1
EXHIBIT 13
OHM CORPORATION
FIVE YEAR SUMMARY OF RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Gross Revenues....................... $323,381 $242,401 $221,370 $189,137 $189,624
Less direct subcontract costs... 103,114 66,661 59,461 51,467 48,573
-------- -------- -------- -------- --------
Net Revenues......................... 220,267 175,740 161,909 137,670 141,051
Cost of services................... 193,045 135,680 126,246 112,073 104,195
-------- -------- -------- -------- --------
Gross Profit......................... 27,222 40,060 35,663 25,597 36,856
Selling, general and administrative
expenses........................ 32,281 27,110 30,845 25,204 22,065
-------- -------- -------- -------- --------
Operating Income (Loss).............. (5,059) 12,950 4,818 393 14,791
-------- -------- -------- -------- --------
Other (Income) Expenses:
Investment income.................. (28) (28) (31) (30) (109)
Interest expense................... 9,177 7,748 7,106 7,423 8,115
Gain on sale of common stock of
subsidiary...................... -- -- -- -- (9,225)
Equity in net (earnings) loss of
affiliates' continuing
operations...................... (1,032) (1,600) 1,121 2,443 (2,741)
Miscellaneous expense.............. 898 341 966 789 2,654
-------- -------- -------- -------- --------
9,015 6,461 9,162 10,625 (1,306)
-------- -------- -------- -------- --------
Income (Loss) From Continuing
Operations Before Income Taxes
(Benefit).......................... (14,074) 6,489 (4,344) (10,232) 16,097
Income taxes (benefit).......... (6,458) 2,082 (1,230) (3,369) 1,703
-------- -------- -------- -------- --------
Income (Loss) From Continuing
Operations......................... (7,616) 4,407 (3,114) (6,863) 14,394
Discontinued Operations, Net of
Income Taxes (Benefit):
Income (Loss) from operations...... -- -- 122 -- (2,271)
Provision for loss on
disposition..................... -- -- (420) -- (6,195)
-------- -------- -------- -------- --------
Income (Loss) Before Cumulative
Effect of Accounting Change........ (7,616) 4,407 (3,412) (6,863) 5,928
Cumulative effect of accounting
change........................ -- -- (857) -- --
-------- -------- -------- -------- --------
Net Income (Loss).................... $ (7,616) $ 4,407 $ (4,269) $ (6,863) $ 5,928
========= ========= ========= ========= =========
Net Income (Loss) Per Share:
Continuing operations.............. $ (0.49) $ 0.35 $ (0.26) $ (0.57) $ 1.20
Discontinued operations:
From operations................. -- -- 0.01 -- (0.19)
From disposition................ -- -- (0.03) -- (0.52)
-------- -------- -------- -------- --------
Income (Loss) per share before effect
of cumulative accounting change.... (0.49) 0.35 (0.28) (0.57) 0.49
Cumulative effect of accounting
change........................ -- -- (0.07) -- --
-------- -------- -------- -------- --------
Net Income (Loss) Per Share.......... $ (0.49) $ 0.35 $ (0.35) $ (0.57) $ 0.49
========= ========= ========= ========= =========
Weighted Average Number Of Common And
Common Equivalent Shares
Outstanding........................ 15,582 12,506 12,051 12,042 12,015
========= ========= ========= ========= =========
17
2
NOTES:
(1) The results of operations for each of the four years ended December 31, 1993
have been presented to reflect the accounting for discontinued operations of
certain business units. See "Note 2 to the Consolidated Financial
Statements."
(2) The cumulative effect of accounting change of $857,000 or $0.07 per share
for the year ended December 31, 1992 is for adoption of Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." See "Note
9 to the Consolidated Financial Statements."
(3) Special and nonrecurring charges include: (i) 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; (ii) for the
year ended December 31, 1992, special charges of $2,550,000 (net of income
tax benefit of $1,600,000) recorded by the Company, and $2,162,000 recorded
by NSC, both of which relate to the restructuring of the Company and NSC's
asbestos abatement operations in anticipation of NSC's acquisition of the
asbestos abatement division of Brand (completed on May 4, 1993), and which
include provisions for legal and insurance reserves, and for certain other
matters; (iii) for the year ended December 31, 1991, charges of $3,950,000
for equity losses in Concord Resources Group, Inc. ("Concord"); and (iv) for
the year ended December 31, 1990, a nonrecurring gain of $8,275,000 (net of
income tax of $950,000) which resulted from an initial public offering of
NSC's common stock, nonrecurring charges of $1,426,000 (net of income tax
benefit of $950,000) related to a pension agreement and certain
nonproductive assets, and a charge of $630,000 (net of income tax benefit of
$420,000) for equity losses in Concord.
FIVE YEAR SUMMARY OF FINANCIAL POSITION
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Working capital...................... $116,464 $ 69,985 $ 56,148 $ 43,919 $ 27,547
Total assets......................... 272,546 215,357 185,415 168,986 171,425
Long-term debt....................... 127,279 71,113 101,085 81,500 71,500
Shareholders' equity................. 76,920 82,743 43,833 48,253 54,743
NOTE:
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."
18
3
OHM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
OHM Corporation ("the Company") provides a broad range of environmental and
hazardous waste remediation services to its clients located primarily in the
United States. The timing of the Company's revenues is dependent on its backlog,
contract awards and the performance requirements of each contract. The Company's
revenues are 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 revenues can
fluctuate, and revenues 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.
On December 5, 1994, the Company entered into a definitive agreement to
acquire substantially all of the assets and certain liabilities of the hazardous
and nuclear waste remediation services business units of Rust International Inc.
("Rust") in exchange for 10,368,000 shares of common stock of the Company, or
approximately 40% of the outstanding shares of the Company's common stock upon
completion of the transaction. In addition, 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 $75,000,000 of the Company's indebtedness outstanding during the five
years following the closing of the transaction. Such enhancement should enable
the Company to secure lower cost financing to fund its growth. The transaction
is subject to the approval of the shareholders of the Company. The required
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act expired in
January 1995. The anticipated closing date of such transaction is May 1995. The
Company is currently evaluating whether it will incur any significant costs for
restructuring its organization and operations upon consummation of the Merger.
Such costs would be recorded as a restructuring charge and may include the costs
of closing certain of the Company's offices and other non-recurring expenses
related to such restructuring.
During the fourth quarter of 1994, certain developments within and external
to the Company caused management to revaluate certain accounts receivable
recorded during 1994. As a result, the Company recorded a $25,000,000 pre-tax
charge, $15,000,000 after-tax or $0.96 per share, to establish a reserve for
accounts receivable, primarily where such accounts are in litigation, including
projects performed by the Company for Citgo Petroleum Company ("Citgo") and
Occidental Chemical Corporation ("Occidental"). The Company is in litigation
with Citgo over contract specifications in which the Company has asserted claims
for payment in excess of $35,000,000. Citgo has recently named Occidental Oil
and Gas Corporation and OXY USA, Inc. as third party defendants in such
litigation because of their prior involvement with the Citgo site and its
contract specifications. The Company has also become involved in litigation with
Occidental relating to a separate project it performed in 1994 for Occidental in
New York. While the Company believes its legal position in the litigation
remains strong, the establishment of the reserve provides the Company with
flexibility to pursue resolution of such matters. See "Note 15 to the
Consolidated Financial Statements."
19
4
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
relationship that items in the statement of operations bear to net revenues:
YEAR ENDED DECEMBER
31,
----------------------
1994 1993 1992
---- ---- ----
Gross revenues....................................................... 147 % 138 % 137 %
Less direct subcontract costs........................................ 47 38 37
---- ---- ----
Net revenues......................................................... 100 100 100
Cost of services..................................................... 88 77 78
---- ---- ----
Gross profit......................................................... 12 23 22
Selling, general and administrative expenses......................... 15 16 19
---- ---- ----
Operating income (loss).............................................. (3 ) 7 3
Net interest expense................................................. 4 4 4
Equity in net earnings (loss) of affiliates' continuing operations... 1 1 (1 )
Miscellaneous, net................................................... -- -- 1
---- ---- ----
Income (loss) from continuing operations before income taxes
(benefit).......................................................... (6 ) 4 (3 )
---- ---- ----
Income taxes (benefit)............................................... (3 ) 1 (1 )
---- ---- ----
Income (loss) from continuing operations............................. (3 )% 3 % (2 )%
==== ==== ====
Twelve Months Ended December 31, 1994 vs. Twelve Months Ended December 31, 1993
Gross Revenues. The following table sets forth the Company's gross
revenues by client type for the twelve months ended December 31, 1994 and 1993
(in thousands, except percentages):
1994 1993
---------------- ----------------
Federal, State, and Local Government........... $208,610 65% $113,346 47%
Industrial..................................... 114,771 35 129,055 53
-------- --- -------- ---
Total Gross Revenues......................... $323,381 100% $242,401 100%
======== === ======== ===
Total gross revenues increased by $80,980,000 to $323,381,000 for the year
ended December 31, 1994 from $242,401,000 for 1993. Gross revenues reflect all
amounts to be billed by the Company to its clients for work performed and
include subcontract costs that are generally passed through to clients at a
minimal amount of mark-up. The Company's management believes that net revenues
are a better measurement of the Company's ability to generate profit from
activities performed by the Company and, accordingly, management's discussion
and analysis of revenues focuses on net revenues.
Direct Subcontract Costs. Direct subcontract costs for the year ended
December 31, 1994 increased $36,453,000 or 55% to $103,114,000 from $66,661,000
for 1993. Increases or decreases in direct subcontract costs generally result
from varying requirements for the use of subcontractors in the projects
performed by the Company during the year when compared to the projects performed
in the prior year. The increase in direct subcontract costs is primarily due to
the increase in gross revenues in 1994 over 1993. Direct subcontract costs as a
percentage of gross revenues was 32% in 1994 and 28% in 1993.
20
5
Net Revenues. The following table sets forth the Company's consolidated
net revenues by client type for the years ended December 31, 1994 and 1993 (in
thousands, except percentages):
1994 1993
---------------- ----------------
Federal, State, and Local Government........... $141,990 64% $ 82,996 47%
Industrial..................................... 78,277 36 92,744 53
-------- --- -------- ---
Total Net Revenues........................... $220,267 100% $175,740 100%
======== === ======== ===
Total net revenues for the year ended December 31, 1994 increased 25% to
$220,267,000 from $175,740,000 in 1993. Such improvement resulted primarily from
increased net revenues from the Company's contracts with the United States Army
Corps of Engineers ("USACE"), the U.S. Navy, the Environmental Protection Agency
("EPA") and certain state and local governments.
The Company experienced a $14,467,000 or 16% decrease in net revenues from
industrial clients for the year ended December 31, 1994 as compared to 1993.
Industrial revenues were negatively impacted by the previously discussed
$25,000,000 accounts receivable reserve which was primarily related to
industrial clients. The Company's industrial sector revenues remain sluggish,
which the Company believes is due to anticipated changes in the Superfund law
which may result from its pending reauthorization and current economic
conditions in certain industry and geographic sectors. Industrial sector net
revenues as a percentage of total net revenues decreased to 36% for 1994 from
53% in 1993.
During 1994, the Company experienced a $58,994,000 or 71% increase in net
revenues from government agencies. This improvement resulted primarily from
increased activity under the Company's term contracts with USACE, the United
States Navy, the EPA, and certain state and local governments. The Company also
experienced a significant increase in net revenues from its USACE thermal
incineration project in Holbrook, Massachusetts. In addition, the Company
continues to experience a significant amount of proposal activity with the
various Department of Defense agencies.
During 1994, the Company's government revenues as a percent of total
revenues increased to 64% from 47% in 1993. The Company believes that this shift
in revenue mix toward the government sector will continue for the foreseeable
future in light of the Company's significant term contracts with the Department
of Defense, combined with continued increased spending by the federal government
for environmental remediation as well as other factors discussed above.
COST OF SERVICES AND GROSS PROFIT. Cost of services for the year ended
December 31, 1994 increased 42% to $193,045,000 from $135,680,000 in 1993. As a
percentage of net revenues, cost of services increased to 88% in 1994 from 77%
in 1993. The increase in cost of services as a percentage of net revenues was
primarily due to the aforementioned charge for accounts receivable. Gross profit
decreased 32% to $27,222,000 in 1994 from $40,060,000 in 1993. Gross profit
decreased primarily as a result of the recording of the accounts receivable
reserve and other factors discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SGA") expenses for the year ended December 31, 1994 increased
19% to $32,281,000 from $27,110,000 in 1993. The increase in SGA expense was due
primarily to the increase in gross revenues and the expansion of the Company's
Northeast and Western operations as a result of the award of certain significant
term contracts from the Department of Defense. SGA expense as a percent of net
revenues was 15% for both 1994 and 1993, and would have declined to 13% of net
revenues excluding the accounts receivable reserve discussed above.
OPERATING INCOME (LOSS). Operating income (loss) for 1994 decreased
$18,009,000 to $(5,059,000) from $12,950,000 in 1993, due primarily to the
recording of the accounts receivable reserve and the factors discussed above.
OTHER (INCOME) EXPENSES. Other (income) expenses, excluding the Company's
equity in net earnings of affiliate, increased $1,986,000 to $10,047,000 for
1994 compared to $8,061,000 in 1993. Such increase was primarily due to a
$1,429,000 increase in interest expense. Such increase was due to additional
borrowings as a result of the increased working capital requirements, including
accounts receivable, of certain of the
21
6
Company's large remediation projects and its government contracts. In addition,
the Company experienced an increase in the interest rates charged under its
revolving credit facility. Miscellaneous expense increased $557,000 to $898,000
for 1994 compared to $341,000 in 1993 and was primarily due to losses incurred
on the disposal of certain of the Company's equipment and offices.
EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES. The Company's equity interest
in NSC's net earnings from continuing operations decreased $568,000 to
$1,032,000 in 1994 from $1,600,000 in 1993. NSC'S
financial results for 1994 were negatively impacted by significant losses from
its New York City operations, which were closed in early 1994. The asbestos
abatement industry continues to experience competitive pressures in the
marketplace which have negatively impacted the gross margin on NSC's projects.
INCOME (LOSS) FROM CONTINUING OPERATIONS. The loss from continuing
operations for the year ended December 31, 1994 was $(7,616,000) or $(0.49) per
share compared to income of $4,407,000 or $0.35 per share in 1993. Excluding the
charge to establish the accounts receivable reserve discussed above, income from
continuing operations for the year ended December 31, 1994 would have been
$7,384,000 or $0.47 per share.
Twelve Months Ended December 31, 1993 vs. Twelve Months Ended December 31, 1992
GROSS REVENUES. The following table sets forth the Company's gross revenue
by client type for the twelve months ended December 31, 1993 and 1992 (in
thousands, except percentages):
1993 1992
---------------- ----------------
Federal, State, and Local Government........... $113,346 47% $ 64,798 29%
Industrial..................................... 129,055 53 156,572 71
-------- --- -------- ---
Total Gross Revenues......................... $242,401 100% $221,370 100%
======== === ======== ===
Total gross revenues increased by $21,031,000 to $242,401,000 for the year
ended December 31, 1993 from $221,370,000 for 1992. Gross revenues reflect all
amounts to be billed by the Company to its clients for work performed and
include subcontract costs that are generally passed through to clients at a
minimal amount of mark-up. The Company's management believes that net revenues
are a better measurement of the Company's ability to generate profit from
activities performed by the Company and, accordingly, management's discussion
and analysis of revenues focuses on net revenues.
DIRECT SUBCONTRACT COSTS. Direct subcontract costs for the year ended
December 31, 1993 increased $7,200,000 or 12% to $66,661,000 from $59,461,000
for 1992. Increases or decreases in direct subcontract costs generally result
from varying requirements for the use of subcontractors in the projects
performed by the Company during the year when compared to the projects performed
in the prior year. The increase in direct subcontract costs is primarily due to
the increase in gross revenues in 1993 over 1992. Direct subcontract costs as a
percentage of gross revenues was 28% in 1993 and 27% in 1992.
NET REVENUES. The following table sets forth the Company's consolidated
net revenues by client type for the years ended December 31, 1993 and 1992 (in
thousands, except percentages):
1993 1992
---------------- ----------------
Federal, State, and Local Government........... $ 82,996 47% $ 47,415 29%
Industrial..................................... 92,744 53 114,494 71
-------- --- -------- ---
Total Net Revenues........................... $175,740 100% $161,909 100%
======== === ======== ===
Total net revenues for the year ended December 31, 1993 increased 9% to
$175,740,000 from $161,909,000 in 1992. The Company experienced a $21,750,000 or
19% decrease in net revenues from industrial clients for the year ended December
31, 1993 when compared to 1992. Industrial sector net revenues as a percentage
of total net revenues decreased to 53% for 1993 from 71% in 1992.
During 1993, the Company also experienced a decrease in net revenues from
the Emergency Response Cleanup Services ("ERCS") program with the EPA when
compared to 1992. Such decline is primarily due to
22
7
the expiration of certain of the Company's ERCS contracts in late 1991 and 1992
and delays in the procurement process relating to certain new ERCS contracts
which the Company was pursuing. In 1993, the Company was awarded three of the
EPA's outstanding ERCS procurements that it was pursuing and experienced a
significant increase in activity under the ERCS contracts during the fourth
quarter of 1993 when compared to the same period in 1992. The decrease in net
revenues from the Company's ERCS contracts were offset by an increase in net
revenues from government agencies other than the EPA. This improve-
ment resulted primarily from contracts with the USACE, the United States Navy,
and certain state and local governments. Net revenues from USACE increased
primarily due to the Company's thermal incineration project in Holbrook,
Massachusetts and its 32% owned joint venture at the Bayou Bonfouca site in
Slidell, Louisiana.
COST OF SERVICES AND GROSS PROFIT. Cost of services for the year ended
December 31, 1993 increased 8% to $135,680,000 from $126,246,000 in 1992. As a
percentage of net revenues, cost of services decreased to 77% in 1993 from 78%
in 1992. The decrease in cost of services as a percentage of net revenues was
primarily due to cost control measures, including reduction of certain personnel
costs and the realignment of certain regional administrative functions,
initiated during the fourth quarter of 1992 and the first quarter of 1993. Gross
profit increased 12% to $40,060,000 in 1993 from $35,663,000 in 1992. Gross
profit increased primarily as a result of the increase in net revenues and other
factors discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SGA expenses for the year
ended December 31, 1993 decreased 12% to $27,110,000 from $30,845,000 in 1992.
The decrease is primarily due to $3,500,000 of special and nonrecurring charges
recorded in 1992 for the restructuring of the Company in anticipation of NSC's
acquisition of the asbestos abatement division of Brand, provisions for
insurance and legal reserves, and certain other matters.
OPERATING INCOME. Operating income for 1993 increased $8,132,000 to
$12,950,000 from $4,818,000 in 1992, due primarily to the factors discussed
above.
OTHER (INCOME) EXPENSES. Other (income) expenses, excluding the Company's
equity in net earnings of affiliate and special charges, increased $670,000 to
$8,061,000 for 1993 compared to $7,391,000 in 1992. Such increase was primarily
due to a $642,000 increase in interest expense. Interest expense was negatively
impacted during 1993 by capital expenditure requirements on certain of the
Company's projects and increased working capital requirements (primarily
accounts receivable) resulting from the increase in revenues from government
agencies which resulted in increased borrowings by the Company.
Other (income) expenses for 1992 include a special charge of $650,000 or
$0.03 per share related to the write down of the Company's investment in NSC
resulting from the issuance of NSC common stock in connection with its
acquisition of the asbestos abatement division of Brand.
EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES. The Company's equity interest
in NSC's net earnings from continuing operations, excluding special charges
recorded by NSC, increased $559,000 to $1,600,000 in 1993 from $1,041,000 in
1992. On May 4, 1993, NSC completed the acquisition of all of the assets and
certain liabilities of the asbestos abatement division of Brand, in exchange for
4,010,000 shares of NSC's common stock and NSC's industrial maintenance
business. The result of such acquisition reduced the Company's ownership and
significantly increased the size of NSC's business and operations.
Equity in NSC's net earnings for the year ended December 31, 1992 includes
special charges related to the restructuring of NSC's acquisition of the
asbestos abatement division of Brand. The Company's equity interest in such
special charges was $2,162,000 or $0.18 per share.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income (loss) from continuing
operations for the year ended December 31, 1993 was $4,407,000 or $0.35 per
share compared to losses of $(3,114,000) or $(0.26) per share in 1992. Income
from continuing operations for the year ended December 31, 1992, excluding the
nonrecurring and special charges discussed above, was $1,598,000 or $0.13 per
share.
23
8
CONTRACT BACKLOG
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,
------------------------------------
1994 1993 1992
---------- -------- --------
Backlog......................................... $ 255,000 $201,000 $164,000
Term contracts.................................. 1,498,000 652,000 207,000
---------- -------- --------
Total contract backlog........................ $1,753,000 $853,000 $371,000
========= ======== ========
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
has not historically experienced any material contract terminations and
generally experiences favorable changes in contract scope. The Company estimates
that approximately 65% of the backlog at December 31, 1994 will be realized
within the next year.
TERM CONTRACTS. The significant increase in the potential value of term
contracts since 1993 has resulted from the award of two $250,000,000 five-year
term contracts with the U.S. Navy and a $45,000,000 five-year term contract with
the Air Force. In addition, the Company was awarded three five-year term
contracts aggregating $210,000,000 from the U.S. Department of the Air Force
Center for Environmental Excellence and a ten year Total Environmental
Restoration Contract with the Tulsa District of USACE with an aggregate value of
$216,000,000. Term contracts are typically performed under delivery orders,
issued by the contracting government entity, for a large number of small- to
medium-sized remediation projects throughout the geographic area covered by the
contract. The Company's government term contracts generally may be cancelled,
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a party to a $135,000,000 Revolving Credit Facility (as
amended on January 18, 1995) to provide letters of credit and cash borrowings
which has a three year term and is scheduled to expire on May 11, 1996. Under
the terms of the agreement, cash borrowings may not exceed $95,000,000 and bear
interest at either the prime rate plus a percentage ranging from .75% to 1.875%
or, at the Company's option, the Eurodollar market rate plus a percentage
ranging from 1.75% to 2.875%. The percentage over the prime rate or the
Eurodollar market rate is based on the aggregate amount borrowed under the
facility as well as the Company's financial performance as measured by an
interest coverage ratio and a total funded debt ratio. The agreement provides
the participating banks a security interest in the Company's equipment,
inventories, accounts receivable, 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 and a restriction on all of the Company's retained
earnings which precludes the declaration and payment of cash dividends. The
amounts outstanding for cash borrowings under the Revolving Credit Facility at
December 31, 1994 and 1993 were $57,700,000 and $7,000,000, respectively, and
aggregate letters of credit outstanding at December 31, 1994 and 1993 were
$34,771,000 and $40,327,000, respectively.
Capital expenditures for the years ended December 31, 1994, 1993, and 1992
were $13,354,000, $15,783,000, and $8,859,000. The Company's capital
expenditures are primarily related to the purchase of heavy equipment and the
fabrication of custom equipment by the Company for the execution of remediation
projects. The Company expects capital expenditures for 1995 to approximate
$15,000,000 dependent upon the type and size of future remediation projects
awarded to the Company.
24
9
During 1994, the Company derived 65% of its gross revenues from government
agencies compared to 47% for 1993, a trend which the Company expects to
continue. Revenues from government agencies historically have required greater
working capital, the major component of which is accounts receivable, than
revenues from industrial sector clients. During 1994, the Company completed a
large remediation project for Citgo, now in litigation, which resulted in a
large investment by the Company in accounts receivable from Citgo. 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. As a result of these factors, the Company believes it will
be required to supplement its cash flows from continuing operations with
additional external sources to finance its short and long-term capital
expenditure and working capital needs.
The Company believes it will be able to finance its increased working
capital needs and capital expenditures, in the short-term, through a combination
of cash flows from continuing operations, borrowings under its Revolving Credit
Facility and proceeds from permitted asset sales. In addition, the terms of the
agreement for the Company's pending acquisition of Rust's hazardous and nuclear
waste remediation business units provide that Rust's parent company, 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 $75,000,000 of the
Company's indebtedness outstanding during the five years following the closing
of the transaction. Such guarantee should expand the Company's borrowing
capacity and lower its cost of capital after the completion of the acquisition.
The Company's identified long-term capital needs consist of payments upon
the maturity of the Company's Revolving Credit Facility in 1996 and sinking fund
payments commencing in 1996 as well as payments upon maturity of its Convertible
Debentures in 2006. The Company expects that it will be able to refinance this
indebtedness as necessary. The Company is currently actively negotiating a new
credit facility with a group of banks which it expects to become effective
concurrent with the consummation of the acquisition of Rust's hazardous and
nuclear waste remediation business units.
INFLATION
Historically, inflation has not been a significant factor to the Company or
to the cost of its operations.
RECENTLY ENACTED PRONOUNCEMENTS
The Company has recorded a valuation allowance for its deferred tax assets
to the extent that the Company believes such deferred tax assets may 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 future taxable income of approximately
$12,000,000 necessary to realize the deferred tax asset is reasonably assured
because of its substantial backlog and term contracts from which the Company has
historically realized sufficient margin to produce consolidated net income.
Exclusive of non-recurring special charges and the accounts receivable reserve
recorded in 1994, such deferred tax asset would have been realized during the
three years ended December 31, 1994. The principal uncertainty of realization of
the deferred tax asset is the Company's ability to convert its backlog to
revenues and margin. See "Contract Backlog" and "Environmental Matters and
Government Contracting" in other sections of Management's Discussion and
Analysis of Financial Condition and Results of Operations. The Company intends
to evaluate the realizability of its deferred tax assets quarterly by assessing
the need for an additional valuation allowance.
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
25
10
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. See "Note 15 to the Consolidated Financial Statements."
26
11
OHM CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------------
1994 1993
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 4,930 $ 5,039
Accounts receivable.............................................. 86,663 64,384
Costs and estimated earnings on contracts in process in excess of
billings...................................................... 65,437 45,744
Materials and supply inventory, at cost.......................... 10,099 6,883
Prepaid expenses and other assets................................ 7,252 5,548
Deferred income taxes............................................ 6,744 --
Refundable income taxes.......................................... 205 91
--------- ---------
181,330 127,689
--------- ---------
Property and Equipment, net........................................ 57,240 53,258
--------- ---------
Other Noncurrent Assets:
Deferred debt issuance and financing costs....................... 2,381 2,851
Investments in and advances to affiliated company................ 23,352 22,922
Deferred income taxes............................................ 336 617
Other assets..................................................... 7,907 8,020
--------- ---------
33,976 34,410
--------- ---------
Total Assets............................................. $ 272,546 $ 215,357
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. $ 47,936 $ 42,130
Billings on contracts in process in excess of costs and estimated
earnings...................................................... 40 709
Accrued compensation and related taxes........................... 3,874 3,159
Federal, state and local taxes................................... 102 297
Deferred income taxes............................................ - 1,006
Other accrued liabilities........................................ 9,652 8,857
Current portion of noncurrent liabilities........................ 3,262 1,546
--------- ---------
64,866 57,704
--------- ---------
Noncurrent Liabilities:
Long-term debt................................................... 127,279 71,113
Capital leases................................................... 92 65
Pension agreement................................................ 906 917
--------- ---------
128,277 72,095
--------- ---------
Deferred Income Taxes.............................................. 2,483 2,815
--------- ---------
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: 1994 - 15,848,089; 1993 - 15,763,089........... 1,584 1,576
Additional paid-in capital....................................... 63,294 62,774
Retained earnings................................................ 14,598 22,222
--------- ---------
79,476 86,572
Less treasury stock, 1994 - 211,624; 1993 - 317,049, at cost....... (2,556) (3,829)
--------- ---------
76,920 82,743
--------- ---------
Total Liabilities and Shareholders' Equity............... $ 272,546 $ 215,357
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
27
12
OHM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
--------- --------- ---------
Gross Revenues........................................ $ 323,381 $ 242,401 $ 221,370
Less direct subcontract costs....................... 103,114 66,661 59,461
--------- --------- ---------
Net Revenues.......................................... 220,267 175,740 161,909
Cost of services.................................... 193,045 135,680 126,246
--------- --------- ---------
Gross Profit.......................................... 27,222 40,060 35,663
Selling, general and administrative expenses........ 32,281 27,110 30,845
--------- --------- ---------
Operating Income (Loss)............................... (5,059) 12,950 4,818
--------- --------- ---------
Other (Income) Expenses:
Investment income................................... (28) (28) (31)
Interest expense.................................... 9,177 7,748 7,106
Equity in net (earnings) loss of affiliates'
continuing operations............................ (1,032) (1,600) 1,121
Miscellaneous expenses.............................. 898 341 966
--------- --------- ---------
9,015 6,461 9,162
--------- --------- ---------
Income (Loss) From Continuing Operations
Before Income Taxes (Benefit)....................... (14,074) 6,489 (4,344)
Income taxes (benefit)........................... (6,458) 2,082 (1,230)
--------- --------- ---------
Income (Loss) From Continuing Operations.............. (7,616) 4,407 (3,114)
Discontinued Operations of Investee, Net of Income
Taxes (Benefit):
Income from operations.............................. -- -- 122
Provision for loss on disposition................... -- -- (420)
--------- --------- ---------
Income (Loss) Before Cumulative Effect of
Accounting Change................................... (7,616) 4,407 (3,412)
Cumulative effect of accounting change.............. -- -- (857)
--------- --------- ---------
Net Income (Loss)..................................... $ (7,616) $ 4,407 $ (4,269)
========= ========= =========
Net Income (Loss) Per Share:
Continuing operations............................... $ (0.49) $ 0.35 $ (0.26)
Discontinued operations:
From operations.................................. -- -- 0.01
From disposition................................. -- -- (0.03)
--------- --------- ---------
(0.49) 0.35 (0.28)
Cumulative effect of accounting change.............. -- -- (0.07)
--------- --------- ---------
$ (0.49) $ 0.35 $ (0.35)
========= ========= =========
Weighted average number of common and common
equivalent shares outstanding....................... 15,582 12,506 12,051
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
28
13
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 DECEMBER 31, 1991..... 12,398,089 $1,239 $ 28,948 $22,134 $129 $(4,197)
Deferred translation
adjustments................... (151)
Net loss........................ (4,269 )
----------- ------ ---------- -------- ---------- -----------
BALANCE AT DECEMBER 31, 1992..... 12,398,089 1,239 28,948 17,865 (22) (4,197)
Proceeds from sale of 3,365,000
shares of common stock, less
issuance expenses of
$705,000...................... 3,365,000 337 33,921
Stock options exercised, 30,480
reissued from treasury........ (95) 368
Deferred translation
adjustments................... (28)
Net income...................... 4,407
----------- ------ ---------- -------- ---------- -----------
BALANCE AT DECEMBER 31, 1993..... 15,763,089 1,576 62,774 22,272 (50) (3,829)
Proceeds from sale of 85,000
shares of common stock, less
issuance expenses of
$86,000....................... 85,000 8 789
Stock options exercised, 105,425
reissued from treasury........ (269) 1,273
Deferred translation
adjustments................... (8)
Net loss........................ (7,616 )
----------- ------ ---------- -------- ---------- -----------
BALANCE AT DECEMBER 31, 1994..... 15,848,089 $1,584 $ 63,294 $14,656 $(58) $(2,556)
=========== ====== ========== ======== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
29
14
OHM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
-------- --------- ---------
Cash flows from operating activities:
Net income (loss).............................................. $ (7,616) $ 4,407 $ (4,269)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization................................ 7,395 7,073 7,186
Amortization of other noncurrent assets...................... 2,418 1,698 1,279
Deferred income taxes........................................ (7,801) 1,456 (2,228)
Loss on sale of property and equipment....................... 764 55 218
Equity in net (earnings) loss of affiliates' continuing
operations, net of dividends received...................... (430) 3,212 1,121
Provision for loss on disposition of discontinued operations,
including deferred income tax benefit...................... -- -- 420
Cumulative effect of accounting change....................... -- -- 857
Deferred translation adjustments and other................... 90 255 486
Changes in current assets and liabilities:
Accounts receivable............................................ (22,279) (17,379) 541
Costs and estimated earnings on contracts in process in excess
of billings.................................................. (19,693) (24,742) (4,312)
Materials and supply inventory................................. (3,216) (426) (1,193)
Prepaid expenses and other assets.............................. (1,704) (85) 1,230
Refundable income taxes and other.............................. (114) 1,079 219
Accounts payable............................................... 5,263 20,549 1,973
Billings on contracts in process in excess of costs and
estimated earnings........................................... (669) (439) 130
Accrued compensation and related taxes......................... 715 227 (792)
Federal, state and local income taxes.......................... (195) (410) 662
Other accrued liabilities...................................... 795 (5,432) 1,715
-------- --------- ---------
Net cash flows provided by (used in) operating
activities.............................................. (46,277) (8,902) 5,243
-------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................ (13,354) (15,783) (8,859)
Proceeds from sale of property and equipment................... 1,847 126 2,458
Increase in other noncurrent assets............................ (1,835) (6,163) (2,450)
Proceeds from (advances to) affiliated companies, net.......... -- 14,850 (14,109)
Investment in discontinued operations, net..................... -- (146) (1,430)
Proceeds (adjustments) from sale of discontinued operations.... -- 14,613 (405)
-------- --------- ---------
Net cash provided by (used in) investing activities........ (13,342) 7,497 (24,795)
-------- --------- ---------
Cash flows from financing activities:
Increase in long-term debt..................................... 8,900 5,663 --
Payments on long-term debt and capital leases.................. (1,782) (212) (96)
Proceeds from borrowing under revolving credit agreement....... 147,200 99,500 109,000
Payments on revolving credit agreement......................... (96,500) (135,500) (90,000)
Payments on pension agreement.................................. (109) (105) (111)
Proceeds from public offering of common stock.................. 797 34,258 --
Reissuance of treasury stock................................... 1,004 273 --
-------- --------- ---------
Net cash provided by financing activities.................. 59,510 3,877 18,793
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... (109) 2,472 (759)
Cash and cash equivalents at beginning of year................... 5,039 2,567 3,326
-------- --------- ---------
Cash and cash equivalents at end of year......................... $ 4,930 $ 5,039 $ 2,567
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
30
15
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
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 also includes its proportionate
share of joint ventures, in which the Company's ownership is less than 50%,
which were entered into for the purpose of performing large remediation
projects. The Company's investment in 40% of the outstanding common stock of NSC
Corporation ("NSC") is carried on the equity basis. All material intercompany
transactions and balances among the consolidated group have been eliminated in
consolidation.
REVENUES AND COST RECOGNITION The Company primarily derives its revenues
from providing environmental services under cost plus fee, time and materials,
fixed price and unit price contracts. The Company records revenues and related
income from its fixed and unit price contracts in process using the
percentage-of-completion method of accounting. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
determined. 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 revenues when realization is
probable and the amount can be reliably estimated. Revenues from time and
materials and cost plus fee type contracts are recorded based on performance and
efforts expended. Contract costs include all direct labor, material, per diem,
subcontract and other direct and indirect project costs related to contract
performance. Revenues derived from non-contract activities are recorded as the
services are performed.
DIRECT SUBCONTRACT COSTS The Company incurs a substantial amount of direct
subcontract costs which are passed through to its clients. These costs result
from the use of subcontractors on projects principally for transportation and
disposal of hazardous wastes, and in some cases for analytical and remediation
services, where contracts or other business conditions require the use of
subcontractors. The Company believes that net revenues, excluding direct
subcontract costs, more accurately reflect the amounts earned for activities
performed by the Company. Accordingly, the Company reports direct subcontract
costs as a reduction of gross revenues to arrive at net revenues.
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 primarily 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 $10,127,000,
$8,447,000, and $7,191,000 for the years ended December 31, 1994, 1993 and 1992,
respectively. Total interest capitalized was $950,000, $699,000, and $85,000 for
the years ended December 31, 1994, 1993 and 1992, respectively.
OTHER ASSETS Other assets include goodwill and other intangible assets of
$370,000 and $460,000 at December 31, 1994 and 1993, respectively, resulting
primarily from acquisitions accounted for using the purchase method of
accounting. Goodwill is amortized using the straight-line method over forty
years. Other intangible assets relating to acquired businesses consist
principally of proprietary processes, and other deferred costs, and are
amortized on a
31
16
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
straight-line basis over nine to ten years. The accumulated amortization of
intangible assets, including goodwill, relating to acquired businesses was
$919,000 and $828,000 at December 31, 1994 and 1993, respectively.
GAIN RECOGNITION ON SALE OF SUBSIDIARIES' STOCK It is the Company's policy
to record gains and losses from sale or issuance of previously unissued stock by
its subsidiaries. The Company recorded losses of $185,000 and $650,000 for the
issuance of stock by NSC for the years ended December 31, 1993 and 1992,
respectively.
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." Under the liability method, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax basis 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, 1994, 1993 and 1992 was $550,000, $381,000 and $141,000,
respectively. Cash paid for interest was $9,171,000, $7,940,000 and $7,720,000
for each of the years ended December 31, 1994, 1993 and 1992, respectively.
With respect to non-cash investing and financing activities, the Company
acquired $91,000, $2,019,000 and $702,000 of fixed assets under financial
obligations for the years ended December 31, 1994, 1993 and 1992, respectively.
NET INCOME (LOSS) PER SHARE Net income (loss) per share amounts are based on
the weighted average common and common equivalent shares outstanding during the
respective periods. Shares of common stock issuable upon conversion of the 8%
Convertible Subordinated Debentures due 2006 are not considered to be common
stock equivalents and were antidilutive in each of the years presented;
therefore, they were excluded from the calculation of net income per share.
RECLASSIFICATION Certain amounts presented for the years ended December 31,
1993 and 1992 have been reclassified to conform to the 1994 presentation.
NOTE 2 -- DISCONTINUED OPERATIONS
In 1990, the Company adopted a plan to pursue the divestiture of its three
commercial testing laboratories and its fixed-base hazardous waste treatment
facility. These service areas of the Company's business have been accounted for
as discontinued operations and, accordingly, the accompanying consolidated
statements of operations for the years ended December 31, 1993 and 1992 have
been presented to report such businesses as discontinued operations. The Company
sold its three commercial testing laboratories in 1991. On February 22, 1993,
the Company completed the sale of all of the common stock of the Company's
fixed-base hazardous waste treatment facility for $14,613,000 in cash.
On December 23, 1992, NSC entered into a Purchase Agreement among the
Company, NSC and its wholly-owned subsidiary NSC Industrial Services Corp.
("NSCIS"), The Brand Companies, Inc. ("Brand") and Waste Management, Inc. to
acquire the asbestos abatement operations of Brand in exchange for 4,010,000
shares of NSC's common stock and the common stock of NSCIS which in turn owns
all of the common stock of Combined Plant Services Corp. and its affiliate
Gundersen/Viking Corp. (collectively, "CPS") acquired on February 5, 1992 and
Miami Valley Pressure Cleaning, Inc. and its affiliate M.V. Industrial Services,
Inc. (collectively, "MVIS") acquired on April 17, 1992 (see Note 18 -- Brand
32
17
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Agreement). Accordingly, NSC's environmental cleaning and industrial maintenance
services business was accounted for as discontinued operations. The provision
for loss on disposition recorded by NSC at December 31, 1992 consisted of
estimated costs associated with the disposal and expected operating losses
through the date of disposition of CPS and MVIS. The Company's equity interest
in such provision for loss on disposition was $420,000.
NOTE 3 -- ACCOUNTS RECEIVABLE AND COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN
PROCESS
Accounts receivable are summarized as follows:
DECEMBER 31,
--------------------
1994 1993
-------- -------
(IN THOUSANDS)
Accounts billed and due currently............................. $ 49,560 $42,693
Unbilled receivables.......................................... 56,334 17,391
Retained...................................................... 6,832 7,076
-------- -------
112,726 67,160
Allowance for uncollectible accounts.......................... (26,063) (2,776)
-------- -------
$ 86,663 $64,384
======== =======
The consolidated balance sheets include the following amounts:
DECEMBER 31,
-----------------------
1994 1993
--------- ---------
(IN THOUSANDS)
Costs incurred on contracts in process..................... $ 203,742 $ 129,767
Estimated earnings......................................... 42,032 26,410
--------- ---------
245,774 156,177
Less billings to date...................................... (180,377) (111,142)
--------- ---------
$ 65,397 $ 45,035
========= =========
Costs and estimated earnings on contracts in process in
excess of billings....................................... $ 65,437 $ 45,744
Billings on contracts in process in excess of costs and
estimated earnings....................................... (40) (709)
--------- ---------
$ 65,397 $ 45,035
========= =========
During the fourth quarter of 1994, the Company recorded a $25,000,000
reserve for accounts receivable, primarily where such accounts are in litigation
(see Note 15 -- Litigation and Contingencies).
Unbilled receivables and costs and estimated earnings on contracts in
process typically represent 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 amounts equal to contract costs attributable to claims included in
revenues. 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 believes that its
accounts receivable at December 31, 1994 will be collected within one year.
33
18
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 34%, 56%, and 10%, respectively, of total accounts receivable and
costs and estimated earnings on contracts in process at December 31, 1994.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
DECEMBER 31,
--------------------
1994 1993
-------- -------
(IN THOUSANDS)
Land.......................................................... $ 257 $ 257
Buildings and improvements.................................... 17,179 17,075
Machinery and equipment....................................... 74,270 62,413
Construction in progress...................................... 4,190 12,473
-------- -------
95,896 92,218
Less accumulated depreciation and amortization................ (38,656) (38,960)
-------- -------
$ 57,240 $53,258
======== =======
NOTE 5 -- INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANY
On May 4, 1993, NSC, then a 70% owned subsidiary, acquired all the assets
and certain liabilities of the asbestos abatement division of Brand in exchange
for 4,010,000 shares of NSC's common stock and the common stock of NSCIS, NSC's
industrial maintenance subsidiary (see Note 18 -- Brand Agreement). As a result
of this transaction the Company's ownership interest in NSC was reduced to 40%.
The combined summarized financial information for NSC is set forth below:
DECEMBER 31,
-------------------
1994 1993
------- -------
(IN THOUSANDS)
Current assets................................................. $40,648 $44,876
Noncurrent assets.............................................. 47,639 50,293
Total assets................................................... 88,287 95,169
Current liabilities............................................ 18,505 22,608
Noncurrent liabilities......................................... 11,720 15,569
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
-------- -------- -------
(IN THOUSANDS)
Gross revenues..................................... $132,218 $110,254 $62,220
Gross profit....................................... 21,716 20,901 7,525
Operating income (loss)............................ 5,101 6,356 (2,420)
Income (loss) from continuing operations........... 2,566 3,373 (1,604)
Net income (loss).................................. 2,566 3,373 (3,030)
Company's interest in net income (loss)............ 1,032 1,600 (2,119)
34
19
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company's accumulated equity in the undistributed earnings of NSC
included in consolidated retained earnings was $6,169,000 at December 31, 1994.
The Company received cash dividends from NSC aggregating $602,000 and $4,812,000
for the years ended December 31, 1994 and 1993, respectively.
As a result of the Brand Agreement, NSC obtained a senior credit facility
and paid all of its indebtedness to the Company, which totaled $12,958,000 on
May 4, 1993, and replaced $16,697,000 of outstanding letters of credit issued on
behalf of NSC under the Company's revolving credit agreement.
NOTE 6 -- OTHER ACCRUED LIABILITIES
Other accrued liabilities are summarized as follows:
DECEMBER 31,
-----------------
1994 1993
------ ------
(IN THOUSANDS)
Accrued interest................................................. $1,701 $1,439
Accrued insurance................................................ 2,041 2,057
Reserves for self-insurance...................................... 3,227 2,146
Other............................................................ 2,683 3,215
------ ------
$9,652 $8,857
====== ======
NOTE 7 -- LONG-TERM DEBT
The long-term debt of the Company is summarized below:
DECEMBER 31,
--------------------
1994 1993
-------- -------
(IN THOUSANDS)
8% Convertible Subordinated Debentures due October 1, 2006.... $ 57,500 $57,500
Revolving credit facility..................................... 57,700 7,000
Notes payable to financial institutions....................... 14,732 7,361
Notes payable................................................. 560 725
-------- -------
130,492 72,586
Less current portion.......................................... (3,213) (1,473)
-------- -------
$127,279 $71,113
======== =======
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 commence on October 1, 1996, and continue through
October 1, 2005. The fair value of the convertible subordinated debentures is
based on a quoted market price and approximates $45,138,000 at December 31,
1994. The amortization of debt issuance costs related to the convertible
subordinated debentures was $108,000 for each of the years ended December 31,
1994, 1993, and 1992.
On May 11, 1993, the Company entered into a $135,000,000 revolving credit
agreement, which was subsequently amended on January 18, 1995, with a group of
banks to provide letters of credit and cash borrowings. The agreement has a
three year term and is scheduled to expire on May 11, 1996. Under the terms of
the agreement, cash borrowings may not exceed $95,000,000 and bear interest at
either the prime rate plus a percentage ranging from .75% to 1.875% or, at the
Company's option, the Eurodollar market rate plus a
35
20
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
percentage ranging from 1.75% to 2.875%. The percentage over the prime rate or
the Eurodollar market rate is based on the aggregate amount borrowed under the
facility as well as the Company's financial performance as measured by an
interest coverage ratio and a total funded debt ratio. The agreement provides
the participating banks a security interest in the Company's equipment,
inventories, accounts receivable, 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 and a restriction on all of the Company's retained
earnings which precludes the declaration and payment of cash dividends.
The Company had $34,771,000 and $40,327,000 of letters of credit
outstanding under its revolving credit facility at December 31, 1994 and 1993,
respectively.
Notes payable to financial institutions consist of: (i) a $6,057,000 note
payable bearing interest at 7.24% payable in equal monthly installments of
$146,000 with the final payment due in May 1996, (ii) a $1,425,000 note payable
bearing interest at 9.25% payable in equal monthly installments of $35,000 with
the final payment due in May 1996, (iii) a $5,902,000 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, and (iv) a $1,348,000 note payable
bearing interest at 8.72% payable in equal monthly installments of $43,000 with
the final payment due in January 1998. Each of the above agreements provides the
respective financial institution with a security interest in the equipment
financed with the proceeds from such notes.
Notes payable include: (i) a $457,000 interest bearing note at a rate of
8.75% payable in monthly installments of $14,000 with a final payment of
$320,000 due in December 1995, (ii) a $103,000 interest bearing note at a rate
of 9% payable in monthly installments of $4,000 with a final payment of $50,000
due in March 1996. Both notes are secured by certain machinery and equipment of
the Company.
The aggregate maturity of long-term debt for the five years ending December
31 is: 1995, $3,213,000; 1996, $65,658,000; 1997, $7,855,000; 1998, $7,617,000;
1999, $5,899,000; 1999 and thereafter, $40,250,000.
NOTE 8 -- LEASES
Future minimum lease payments under noncancelable operating leases total
$6,183,000, $5,190,000, $4,844,000, $4,233,000, and $2,974,000 for the years
ended December 31, 1995, 1996, 1997, 1998 and 1999, respectively. Lease payments
under noncancelable operating leases subsequent to the year ended December 31,
1999 aggregate $3,406,000.
Rental expense under operating leases totaled $5,906,000, $4,235,000, and
$2,791,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
NOTE 9 -- INCOME TAXES
Effective January 1, 1992, the Company elected to adopt SFAS No. 109. As
permitted by SFAS No. 109, prior year financial statements were not restated to
reflect the change in accounting method. The cumulative effect as of January 1,
1992 of adopting SFAS No. 109 decreased net income by $857,000, of which
$700,000 represents the Company's equity interest in NSC's adoption of SFAS No.
109.
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.
36
21
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1994 and 1993, are as follows:
DECEMBER 31,
---------------------
1994 1993
------- -------
(IN THOUSANDS)
Long-term deferred tax liabilities:
Property and equipment............................................. $ 5,256 $ 7,048
Intangible assets.................................................. 1,768 2,008
Investments........................................................ 2,821 2,695
------- -------
Total long-term deferred tax liabilities........................ 9,845 11,751
Long-term deferred tax assets:
Net operating loss ("NOL") carryforwards........................... 3,156 5,612
Separate return limitation year ("SRLY") NOLs...................... -- 1,493
Research and development tax credits............................... 1,433 --
Other, net......................................................... 3,652 3,464
------- -------
Total long-term deferred tax assets............................. 8,241 10,569
Valuation allowance for deferred tax assets........................ (879) (1,633)
------- -------
Net long-term deferred tax asset................................ 7,362 8,936
------- -------
Net long-term deferred tax liabilities............................... $ 2,483 $ 2,815
======= =======
Long-term deferred tax assets:
Foreign tax NOLs................................................... $ 366 $ 693
Valuation allowance for deferred tax assets........................ (30) (76)
------- -------
Total long-term deferred tax assets............................. $ 336 $ 617
======= =======
Current deferred tax liabilities:
Revenue recognition................................................ $ 2,544 $ 3,244
Prepaid expenses................................................... 1,079 1,056
Tax reserves....................................................... 526 419
------- -------
Total current deferred tax liabilities.......................... 4,149 4,719
Current deferred tax assets:
Bad debt reserves.................................................. 10,049 --
Capital loss carryforwards......................................... -- --
NOL carryforwards.................................................. 1,928 2,892
Other, net......................................................... 155 1,260
------- -------
Total current deferred tax assets............................... 12,132 4,152
Valuation allowance for deferred tax assets.......................... (1,239) (439)
------- -------
Net current deferred tax assets................................. 10,893 3,713
------- -------
Net current deferred tax liabilities................................. $ 1,006
=======
Net current deferred tax assets...................................... $ 6,744
=======
The net long-term deferred tax assets of $336,000 and $617,000 at December
31, 1994 and 1993, 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.
37
22
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
For financial reporting purposes, income (loss) from continuing operations
before income taxes (benefit) includes the following components:
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
-------- ------ -------
(IN THOUSANDS)
United States........................................ $(14,074) $6,489 $(4,813)
Foreign.............................................. -- -- 469
-------- ------ -------
$(14,074) $6,489 $(4,344)
======== ====== =======
The provisions for income taxes (benefit) consist of the following:
YEARS ENDED DECEMBER 31,
------------------------------
1994 1993 1992
------- ------ -------
(IN THOUSANDS)
Current:
Federal...................................................... $ 244 $ 199 --
Foreign...................................................... -- -- $ 35
State........................................................ -- 75 --
------- ------ -------
244 274 35
Benefit of loss carryforwards.................................. (5,380) (3,816) --
Deferred:
Federal...................................................... (1,161) 5,189 (1,235)
Foreign...................................................... -- -- 200
State........................................................ (161) 435 (230)
------- ------ -------
(1,322) 5,624 (1,265)
------- ------ -------
$(6,458) $2,082 $(1,230)
======= ====== =======
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,
----------------------
1994 1993 1992
---- ---- ----
Federal statutory rate................................................ 34.0% 34.0% 34.0%
Add (deduct):
State income taxes, net of federal benefit.......................... 3.7 3.0 3.4
Research and development tax credits................................ 3.6 -- --
Equity in net earnings of affiliates................................ 2.0 (6.4) (8.8)
Other, net.......................................................... 2.6 1.5 (0.3)
---- ---- ----
45.9% 32.1% 28.3%
==== ==== ====
38
23
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Net operating loss, capital loss and tax credit carryforward amounts and
their respective expiration dates for income tax purposes are as follows (in
thousands):
EXPIRATION
AMOUNT DATES
------- ------------------
Net operating loss............................................. $12,616 1997 through 2007
Foreign tax net operating loss................................. 949 1997 through 1998
State net operating losses in excess of federal................ 15,817 1997 through 2007
Research and development tax credits........................... 1,433 2005 through 2009
Alternative minimum tax credits................................ 1,209 Indefinite
Miscellaneous credits.......................................... 600 1997 through 2005
The valuation allowance for deferred tax assets is $2,148,000 at December
31, 1994 and 1993. No change in the valuation allowance was recorded in 1994.
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.
Prior to NSC's acquisition of the asbestos abatement division of Brand in
May 1993, the Company had an intercompany loan and management services
arrangement with NSC. Under the intercompany loan arrangement, the Company would
borrow from NSC its excess cash and advance to NSC funds for working capital
requirements and expansion of NSC's business. The Company charged NSC net
interest expense of $275,000 and $310,000 for the years ended December 31, 1993
and 1992, respectively. In addition, the Company and its subsidiaries furnished
to NSC management services for financial, administrative, legal and certain
other staff functions. The Company charged NSC $149,000 and $281,000 for the
years ended December 31, 1993 and 1992, respectively, for such services. The
Company believes the charges for such services have been made on a reasonable
basis and approximate what it would have cost NSC to obtain such services on its
own. Upon completion of the Brand asbestos abatement division acquisition, such
intercompany loan and management services agreements were terminated.
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 $363,000, $93,000 and $475,000 for the years ended December 31,
1994, 1993 and 1992, respectively. In addition, prior to NSC's acquisition of
Brand's asbestos abatement division, NSC employees were eligible to participate
in OHM's group insurance and other employee benefit plans. The costs charged to
NSC for such employee benefits were $242,000 and $540,000 for the years ended
December 31, 1993 and 1992, 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 $689,000,
$3,469,000 and $3,961,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
The Company rents certain buildings and prior to 1993 rented aircraft from
an affiliated partnership. Rental expenses for these facilities and aircraft
totaled $38,000, $33,000 and $134,000 for the years ended December 31, 1994,
1993 and 1992, respectively.
39
24
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company has purchased general contractor services and equipment from a
company which totaled $24,000, $166,000 and $460,000 for the years ended
December 31, 1994, 1993 and 1992, respectively. The principal shareholder of the
company is directly related to certain directors of the Company.
In the normal course of business, the Company has purchased subcontractor
services on certain of its projects from a company which totaled $2,055,000 for
the year ended December 31, 1994. The principal shareholder of the company is
directly related to certain directors of the Company.
NOTE 11 -- AGREEMENT WITH FORMER SHAREHOLDER
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 $109,000, $105,000 and
$111,000 pursuant to this agreement during the years ended December 31, 1994,
1993 and 1992, respectively.
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 have been issued at December 31, 1994.
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.
In December 1993, the Company completed a public offering of 3,365,000
shares of common stock at $11.00 per share. Total net proceeds to the Company
from such offering were $34,963,000, less issuance expenses of $705,000, and
were used to reduce the outstanding amounts under the Company's revolving credit
agreement. If the offering had occurred at the beginning of 1993, pro forma
income per share would have been $0.37. This pro forma per share data is
unaudited and not necessarily indicative of the results that would have been
obtained had this event actually occurred at the assumed date. In January 1994,
the Company issued an additional 85,000 shares of common stock at $11.00 per
share which resulted in $883,000 of net proceeds, less issuance expenses of
$86,000, to the Company.
NOTE 13 -- STOCK OPTION PLAN
In 1986, the Company adopted and the shareholders approved the 1986 Stock
Option Plan (the "1986 Plan") which provides for the granting of stock options
to directors, officers and key employees at prices not less than the fair market
value of the Company's common stock on the date of grant. A total of 1,850,000
shares of the Company's common stock had been reserved for issuance upon the
exercise of options granted under the 1986 Plan at December 31, 1993. The total
amount of shares reserved for issuance was subsequently increased to 2,850,000
by vote of the shareholders at the 1994 Annual Meeting. Substantially all
options presently issued under the 1986 Plan are exercisable in cumulative
annual installments ranging up to 20 percent commencing on the date of grant and
expiring ten years thereafter. The number of shares available for grants of
additional options under the 1986 Plan were 752,859 and 137,834 at December 31,
1994 and 1993, 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
40
25
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
exercised for a period of six months following the date of grant and terminate
ten 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, 1994 and 1993 was 915,000 and 940,000, respectively.
The following summarizes stock option activity in 1994:
NUMBER OF PRICE RANGE
SHARES PER SHARE
--------- ---------------
1986 PLAN
Outstanding at December 31, 1993................................. 1,485,800 $6.38 to $11.88
Granted........................................................ 477,350 $9.75 to $16.25
Exercised...................................................... (105,425) $7.00 to $11.88
Cancelled...................................................... (92,375) $7.00 to $11.88
--------- ---------------
Outstanding at December 31, 1994................................. 1,765,350 $6.38 to $16.25
--------- ---------------
Exercisable at December 31, 1994................................. 907,725 $6.38 to $16.25
======== =============
DIRECTORS' PLAN
Outstanding at December 31, 1993................................. 60,000 $7.63 to $8.25
Granted........................................................ 25,000 $15.63
Exercised...................................................... -- --
Cancelled...................................................... -- --
--------- ---------------
Outstanding at December 31, 1994................................. 85,000 $7.63 to $15.63
--------- ---------------
Exercisable at December 31, 1994................................. 85,000 $7.63 to $15.63
======== =============
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 $1,225,000, $743,000 and $609,000 to the Plan for the
years ended December 31, 1994, 1993 and 1992, respectively.
NOTE 15 -- LITIGATION AND CONTINGENCIES
The Company's financial statements at December 31, 1994 include a claim
receivable aggregating approximately $22,829,000 in direct costs relating to a
major remediation project being performed by the Company for Citgo Petroleum
Corporation ("Citgo") at its Lake Charles, Louisiana refinery. This claim
receivable represents direct costs to date for activities which the Company's
management believes exceeded
41
26
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
the scope of the existing contract due to deficient project specifications
provided by Citgo as well as other unplanned events controlled by Citgo. In
addition, at December 31, 1994, the Company has recorded in its financial
statements approximately $5,381,000 of accounts receivable that are in dispute
for work performed under the terms of the Company's base contract with Citgo.
During April 1994, the Company submitted to Citgo a request for equitable
adjustment and Citgo responded by filing an action in the U.S. District Court
for the Western District of Louisiana seeking a declaratory judgment that the
Company is not entitled to additional compensation under the contract and
certain other relief. The Company's answer to the declaratory judgment action
was filed in July 1994, together with counterclaims against Citgo for negligent
misrepresentation, breach of contract and quantum meruit seeking damages in
excess of $35,000,000. In August 1994, Citgo amended its complaint seeking
damages under the contract. In December, 1994 Citgo filed a motion to allow it
to file, and in January 1995, Citgo filed, a third party complaint against
Occidental Oil and Gas Corporation and OXY USA, Inc. as third party defendants
in such litigation because of their prior involvement with the Citgo site and
its contract specifications.
The Company has also become involved in litigation with Occidental Chemical
Corporation ("Occidental") relating to a separate project it performed in 1993
and 1994 for Occidental. The Company's financial statements at December 31, 1994
include a claim receivable of $8,114,000 in direct costs relating to this
project. The litigation arises from an October 1993 contract between the Company
and Occidental for work at a contaminated site 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's management believes were materially different than as represented by
Occidental. The Company believes that Occidental has implicitly acknowledged the
existence of differing conditions at the site through its previous execution and
partial payment of a change order relating to the Company's position. In October
1994, Occidental issued a deductive change order deleting substantially all
remaining work from the Company's contract. On December 30, 1994, while the
Company was in the process of developing a comprehensive claim document,
Occidental filed suit against the Company in the U.S. District Court for the
Western District of New York alleging damages in excess of $50,000, the
jurisdictional minimum. The Company will oppose Occidental's position vigorously
and will assert a counterclaim in excess of its direct costs relating to the
project.
During the fourth quarter of 1994, the Company recorded a $25,000,000
pre-tax charge, $15,000,000 after-tax or $0.96 per share, to establish a reserve
for accounts receivable, primarily where such accounts are in litigation.
Management believes that it has established adequate reserves should the
resolution of such accounts receivable be lower than the amounts recorded and
such resolution should not have a material adverse impact upon the Company's
consolidated results of future operations or financial condition.
The Company was named in April 1994 as one of 33 third party defendants in
a case titled UNITED STATES OF AMERICA V. AMERICAN CYANAMID COMPANY, INC., ET
AL., pending in the United States District Court for the Southern District of
West Virginia. This litigation arises out of claims made against several
potentially responsible parties ("PRPs") by the Environmental Protection Agency
("EPA") for amounts in excess of $24,000,000 for response costs arising out of
releases and threatened releases of hazardous wastes at the Fike Chemical, Inc.
Superfund site (the "Site") in Nitro, West Virginia. The Company was retained as
a response action contractor for the Site under contracts with the United States
Army Corps of Engineers ("USACE") and the EPA. The third party complaint alleges
that the Company was an operator of the Site during the remediation and that the
Company caused releases or threatened releases of hazardous substances at the
Site as a result of its negligent conduct, grossly negligent conduct or
intentional misconduct. The third party complaint seeks damages and contribution
from the Company and the other third party defendants. The Company has submitted
claims for indemnification related to this lawsuit under its contract with the
USACE and the EPA and has notified its contractor's pollution liability
insurance carrier. The Company believes the lawsuit is without merit, intends to
vigorously defend against it and does not believe that it will have a material
adverse effect on the results of future operations and financial condition of
the Company. The Company has
42
27
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
learned a criminal and civil investigation has been commenced by the government
relating to the Company's billings to the EPA and USACE and for its work at the
Site. The Company believes the investigation followed certain allegations made
by the PRPs in defense of the main cost recovery action. The Company is
cooperating with the investigation.
In addition to the above, the 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.
The Company is self-insured for the initial $1,000,000 of certain
comprehensive general and automobile liability risks through its wholly-owned
insurance company subsidiary and through deductible programs. The Company is
insured through commercial sources for certain environmental impairment risks as
well
as for certain general and automobile liability umbrella coverages in excess of
primary coverages. The Company provides for losses when identified and
evaluated.
NOTE 16 -- MAJOR CUSTOMERS
Revenues from federal government agencies accounted for 55%, 40%, and 25%
of gross revenues from continuing operations for the years ended December 31,
1994, 1993 and 1992, respectively. Revenues from state and local government
agencies accounted for 10%, 7% and 4% of gross revenues from continuing
operations for the years ended December 31, 1994, 1993 and 1992, respectively.
There were no industrial customers which accounted for more than 10% of gross
revenues for the years ended December 31, 1994, 1993 and 1992.
NOTE 17 -- SPECIAL CHARGES
The Company's loss from continuing operations for the year ended December
31, 1992 included special charges of $2,550,000 (net of $1,600,000 income tax
benefit) or $0.21 per share recorded by the Company and $2,162,000 or $0.18 per
share, which represents the Company's interest in special charges recorded by
NSC. Such special charges primarily relate to the restructuring of the Company
and NSC's asbestos abatement operations in anticipation of the acquisition of
the asbestos abatement division of Brand (see Note 18 -- Brand Agreement),
provisions for legal and insurance reserves, and certain other matters.
As discussed in Note 15, the Company's loss from continuing operations
included a special charge of $15,000,000 (net of $10,000,000 income tax benefit)
or $0.96 per share, to establish a reserve for accounts receivable, primarily
where such accounts are in litigation.
NOTE 18 -- BRAND AGREEMENT
On May 4, 1993, NSC completed the acquisition of all the assets and certain
liabilities of the asbestos abatement division of Brand in exchange for
4,010,000 shares of NSC's common stock and the common stock of NSCIS which in
turn owns all of the common stock of CPS and MVIS (the "Brand Transaction").
Pursuant to the Brand Agreement, Brand guaranteed a minimum gross margin on
certain asbestos abatement contracts to be assumed by NSC and will provide NSC
with access to certain asbestos disposal facilities on favorable terms. As part
of the Brand Transaction, Brand has negotiated settlements of the agreements
which provided for contingent payments to the former shareholders of CPS and
MVIS and NSC has revised the exercise price of the warrant to purchase 150,000
shares of NSC's common stock which was issued in connection with the acquisition
of CPS from $10.00 per share to $6.00 per share. In addition, NSC received
bonding support and a $25,000,000 subordinated working capital facility from an
affiliate of Brand. The
43
28
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Company and Brand each own 4,010,000 shares or approximately 40% of NSC's
outstanding common stock. See "Note 5 -- Investments in and Advances to
Affiliated Company."
NOTE 19 -- ACQUISITION
On December 6, 1994, the Company entered into a definitive agreement to
acquire substantially all of the assets and certain liabilities of the hazardous
and nuclear waste remediation services business units of Rust International Inc.
("Rust") in exchange for 10,368,000 shares of common stock of the Company, or
approximately 40% of the outstanding shares of the Company's common stock upon
completion of the transaction. In addition, Rust's parent company, WMX
Technologies, Inc., 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 $75,000,000 of the Company's indebtedness outstanding during the five years
following the closing of the transaction. The transaction is subject to the
approval of the shareholders of the Company. The required waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act expired during January 1995.
The anticipated closing date of such transaction is May 1995.
NOTE 20 -- QUARTERLY FINANCIAL INFORMATION AND MARKET PRICE INFORMATION
(UNAUDITED)
The following table sets forth the Company's condensed consolidated
statements of operations by quarter for 1994 and 1993.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1994
Gross revenues (1)................................. $75,031 $94,686 $91,308 $ 62,356
Net revenues....................................... 51,811 65,027 69,333 34,096
Gross profit (loss)................................ 10,384 13,691 15,033 (11,886)
Selling, general and administrative expenses....... 7,287 8,316 8,419 8,259
Operating income (loss)............................ 3,097 5,375 6,614 (20,145)
Net income (loss).................................. $ 805 $2,069 $2,615 $(13,105)
======= ======= ======= ========
Net income (loss) per share........................ $ 0.05 $ 0.13 $ 0.16 $ (0.84)
======= ======= ======= ========
Stock price range: (2)
High............................................. 17 1/4 18 1/2 13 1/2 11 3/8
Low.............................................. 11 3/8 10 5/8 11 6 7/8
1993
Gross revenues..................................... $43,840 $58,087 $62,063 $ 78,411
Net revenues....................................... 34,374 41,164 46,773 53,429
Gross profit....................................... 7,398 9,958 11,730 10,974
Selling, general and administrative expenses....... 5,977 6,593 7,351 7,189
Operating income................................... 1,421 3,365 4,379 3,785
Net income......................................... $ 331 $1,227 $1,749 $ 1,100
======= ======= ======= ========
Net income per share............................... $ 0.03 $ 0.10 $ 0.14 $ 0.08
======= ======= ======= ========
Stock price range: (2)
High............................................. 9 3/8 9 12 12 1/8
Low.............................................. 7 1/4 7 1/2 9 10 3/4
OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
---------------
NOTE:
(1) During the fourth quarter of 1994, the Company recorded a $25,000,000
pre-tax charge, $15,000,000 after-tax or $0.96 per share, to establish a
reserve for accounts receivable, primarily where such accounts are in
litigation.
(2) Reflects the high and low closing prices of the Company's common stock on
the New York Stock Exchange as reported by The Wall Street Journal. As of
December 31, 1994, the Company has approximately 869 shareholders of record.
The Company has not declared any cash dividends on its common stock and does
not intend to pay cash dividends in the foreseeable future.
44
29
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, 1994 and 1993, 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, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Columbus, Ohio
February 1, 1995
45