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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
[X] AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
COMMISSION FILE NUMBER 1-9654
OHM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1503050
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
16406 U.S. ROUTE 224 EAST, FINDLAY, OH 45840
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 423-3526
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $0.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
8% Convertible Subordinated Debentures due October 1, 2006
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on February 16, 1998, was $333,991,409.
The number of shares of common stock outstanding on February 24, 1998,
was 28,284,405 shares.
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This report is an amendment to the OHM Corporation annual report on Form 10-K
for the year ended December 31, 1997. The report is being amended to modify (1)
discussion of the investment in NSC in Part I, Item I - Business, regarding the
restatement to the equity method, (2) Management's Discussion and Analysis of
Financial Condition and Results of Operations for the Twelve Months Ended
December 31, 1997 vs. Twelve Months Ended December 31, 1996, Liquidity and
Capital Resources and Deferred Tax Assets, (3) the Selected Financial Data for
the reclassification of bad debt expense and the restatement of the investment
in NSC to the equity method, (4) the Consolidated Financial Statements for the
reclassification of deferred contract costs from long-term to current,
reclassification of bad debt expense and the restatement of the investment in
NSC to the equity method, (5) the disclosures in the Notes to Consolidated
Financial Statements, and (6) the Financial Data Schedule for the above changes.
The following items to the Company's annual report on Form 10-K/A are being
filed herewith:
Part I Item 1-- Business
Part II Item 6-- Selected Financial Data
Item 7-- Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8-- Financial Statements and Supplementary Data Schedule
Part IV Item 14--Exhibits, Financial Statement Schedule and Reports on
Form 8-K
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OHM CORPORATION
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business......................................................... 1
PART II
Item 6. Selected Financial Data.......................................... 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 10
Item 8. Financial Statements and Supplementary Data...................... 19
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K......................................................... 43
SIGNATURES ............................................................... 44
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PART I
ITEM 1. BUSINESS
OVERVIEW
OHM Corporation, an Ohio corporation, and its predecessors (the
"Company"), is a provider of technology-based, on-site hazardous waste
remediation services in the United States. The Company has been in the
environmental services business since 1969. The Company has successfully
completed approximately 32,000 projects involving contaminated groundwater, soil
and facilities.
The Company provides a wide range of environmental services, primarily
to government agencies and to large chemical, petroleum, transportation and
industrial companies. The Company 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, the Company
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 the Company in early 1993 of its interest in
OHM Resource Recovery Corp., the operator of a hazardous waste treatment and
disposal facility, the Company does not own or operate any hazardous waste
disposal sites or other off-site waste treatment or disposal facilities. The
Company 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,
the Company through its wholly-owned subsidiary, OHM Remediation Services Corp.
("OHMR"), acquired (the "Acquisition") in exchange for 9,668,000 shares of
Common Stock of the Company, 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, the
Company 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 the Company 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, the Company
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 the
Company. Key provisions of the Standstill Agreement will terminate upon the
occurrence of the Merger described below.
On June 17, 1997, the Company 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. The Company has agreed to make
an additional payment in the year 2000 contingent upon the achievement of
certain operating results and other contractual conditions.
The Company has entered into an Agreement and Plan of Merger (the
"Merger Agreement"), dated January 15, 1998, by and among the Company,
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").
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 the Company (the "Merger"), and the Company will be the
surviving corporation in the Merger, with the result that the Company 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.
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James L. Kirk, Joseph R. Kirk, H. Wayne Huizenga and The Huizenga
Family Foundation, all shareholders of the Company, 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 the Company, Parent, WMX, Rust and Rust Remedial
Services Holding Company Inc., an affiliate of WMX, the Company 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.
The Company also has an approximately 40% interest in NSC Corporation
("NSC"), a provider of asbestos abatement and specialty contracting services.
Pursuant to the Merger Agreement, the Company 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 the Company (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 the Company'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
The Company 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, the Company performs on-site treatment and remediation services
for the control, detoxification, decontamination, and volume reduction of
hazardous and toxic material. Accordingly, the Company 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, the Company has completed
approximately 32,000 projects throughout the United States, cleaning up
hazardous wastes, removing toxic chemicals from groundwater and cleaning
facilities of contaminants.
The Company 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. The Company 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 the Company's revenue.
The Company 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. The Company has adopted a number of risk management policies and
practices including special employee training and health monitoring programs.
The Company'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
the Company's medical monitoring program to staff involved. The Company believes
that it has an excellent overall health and safety record.
The Company 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. The
Company employs scientific and engineering professionals in the environmental
services field who enhance the Company's ability to effectively participate in
larger, more technically complex remediation projects.
The Company 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 the Company's acquisition of Beneco, the Company has entered
the government outsourcing market for operations, maintenance and construction
at federal facilities. Beneco is a leading provider of project, program and
construction
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management services to the DOD, and state and local government agencies. The
Beneco acquisition is the first step to leveraging the Company'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, the Company may offer a service related business of
a recurring nature that is not dependent on regulatory enforcement.
FOCUS ON LARGER PROJECTS AND GOVERNMENT CONTRACTS
The Company 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, the
Company 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. The Company 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 the Company has been awarded a large number of
multi-million dollar government term contracts which, in some cases, may require
several years to complete. Although the Company still performs private sector
remediation projects, the Company 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, the Company 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 the Company's
revenue was derived from federal, state and local government contracts. The
Company 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, the Company 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, the Company is, has been and may in the future
be subject to audits and investigations by government agencies. In addition to
potential damage to the Company's business reputation, the failure by the
Company to comply with the terms of its government contracts could also result
in the Company'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 the Company's
suspension or debarment, could have a material adverse effect on the Company's
business, particularly in light of the increasing importance to the Company of
work for various government agencies.
ENVIRONMENTAL CONTRACTOR RISKS
Although the Company believes that it generally benefits from increased
environmental regulations, and from enforcement of those regulations, increased
regulation and enforcement also create significant risks for the Company. The
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 the Company.
Potential Liabilities Arising Out of Environmental Laws and
Regulations. All facets of the Company's business are conducted in the context
of a developing and changing statutory and regulatory framework. The Company'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, the Company could potentially be liable for
breach of contract, personal injury, property damage and negligence, including
claims for lack of timely
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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 the Company. 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 the Company to assume
liabilities for damage or injury to third parties and property and for
environmental fines and penalties. The Company has adopted risk management
policies designed to address these problems, but cannot assure their adequacy.
In addition, the Company 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.
DEPENDENCE ON ENVIRONMENTAL REGULATION
Much of the Company'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 the Company's business.
See "Regulation."
MARKETS AND CUSTOMERS
The Company 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. The Company has worked for a majority of the Fortune 100
industrial companies. Historically, the majority of the Company'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 the Company's revenue.
In the government sector, the market for the Company's services
primarily consists of federal government agencies. The Company 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, the Company 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 the Company's revenue is dependent on its backlog,
contract awards and the performance requirements of each contract. The Company'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, the Company'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 the Company 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.
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COMPETITION
The environmental services industry is highly competitive with numerous
companies of various size, geographic presence and capabilities participating.
The Company believes that it has approximately a dozen principal competitors in
the environmental remediation sector of the environmental services industry and
numerous smaller competitors. The Company 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 the Company's environmental remediation business, substantial capital
investment is required for equipment. Certain of the Company'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. The
Company 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.
INSURANCE
The Company 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. The Company 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 the Company's workers'
compensation risks.
Although the Company believes its insurance program to be appropriate
for the management of its risks, its insurance policies may not fully cover
risks arising from the Company'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
The Company had approximately 2,800 employees at December 31, 1997.
Five employees of the Company were covered by collective bargaining agreements.
The Company considers relations with its employees to be satisfactory.
PATENTS
The Company 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 the Company 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 the Company
to remove contaminants from the soil through a process, commonly known as soil
vapor extraction. The Company utilizes X*TRAX(R) and LT*X(R) to perform thermal
desorption services. The X*TRAX(R) and LT*X(R) systems are waste treatment
processes that thermally separate organic contaminants from soils or solids with
subsequent treatment of the organic vapor stream. Although the Company 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, the Company'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 the Company'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 the Company'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
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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 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 the Company 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. The Company'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 the
Company 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 the Company'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.
The Company's services are also utilized by its clients in complying
with, and the Company'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.
The Company, through its on-site treatment capabilities and the use of
subcontractors, attempts to minimize its
6
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transportation of hazardous substances and wastes. However, there are occasions,
especially in connection with its emergency response activities, when the
Company 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) the Company's
backlog, defined as the unearned portion of the Company's existing contracts and
unfilled orders, and (ii) the Company'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 the
Company's contracts in backlog may be terminated at the convenience of the
client. In addition, the amount of the Company's backlog is subject to changes
in the scope of services to be provided under any given contract. The Company
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. The Company'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, the Company'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.
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.
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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.
The Company has historically accounted for its investment in NSC on the
equity method. The Company 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 the Company 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, the Company 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 the Company'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.
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ITEM 6. SELECTED FINANCIAL DATA
(a) The Five Year Summary of Results of Operations for each of the five years
ended December 31 is set forth below:
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
Revenue $ 526,691 $ 550,984 $ 457,925 $ 323,381 $ 242,401
Cost of services 454,556 478,924 393,149 296,159 202,341
--------- --------- --------- --------- ---------
Gross Profit 72,135 72,060 64,776 27,222 40,060
Claims settlement cost and other, excluding provision for
bad debts 15,919 ---- ---- ---- ----
Provision for bad debts: Claims Settlement 21,958 ---- ---- ---- ----
Other 2,900 5,343 2,931 522 1,210
Selling, general and administrative expenses 43,160 43,907 42,292 31,759 25,900
--------- --------- --------- --------- ---------
Operating (Loss) Income (11,802) 22,810 19,553 (5,059) 12,950
--------- --------- --------- --------- ---------
Other (Income) Expenses:
Investment income (389) (124) (849) (28) (28)
Interest expense 5,186 7,087 10,413 9,177 7,748
Loss (Equity) in net earnings of affiliates'
continuing operations 1,997 (748) (287) (1,032) (1,600)
Write-down of investment in NSC Corporation 14,949 ---- ---- ---- ----
Miscellaneous (income) expense 878 (296) (72) 898 341
--------- --------- --------- --------- ---------
22,621 5,919 9,205 9,015 6,461
--------- --------- --------- --------- ---------
(Loss) Income From Continuing Operations Before
Income Taxes (Benefit) (34,423) 16,891 10,348 (14,074) 6,489
Income taxes (benefit) (10,490) 5,376 3,541 (6,458) 2,082
--------- --------- --------- --------- ---------
Net (Loss) Income $ (23,933) $ 11,515 $ 6,807 $ (7,616) $ 4,407
========= ========= ========= ========= =========
Net (Loss) Income Per Common Share $ (0.88) $ 0.43 $ 0.31 $ (0.49) $ 0.36
========= ========= ========= ========= =========
Weighted Average Common Shares 27,210 26,820 22,211 15,582 12,250
========= ========= ========= ========= =========
Net (Loss) Income Per Common Share--Assuming Dilution $ (0.88) $ 0.43 $ 0.30 $ (0.49) $ 0.35
========= ========= ========= ========= =========
Adjusted Weighted Average Common Shares--Assuming Dilution 27,210 26,840 22,413 15,582 12,454
========= ========= ========= ========= =========
NOTES:
(1) Special charges include: (i) for the year ended December 31,
1997, the Company recorded a $22,726,000 charge (net of income
tax benefit of $15,151,000) for the settlement and write-down of
certain claims and litigation, establishment of reserves for the
consolidation of certain laboratory and operational functions.
In addition, the Company recorded a $12,089,000 (net of
$2,860,000 income tax benefit) charge to reduce the carrying
value of its NSC investment to reflect the likely value to be
realized given the Company's intention to divest this
investment; (ii) for the year ended December 31, 1995, the
Company recorded a $2,312,000 charge (net of income tax benefit
of $1,542,000) for integration costs related to the acquisition
of the hazardous and nuclear waste remediation service business
(the "Division") of Rust International Inc. ("Rust"); and (iii)
for the year ended December 31, 1994, the Company recorded a
special charge of $15,000,000 (net of income tax benefit of
$10,000,000) to establish a reserve for accounts receivable,
primarily where such accounts are in litigation.
(2) Effective June 1, 1997, the Company acquired all of the
outstanding stock of Beneco Enterprises, Inc., a Utah
corporation ("Beneco"), for an aggregate purchase price of
$14,700,000. 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. The Company's
consolidated financial statements for the year ended December
31, 1997 include the results of Beneco since June 1, 1997. See
"Note 2 to the Consolidated Financial Statements."
(3) On May 30, 1995, the Company completed the acquisition of
substantially all of the assets and certain liabilities of the
Division of Rust in exchange for 9,668,000 shares of Common
Stock of the Company, or approximately 37% of the outstanding
shares of the Company's Common Stock. 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. The Company's consolidated financial
statements for the year ended December 31, 1995, include the
results of operations for the Division since May 30, 1995. See
"Note 2 to the Consolidated Financial Statements."
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(b) The Five Year Summary of Financial Position as of December 31 is set forth
below (In thousands):
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital $ 81,219 $ 94,342 $129,156 $116,464 $ 69,985
Total assets 317,043 336,537 376,506 272,546 215,357
Long-term debt 50,041 52,972 104,111 127,279 71,113
Shareholders' equity 154,160 174,572 160,492 76,920 82,743
NOTE:
(1) The Company has not declared any cash dividends on its Common
Stock and is restricted by bank covenants from the payment of
cash dividends in the future. See "Note 7 to the Consolidated
Financial Statements."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(A) RESULTS OF OPERATIONS
GENERAL
The Company 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 the
Company's revenue is dependent on its backlog, contract awards and the
performance requirements of each contract. The Company'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, the Company'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 Part I, Item 1 for a description of the Merger, the Offer and the
NSC Distribution.
In connection with the Company's entry into the Merger Agreement and by
resolution of the Company's Board of Directors, the Company's 1986 Stock Option
Plan and the Company'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, the Company's Board of
Directors took action to allow holders of the restricted stock issued under the
Company's Incentive Stock Plan to tender such stock in the Offer. As a result of
the above actions, the Company 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
the Company. The Company 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 the
Company 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 the Company's assets and liabilities.
Effective June 1, 1997, the Company 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. The
Company 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. The Company'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.
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14
On May 30, 1995, the Company 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 9,668,000
shares of Common Stock of the Company, or approximately 37% of the outstanding
shares of the Company's Common Stock. In exchange for the Warrants WMX provided
the Company with a credit enhancement in the form of guarantees, issued from
time to time upon request of the Company, of up to $62,000,000 of the Company'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." The Company'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 the Company'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. The Company 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 the
Company's environmental remediation services business, which was offset by the
acquisition of Beneco. The environmental remediation business experienced a
decrease in revenue from the Company's term contracts with the United States Air
Force ("Air Force") and the United States Navy ("Navy"). In addition, the
Company 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 the Company's
term contracts with the USACE and various state and local governments. The
Company 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 the
Company 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 the Company's government term contracts included in
contract backlog.
The Company experienced a $12,772,000 or 10% decrease in revenue from
industrial clients for the year ended December 31, 1997 as compared to 1996. The
Company 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 the Company 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 the Company's services in the form
of project delays as clients and potential clients wait for and anticipate
changes in these 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. The Company 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. The Company 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 the Company'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. The Company's
11
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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.
The Company's cost of services and gross profit during 1997 was favorably
impacted by the following: (i) actions taken by the Company to lessen the use of
subcontractors on its government cost reimbursable projects as the amount of
mark-up the Company 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 the Company'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,
the Company settled litigation and received an unfavorable binding arbitration
decision that established a need to write-down claims receivable previously
recorded by the Company. 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 the Company 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, the
Company received an unfavorable binding arbitration decision in a dispute
between the Company and SRS. SRS's subcontract with the Company to provide
thermal desorption treatment services at the Hilton Davis chemical site in
Cincinnati, Ohio was terminated by the Company in the second quarter of 1996 due
to failure to perform. The Company subsequently attempted to perform the
treatment process with the SRS equipment and was unsuccessful. The inability of
SRS to perform caused the Company to incur significant expense to complete the
required treatment process. The Company'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 the Company as a receivable from SRS. In
addition to not collecting the receivable, the arbitration decision required the
Company to pay SRS $2,400,000 in damages for their counterclaim for wrongful
termination. The Company 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 the Company 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, the Company
settled litigation with Citgo and Occidental Oil & Gas (Oxy) relating to a
project which was performed by the Company for Citgo at its Lake Charles,
Louisiana refinery in 1993 and 1994. This litigation resulted from the Company
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 the Company in July 1994. In 1995
Citgo and the Company 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, the Company 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, the Company 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 the Company'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.
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* Other Litigation and Accounts Receivable. In addition to the
aforementioned disputes, the Company made a decision to resolve other
significant legal matters involving outstanding accounts receivable. In June
1997, the Company 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,
the Company 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, the Company 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. The Company
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 the Company 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 the company. Thus, resulting
expense was recognized as a special charge at that time. Employees of the
Company 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
------
$3,800
======
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* The following table summarizes the detailed components of the charge:
(In Thousands)
Tax Net
Charge Benefit Loss
------ ------- ----
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. The Company'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, the Company
made substantial investments in personnel and systems in support of its
government contracts and related compliance issues. Such investments will
continue in light of the Company'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 the Company's revolving credit agreement during 1997 when
compared to 1996. Such decease is primarily the result of the Company utilizing
lease lines of credit for purchases and financing of certain of its operational
equipment as well as improvements made in the Company's cash management
procedures and systems which decreased its working capital investment. The
Company'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 Afflilate. During the second quarter of 1997, the
Company 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, the Company
recorded a $12,089,000 (net of $2,860,000 income tax benefit) charge to
earnings. The Company 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, the Company 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, the Company made the
decision to sell its investment in NSC. The Company 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 the Company'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 the Company decided to sell ($2.10)
times the 4,010,000 shares held by the Company.
The Company 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 the Company's investment in NSC, partially
offset by other factors discussed above.
14
18
TWELVE MONTHS ENDED DECEMBER 31, 1996 VS. TWELVE MONTHS ENDED DECEMBER 31, 1995
Revenue. The following table sets forth the Company'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 the Company'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
the Company's revenue from the EPA and delayed delivery orders issued under the
Company's existing federal term contracts.
The Company 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. The Company 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.
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. The Company'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, the Company 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 the Company
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, the Company 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 the Company's
personnel and the closing of certain of the Company's offices as a result of
combining the operations of the Division and the Company. Without such charge,
SGA expenses increased 19% primarily as a result of the acquisition of the
Division and the growth in revenue. In addition, the Company 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 the Company'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 the Company's debt in exchange for the warrant
described above. Upon successful completion of the aforementioned merger with
IT, such debt guarantee will be terminated. The Company'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 the Company on
September 30, 1995.
15
19
Equity in Net Earnings of Affiliate. The Company'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.
(B) LIQUIDITY AND CAPITAL RESOURCES
On May 31, 1995, the Company 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 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 the Company'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 the Company'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 the Company's equipment, inventories, accounts receivables, general
intangibles and in the Company's investment in the common stock of NSC as well
as the Company's other subsidiaries. The agreement also imposes, among other
covenants, a minimum tangible net worth covenant, a restriction on all of the
Company'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. The Company 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, the Company entered into agreements for the sale
and leaseback of certain of the Company'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. The Company's
capital expenditures are primarily related to the purchase of heavy construction
equipment the fabrication of custom equipment by the Company 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. The Company's
long-term capital expenditure requirements are dependent upon the type and size
of future remediation projects awarded to the Company.
The Company 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 the Company'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, the Company is bidding on a
number of large, long-term contract opportunities which, if awarded to the
Company, would also increase working capital needs and capital expenditures. The
Company 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.
The Company's identified long-term capital needs consist of payments
due upon the maturity of the Company'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. The
Company 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
16
20
well as a portion of the sinking fund obligation due October 1, 1998. The
Company believes that it will be able to refinance the remaining indebtedness as
necessary. See "Note 7 to the Consolidated Financial Statements."
(C) INFLATION
Historically, inflation has not been a significant factor to the
Company or to the cost of its operations.
(D) 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 the
Company, 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 the Company's
financial reporting, however, the extent of this change, if any, has not been
determined.
(E) DEFERRED TAX ASSETS
The Company has recorded a valuation allowance for its deferred tax
assets, which almost exclusively relate to the environmental remediation
industry segment, to the extent that the Company 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, the Company
believes it will realize the benefit of these assets through the reversal of
taxable temporary differences and future income. The Company 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 the Company has historically realized
sufficient margin to produce consolidated net income. The principal uncertainty
of realization of the deferred tax assets is the Company'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. The Company 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."
(F) IMPACT OF YEAR 2000
Some of the Company'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.
The Company has completed an assessment and will have to modify or
replace portions of its software. The Company believes the cost to modify or
replace such software will be minimal and will not have a material adverse
impact upon the Company's future results of operations or financial condition.
17
21
(G) ENVIRONMENTAL MATTERS AND GOVERNMENT CONTRACTING
Although the Company believes that it generally benefits from increased
environmental regulations and from enforcement of those regulations, increased
regulation and enforcement also create significant risks for the Company. The
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 the Company.
The Company does not believe there are currently any material
environmental liabilities which should be recorded or disclosed in its financial
statements. The Company anticipates that its compliance with various laws and
regulations relating to the protection of the environment will not have a
material effect on its capital expenditures, future earnings or competitive
position.
Because of its dependence on government contracts, the Company also
faces the risks associated with such contracting, which could include civil and
criminal fines and penalties. As a result of its government contracting
business, the Company has been, is, and may in the future be subject to audits
and investigations by government agencies. The fines and penalties which could
result from noncompliance with the Company's government contracts or appropriate
standards and regulations, or the Company's suspension or debarment from future
government contracting, could have a material adverse effect on the Company's
business.
(H) FORWARD LOOKING STATEMENTS
All statements, other than statements of historical facts, included in
this Form 10-K that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as future capital expenditures, including the amount and nature thereof,
potential acquisitions by the Company, trends affecting the Company's financial
condition or results of operations, and the Company's business and growth
strategies are forward-looking statements. Such statements are subject to a
number of risks and uncertainties, including risks and uncertainties identified
in "Business -- Environmental Contractor Risks," "Business -- Regulation," "--
Results of Operation," "--Environmental Matters and Government Contracting,"
"Note 1 to Consolidated Financial Statements" and other general economic and
business conditions, the business opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in laws or regulations
affecting the Company's operations and other factors, many of which are beyond
the control of the Company. In addition, these risks and uncertainties include,
without limitation, (i) the potential for fluctuations in funding of backlog,
(ii) weather conditions affecting or delaying the Company's ability to perform
or complete the services required by its contracts, (iii) the Company's ability
to be awarded new contracts in its target markets or its ability to expand
existing contracts, (iv) other industry-wide market factors, including the
timing of client's planned remediation activities, and (v) interpretation or
enforcement by federal, state or local regulators of existing environmental
regulations. Also, there is always risk and uncertainty in pursuing and
defending litigation, arbitration proceedings and claims in the course of the
Company's business. All of these risks and uncertainties could cause actual
results to differ materially from those assumed in the forward-looking
statements. These forward-looking statements reflect management's analysis,
judgment, belief or expectation only as of the date of this Form 10-K. The
Company undertakes no obligation to revise publicly these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
In addition to the disclosure contained herein, readers should carefully review
risks and uncertainties contained in other documents the Company files or has
filed from time to time with the Commission pursuant to the Exchange Act that
are incorporated by reference herein.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and supplementary quarterly
financial data of the Company and its subsidiaries for the years ended December
31, 1997, 1996 and 1995, are set forth on pages 19 through 42.
OHM CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
1997 1996
---- ----
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.
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23
OHM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31,
1997 1996 1995
---- ---- ----
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.
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24
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.
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OHM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
1997 1996 1995
---- ---- ----
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
Amortization of other noncurrent assets 3,139 3,332 2,916
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.
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26
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. The Company'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. The Company 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 the Company announced its intention to sell its investment in NSC. As a
result, the Company 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 the Company'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, the Company 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 the Company, 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 the Company'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. The Company provides a broad range of
environmental and hazardous waste remediation services to its clients located
primarily in the United States. The assessment, remediation, analysis, handling
and management of hazardous substances necessarily involve significant risks,
including the possibility of damages or injuries caused by the escape of
hazardous materials into the environment, and the possibility of fines,
penalties or other regulatory action. These risks include potentially large
civil and criminal liabilities for violations of environmental laws and
regulations, and liability to customers and to third parties for damages arising
from performing services for clients, which could have a material adverse effect
on the Company. Although the Company believes that it generally benefits from
increased environmental regulations, and from enforcement of those regulations,
increased regulation and enforcement also create significant risks for the
Company.
The Company does not believe there are currently any material environmental
liabilities which should be recorded or disclosed in its financial statements.
The Company anticipates that its compliance with various laws and regulations
relating to the protection of the environment will not have a material effect on
its capital expenditures, future earnings or competitive position.
The Company's revenue from 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, the Company
also faces the risks associated with such contracting, which could include civil
and criminal fines and penalties. As a result of its government contracting
business, the Company has been, is and may in the future be subject to audits
and investigations by government agencies. The fines and penalties which could
result from noncompliance with the Company's government contracts or appropriate
standards and regulations, or the Company's suspension or debarment from future
government contracting, could have a material adverse effect on the Company's
business. The dependence on government contracts will also continue to subject
the Company to significant financial risk and an uncertain business environment
caused by any federal budget reductions.
In addition to the above, there are other risks and uncertainties that
involve the use of estimates in the preparation of the Company's consolidated
financial statements. See "Note 2 - Acquisitions" and "Note 15 - Litigation and
Contingencies."
23
27
STOCK-BASED COMPENSATION. The Company grants stock options for a fixed
number of shares to employees and members of the Board of Directors with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for 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. The Company 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. The Company primarily derives its revenue
from providing environmental services under cost plus fee, time and materials,
fixed price and unit price contracts. The Company 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, the
Company 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 the Company when the Company 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 the Company is capitalized and is included in the cost of
such assets. Total interest expense incurred by the Company 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.
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, the Company'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. The Company 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. The Company 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
the Company's workers' compensation risks. Provisions for losses expected under
these programs are recorded based upon the Company'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. The
Company incurred expense of
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28
$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. The Company 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. The
Company accrues such cost as necessary based on this analysis.
INCOME TAXES. The Company 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. The Company 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, the Company
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, respectively.
In addition, the Company 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. The Company 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, the Company 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. The Company 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.
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29
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, the Company 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 the Company, or approximately
37% of the outstanding shares of the Company'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 the Company, Rust and certain of their subsidiaries. In
addition to the net assets of the Division, the Company 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 the Company'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, the Company received an
additional $15,000,000 on March 25, 1996, which reduced goodwill. For purposes
of calculating the consideration given by the Company 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.
In exchange for a warrant to purchase up to 700,000 shares of the Company'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 the Company with a credit enhancement in the form of
guarantees, issued from time to time upon request of the Company, of up to
$62,000,000 of the Company'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. The
Company'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 the Company
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.
The Company'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
the Company 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.
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30
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
======== ========
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 the Company'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 the
Company's subcontractors to be paid prior to billing. The Company 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.
The Company 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. The
Company'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, Useful
1997 1996 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
======== ========
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NOTE 5 - INVESTMENT IN AFFILIATED COMPANY
The combined summarized financial information of the Company'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, the Company 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, the Company recorded a $12,089,000 (net of $2,860,000
income tax benefit) charge to earnings. The Company 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, the Company 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, the Company made the decision to sell its investment in NSC. The
Company 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 the Company'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 the Company
decided to sell ($2.10) times the 4,010,000 shares held by the Company. See
"Note 20 - Subsequent Events". The Company 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
======= =======
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NOTE 7 - LONG-TERM DEBT
The long-term debt of the Company 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 the Company. The convertible
subordinated debentures require annual mandatory sinking fund payments of 7.5%
of the principal amount which commenced in 1996, and continue through October 1,
2005. The Company 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, the Company 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 the Company'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 the Company'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
the Company's equipment, inventories, accounts receivables, general intangibles
and in the Company's investment in the common stock of NSC as well as the
Company's other subsidiaries. The agreement also imposes, among other covenants,
a minimum tangible net worth covenant, a restriction on all of the Company'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. The Company 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% 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.
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33
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, the Company has entered into agreements for the
sale and leaseback of certain of the Company's thermal destruction units located
at various project sites. The leases are for one or two years with annual
renewals at the option of the Company 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.
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34
Significant components of the Company'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
======== ========
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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 the Company and cannot be offset with the net long-term deferred
tax liabilities resulting from the Company'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%
==== ==== ====
32
36
Net operating loss, capital loss and tax credit carryforward amounts
and their respective expiration dates for income tax purposes are as follows (in
thousands):
Amount Expiration 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
The Company has a policy whereby transactions with directors, executive
officers and related parties require the approval of a disinterested majority of
the Board of Directors.
The Company 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 the Company 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. The Company 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, the Company 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
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37
for the years ended December 31, 1997, 1996 and 1995, respectively. The Company
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, the Company 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 the Company in 1996, which was related to
final payments due under terms of the Reorganization Agreement, as amended March
22, 1996.
The Company 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 the Company.
The Company 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 the company is directly related to certain officers and directors
of the Company.
In the normal course of business, the Company 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 the company
are directly related to certain officers and directors of the Company.
During 1985, the Company executed a pension agreement with a former
officer, directly related to certain directors of the Company, 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. The Company 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.
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.
34
38
NOTE 12 - CAPITAL STOCK
The Company 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, the Company 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
The Company 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 the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company'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
the Company'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.
On August 6, 1992, the Company's Board of Directors approved a stock
option plan for the Board of Directors (the "Directors' Plan"), which was
subsequently approved by the Company'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 the Company'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 the Company'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 the Company approved the
OHM Corporation Incentive Stock Plan ("ISP") which permits the Board to grant
shares of common stock of the Company to officers of the Company 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 the Company 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:
35
39
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 the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
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. The Company'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
The following is a summary of the stock option activity:
Number Weighted 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
=========
36
40
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
The Company 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
the Company. The Company may, at its discretion, make matching contributions and
profit sharing contributions to the Plan out of its profits for the plan year.
The Company 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 the Company
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 the Company 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 the Company's stock and not as
actual purchases of the Company's stock. At the discretion of the compensation
committee of the Board of Directors, contributions to the plan will be matched
by the Company 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.
The Company'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
The Company 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. The Company's work was
substantially delayed and its costs of performance were substantially increased
as a result of conditions at the site which the Company believes were materially
different than as represented by Occidental. In December 1994, Occidental filed
suit against the Company. 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. The Company'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.
The Company 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 the Company 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. The Company 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 the Company's suit against HESI and ERM. GM alleges that the
Company abandoned the contract through inability to perform while the Company
claims that performance was impacted by conditions at the site that were not as
represented.
Litigation and claims involving the Company relate primarily to the
collection of outstanding accounts receivable of the Company. The Company
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, the Company 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, however,
always risk and uncertainty in pursuing and defending litigation and arbitration
proceedings in the course of the Company's remediation business and,
notwithstanding the reserves currently established, adverse future results in
litigation or other proceedings could have a material adverse impact upon the
Company's consolidated future results of operations or financial condition. In
addition to the above, the
37
41
Company 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 the Company'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, the Company settled litigation and
received an unfavorable binding arbitration decision that established a need to
write-down claims receivable previously recorded by the Company. 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
the Company 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, the
Company received an unfavorable binding arbitration decision in a dispute
between the Company and SRS. SRS's subcontract with the Company to provide
thermal desorption treatment services at the Hilton Davis chemical site in
Cincinnati, Ohio was terminated by the Company in the second quarter of 1996 due
to failure to perform. The Company subsequently attempted to perform the
treatment process with the SRS equipment and was unsuccessful. The inability of
SRS to perform caused the Company to incur significant expense to complete the
required treatment process. The Company'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 the Company as a receivable from SRS. In
addition to not collecting the receivable, the arbitration decision required the
Company to pay SRS $2,400,000 in damages for their counterclaim for wrongful
termination. The Company 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 the Company 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, the Company
settled litigation with Citgo and Occidental Oil & Gas (Oxy) relating to a
project which was performed by the Company for Citgo at its Lake Charles,
Louisiana refinery in 1993 and 1994. This litigation resulted from the Company
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 the Company in July 1994. In 1995
Citgo and the Company 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, the Company 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, the Company 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 the Company'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, the Company made a decision to resolve other
significant legal matters involving outstanding accounts receivable. In June
1997, the Company 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,
the Company had concluded that it was not probable that a loss had occurred
based on the opinion of counsel.
38
42
Litigation Costs. As a result of the above discussed legal matters and
the significant expense of resolving such matters, the Company 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. The Company
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 the Company 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 the company. Thus, resulting
expense was recognized as a special charge at that time. Employees of the
Company 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, the Company decided
to sell its 40% share of NSC Corporation. As a result, the Company 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 the Company's current intentions. See
"Note 5 - Investment in Affiliated Company" and "Note 20 - Subsequent Events".
The following table summarizes the detailed components of the charge:
(In Thousands, Except Per Share Data)
Tax Net
Charge Benefit Loss
------ ------- ----
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
======= ======= =======
The Company'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 the Company's
personnel and the closing of certain of the Company's offices as a result of
combining the operations of the Division and the Company.
39
43
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the Company'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
======== ========= ======== ========
NOTES:
(1) During the second quarter of 1997, the Company 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.
NOTE 19 - SEGMENT INFORMATION
The Company operates in two industry segments. The first includes
environmental and hazaradous 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
----------- ---------- ------------
1997 (In Thousands)
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, the Company 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."
40
44
NOTE 20 - SUBSEQUENT EVENTS (UNAUDITED)
The Company has entered into an Agreement and Plan of Merger (the
"Merger Agreement"), dated January 15, 1998, by and among the Company,
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 the Company (the "Merger"), and the Company will be the
surviving corporation in the Merger, with the result that the Company 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 the Company, 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 the Company, Parent, WMX, Rust and Rust Remedial
Services Holding Company Inc., an affiliate of WMX, the Company 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. In addition, the Guaranty Agreement and related
guarantees as well as key provisions of the Standstill Agreement will terminate
upon consummation of the Merger.
The Company also has an approximately 40% interest in NSC Corporation
("NSC"), a provider of asbestos abatement and specialty contracting services.
Pursuant to the Merger Agreement, the Company 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 the Company (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 the Company'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 the Company's entry into the Merger Agreement and by
resolution of the Company's Board of Directors, the Company's 1986 Stock Option
Plan and the Company'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, the Company's Board of
Directors took action to allow holders of the restricted stock issued under the
Company's Incentive Stock Plan to tender such stock in the Offer. As a result of
the above actions, the Company 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 the Company, all of the outstanding options held
by H. Wayne Huizenga were cancelled 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
the Company. The Company 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 the
Company 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 the Company's assets and liabilities.
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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.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
February 12, 1998, except for Note 1, as to
which the date is May 4, 1998
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PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8:
Consolidated Balance Sheets -As of December 31, 1997 and 1996
Consolidated Statements of Operations -For the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity -For the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -For the Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
(a)(3) Exhibits
27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OHM CORPORATION
May 8, 1998 By: /s/ ANTHONY J. DELUCA
-----------------------------------------
Anthony J. DeLuca-Chief Executive Officer
and President
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