 -- -- 36,492 -- 40,609
Conversion of preferred
stock.................. (344) -- 7 -- 337 -- --
Restricted stock awards,
net.................... -- -- (1) 10 214 -- 223
Dividends on preferred
stock.................. -- 87 -- -- 779 (4,916) (4,050)
Cumulative translation
adjustment............. -- -- -- -- -- (17) (17)
Net loss................ -- -- -- -- -- (8,777) (8,777)
------ ------ --- ----- -------- -------- --------
Balance at March 28,
1997................... $2,056 $4,204 $97 $ (74) $244,287 $(81,717) $168,853
====== ====== === ===== ======== ======== ========
See accompanying notes to consolidated financial statements.
114
INTERNATIONAL TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
------------------------------
MARCH 28, MARCH 29, MARCH 31,
1997 1996 1995
--------- --------- ---------
Net income (loss)................................ $(8,777) $ 546 $(14,283)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Net loss from disposition of discontinued
operations.................................... -- -- 10,603
Depreciation and amortization.................. 14,363 14,502 19,150
Deferred income taxes.......................... 360 (13,744) (4,385)
Equity in net loss of Quanterra, including loss
on recapitalization in 1996 and integration
charge in 1995................................ -- 26,416 9,827
(Gain from) provision for settlement of
lawsuits...................................... -- (9,090) 9,100
Writedown of equipment......................... -- 8,000 --
Minority interest in subsidiary................ (35) -- --
Changes in assets and liabilities, net of effects
from acquisitions and dispositions of
businesses:
Decrease (increase) in receivables............. 25,422 12,904 (21,149)
Decrease in prepaid expenses and other current
assets........................................ 601 1,416 486
Increase (decrease) in accounts payable........ 905 (2,204) 2,681
Increase (decrease) in accrued wages and
related liabilities........................... 2,473 (3,987) 1,636
Increase (decrease) in billings in excess of
revenues...................................... 5,183 (1,986) (5,338)
(Decrease) increase in other accrued
liabilities................................... (2,111) (6,613) 5,966
Increase (decrease) in other long-term accrued
liabilities................................... 452 (275) (719)
Decrease in liabilities of discontinued
operations.................................... (14,041) (11,704) (11,324)
------- -------- --------
Net cash provided by operating activities........ 24,795 14,181 2,251
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Motco settlement................... -- 41,100 --
Capital expenditures............................. (3,361) (4,696) (10,533)
Investment in Quanterra.......................... (3,325) (5,475) (1,208)
Acquisition of businesses, net of cash acquired.. (1,455) (2,223) --
Other, net....................................... 700 (655) 1,198
------- -------- --------
Net cash (used for) provided by investing
activities...................................... (7,441) 28,051 (10,543)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term borrowings............... (438) (110,751) (55,965)
Long-term borrowings............................. 962 89,598 63,802
Net proceeds from issuance of preferred stock.... 40,609 -- --
Dividends paid on preferred stock................ (4,050) (4,200) (4,200)
Issuances of common stock, net................... (33) 1,807 556
Repurchase of common stock....................... -- (740) --
------- -------- --------
Net cash provided by (used for) financing
activities...................................... 37,050 (24,286) 4,193
------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 54,404 17,946 (4,099)
Cash and cash equivalents at beginning of year... 24,493 6,547 10,646
------- -------- --------
Cash and cash equivalents at end of year......... $78,897 $ 24,493 $ 6,547
======= ======== ========
See accompanying notes to consolidated financial statements.
115
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation and principles of consolidation
The consolidated financial statements include ITC and its wholly-owned and
majority-owned subsidiaries. ITC uses the equity method to account for certain
joint ventures which were entered into for the purpose of executing large
remediation projects and in which ITC does not have in excess of 50% of voting
control. Intercompany transactions are eliminated. Certain reclassifications
have been made to prior years' consolidated financial statements in order to
conform to the current year presentation.
Beginning in fiscal year 1996, ITC changed its fiscal year to consist of
four thirteen-week fiscal quarters with the fourth quarter ending on the last
Friday of March. Previously, the fiscal year ended on March 31 of each year.
Estimates used in the preparation of the consolidated financial statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and the accompanying notes. Actual results inevitably will differ from those
estimates and such differences may be material to the consolidated financial
statements.
Cash equivalents
Cash equivalents include highly liquid investments with an original maturity
of three months or less.
Contract accounting and accounts receivable
ITC primarily derives its revenues from providing environmental management
services in the United States, principally to federal, state and local
governmental entities, large industrial companies, utilities and waste
generators. Services are performed under time-and-material, cost-
reimbursement, fixed-price and unit-bid contracts.
Revenues from time-and-material and cost-reimbursement contracts are
recognized as costs are incurred. Estimated fees on such contracts and
revenues on fixed-price and certain unit-bid contracts are recognized under
the percentage-of-completion method determined based on the ratio of costs
incurred to estimated total costs. Anticipated losses on contracts are
recorded as identified. Certain contracts include provisions for revenue
adjustments to reflect scope changes and other matters, including claims,
which require negotiations with clients in the ordinary course of business,
leading to some estimates of claim amounts being included in revenues. When
such amounts are finalized, any changes from the estimates are reflected in
earnings.
Included in accounts receivable at March 28, 1997 are billed receivables,
unbilled receivables and retention in the amounts of $89,975,000, $12,305,000
and $7,982,000, respectively. Billed receivables, unbilled receivables and
retention from the U.S. Government as of March 28, 1997 were $42,501,000,
$9,162,000 and $4,105,000, respectively. At March 29, 1996, billed
receivables, unbilled receivables and retention were $108,830,000, $12,355,000
and $8,590,000, respectively. Receivables from the U.S. Government as of
March 29, 1996 were at approximately the same percentage to total receivables
as the balances reported at March 28, 1997.
Unbilled receivables typically represent amounts earned under ITC's
contracts but not billable according to the contract terms, which usually
consider the passage of time, achievement of certain milestones or completion
of the project. Generally, unbilled receivables are expected to be billed and
collected in the subsequent fiscal year. Included in unbilled receivables at
March 28, 1997 and March 29, 1996 are $9,200,000 and $8,500,000,
116
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively, of claims related to the Helen Kramer project which is subject
to a governmental investigation. (See Commitments and contingencies-Helen
Kramer contract.)
Billings in excess of revenues represent amounts billed in accordance with
contract terms, which are in excess of the amounts includable in revenue.
At March 28, 1997, accounts receivable are primarily concentrated in
federal, state and local governmental entities and in commercial clients in
which ITC does not believe there is any undue credit risk.
Property, plant and equipment
The cost of property, plant and equipment is depreciated using primarily the
straight-line method over the following useful lives of the individual assets:
buildings--20 to 30 years, land improvements--3 to 20 years, and machinery and
equipment--5 to 10 years including salvage value. The Hybrid Thermal Treatment
System (HTTS() transportable incineration units are depreciated over the
shorter of in-production operating days or on an 8-year straight-line basis
(idle basis) to salvage value. Most of the HTTS units are currently idle and
continue to be depreciated as described. Amortization of leasehold
improvements is provided using the straight-line method over the term of the
respective lease.
Interest
Interest incurred on qualified capital expenditures is capitalized and
included in the cost of such constructed assets. Interest incurred was
$7,168,000, $7,014,000 and $8,065,000 for fiscal years 1997, 1996 and 1995,
respectively. No interest was capitalized in fiscal years 1997 or 1996. Total
interest capitalized was $484,000 for fiscal year 1995.
Interest income is principally earned on ITC's investments in cash
equivalents and was $1,908,000, $569,000 and $471,000 in fiscal years 1997,
1996 and 1995, respectively. In fiscal year 1995, ITC received a combined
$278,000 of interest income resulting from a settlement of a lawsuit and an
income tax refund.
Intangible assets
Cost in excess of net assets of acquired businesses is amortized over 20
years on a straight-line basis. At March 28, 1997 and March 29, 1996,
accumulated amortization is $8,143,000 and $7,305,000, respectively. Other
intangibles, arising principally from acquisitions, are amortized on a
straight-line basis over periods not exceeding 20 years. ITC regularly reviews
the individual components of its intangible assets and recognizes, on a
current basis, any diminution in value.
Per share information
The consolidated financial statements as well as all footnote references to
ITC's common shares and stock options have been restated to reflect the one-
for-four reverse split of ITC common shares and the reduction in par value of
ITC's common stock which were approved by the shareholders at the Annual
Meeting of Stockholders on November 20, 1996.
Per share information is based on the weighted average number of outstanding
common shares and common share equivalents during each period which aggregated
9,226,596 in 1997, 8,981,827 in 1996 and 8,889,327 in 1995. Common share
equivalents include dilutive stock options. For each fiscal year presented,
the computation of net income per share, assuming the conversion into common
shares of ITC's 7% Cumulative Convertible Exchangeable Preferred Stock, is
antidilutive. For fiscal year 1997, the computation of net income per share,
assuming the conversion into common shares of ITC's 6% Cumulative
Participating Preferred Stock, is antidilutive. (See Preferred Stock.)
117
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, ITC will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement 128 on the
calculation of basic earnings per share and fully diluted earnings per share
for fiscal 1997, 1996 and 1995 is not expected to be materially different.
Fair value of financial instruments
The following methods and assumptions were used by ITC in estimating the
fair value of its financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
approximates its fair value.
Investment in Quanterra: ITC has a 19% ownership interest in Quanterra (see
Quanterra), in which the remaining 81% interest is held by Corning
Incorporated. The determination of fair value of ITC's investment in this
untraded, closely held entity is not practicable.
Long and short-term debt: A reasonable estimate of the fair value for the
9.42% senior secured notes was based upon a discounted cash flow analysis. The
carrying amount of other debt approximates its fair value.
The carrying amounts and estimated fair values of ITC's financial
instruments are:
MARCH 28, 1997 MARCH 29, 1996
------------------------ ------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------------- -------- ---------------
(IN THOUSANDS)
Cash and cash
equivalents............. $78,897 $78,897 $24,493 $24,493
Not practicable Not practicable
Investment in Quanterra 16,300 to determine 12,975 to determine
Long and short-term debt:
9.42% senior secured
notes................. 65,000 63,329 65,000 64,759
Other.................. 6,217 6,217 708 708
LONG-LIVED ASSETS
In March 1995, the FASB issued Statement of Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to Be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying value. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. ITC
has adopted SFAS No. 121 in fiscal year 1997 which did not result in any
material impact on the results of operations or financial position of ITC.
Long-term assets of discontinued operations (see Discontinued operations) are
accounted for under APB Opinion No. 30, "Reporting the Results of Operations"
and are not subject to SFAS No. 121.
118
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES:
Supplemental cash flow information is:
YEAR ENDED
-----------------------------
MARCH 28, MARCH 29, MARCH 31,
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Interest paid, net of amounts capitalized.... $6,713 $7,184 $7,230
Interest received............................ 1,730 293 317
Income taxes paid............................ 287 1,860 782
Income tax refunds received.................. 1,178 2 989
Acquisition liabilities assumed.............. 6,346 1,155 --
QUANTERRA:
In June 1994, ITC and an affiliate of Corning Incorporated (Corning)
combined the two companies' environmental analytical services businesses into
a newly formed 50%/50% jointly-owned company (Quanterra). In connection with
the formation, ITC contributed the $38,766,000 net assets of its analytical
business into Quanterra and recorded this investment at the historical cost of
the assets contributed. Additionally, ITC incurred cash transaction costs of
$1,208,000, issued to Corning 83,250 shares of ITC common stock and a five-
year warrant to purchase 500,000 shares of ITC common stock at $20.00 per
share, which were valued together at a fair market value of $3,300,000, and
agreed to indemnify Quanterra and Corning from certain liabilities arising
prior to the closing of the transaction. Corning contributed an equivalent
amount of assets as ITC as determined by an arms length negotiation and
supported by an independent analysis of fair market value. Upon the closing of
the formation of Quanterra, an integration plan was implemented to eliminate
redundant laboratory facilities and duplicative overhead and systems. These
costs included severance, disposition of non-productive assets and the
termination of certain facility leases. ITC's portion of the charge for
integration was $9,264,000, including $2,869,000 incurred directly by ITC.
In January 1996, ITC and Corning completed an agreement to recapitalize
Quanterra which resulted in a change in Quanterra's ownership to 19% by ITC
and 81% by Corning. ITC decided it would be in the best interest of ITC to
negotiate a structure for its Quanterra investment that would sustain
Quanterra's future potential but limit future ITC capital requirements. This
approach allowed ITC to invest its available resources in its core business.
The recapitalization included a $25,000,000 infusion of new equity in
Quanterra, of which $2,500,000 was contributed by ITC. In addition, ITC sold a
common stock interest in Quanterra to Corning in consideration of the exchange
of 83,250 shares of ITC stock and warrants to purchase 500,000 shares of ITC
common stock, previously issued to Corning in connection with the formation of
Quanterra. These shares and warrants were subsequently retired by ITC. ITC
also received a put option allowing it to sell its shares to Quanterra at
market value in the year 2003. ITC reported a pre-tax charge of $24,595,000 to
reflect the impairment in the value of ITC's investment resulting from and
subsequent to the recapitalization transaction. The events that led to the
other than temporary decline in the value of ITC's investment in Quanterra
occurred in December 1995 when it became evident that Quanterra's net loss
would increase significantly in comparison to the September 1995 quarterly
results and it became apparent that Quanterra would require additional capital
from its owners to meet its liquidity needs in 1996. These two events led to
the recapitalization transaction and ITC's loss recognition. As a result of
the recapitalization, ITC's investment in Quanterra, which was previously
accounted for under the equity method, is currently accounted for on the cost
basis.
Although Quanterra has experienced net losses in the past several years, the
level of net loss has decreased over the past several quarters, and Quanterra
has recently neared break-even operation. ITC will continue to
119
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
evaluate the ultimate recoverability of its investment in Quanterra (which is
carried at $16,300,000 on the March 28, 1997 consolidated balance sheet) on an
ongoing basis and will recognize any impairment in value should it occur.
Summarized income statement data for Quanterra for fiscal years 1997, 1996
and 1995 (nine months) is the following: revenues--$72,900,000 in 1997,
$94,100,000 in 1996 and $92,400,000 in 1995; operating loss--$16,700,000 in
1997, $14,400,000 in 1996 and $18,900,000 in 1995; and net loss--$10,600,000
in 1997, $11,300,000 in 1996 and $12,900,000 in 1995. Quanterra's revenues
from ITC were $8,100,000, $15,700,000 and $12,000,000 in fiscal years 1997,
1996 and 1995 (nine months), respectively.
DISCONTINUED OPERATIONS:
Overview
In December 1987, ITC's Board of Directors adopted a strategic restructuring
program which included a formal plan to divest the transportation, treatment
and disposal operations through sale of some facilities and closure of certain
other facilities. In connection with the divestiture, from December 1987
through March 31, 1994, ITC cumulatively recorded a provision for loss on
disposition of transportation, treatment and disposal discontinued operations
(including the initial provision and two subsequent adjustments) in the amount
of $149,589,000, net of income tax benefit of $26,482,000. The adjustments
principally related to a write-off of the contingent purchase price from the
earlier sale of certain assets, increased closure costs principally due to
delays in the regulatory approval process, and costs related to certain waste
disposal sites where ITC has been named a potentially responsible party (PRP).
At March 31, 1995, ITC recorded a further increase in the provision for loss
on disposition of $10,603,000, net of income tax benefit of $6,397,000,
primarily for increased closure costs resulting from additional delays in the
regulatory approval process and costs (increasing the provision from
$149,589,000 to $160,192,000) related to certain waste disposal sites where
ITC has been named as a PRP. ITC has incurred costs of $15,698,000 in 1997,
$11,704,000 in 1996 and $11,324,000 in 1995 relating to the closure plans and
construction and PRP matters. ITC expects to incur significant costs over the
next several years. At March 28, 1997, ITC's consolidated balance sheet
included accrued liabilities of approximately $26,300,000 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 $26,300,000 in accrued liabilities includes reserves of $43,779,000 for
the closure, clean up and post closure care of ITC's Northern California Sites
and $3,221,000 for the settlement of alleged liabilities with regard to the
OII, GBF and other third party site clean up matters, netted against
$20,700,000 of related assets predominantly consisting of trust funds and
annuity investments noted above.
The annuities and trust fund assets are held in a legally binding trust
agreement by a third party trustee naming DTSC as the beneficiary of the
trust. The trust agreement was entered into pursuant to a 1989 consent
agreement between ITC and DTSC. As closure and post closure obligations are
met by ITC, DTSC is obligated to release funds from the trusts to reimburse
ITC to pay for work completed.
The provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and
estimates, including those discussed below. The adequacy of the provision for
loss has been currently reevaluated in light of the developments since the
adoption of the divestiture plan, and management believes that the provision
as adjusted is reasonable; however, the ultimate effect of the divestiture on
the consolidated financial condition, liquidity and results of operations of
ITC is dependent upon future events, the outcome of which cannot be determined
at this time. Outcomes significantly different from those used to estimate the
provision for loss could result in a material adverse effect on the
consolidated financial condition, liquidity and results of operations of ITC.
120
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Northern California Facilities
With regard to ITC's transportation, treatment and disposal discontinued
operations, ITC has previously completed closure of its Montezuma Hills and
Benson Ridge facilities and is pursuing closure of its inactive Panoche and
Vine Hill Complex facilities. On November 17, 1995, the California EPA,
Department of Toxic Substances Control (DTSC) approved the final closure plan
and post-closure plan for the Vine Hill Complex facility. The approved final
closure plan provides for solidification and capping of waste sludges and
installation of underground barriers and groundwater control systems.
Substantial remediation has already been completed over both the past year
since approval of the plan and over the prior several years based upon interim
approvals by DTSC, and the final closure is scheduled to be substantially
completed in fiscal year 1998 with final completion in fiscal year 1999.
On June 28, 1996, DTSC released a Draft Environmental Impact Report (DEIR)
and Draft Closure Plan for public comment for the Panoche facility. The DEIR
evaluates ITC's preferred closure plan as well as several alternative plans
and states that ITC's preferred closure plan is environmentally superior. The
alternative plans involve excavation and on-site relocation of substantial
quantities of waste materials in addition to landfill capping and groundwater
controls which are common to all alternatives. If implemented, the alternative
plans would extend the closure construction schedule and increase the cost of
closure. The DEIR and Draft Closure Plan were subject to a 90- day comment
period which ended September 30, 1996, during which interested parties
presented comments including some supporting alternative plans. DTSC, after
considering all comments received, will approve a final closure plan and
certify the final EIR. The DTSC continues to consider comments by ITC, and by
other interested parties supporting alternative plans, and it is uncertain
what plan DTSC may ultimately approve. ITC expects a plan and all necessary
permits to be approved in mid-fiscal year 1998. Closure construction for ITC's
preferred plan is scheduled to be completed within three years of approval of
the plan. If DTSC were to approve an alternative plan or fail to timely
approve any plan or if implementation of any plan is delayed by litigation or
appeals, ITC's cost to close the site would increase, which could have a
material adverse impact on the consolidated financial condition, liquidity and
results of operations of ITC. Pending approval of a closure plan, ITC has
requested permission, and the DTSC has agreed through the amendment of a
previously issued consent order, to allow ITC to promptly excavate drums
buried in a portion of the facility. The drums are the alleged source of low
levels of contaminants which have migrated through groundwater underneath a
portion of municipally-owned land adjacent to the facility.
Closure construction was completed for the Montezuma Hills and Benson Ridge
facilities in December 1991 and December 1992, respectively. Upon completion
of closure construction, ITC is required to perform post-closure monitoring
and maintenance of its disposal facilities for at least 30 years. Operation of
the facilities in the closure and post-closure periods is subject to numerous
federal, state and local regulations. ITC may be required to perform
unexpected remediation work at the facilities in the future or to pay
penalties for alleged noncompliance with regulatory permit conditions.
Regulations of the DTSC and the United States Environmental Protection
Agency (USEPA) require that owners and operators of hazardous waste treatment,
storage and disposal facilities provide financial assurance for closure and
post-closure costs of those facilities. ITC has provided such financial
assurance equal to its estimate for closure costs at March 1, 1997, which
could be subject to increase at a later time as a result of regulatory
requirements, in the form of a corporate guarantee of approximately
$14,900,000, letters of credit totaling approximately $6,700,000 and a trust
fund containing approximately $12,200,000, and has purchased annuities which
will ultimately mature over the next 30 years to pay for its estimates of
post-closure costs.
Closure and post-closure costs are incurred over a significant number of
years and are subject to a number of variables including, among others,
completion of negotiations regarding specific site closure and post-closure
plans with DTSC, USEPA, the California State Water Resources Control Board,
the California Air Resources
121
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Board, Regional Water Quality Control Boards (RWQCBs), Air Quality Management
Districts, various other state authorities and certain applicable local
regulatory agencies. Such closure costs are comprised principally of
engineering, design and construction costs and of caretaker and monitoring
costs during closure. ITC has estimated the impact of closure and post-closure
costs in the provision for loss on disposition of transportation, treatment
and disposal discontinued operations; however, closure and post-closure costs
could be higher than estimated if regulatory agencies were to require closure
and/or post-closure procedures significantly different than those in the plans
developed by ITC or if there are additional delays in the closure plan
approval process. Certain revisions to the closure procedures could also
result in impairment of the residual land values attributed to certain of the
sites.
The carrying value of the long-term assets of transportation, treatment and
disposal discontinued operations of $40,048,000 at March 28, 1997 is
principally comprised of residual land at the inactive disposal facilities
(a substantial component of which is adjacent to those facilities and was
never used for waste disposal) and assumes that sales will occur at market
prices estimated by ITC based on certain assumptions (entitlements,
development agreements, etc.), taking into account market value information
provided by independent real estate appraisers. ITC has an agreement with a
real estate developer to develop some of this property as part of a larger
development in the local area involving a group of developers. The entitlement
process has been delayed pending approval of ITC's closure plan for its
adjacent disposal facility and local community review of growth strategy. This
review is proceeding and initially recommends, on a non-binding basis,
strategies for limiting growth in the area. Ultimately, if the developers'
plans change or the developers are unable to obtain entitlements, the carrying
value of this property could be significantly impaired. With regard to this
property or any of the other residual land, there is no assurance as to the
timing of sales or ITC's ability to ultimately liquidate the land for the sale
prices assumed. If the assumptions used to determine such prices are not
realized, the value of the land could be materially different from the current
carrying value.
Operating Industries, Inc. Superfund Site
In June 1986, USEPA notified a number of entities, including ITC, that they
were PRPs under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) with respect to the Operating Industries, Inc. (OII)
Superfund site in Monterey Park, California, and as such, faced joint and
several liability for the cost to investigate and clean up this site.
Subsequently, USEPA alleged that ITC had generated approximately 2% by volume
of the hazardous wastes disposed of at the site, and ITC was also served with
lawsuits brought by members of a group of PRPs (the Steering Committee). ITC
has not been named as a defendant in any of the several personal injury and
property damage lawsuits brought by area residents.
In October 1995, ITC and the USEPA agreed to a settlement of ITC's alleged
liability for response costs incurred by the USEPA pursuant to the first three
partial consent decrees entered into in connection with the OII site pursuant
to which ITC paid $5,400,000 to the USEPA. While resolving ITC's alleged
liability for response costs incurred by the USEPA pursuant to the first three
partial consent decrees, the settlement does not include a release of
liability for future or final OII remedies. In September 1996, the USEPA
released a final record of decision selecting the final remedy for the site.
Response costs for the final remedy are estimated by USEPA to be approximately
$161,800,000. ITC believes that this estimate does not take into account the
benefits of certain work to be performed under the previous consent decrees
and therefore substantially overstates the remaining cost.
In April 1996, ITC reached a settlement of the lawsuits with the Steering
Committee, pursuant to which ITC paid $250,000 in settlement of the Steering
Committee's claims. ITC and the Steering Committee also agreed, as a part of
the settlement, to cooperate and share on a pro-rata basis certain response
and other defense costs with respect to certain groundwater cleanup actions
which may be a part of the final remedy for the site.
122
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ITC and the Steering Committee have not agreed to share all costs related to
the final remedy at the site, inasmuch as the Steering Committee claims that
pursuant to earlier consent decrees it is excused from paying for or
performing certain actions which may be required as a part of any final
remedy. ITC does not agree with these claims. ITC's agreement with the
Steering Committee to cooperate and share costs may be terminated voluntarily
by either party, including in the event of a dispute as to the parties'
respective obligations to pay for or perform the final remedy for the site.
Should the costs of the final remedy be greater than expected, or should ITC
be forced to assume a disproportionate share of the costs of the final remedy
(whether because of differences in the protections obtained by the Steering
Committee and ITC under the various consent decrees to which Steering
Committee members and ITC are subject, or otherwise), the cost to ITC of
concluding this matter could materially increase.
GBF Pittsburg Site
In September 1987, ITC was served with a Remedial Action Order (RAO) issued
by the DTSC, concerning the GBF Pittsburg landfill site near Antioch,
California, a site which had been proposed by the USEPA to be added to the
National Priorities List under CERCLA. ITC and 17 other firms and individuals
were characterized as responsible parties in the RAO and directed to undertake
investigation and potential remediation of the site which consists of two
contiguous parcels. From the 1960's through 1974, a predecessor to IT
Corporation operated a portion of one parcel as a liquid hazardous waste site.
The activity ceased in 1974, and ITC's predecessor's facility was closed
pursuant to a closure plan approved by the appropriate RWQCB. Both of the
parcels were then operated by other parties as a municipal and industrial
waste site (overlying the former liquid hazardous waste site) and, until 1992,
continued to accept municipal waste. Water quality samples from monitoring
wells in the vicinity of the site were analyzed by the property owner in
August 1986 and indicated the presence of volatile organics and heavy metals
along the periphery of the site.
Additional PRPs, consisting primarily of known waste generators, were
subsequently served with an amended RAO by the DTSC. ITC and these other PRPs
(the PRP group) further investigated the nature and extent of any subsurface
contamination beneath the site and beyond its borders. The PRP group submitted
Remedial Investigation and Feasibility Study (RI/FS) reports which were
accepted by the DTSC. The studies indicate that groundwater quality impact is
not affecting drinking water supplies and is not attributable solely to the
portion of the site previously operated by ITC's predecessor.
In July 1993, ITC, along with the other PRPs at the site, was issued a
revised RAO and Imminent and Substantial Endangerment Order that restates
previous RAOs and directs all previously named PRPs to undertake specific
additional tasks including the closure of the municipal landfill.
In November 1995, the DTSC, by letter, required the PRP group to submit for
public comment and DTSC approval a draft Remedial Action Plan (RAP) describing
a remedial alternative preferred by DTSC but not supported by the PRP group.
The PRP group disputed the timing and content of the draft RAP as required by
DTSC as not justified by the RI/FS process, but in January 1996 submitted a
draft RAP discussing a number of remedial alternatives. After a period of
public review and comment, in June 1997, the DTSC completed and released a
final RAP selecting DTSC's original preferred alternative of actively pumping
and treating groundwater from both the alleged source points of contamination
and the edge of the allegedly contaminated groundwater plume emanating from
the site, which DTSC estimated to cost between $18,000,000 and $33,000,000,
depending upon whether certain options for discharge of produced waters are
available. The PRP group continues to believe that its preferred alternative
of continued limited site monitoring, which was estimated to cost
approximately $4,000,000, is appropriate. As part of the RAP, the DTSC also
advised the PRP group of its position that both the group and the current
owner/operators are responsible for paying the future closure and postclosure
costs of the overlying municipal landfill, which have been estimated at
approximately $4,000,000.
123
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ITC and the PRP group initiated litigation (Members of the GBF/Pittsburg
Landfill(s) Respondents Group, etc., et al, v. State of California
Environmental Protection Agency Contra Costa County, California Superior Court
Case No. C97-02936) challenging the final RAP, and the ultimate outcome of the
litigation and any other available remedies cannot be predicted at this time.
As a part of the draft RAP that the PRP group submitted in January 1996, the
group asserted that other PRPs at the site (principally, the current and past
owner/operators of the site) were responsible for approximately 85% of the
site's remediation costs, and that the PRP group was responsible for no more
than approximately 15% of such costs. ITC has paid approximately 50% of the
PRP group's costs to-date on an interim basis. The current owner/operators
claimed in response that ITC and other members of the PRP group were
responsible for at least 89% of the site's remediation costs and that they
were responsible for only a small percentage of such costs. They also demanded
indemnity from ITC pursuant to the lease agreement under which IT
Corporation's predecessor operated the site, which demand ITC has rejected. In
the draft RAP released in October 1996 the DTSC released a draft non-binding
allocation suggesting that ITC is responsible for 15% of the site's response
costs, that the generators and others who are part of the PRP group are
responsible for 35% of such costs and that the current owner/operators and
others are responsible for 50% of such costs. In the final RAP the DTSC
assigned ITC and the other members of the PRP group collective responsibility
for 50% of the site's response costs. Although the DTSC's allocation of
responsibility is not binding except in very limited circumstances, the PRP
group continues to believe that the current owner/operators should pay a
larger portion of the site's response costs and ITC is attempting to continue
to cooperate with the generators and other members of the PRP group to effect
an appropriate allocation of responsibility for site costs.
ITC and the PRP group are evaluating their potential remedies, including
judicial review, with respect to the final RAP, and the ultimate outcome of
any available remedies cannot be predicted at this time.
The PRP group has also filed an application with the appropriate RWQCB for
designation of the site as a containment zone which, if approved, would
facilitate the PRP group's preferred remedial alternative. The DTSC has
advised the PRP group that if, at some point, the RWQCB designates all or part
of the site as a containment zone, DTSC will work with the PRPs to either
amend or modify the final RAP as appropriate. In the interim, however, DTSC
will require that the PRPs comply with the existing RAO, including
implementation of the final RAP.
The PRP group has initiated litigation (Members of the GBF/Pittsburg
Landfill(s) Respondents Group, etc., et al, v. Contra Costa Waste Service,
etc., et al. U.S. District Court, N. Dist Cal, Case No. C96-03147SI) against
the current owner/operators of the site and other non-cooperating PRPs to
cause them to bear their proportionate share of site remedial costs. The
current owner/operators of the site have not cooperated with the PRP group in
its efforts to study and characterize the site, except for limited cooperation
which was offered shortly after the September 1987 RAO and, currently, with
respect to DTSC's attempts to cause the selection of its preferred remedial
alternative. The current owner/operators are vigorously defending the PRP
group's litigation, and the outcome of the litigation cannot be determined at
this time.
Failure of the PRP group to effect a satisfactory resolution with respect to
the choice of appropriate remedial alternatives or to obtain an appropriate
contribution towards site remedial costs from the current owner/operators of
the site and other non-cooperating PRPs, could substantially increase the cost
to ITC of remediating the site, which could have a material adverse effect on
ITC's consolidated financial condition, liquidity and results of operations.
124
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Environmental Protection Corporation Sites
In March 1995, ITC was notified by the DTSC that it was among 13 companies
identified as potentially responsible for costs associated with investigation
and cleanup of the Environmental Protection Corporation (EPC) site known as
the Eastside Facility near Bakersfield, California. The DTSC notice letter
states that ITC is believed to have arranged for disposal of hazardous
substances at the Eastside Facility during the period between 1972 and 1985
when it was permitted and operated as a land treatment facility. In March
1997, ITC was notified by a potentially responsible party which performed work
at another site near Bakersfield, California, formerly operated by EPC known
as the Westside Facility, that ITC was considered a potentially responsible
party to share in the costs of that cleanup, which has been completed.
ITC transported various waste streams both generated by ITC and on behalf of
its customers to the Eastside Facility and the Westside Facility at various
times during those facilities' operations and it was a minority shareholder in
EPC for a period of its operations. In January 1996, the PRP group for the
Eastside Facility (of which ITC is a member) and the DTSC entered into an
agreement for the performance of a RI/FS for the site, as well as for cost
sharing for the RI/FS among the group and the DTSC. ITC is cooperating with
other group members to perform the work outlined in the agreement. Because of
the early stage of the matter, the potential costs associated with the
remediation of the Eastside Facility will not be reasonably estimable until
completion of the RI/FS.
Other Site Cleanup Actions
ITC, 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. ITC 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 ITC'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 ITC 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 ITC.
ITC 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 ITC
and ITC expects them to continue to contest the claims. ITC 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.
125
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT:
Long-term debt consists of the following:
MARCH 28, MARCH 29,
1997 1996
--------- ---------
(IN THOUSANDS)
Senior secured notes, due 2001-2003.................... $65,000 $65,000
Other.................................................. 6,217 708
------- -------
71,217 65,708
Less current portion................................... 5,343 97
------- -------
$65,874 $65,611
======= =======
Aggregate amounts of long-term debt maturing in the five years following
March 28, 1997 are $5,343,000, $749,000, $75,000, $50,000 and $21,667,000,
respectively.
On October 25, 1995, ITC executed a combined $125,000,000 financing which
included $65,000,000 of 8.67% senior secured notes with a group of major
insurance companies and a $60,000,000 syndicated bank revolving credit
facility. The financing package, which is subject to a borrowing base, is
secured by the accounts receivable and certain fixed assets of ITC. The senior
secured notes have an eight-year final maturity with no principal payments
until the sixth year, and the bank line has a term of five years. In addition,
the facilities contain certain other restrictive covenants, including
prohibitions on the payment of cash dividends on common stock (and, if ITC is
in default under the facilities, on preferred stock), and on the repurchase of
stock other than to fund ITC's compensation plans, limitations on capital
expenditures, the incurrence of other debt and the purchase or sale of assets
and a negative pledge on substantially all of ITC's assets not pledged to the
facilities. ITC is in compliance with its covenants as of March 28, 1997.
During the quarter ended December 27, 1996, ITC negotiated amendments to its
lending arrangements to provide enhanced flexibility in ITC's operations in
conjunction with the Carlyle Investment (see below). Among other things, the
changes modify certain financial covenants, permit the Carlyle Investment and
the payment of dividends on such investment, increase ITC's allowable debt and
permit proceeds from borrowings to be used to finance acquisitions in certain
circumstances, and increase the cost of the senior secured notes and credit
line based upon certain leverage thresholds. At March 28, 1997, this provision
increased the cost of the facilities by 0.75% with the senior notes currently
bearing interest at 9.42%.
In aggregate, at March 28, 1997, letters of credit totaling approximately
$20,000,000 related to ITC's insurance program, financial assurance
requirements and bonding requirements were outstanding against ITC's
$60,000,000 bank line of credit. ITC had no outstanding cash advances under
the line at March 28, 1997. As of that date, ITC's borrowing base under its
combined financing arrangement allowed for additional letters of credit or
borrowings under the line of credit of up to $580,000. At March 28, 1997,
interest on borrowings under ITC's revolving line of credit is at the bank's
prime rate plus 1.25%, or in the case of Eurodollar borrowings, at the
interbank offered rate plus 2.25%. ITC is subject to a 0.5% per annum charge
on the unused portion of the commitment.
126
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES:
The benefit for income taxes, net of changes in the deferred tax valuation
allowance, consists of the following:
YEAR ENDED
-----------------------------
MARCH 28, MARCH MARCH 31,
1997 29, 1996 1995
--------- -------- ---------
(IN THOUSANDS)
Current:
Federal...................................... $(764) $ 1,098 $ --
State........................................ 215 346 371
----- -------- -------
(549) 1,444 371
----- -------- -------
Deferred:
Federal...................................... 336 (11,942) (1,828)
State........................................ 57 (1,792) (2,557)
Foreign...................................... (23) -- --
----- -------- -------
370 (13,734) (4,385)
----- -------- -------
Total benefit.................................. $(179) $(12,290) $(4,014)
===== ======== =======
The benefit for income taxes is included in the statements of operations as
follows:
YEAR ENDED
-----------------------------
MARCH 28, MARCH MARCH 31,
1997 29, 1996 1995
--------- -------- ---------
(IN THOUSANDS)
Continuing operations......................... $(179) $(12,290) $ 2,383
Discontinued operations....................... -- -- (6,397)
----- -------- -------
Total benefit................................. $(179) $(12,290) $(4,014)
===== ======== =======
A reconciliation of the provision (benefit) for income taxes on continuing
operations computed by applying the federal statutory rate of 34% to the loss
from continuing operations before income taxes and the reported provision
(benefit) for income taxes of continuing operations is as follows:
YEAR ENDED
-----------------------------
MARCH 28, MARCH MARCH 31,
1997 29, 1996 1995
--------- -------- ---------
(IN THOUSANDS)
Income tax benefit computed at statutory
federal income tax rate..................... $(3,045) $ (3,993) $ (441)
State income taxes, net of federal tax
benefit, if any............................. 179 (954) 424
Equity in income (loss) of foreign
subsidiaries................................ -- -- 57
Amortization of cost in excess of net assets
of acquired businesses...................... 100 199 200
Equity in net loss of Quanterra.............. -- (2,366) 2,366
Research credit.............................. -- -- (212)
Federal deferred tax asset valuation
allowance adjustment........................ 2,597 (5,539) --
Other (principally nondeductible items)...... (10) 363 (11)
------- -------- ------
Total provision (benefit).................... $ (179) $(12,290) $2,383
======= ======== ======
127
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At March 28, 1997, ITC had net operating loss (NOL) carryforwards of
approximately $47,779,000 for tax reporting purposes expiring primarily in
2007 through 2012. ITC also has tax credit carryforwards of approximately
$2,601,000 which expire in various years through 2008 and alternative minimum
tax credit carryforwards of approximately $2,240,000 with no expiration.
At March 28, 1997 and March 29, 1996, ITC had deferred tax assets and
liabilities as follows:
MARCH 28, MARCH 29,
1997 1996
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Closure accruals--discontinued operations................. $18,468 $24,854
NOL carryforwards......................................... 20,481 9,109
Tax basis in excess of book basis in Quanterra............ 11,145 11,145
Alternative minimum tax credit carryforwards.............. 2,240 3,246
Investment and other tax credit carryforwards............. 2,601 2,350
Other accrued liabilities................................. 11,193 7,581
Other, net................................................ 3,053 2,042
------- -------
Gross deferred tax asset.................................. 69,181 60,327
Valuation allowance for deferred tax asset................ (9,471) (4,869)
------- -------
Total deferred tax asset................................ 59,710 55,458
Deferred tax liabilities:
Tax depreciation in excess of book depreciation........... (9,235) (6,047)
Asset basis difference--discontinued operations........... (13,012) (11,997)
Other, net................................................ (5,347) (4,938)
------- -------
Total deferred tax liabilities.......................... (27,594) (22,982)
------- -------
Net deferred tax asset.................................. $32,116 $32,476
======= =======
Net current asset........................................... $11,324 $12,149
Net noncurrent asset........................................ 20,792 20,327
------- -------
Net deferred tax asset.................................. $32,116 $32,476
======= =======
During the year ended March 28, 1997, ITC increased its deferred tax asset
valuation allowance from $4,869,000 to $9,471,000. This change was principally
due to ITC's assessment of the uncertainty as to when it will generate a
sufficient level of future earnings to realize the deferred tax asset created
by the restructuring charge (see Restructuring Charge). Because of ITC's
position in the industry, recent restructuring, existing backlog and
acquisition strategies, management expects that its future taxable income and
the use of tax-planning strategies (principally the matching of any future
capital gains and losses during the relevant carryforward or carryback period)
will more likely than not allow ITC to fully realize its deferred tax asset.
ITC evaluates the adequacy of the valuation allowance and the realizability of
the deferred tax asset on an ongoing basis.
During the year ended March 29, 1996, ITC decreased its deferred tax asset
valuation allowance from $12,650,000 to $4,869,000. The cumulative impact of
the resolution in fiscal year 1996 of a number of uncertainties led to a
reassessment of ITC's ability to generate a sufficient level of future
earnings to realize a greater portion of its related deferred tax asset,
resulting in the release of valuation allowance. Matters resolved in fiscal
year 1996 included: (1) the $41,100,000 settlement of the Motco Trust lawsuit
related to a major contract performed by ITC, which resulted in a substantial
tax gain (see Motco litigation settlement), (2) the $125,000,000 refinancing
of ITC's senior notes and revolving credit line at efficient rates on a long-
term basis thereby
128
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
mitigating the potential impact of higher future interest expenses (see Long-
term debt), (3) the final approval from California state regulators for the
closure plan related to the Vine Hill Complex facility, resolving certain of
the uncertainties regarding the ultimate costs for closure of the facility
(see Discontinued operations), (4) the settlement of past costs related to the
OII disposal facility PRP action (see Discontinued operations), (5) the
recapitalization of Quanterra (see Quanterra), and (6) the settlement of the
majority of the lawsuits related to the Central Garden litigation (see
Commitments and contingencies--Central Garden).
During the year ended March 31, 1995, ITC decreased the deferred tax asset
valuation allowance to $12,650,000, principally to offset an adjustment made
to reduce the gross deferred tax asset to recognize the federal benefit of net
operating losses for state purposes.
COMMITMENTS AND CONTINGENCIES:
Lease Commitments
ITC's operating lease obligations are principally for buildings and
equipment. Generally, ITC is responsible for property taxes and insurance on
its leased property. At March 28, 1997, future minimum rental commitments
under noncancelable operating leases with terms longer than one year aggregate
$34,558,000 and require payments in the five succeeding years and thereafter
of $7,656,000, $7,022,000, $5,603,000, $4,260,000, $2,966,000, and $7,051,000,
respectively.
Rental expense related to continuing operations was $12,564,000 (including
$2,184,000 of the restructuring charge), $11,037,000 and $11,550,000 for
fiscal years 1997, 1996 and 1995, respectively.
Contingencies
Helen Kramer contract
In May 1993, ITC received an administrative subpoena from the Office of the
Inspector General (OIG) of the USEPA seeking documents relating to certain of
ITC's claims which were submitted to the U.S. Army Corps of Engineers with
regard to the Helen Kramer remediation contract, a completed project which ITC
performed in joint venture. Since August 1992, the Defense Contract Audit
Agency (DCAA) has been conducting an audit of certain claims submitted by the
joint venture, and ITC has been subject to a continuing investigation into the
claims. Government investigators have interviewed employees of the joint
venture, ITC's joint venture partner, and ITC. Remedies which the government
could pursue as a result of the investigation include damages, penalties, and
forfeiture of all or part of ITC's claims. ITC is currently engaged in
settlement discussions concerning these allegations.
In October 1993, a shareholder of ITC alleged that the acts giving rise to
the Helen Kramer investigation constituted, among other things, a waste of
ITC's assets and demanded that ITC institute an action against those
responsible for the alleged wrongdoing. The Audit Committee (Committee) of the
Board of Directors investigated the allegations of the OIG. The Committee,
acting with the assistance of outside counsel and experts, determined that
there was no evidence of intentional wrongdoing or negligence by ITC or any
employee. The Board approved the report of the Committee and advised counsel
to the shareholder of its conclusions in September 1994. ITC has not received
any further communication from the shareholder or her counsel.
Central Garden
In July 1992, ITC responded to an emergency call to clean up a chemical
spill at a finished product warehouse facility leased by Central Garden & Pet
Supply Company (Central) in Baton Rouge, Louisiana. While cleanup was under
way, a fire began which damaged the warehouse facility. A total of nine
lawsuits arising from
129
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the fire were filed against ITC including three actions brought by residents
of a nearby apartment complex alleging personal injuries and property damage
caused by smoke from the fire (including Gravois, Tinnea, and Gordillo et al.
v. IT Corporation, et al., 19th Judicial District, Parish of East Baton Rouge,
Louisiana, Case Nos. 383,887, 396,376 and 396,375).
The parties to all the lawsuits alleged, among other things, that ITC was
the cause of the fire and of approximately $23,000,000 in damages (not
including punitive damages). ITC in pleadings denied responsibility for the
fire and the claimed damages. In March and April 1996, ITC and its insurer
settled or reached settlements-in-principle regarding six of the nine lawsuits
against ITC brought by those claiming principally property damage, which
settlements were completed and approved by the court.
ITC has not yet been able to reach settlements of the claims asserted in the
Gravois action and in the two other related cases by nearby apartment dwellers
and others who claim personal injuries, damages to their residences, related
personal property damage, and punitive damages. While ITC is pursuing
settlement of these matters, ITC is defending them vigorously and believes
that it has meritorious challenges to some of the damages claimed and
meritorious claims for contribution against others. Trial of the Gravois case
has been set for December 8, 1997.
ITC's insurance carrier defended the actions which were settled and is
defending the three remaining actions subject to a reservation of its rights
to contest coverage at a later date. ITC may face reimbursement claims by its
carrier, based on assertions that ITC's policies do not cover damages
resulting from the fire because of allegations that such damages are excluded
pollution liabilities or punitive damages.
In fiscal year 1995, ITC recorded a $5,300,000 charge to cost of revenues,
covering both defense and potential settlement costs, to provide for its self-
insured retention under its general liability insurance coverage for the
Central Garden matter. ITC paid this amount in cash principally in fiscal year
1996. Based on discovery to-date, should any of the three remaining cases
proceed to trial, there is a risk that ITC will be found liable for at least
some damages. If ITC is held liable for damages, there is the further risk
that ITC could be held liable for punitive damages. Should any of the three
remaining cases proceed to trial and result in a significant award of damages
against ITC, or should ITC be required to pay significant amounts in
settlement of any of the cases, any of which are not substantially covered by
ITC's insurance policies, additional litigation costs would be recorded
related to the matter.
OTHER
ITC 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 ITC.
ITC maintains a liability insurance program which includes commercial
general liability, product liability, automotive liability, employer's
liability, workers' compensation, all risk property coverage, consultants'
environmental liability (including errors and omissions), employment practices
liability and directors' and officers' liability insurance coverage. A portion
of ITC's commercial general liability, product liability, automotive liability
and workers' compensation insurance is provided through arrangements which
require ITC to indemnify the insurance carriers for all losses and expenses
under the policies and to support the indemnity commitments with letters of
credit and is, in effect, a self-insurance layer.
Environmental Impairment Liability coverage for ITC's inactive treatment,
storage and disposal facilities located in Northern California is provided
through ITC's captive insurance subsidiary, which has issued a
130
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$32,000,000 policy which meets the current requirements of both federal and
state law. See Discontinued operations for information regarding certain legal
and governmental proceedings affecting ITC's treatment, storage and disposal
facilities.
RESTRUCTURING CHARGE:
In conjunction with the corporate restructuring to position ITC for growth
and diversification which was initiated in the second quarter of fiscal year
1997, ITC incurred a pre-tax restructuring charge of $8,403,000. The
restructuring charge included $3,400,000 of costs for severance, $4,100,000 of
costs for closing and reducing the size of a number of ITC's offices, and
$900,000 of costs for other related items. As part of the plan of termination,
ITC laid-off 133 employees and paid over $2,460,000 in termination benefits.
In addition, ITC approved a plan to close 5 leased facilities and reduce the
size of 11 other leased facilities by either sublease or abandonment. At March
28, 1997, $3,720,000 of the charge remained to be paid. Most of the remaining
costs to be paid relate to the facility closures and office space reductions
which will be paid out over the terms of the lease. One of these facility
closures has a remaining lease obligation of about 8 years. The restructuring
charge was taken in conjunction with an organizational realignment which is
expected to enable ITC to operate more efficiently and cost-effectively on an
ongoing basis.
MOTCO LITIGATION SETTLEMENT:
Noncurrent other assets at March 31, 1995 included a claim amount of
$31,200,000 representing direct costs incurred in excess of those recovered to
that date under the Motco Site Trust Fund contract.
On December 4, 1991, ITC announced the suspension of work at the Motco
project, the cleanup of a Superfund site in Texas and the filing of a
$56,000,000 breach of contract lawsuit against the Motco Trust, the PRP group
that agreed to finance remediation of the site, and Monsanto Company, the
leader of the PRP group. In May 1995, a federal court judge issued a judgment
in favor of ITC in the amount of approximately $66,000,000, including
attorneys' fees and interest.
In August 1995, ITC settled the litigation and received $41,100,000 of cash
from the Motco Trust. In the second quarter of fiscal year 1996, ITC reported
in other income a pre-tax gain of $1,090,000, which represented the settlement
proceeds, net of the previously recorded $31,200,000 claim amount, $8,000,000
of costs related to certain equipment specially constructed for the Motco
project which has been idle since ceasing work on the project, and legal and
other expenses.
GOVERNMENTAL REGULATION:
ITC is subject to extensive regulation by applicable federal, state and
local agencies. All facets of ITC's business are conducted in the context of a
complex statutory, regulatory and governmental enforcement framework and a
highly visible political environment. ITC's operations must satisfy stringent
laws and regulations applicable to performance. Future changes in regulations
may have an adverse effect on ITC's business.
PREFERRED STOCK:
Carlyle Investment
At the November 20, 1996 Annual Meeting of Stockholders, ITC's shareholders
voted to approve a $45,000,000 investment (the Carlyle Investment) by The
Carlyle Group (Carlyle), a Washington, D.C. based merchant banking firm. The
Carlyle Investment consists of 45,000 shares of 6% Cumulative Convertible
131
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Participating Preferred Stock, par value $100 per share (Convertible Preferred
Stock) and warrants to purchase 1,250,000 shares of ITC common stock, par
value $.01 per share. The net proceeds to ITC (after related offering costs of
$4,391,000) from the Carlyle Investment were $40,609,000.
Assuming the conversion of all of the Convertible Preferred Stock into ITC
common stock and the exercise of all of the warrants, Carlyle would own
approximately 43% of the voting power of ITC. The terms of the Convertible
Preferred Stock provide that, to November 20, 2001, the holders of the
Convertible Preferred Stock have the right to elect a majority of the Board of
Directors of ITC, provided that Carlyle continues to own at least 20% of the
voting power of ITC.
The Convertible Preferred Stock ranks, as to dividends and liquidation, pari
passu to ITC's 7% Preferred Stock (see 7% Preferred Stock) and prior to ITC's
common stock. The Convertible Preferred Stock is entitled to cumulative annual
dividends. No dividends will be payable in the first year; dividends will be
paid quarterly in kind for the second year at the rate of 3% per annum.
Thereafter, dividends will be paid quarterly in cash at the rate of 6% per
annum. The Convertible Preferred Stock is entitled to a liquidation preference
of $1,000 per share.
The Convertible Preferred Stock and warrants may at any time, at the option
of Carlyle, be converted into ITC common shares. The conversion price of the
Convertible Preferred Stock is $7.59 per share and the exercise price of the
warrants is $11.39 per share. ITC will be entitled at its option to redeem all
of the Convertible Preferred Stock at its liquidation preference plus
accumulated and unpaid dividends on or after November 21, 2003.
Although the first two years' dividends are paid at a rate of 0% and 3%,
respectively, dividends will be imputed during this period at a rate of
approximately 6% per annum. Imputed dividends were $866,000 in fiscal year
1997. Any imputed dividends will never be paid in cash or stock.
7% Preferred Stock
In a September 1993 public offering, ITC issued 2,400,000 depositary shares,
each representing a 1/100th interest in a share of ITC'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 ITC'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 ITC's common stock at a conversion price of $23.36 per share,
subject to adjustment under certain circumstances. On any dividend payment
date, the 7% Preferred Stock is exchangeable at the option of ITC, 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 ITC, 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 ITC. In such situations, the special conversion
132
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 ITC 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, ITC's shareholders
voted to approve ITC's 1996 Stock Incentive Plan (1996 Plan) which provides
for the issuance of ITC's common stock or any other security or benefit with a
value derived from the value of its common stock. Options are granted at
exercise prices equal to or greater than the quoted market price at the date
of grant. At March 28, 1997, the maximum number of shares of ITC's common
stock that may be issued pursuant to awards granted under the 1996 Plan is
79,000. At April 1 of each year, the maximum number of shares available for
award under the 1996 Plan will be increased by an amount which represents 2%
of the number of ITC's common stock which are issued and outstanding at that
date. During fiscal year 1997, 171,000 stock options were granted under the
1996 Plan, which expires in fiscal year 2002.
ITC'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 ITC's common stock or any other security or
benefit with a value derived from the value of its common stock. No shares are
available for grant under these plans as such authority to grant as to the
1991 Plan expired in March 1996 and as to the 1983 Plan expired in September
1993. Options granted under the plans and outstanding at March 28, 1997 will
expire at various dates through March 7, 2006.
Changes in the number of shares represented by outstanding options under the
1996 Plan, the 1991 Plan and the 1983 Plan during the fiscal years ended March
28, 1997, March 29, 1996 and March 31, 1995 are summarized as follows:
YEAR ENDED
----------------------------
MARCH MARCH 29, MARCH
28, 1997 1996 31, 1995
-------- --------- --------
Outstanding at beginning of year.............. 744,847 784,895 791,191
Options granted (1997, $8.63 per share;
1996, $10.50-$13.00 per share; 1995,
$10.00-$14.50 per share)................... 171,000 39,750 358,255
Options exercised (1997, 1996, and 1995--
$11.50 per share).......................... (3,629) (575) (1,794)
Options expired and forfeited............... (164,539) (79,223) (362,757)
-------- ------- --------
Outstanding at end of year (1997, $8.63-$32.50
per share)................................... 747,679 744,847 784,895
======== ======= ========
Vested options................................ 473,257 462,793 371,241
======== ======= ========
The weighted-average grant date fair values of options granted to employees
in fiscal years 1997, 1996 and 1995 were $8.63, $11.96 and $11.60,
respectively. The weighted-average exercise price for all options outstanding
at the end of fiscal years 1997, 1996 and 1995 were $15.96, $17.55 and $18.57,
respectively. The
133
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
weighted-average exercise price of options currently exercisable at the end of
fiscal years 1997, 1996 and 1995 was $19.04, $20.64 and $23.18, respectively.
The weighted-average exercise price of options exercised in fiscal years 1997,
1996 and 1995 was $11.50 for all three years and the weighted-average exercise
price for expired and forfeited options in fiscal years 1997, 1996 and 1995
was $18.53, $24.78 and $25.32, respectively. The weighted-average remaining
contractual life of options outstanding at the end of fiscal years 1997, 1996
and 1995 was 6.8 years, 6.0 years and 6.8 years, respectively.
Compensation cost
ITC has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
ITC'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 ITC has not adopted), disclosure is required
of pro forma net income and net income per share. In determining the pro forma
information for stock options granted in fiscal years 1997 and 1996, the fair
value for these options were estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions:
risk-free interest rate based upon zero-coupon U.S. Treasury Notes of 6.38% in
fiscal years 1996 and 1997; no dividend yield; volatility factor of the
expected market price of ITC's common stock of 0.342 to 0.384; and a weighted
average expected life of each option of 6.6 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because ITC'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 ITC's stock options had been determined based on
the fair value at the grant dates as defined by FAS123, ITC's net loss
applicable to common stock and net loss per common share would have been
reduced to the following pro forma amounts:
YEAR ENDED
-------------------
MARCH MARCH 29,
28, 1997 1996
-------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Net loss applicable to common stock
As reported........................................... $(13,693) $(3,654)
Pro forma............................................. $(13,735) $(3,671)
======== =======
Net loss per common share
As reported........................................... $ (1.48) $ (.41)
Pro forma............................................. $ (1.49) $ (.41)
======== =======
Additionally, under the 1991 Plan, ITC awarded shares of nonvested
restricted stock to officers and key employees which amounted to none, 266,019
and 50,000 in fiscal years 1997, 1996 and 1995, respectively.
134
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 ITC's common stock that exceeds the related market price on the date
of grant. On March 28, 1997, the total number of shares of restricted stock
outstanding was 197,638. The cost of restricted stock awards is generally
expensed over the vesting period, which ranges from two to five years, and
amounted to $575,000 in fiscal year 1997 and $568,000 in fiscal year 1996.
MAJOR CUSTOMERS:
A total of 59%, 65% and 63% of ITC's revenues during fiscal years 1997, 1996
and 1995, respectively, were from federal governmental agencies, primarily the
U.S. Department of Defense (DOD) and the U.S. Department of Energy (DOE). In
fiscal years 1997, 1996 and 1995, the DOD provided 42%, 51% and 47%,
respectively, of ITC's revenues. The DOE provided 14%, 11% and 12% of ITC's
revenues during fiscal years 1997, 1996 and 1995, respectively.
EMPLOYEE BENEFIT PLANS:
ITC has a defined contribution, contributory pension and profit sharing plan
(the Plan), covering all employees with one year of continuous service. ITC
funds current costs as accrued, and there are no unfunded vested benefits.
Through June 30, 1995, the Plan required a minimum annual contribution of 4%
of participants' eligible compensation; thereafter, the required minimum
annual contribution is 3% of participants' eligible compensation.
Additionally, beginning July 1, 1995, ITC contributes up to 2% of
participants' eligible compensation by matching 50% of each participant's
contribution (up to 4% of eligible compensation) to ITC's voluntary 401(k)
savings plan. The Plan currently allows a maximum contribution of up to 8% of
participants' eligible compensation up to $150,000 annually. ITC's
contributions, as a percentage of participants' eligible compensation, were
4.44%, 4.33% and 5% for fiscal years 1997, 1996 and 1995, respectively.
Pension and profit sharing expense was $3,614,000, $3,601,000 and $4,081,000
for fiscal years 1997, 1996 and 1995, respectively.
ITC presently provides certain health care benefits for retirees who are
over age 60, completed a specified number of years of service and retired by
December 31, 1996, the date upon which ITC amended the plan to cease allowing
new participants to join upon their retirement. In fiscal year 1997, ITC made
net contributions of approximately $78,000 toward these benefits. Commencing
in fiscal year 1994, ITC accrued the expected cost of providing these benefits
to an employee and the employee's covered dependents during the years that the
employee rendered the necessary service and recognized its Accumulated
Postretirement Benefit Obligation (APBO) of $733,000 on a delayed basis (over
20 years) as a component of net periodic postretirement benefit cost. In
fiscal year 1997, upon the amendment of the plan, ITC estimated its remaining
liability to be $300,000 and adjusted its accrual accordingly.
135
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERLY RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------
1997:
Revenues............................... $ 81,416 $ 92,490 $ 92,513 $95,712
Gross margin........................... 7,779 9,139 9,723 11,497
Income (loss) from continuing
operations............................ (1,541) (8,890) 371 1,283
Net loss applicable to common stock.... (2,591) (9,940) (924) (238)
Net loss per share..................... $ (.28) $ (1.09) $ (.10) $ (.02)
======== ======== ======== =======
1996:
Revenues............................... $100,292 $106,259 $104,912 $88,579
Gross margin........................... 16,944 15,174 14,651 11,383
Income (loss) from continuing
operations............................ 2,345 2,355 (4,687) 533
Net income (loss) applicable to common
stock................................. 1,295 1,305 (5,737) (517)
Net income (loss) per share............ $ .14 $ .15 $ (.64) $ (.06)
======== ======== ======== =======
During the second fiscal quarter of 1997, ITC recorded a $8,403,000 ($.92
per share) pre-tax and after tax (see Income taxes) restructuring charge in
connection with an organizational realignment (see Restructuring charge).
In the third quarter of fiscal year 1996, ITC reported a $14,600,000 ($1.62
per share) after tax loss related to the recapitalization of Quanterra (see
Quanterra) and a $7,500,000 ($.83 per share) deferred tax asset valuation
allowance adjustment. (See Income taxes.)
136