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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
---- THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
---- THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9654
OHM CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 34-1503050
(State of Incorporation) (I.R.S. Employer Identification Number)
16406 U.S. ROUTE 224 EAST, FINDLAY, OH. 45840
(Address of principal executive offices) (Zip Code)
(419) 423-3529
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirement for the past 90 days. Yes X No
--- ---
The number of shares of Common Stock outstanding on October 31, 1995 was
26,607,222.
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OHM CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
PART I
FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1995 (Unaudited)
and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income (Unaudited) for the Three and Nine Months
Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . 4
Independent Accountants' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . 10
PART II
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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Item 1. FINANCIAL STATEMENTS
OHM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
Sept. 30, Dec. 31,
1995 1994
--------- ---------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,341 $ 4,930
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,561 86,663
Costs and estimated earnings on contracts in process in excess of billings . . 56,596 65,437
Materials and supply inventory, at cost . . . . . . . . . . . . . . . . . . . 11,909 10,099
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . 11,145 7,252
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,660 6,744
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 437 205
--------- ---------
244,649 181,330
--------- ---------
Property and Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,311 57,240
--------- ---------
Other Noncurrent Assets:
Deferred debt issuance and financing costs . . . . . . . . . . . . . . . . . . 1,843 2,381
Investment in affiliated company . . . . . . . . . . . . . . . . . . . . . . . 23,639 23,352
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336 336
Intangible assets relating to acquired businesses, net . . . . . . . . . . . . 8,002 370
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,432 7,537
--------- ---------
41,252 33,976
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 367,212 $ 272,546
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,774 $ 47,936
Billings on contracts in process in excess of costs and estimated earnings . . 2,606 40
Accrued compensation and related taxes . . . . . . . . . . . . . . . . . . . . 5,802 3,874
Federal, state and local taxes . . . . . . . . . . . . . . . . . . . . . . . . 133 102
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
15,412 9,652
Current portion of noncurrent liabilities . . . . . . . . . . . . . . . . . . 4,316 3,262
--------- ---------
85,043 64,866
--------- ---------
Noncurrent Liabilities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,733 127,279
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 92
Pension agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
905 906
--------- ---------
119,696 128,277
--------- ---------
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,774 2,483
--------- ---------
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: 1995 - 26,592,887; 1994 - 15,848,089 . . . . . . . . . . . 2,659 1,584
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 135,718 63,294
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,322 14,598
--------- ---------
157,699 79,476
Less treasury stock, 1995 - 0; 1994 - 211,624 . . . . . . . . . . . . . . . . . . - (2,556)
--------- ---------
157,699 76,920
--------- ---------
Total Liabilities and Shareholders' Equity . . . . . . . . . . . . . . . . . $ 367,212 $ 272,546
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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OHM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1995 1994 1995 1994
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Gross Revenues .......................................... $ 135,886 $ 91,308 $ 315,604 $ 261,025
Less direct subcontract costs ......................... 42,945 21,975 95,500 74,854
--------- --------- --------- ---------
Net Revenues ............................................ 92,941 69,333 220,104 186,171
Cost of services ...................................... 73,870 54,300 171,979 147,063
--------- --------- --------- ---------
Gross Profit ............................................ 19,071 15,033 48,125 39,108
Selling, general and administrative expenses .......... 12,348 8,419 33,314 24,022
--------- --------- --------- ---------
Operating Income ........................................ 6,723 6,614 14,811 15,086
--------- --------- --------- ---------
Other (Income) Expenses:
Investment income ..................................... (577) (10) (600) (26)
Interest expense ...................................... 2,456 2,455 8,527 6,424
Equity in net earnings of affiliate ................... (6) (359) (287) (720)
Miscellaneous (income) expense, net ................... (95) 362 (56) 645
--------- --------- --------- ---------
1,778 2,448 7,584 6,323
--------- --------- --------- ---------
Income Before Income Taxes .............................. 4,945 4,166 7,227 8,763
Income taxes .......................................... 1,758 1,551 2,519 3,274
--------- --------- --------- ---------
Net Income .............................................. $ 3,187 $ 2,615 $ 4,708 $ 5,489
========= ========= ========= =========
Net Income Per Share .................................... $ 0.12 $ 0.16 $ 0.22 $ 0.34
========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding .................. 27,064 16,045 21,126 16,176
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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OHM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
-----------------------
1995 1994
--------- --------
(Unaudited)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,708 $ 5,489
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 7,208 5,181
Amortization of other noncurrent assets . . . . . . . . . . . . . . . . . . 2,071 1,817
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,375 2,608
Loss (gain) on sale of property and equipment . . . . . . . . . . . . . . . (223) 542
Equity in net earnings of affiliate's continuing operations . . . . . . . . . (287) (720)
Deferred translation adjustments and other . . . . . . . . . . . . . . . . . 741 89
Changes in current assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,450) (48,439)
Costs and estimated earnings on contracts in process in excess of billings . 10,692 (11,721)
Materials and supply inventory . . . . . . . . . . . . . . . . . . . . . . . (1,810) (1,220)
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . (4,279) 280
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (232) (34)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,276) 6,143
Billings on contracts in process in excess of costs and estimated earnings . 200 (326)
Accrued compensation and related taxes . . . . . . . . . . . . . . . . . . . (145) 626
Federal, state and local income taxes . . . . . . . . . . . . . . . . . . . 31 (201)
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . (3,557) (567)
--------- --------
Net cash flows provided by (used in) operating activities . . . . . . . . 9,767 (40,453)
--------- --------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . (8,971) (8,755)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . 2,504 1,815
Decrease (increase) in other noncurrent assets . . . . . . . . . . . . . . . 331 (2,135)
Cash acquired from purchase of business . . . . . . . . . . . . . . . . . . 16,670 -
--------- --------
Net cash provided by (used in) investing activities . . . . . . . . . . . 10,534 (9,075)
--------- --------
Cash flows from financing activities:
Increase in long term debt . . . . . . . . . . . . . . . . . . . . . . . . . 1,945 6,126
Payments on long-term debt and capital leases . . . . . . . . . . . . . . . (2,701) (1,183)
Proceeds from borrowing under revolving credit and term loan . . . . . . . . 113,700 112,000
Payments on revolving credit agreement . . . . . . . . . . . . . . . . . . . (120,500) (68,100)
Payments on pension agreement . . . . . . . . . . . . . . . . . . . . . . . (74) (81)
Proceeds from public offering of common stock . . . . . . . . . . . . . . . . - 863
Proceeds from private placement of common stock . . . . . . . . . . . . . . 10,000 -
Reissuance of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . 1,740 503
--------- --------
Net cash provided by financing activities . . . . . . . . . . . . . . . . 4,110 50,128
--------- --------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . 24,411 600
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 4,930 5,039
--------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 29,341 $ 5,639
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
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OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by OHM Corporation (the "Company") and reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for a fair
presentation of financial results for the three and nine months ended September
30, 1995 and 1994, in accordance with generally accepted accounting principles
for interim financial reporting and pursuant to Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
interim consolidated financial statements should be read in conjunction with the
Company's Annual Report to Shareholders for the year ended December 31, 1994.
The results of operations for the three and nine months ended September 30, 1995
and 1994, are not necessarily indicative of the results for the full year.
The unaudited consolidated financial statements include the accounts of the
Company and its subsidiaries. The Company's 40% owned asbestos abatement
affiliate, NSC Corporation ("NSC"), has been accounted for using the equity
method. All material intercompany transactions and balances have been eliminated
in consolidation.
The consolidated financial statements at September 30, 1995, and for the three
and nine months then ended have been reviewed, prior to filing, by Ernst & Young
LLP, the Company's independent accountants, and their report is included herein.
NOTE 2 - SUPPLEMENTARY CASH FLOW INFORMATION
As supplemental information related to the consolidated statements of cash
flows, cash paid for interest was $7,207,000 and $5,063,000 and cash paid for
income taxes was $194,000 and $394,000 for the nine months ended September 30,
1995 and 1994, respectively.
NOTE 3 - RECLASSIFICATIONS
Certain amounts presented for the three and nine months ended September 30, 1994
have been reclassified to conform to the September 30, 1995 presentation.
NOTE 4 - INVESTMENTS IN AFFILIATED COMPANY
The Company owns a 40% equity interest in NSC, a nationwide asbestos abatement
services company, which has been included in the Company's financial statements
using the equity method. The following summarizes the income statements of NSC
for the three and nine months ended September 30, 1995 and 1994:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1995 1994 1995 1994
------- ------- ------- --------
(In Thousands) (In Thousands)
Gross revenues . . . . . . . . . . $29,452 $32,076 $90,962 $101,429
Gross profit . . . . . . . . . . . . . . 4,562 6,075 14,465 15,975
Operating income . . . . . . . . . . . . 123 1,764 1,746 3,637
Net income . . . . . . . . . . . . . . . 2 892 714 1,791
Company's interest in net income . . . . 1 359 287 720
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NOTE 5 - INCOME TAXES
The reasons for differences between the provisions for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before income taxes are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1995 1994 1995 1994
------ ------- ------- -----
Federal statutory rate .................................. 34.0 % 34.0 % 34.0 % 34.0 %
Add (deduct):
State income taxes, net of federal benefit........... 5.0 % 4.2 % 4.8 % 4.2 %
Equity in net earnings of affiliate ................. - % (2.3)% (1.1)% (2.2)%
Other, net .......................................... (3.4)% 1.3 % (2.8)% 1.4 %
---- ---- ---- ----
35.6 % 37.2 % 34.9 % 37.4 %
==== ==== ==== ====
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
September 30, Dec. 31,
1995 1994
-------- --------
(In Thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 374 $ 257
Buildings and improvements . . . . . . . . . . . . . . . . . 17,544 17,179
Machinery and equipment . . . . . . . . . . . . . . . . . . 94,513 74,270
Construction in progress . . . . . . . . . . . . . . . . . . 11,679 4,190
-------- --------
124,110 95,896
Less accumulated depreciation and amortization . . . . . . . (42,799) (38,656)
-------- --------
$ 81,311 $ 57,240
======== ========
NOTE 7 - NET INCOME PER SHARE INFORMATION
Net income per share amounts are based on the weighted average number of 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 periods presented.
NOTE 8 - SEASONALITY
The timing of revenues is dependent on the Company's 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 work which
generally increases 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 can normally be expected to be lower than
the third and fourth quarters. Although the Company believes that the historical
trend in quarterly revenues for the third and fourth quarters of each year are
generally higher than the first and second quarters, there can be no assurance
that this will occur in future periods. Accordingly, quarterly or other interim
results should not be considered indicative of results to be expected for any
quarter or for the full year.
NOTE 9 - ACQUISITION
On May 30, 1995, the Company completed the acquisition of substantially all of
the assets and certain liabilities of the hazardous and nuclear waste
remediation service business (the "Division") of Rust International Inc.
("Rust") in exchange for 9,668,000 shares of common stock of the Company, or
approximately 37% of the outstanding shares of the Company's common stock. Such
shares issued to Rust are subject to a number of restrictions set forth in a
Standstill and Non-Competition Agreement that was entered into pursuant to the
Agreement and Plan of Reorganization dated December 5, 1994, as amended (the
"Reorganization Agreement"), among the Company, Rust and certain of its
subsidiaries. In addition to the net assets of the Division, the Company
received $16,670,000 in cash pursuant to provisions of the Reorganization
Agreement that provided for an adjustment based on the average per share price
of the Company's common stock for a 20 trading day period prior to closing. For
purposes of calculating
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the consideration given by the Company for the Division, such 20 trading day
average per share price of $11.25 was used, adjusted to reflect a discount for
the restricted nature of the common stock issued. In exchange for a warrant to
purchase up to 700,000 shares of the Company's common stock at an exercise price
of $15.00 per share during the five years following the closing date, Rust's
parent company, WMX Technologies, Inc. ("WMX"), will provide the Company with a
credit enhancement in the form of guarantees, issued from time to time upon
request of the Company, of up to $62,000,000 of the Company's indebtedness,
which will increase proportionately up to $75,000,000 upon issuance of shares
under the warrant.
The acquisition of the Division has been accounted for using the purchase method
and, accordingly, the acquired assets and assumed liabilities, including
goodwill, have been recorded at their estimated fair values as of May 30, 1995.
The Company's consolidated financial statements for the three and nine month
periods ended September 30, 1995, include the results of operations for the
Division since May 30, 1995. The following table sets forth the unaudited
combined pro forma results of operations for the nine months ended September 30,
1995 and 1994, giving effect to the acquisition of the Division as if such
acquisition had occurred on January 1, 1994.
Pro Forma
Nine Months Ended
September 30,
----------------------
1995 1994
-------- --------
(In Thousands, Except Per Share Data)
Gross revenue . . . . . . . . . . . . . . . . . . . . . . . $378,144 $432,701
Net income . . . . . . . . . . . . . . . . . . . . . . . . . 6,038 9,966
Net income per share . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.39
The actual purchase accounting adjustments to reflect the fair value of assets
and liabilities acquired have not been finalized and, as a result, the
accompanying consolidated financial statements and combined pro forma results of
operations have been prepared on the basis of preliminary estimates of such
adjustments. The combined pro forma results of operations for the nine months
ended September 30, 1995 are based upon certain assumptions and estimates which
the Company believes are reasonable. The combined pro forma results of
operations may not be indicative of the operating results that actually would
have been reported had the transaction been consummated on January 1, 1994, nor
are they necessarily indicative of results which will be reported in the future.
NOTE 10 - CAPITAL STOCK
On March 28, 1995, the Company sold to H. Wayne Huizenga and an affiliated
family foundation 1,000,000 shares of its common stock and options for an
aggregate purchase price of $10,000,000. The options are exercisable over five
years for the purchase of 620,000 shares of common stock upon payment of $10.00
per share and 380,000 shares of common stock upon payment of $12.00 per share.
NOTE 11 - CREDIT AGREEMENT
On May 31, 1995, the Company entered into a $150,000,000 revolving credit
agreement with a group of banks (the "Bank Group") to provide letters of credit
and cash borrowings. The agreement has a five year term and is scheduled to
expire on May 30, 2000. WMX has issued a guarantee of up to $62,000,000
outstanding under the credit agreement in favor of the Bank Group (See Note 9
Acquisition). Under the terms of the agreement the entire credit facility can be
used for either cash borrowings or letters of credit subject to certain
covenants. Cash borrowings bear interest at either the prime rate plus a
percentage up to 0.625% or, at the Company's option, the Eurodollar market rate
plus a percentage ranging from 0.325% to 1.625%. The percentage over the prime
rate or the Eurodollar market is based on the aggregate amount borrowed under
the facility, the presence of the WMX guarantee, and the Company's financial
performance as measured by an interest coverage ratio and a total funded debt
ratio. The arrangement provides the participating banks and WMX with a security
interest in the Company's equipment, inventories, accounts receivables, general
intangibles and in the Company's investment in the common stock of NSC as well
as the Company's other subsidiaries. The agreement also imposes, among other
covenants, a minimum tangible net worth covenant, a restriction on all of the
Company's retained earnings including the declaration and payment of cash
dividends and a restriction on the ratio of total funded debt to earnings before
income taxes, depreciation and amortization.
The Company had $14,757,000 and $34,771,000 of letters of credit and $50,900,000
and $57,700,000 of cash borrowings outstanding under its revolving credit
facility at September 30, 1995 and December 31, 1994, respectively.
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NOTE 12 - LITIGATION AND CONTINGENCIES
The Company's accounts receivable at September 30, 1995 include a claim
receivable aggregating approximately $25,323,000 in direct costs relating to a
major remediation project which was performed by the Company for Citgo Petroleum
Corporation ("Citgo") at its Lake Charles, Louisiana refinery during 1993 and
1994. This claim receivable represents direct costs to date for activities which
the Company's management believed exceeded the scope of the existing contract
due to deficient project specifications provided by Citgo and Oxy USA, Inc.
("Oxy") as well as differing site conditions. In addition, at September 30,
1995, 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. In 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
for production shortfalls, which Citgo has asserted in answer to the Company's
interrogatories to be approximately $27,600,000. The Company believes that such
assertion of damages is totally without merit since the contract expressly
provides that Citgo's sole remedy for production shortfalls by the Company are
liquidated damages not to exceed $500,000. In January 1995, Citgo filed a third
party complaint against Occidental Oil and Gas Corporation and Oxy as third
party defendants in such litigation because of their prior involvement with the
Citgo site and preparation of the contract specifications. Additionally, in July
1995, the Company filed a complaint against Oxy for negligent misrepresentation
as a result of its involvement with the development of sampling and analytical
data relied upon by the Company in preparation of its bid and cost estimates for
work at the site.
The Company has also become involved in litigation with Occidental Chemical
Corporation ("Occidental") relating to a separate project performed in 1993 and
1994 for Occidental. The Company's accounts receivable at September 30, 1995
include a claim receivable of $8,297,000 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 contract. On December 30, 1994, while the Company was in
the process of developing a comprehensive request for equitable adjustment,
Occidental filed suit against the Company in U.S. District Court for the Western
District of New York alleging damages in excess of $50,000, the jurisdictional
minimum. On March 3, 1995, Occidental filed an amended complaint seeking
$8,806,000 in damages primarily for alleged costs incurred as a result of
project delays and added volumes of incinerated wastes. On April 6, 1995, the
Company filed its answer and counterclaim denying any liability to Occidental
and seeking an amount in excess of $9,200,000 for damages arising from
Occidental's breach of contract, misrepresentation and failure to pay
outstanding contract amounts.
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 waste 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 the lawsuit
under its contract with the
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USACE and the EPA and has notified its contractors 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 also been subject to an investigation by the
government relating to the Company's billings to the EPA for its work at the
Site. The investigation was prompted by allegations made by certain of the PRPs
in defense of the main cost recovery action. Those PRPs have also filed a qui
tam suit against the Company under seal. The Company cooperated fully with the
investigation and has been informed that the government will not be proceeding
criminally against the Company. The Company is in the process of discussing with
the government the potential disposition of any civil or administrative action
by the government, including the qui tam suit.
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.
NOTE 13 - INTEGRATION EXPENSES
The Company's consolidated statements of income for the nine months ended
September 30, 1995, include expenses aggregating $2,428,000 (net of $1,426,000
income tax benefit) or $0.12 per share, for integration costs related to the
acquisition of the Division. The costs were recorded in selling, general and
administrative expenses and were primarily for severance and relocation costs
for certain of the Company's personnel and the closing of certain of the
Company's offices as a result of combining the operations of the Division and
the Company.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
OHM Corporation
We have reviewed the accompanying consolidated balance sheet of OHM Corporation
and subsidiaries as of September 30, 1995, and the related consolidated
statements of income for the three and nine month periods ended September 30,
1995 and 1994 and the consolidated statements of cash flows for the nine month
periods ended September 30, 1995 and 1994. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of OHM Corporation and subsidiaries as
of December 31, 1994, and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for the year then ended (not
present herein) and in our report dated February 1, 1995, except for Note 19, as
to which the date is May 4, 1995, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 1994, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
ERNST & YOUNG LLP
Columbus, Ohio
October 31, 1995
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company provides a broad range of environmental, hazardous and
nuclear 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 this year or 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 March 28, 1995, the Company sold to H. Wayne Huizenga and an
affiliated family foundation 1,000,000 shares of its common stock and options
for an aggregate purchase price of $10,000,000. The options are exercisable over
five years for the purchase of 620,000 shares of common stock upon payment of
$10.00 per share and 380,000 shares of common stock upon payment of $12.00 per
share.
On May 30, 1995, the Company completed the acquisition of substantially
all of the assets and certain liabilities of the hazardous and nuclear waste
remediation service business (the "Division") of Rust International Inc.
("Rust") in exchange for 9,668,000 shares of common stock of the Company, or
approximately 37% of the outstanding shares of the Company's common stock. In
exchange for a warrant to purchase up to 700,000 shares of the Company's common
stock at an exercise price of $15.00 per share during the five years following
the closing date, Rust's parent company, WMX Technologies, Inc. ("WMX"), will
provide the Company with a credit enhancement in the form of guarantees, issued
from time to time upon request of the Company, of up to $62,000,000 of the
Company's indebtedness, which will increase proportionately up to $75,000,000
upon issuance of shares under the warrant. The acquisition of the Division has
been accounted for using the purchase method and, accordingly, the acquired
assets and assumed liabilities, including goodwill, have been recorded at their
estimated fair values as of May 30, 1995. The Company's consolidated financial
statements for the nine months ended September 30, 1995, include the results of
operation for the Division since May 30, 1995.
The Company's consolidated statements of income for the nine months
ended September 30, 1995, include expenses of $3,854,000 pre-tax, $2,428,000
after-tax or $0.12 per share, for integration costs related to the acquisition
of the Division. The costs were recorded in selling, general and administrative
expenses and were primarily for severance and relocation costs for certain of
the Company's personnel and the closing of certain of the Company's offices as a
result of combining the operations of the Division and the Company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 VERSUS
THREE MONTHS ENDED SEPTEMBER 30, 1994
GROSS REVENUES. The following table sets forth the Company's gross
revenues by client type for the three months ended September 30, 1995 and 1994
(in thousands, except percentages):
1995 1994
---------------- --------------
Government . . . . . . . . . . . . . . . . . . . $ 96,192 71% $55,959 61%
Industrial . . . . . . . . . . . . . . . . . . . 39,694 29% 35,349 39%
-------- --- ------- ---
$135,886 100% $91,308 100%
======== === ======= ===
Total gross revenues increased by $44,578,000 to $135,886,000 for the
three months ended September 30, 1995 from $91,308,000 for the same period in
1994. Gross revenues for the three months ended September 30, 1995 include
revenues from the Division acquired on May 30, 1995. 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 with a
minimal amount of mark-up. The Company's management believes that net revenues
represent 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.
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DIRECT SUBCONTRACT COSTS. Direct subcontract costs for the three months
ended September 30, 1995 increased 95% to $42,945,000 from $21,975,000 for the
same period in 1994. Increases or decreases in direct subcontract costs
generally result from varying requirements for the use of subcontractors in the
projects performed by the Company. The increase in direct subcontract costs is
primarily due to the increase in gross revenues during the third quarter of 1995
when compared to the same period in 1994 and the increased use of subcontractors
for projects performed under the Company's government contracts. Direct
subcontract costs as a percentage of gross revenues were 32% for the three
months ended September 30, 1995, compared to 24% for the same period in 1994.
NET REVENUES. The following table sets forth the Company's net revenues
by client type for the three months ended September 30, 1995 and 1994 (in
thousands, except percentages):
1995 1994
------------- --------------
Government . . . . . . . . . . . . . . . . . . . $64,710 70% $40,408 58%
Industrial . . . . . . . . . . . . . . . . . . . 28,231 30% 28,925 42%
------- --- ------- ---
$92,941 100% $69,333 100%
======= === ======= ===
Net revenues for the three months ended September 30, 1995 increased
34% to $92,941,000 from $69,333,000 for the same period in 1994. Net revenues
for the three months ended September 30, 1995 include revenues from the Division
acquired on May 30, 1995.
Net revenues from government agencies for the three months ended
September 30, 1995 increased 60% to $64,710,000 from $40,408,000 for the same
period in 1994. Such improvement resulted primarily from increased net revenues
from the Company's term contracts with the U.S. Navy, the United States Army
Corps of Engineers and the Air Force, as well as increased revenues from other
federal government agencies. Such increases were offset by a significant
decrease in revenues from state and local governments during the three months
ended September 30, 1995 when compared to the same period in 1994. The Company
expects to experience a continued increase in net revenues from such federal
government contracts for the balance of 1995 when compared to the same periods
in 1994 and the Company continues to experience a significant amount of proposal
activity with the various Department of Defense agencies. However, further
reductions by Congress in future environmental remediation budgets of government
agencies may adversely impact future revenues from such agencies and the funding
of the Company's government term contracts included in contract backlog.
The Company experienced a $694,000 or 2% decrease in net revenues from
industrial clients during the three months ended September 30, 1995 as compared
to the same period in 1994. Such revenues would have decreased further if not
for the Company's acquisition of the Division. The Company's industrial sector
revenues have been sluggish, which the Company believes is due to anticipated
changes in the Superfund law pending its reauthorization and current economic
conditions in certain industry and geographic sectors. The Company cannot
predict the impact upon the environmental industry of the failure of Congress to
reauthorize the Superfund law. Further delays in Superfund reauthorization may
have an adverse impact upon the demand for the Company's services in the form of
project delays as clients and potential clients wait for and anticipate changes
in the regulations. Demand for the Company's services from the private sector
will remain dependant on general economic conditions and the outcome of the
proposed changes to the Superfund regulations. Industrial sector net revenues as
a percentage of total net revenues decreased to 30% for the three months ended
September 30, 1995 from 42% for the same period in 1994.
The Company believes that the government sector will be its primary
source of revenues for the foreseeable future in light of the factors discussed
above.
COST OF SERVICES AND GROSS PROFIT. Cost of services for the three
months ended September 30, 1995 increased 36% to $73,870,000 from $54,300,000
for the same period in 1994 primarily due to increased net revenues. Cost of
services as a percentage of net revenues was 79% and 78% for the three months
ended September 30, 1995 and 1994, respectively. Gross profit for the three
months ended September 30, 1995 increased 27% to $19,071,000 from $15,033,000
for the same period in 1994. Both gross profit and cost of services were
negatively impacted during the three months ended September 30, 1995 by the
acquisition of the Division. The Company incurred additional indirect cost of
services for the Division's offices and employees, while revenues from the
Division's projects were significantly lower than expected. The Company is
pursuing certain remediation and construction related opportunities with senior
management of WMX to expand the
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Company's status as a preferred provider, which the Company is hopeful will
expand the revenue opportunities on behalf of the Division. However, the Company
is uncertain as to the outcome of such discussions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SGA") expenses for the three months ended September 30, 1995
increased 47% to $12,348,000 from $8,419,000 for the same period in 1994. SGA
expense increased primarily as a result of the revenue growth and the
acquisition of the Division. SGA expense as a percentage of net revenues
increased to 13% for the third quarter of 1995 from 12% in the same period in
1994.
OPERATING INCOME. Operating income for the three months ended September
30, 1995 increased 2% to $6,723,000 from $6,614,000 for the same period in 1994,
as a result of factors discussed above.
OTHER (INCOME) EXPENSES. Other (income) expenses, excluding the
Company's equity in net earnings of NSC, decreased $1,023,000 to $1,784,000 from
$2,807,000 for the three months ended September 30, 1995 when compared to the
same period in 1994. Such decrease is primarily due to interest earned on
certain outstanding receivables guaranteed by Rust pursuant to the agreement for
the acquisition of the Division and gains realized on the disposition of certain
of the Company's operations equipment. The receivables guaranteed by Rust were
paid to the Company on September 30, 1995.
EQUITY IN NET EARNINGS OF AFFILIATE. The Company's equity interest in
NSC's net earnings for the three months ended September 30, 1995 was $6,000
compared to $359,000 for the same period in 1994. Such decrease in earnings is
primarily a result of losses recorded by NSC on claims settled in the third
quarter of 1995 with certain of its clients. In addition, the asbestos abatement
industry in general continues to experience competitive pressures in the market
place which have negatively impacted the gross margin on NSC's projects.
NET INCOME. Net income for the three months ended September 30, 1995
was $3,187,000 or $0.12 per share compared to $2,615,000 or $0.16 per share for
the same period in 1994. As a result of the acquisition of the Division and the
shares issued to H. Wayne Huizenga, the Company had approximately 69% more
shares outstanding during the third quarter of 1995 when compared to the same
period in 1994. The effective income tax rate was 36% for the three months ended
September 30, 1995, compared to 37% for the same period in 1994. See "Note 5 to
the Consolidated Financial Statements" for a reconciliation of the statutory
federal income tax rate to the effective income tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 1995 VERSUS
NINE MONTHS ENDED SEPTEMBER 30, 1994
GROSS REVENUES. The following table sets forth the Company's gross
revenues by client type for the nine months ended September 30, 1995 and 1994
(in thousands, except percentages):
1995 1994
-------------- ---------------
Government . . . . . . . . . . . . . . . . . . . $233,907 74% $145,393 56%
Industrial . . . . . . . . . . . . . . . . . . . 81,697 26% 115,632 44%
-------- --- -------- ---
$315,604 100% $261,025 100%
======== === ======== ===
Total gross revenues increased by $54,579,000 to $315,604,000 for the
nine months ended September 30, 1995 from $261,025,000 for the same period in
1994. Gross revenues for the nine months ended September 30, 1995 include
revenues from the Division since it was acquired on May 30, 1995. 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 with a minimal amount of mark-up. The Company's management believes that
net revenues represent 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 nine months
ended September 30, 1995 increased 28% to $95,500,000 from $74,854,000 for the
same period in 1994. Increases or decreases in direct subcontract costs
generally result from varying requirements for the use of subcontractors in the
projects performed by the Company. Direct subcontract costs as a percentage of
gross revenues were 30% for the nine months ended September 30, 1995, compared
to 29% for the same period in 1994.
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NET REVENUES. The following table sets forth the Company's net revenues
by client type for the nine months ended September 30, 1995 and 1994 (in
thousands, except percentages):
1995 1994
-------------- ---------------
Government . . . . . . . . . . . . . . . . . . . $159,403 72% $ 99,889 54%
Industrial . . . . . . . . . . . . . . . . . . . 60,701 28% 86,282 46%
-------- --- -------- ---
$220,104 100% $186,171 100%
======== === ======== ===
Net revenues for the nine months ended September 30, 1995 increased 18%
to $220,104,000 from $186,171,000 for the same period in 1994. Net revenues for
the nine months ended September 30, 1995 include revenues from the Division
since it was acquired on May 30, 1995.
Net revenues from government agencies for the nine months ended
September 30, 1995 increased 60% to $159,403,000 from $99,889,000 for the same
period in 1994. Such improvement resulted primarily from increased net revenues
from the Company's term contracts with the U.S. Navy, the United States Army
Corps of Engineers and the Air Force, as well as increased revenues from other
federal government agencies. Such increases were offset by a decrease in
revenues from state and local governments during the nine months ended September
30, 1995 when compared to the same period in 1994. The Company expects to
experience a continued increase in net revenue from such federal government
contracts for the balance of 1995 when compared to the same periods in 1994 and
the Company continues to experience a significant amount of proposal activity
with the various Department of Defense agencies. However, further reductions by
Congress in future environmental remediation budgets of government agencies may
adversely impact future revenues from such agencies and the funding of the
Company's government term contracts included in contract backlog.
The Company experienced a $25,581,000 or 30% decrease in net revenues
from industrial clients during the nine months ended September 30, 1995 as
compared to the same period in 1994. Such revenues would have decreased further
if not for the Company's acquisition of the Division. The nine months ended
September 30, 1994 included significant net revenues from a project that was
performed for Citgo Petroleum Corporation ("Citgo") (see "Note 12 to the
Consolidated Financial Statements") that ended during the third quarter of 1994.
The Company's industrial sector revenues have been sluggish, which the Company
believes is due to anticipated changes in the Superfund law pending its
reauthorization and current economic conditions in certain industry and
geographic sectors. The Company cannot predict the impact upon the environmental
industry of the failure of Congress to reauthorize the Superfund law. Further
delays in Superfund reauthorization may have an adverse impact upon the demand
for the Company's services in the form of project delays as clients and
potential clients wait for and anticipate changes in the regulations. Demand for
the Company's services from the private sector will remain dependant on general
economic conditions and the outcome of the proposed changes to the Superfund
regulations. Industrial sector net revenues as a percentage of total net
revenues decreased to 28% for the nine months ended September 30, 1995 from 46%
for the same period in 1994.
The Company believes that the government sector will be its primary
source of revenues for the foreseeable future in light of the factors discussed
above.
COST OF SERVICES AND GROSS PROFIT. Cost of services for the nine months
ended September 30, 1995 increased 17% to $171,979,000 from $147,063,000 for the
same period in 1994 primarily due to increased net revenues. Cost of services as
a percentage of net revenues was 78% and 79% for the nine months ended September
30, 1995 and 1994, respectively. Cost of services as a percentage of net
revenues was negatively impacted during the nine months of 1994 by contract
claims arising out of the Company's project with Citgo, which was recorded
without gross profit margin. Gross profit for the nine months ended September
30, 1995 increased 23% to $48,125,000 from $39,108,000 for the same period in
1994. Both gross profit and cost of services were negatively impacted during the
nine months ended September 30, 1995 by the acquisition of the Division. The
Company incurred additional indirect cost of services for the Division's offices
and employees, while revenues from the Division's projects were significantly
lower than expected. The Company is pursuing certain remediation and
construction related opportunities with senior management of WMX to expand the
Company's status as a preferred provider, which the Company is hopeful will
expand the revenue opportunities on behalf of the Division. However, the Company
is uncertain as to the outcome of such discussions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SGA") expenses for the nine months ended September 30, 1995
increased 39% to $33,314,000 from $24,022,000 for the same
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16
period in 1994. Selling, general and administrative expenses for the nine months
ended September 30, 1995, include expenses of $3,854,000 for integration costs
related to the acquisition of the Division. The expenses were primarily for
severance and relocation costs for certain of the Company's personnel and the
closing of certain of the Company's offices as a result of combining the
operations of the Company and the Division. SGA expense as a percentage of net
revenues increased to 15% for the first nine months of 1995 from 13% in the same
period in 1994.
OPERATING INCOME. Operating income for the nine months ended September
30, 1995 decreased 2% to $14,811,000 from $15,086,000 for the same period in
1994. The decrease is primarily due to the integration expenses incurred during
the second quarter of 1995 related to combining the operations of the Company
and the Division as well as the other factors discussed above.
OTHER (INCOME) EXPENSES. Other (income) expenses, excluding the
Company's equity in net earnings of NSC, increased $828,000 to $7,871,000 from
$7,043,000 for the nine months ended September 30, 1995 when compared to the
same period in 1994. Such increase is primarily due to the increase in interest
expense for the nine months ended September 30, 1995 of $2,103,000 to $8,527,000
from $6,424,000 for the same period in 1994. The increase in interest expense
was offset by interest earned on certain outstanding receivables guaranteed by
Rust pursuant to the agreement for the acquisition of the Division and gains
realized on the disposition of certain of the Company's operations equipment.
Such receivables guaranteed by Rust were paid to the Company on September 30,
1995. The increase in interest expense was due to additional borrowing under the
Company's credit facility during the first half of 1995 as a result of the
increased working capital requirements of certain large remediation projects and
government contracts.
EQUITY IN NET EARNINGS OF AFFILIATE. The Company's equity interest in
NSC's net earnings for the nine months ended September 30, 1995 was $287,000
compared to $720,000 for the same period in 1994. Such decrease in earnings is
primarily a result of losses recorded by NSC on claims settled in the third
quarter of 1995 with certain of its clients. In addition, the asbestos abatement
industry in general continues to experience competitive pressures in the market
place which have negatively impacted the gross margin on NSC's projects.
NET INCOME. Net income for the nine months ended September 30, 1995 was
$4,708,000 or $0.22 per share compared to $5,489,000 or $0.34 per share for the
same period in 1994. The effective income tax rate was 35% for the nine months
ended September 30, 1995, compared to 37% for the same period in 1994. See "Note
5 to the Consolidated Financial Statements" for a reconciliation of the
statutory federal income tax rate to the effective income tax rate.
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):
September 30, December 31,
1995 1994
------------ ------------
Backlog . . . . . . . . . . . . . . . . . . . . . . $ 482,000 $ 255,000
Term contracts . . . . . . . . . . . . . . . . . . . 1,589,000 1,498,000
---------- ----------
Total contract backlog . . . . . . . . . . . . . $2,071,000 $1,753,000
========== ==========
The Company received more new contract awards from clients and delivery
orders issued under the Company's term contracts during the first nine months of
1995 than was recorded as revenue, which resulted in the increase in backlog at
September 30, 1995. In accordance with industry practice, substantially all of
the Company's contracts in backlog may be terminated at the convenience of the
client. In addition, the amount of the Company's backlog is subject to changes
in the scope of services to be provided under any given contract. The Company
estimates that approximately 60% of the backlog at September 30, 1995 will be
realized within the next year.
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 canceled, delayed or
modified at
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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. In addition, further reductions
by Congress in future environmental remediation budgets of government agencies
may adversely impact future revenues from such agencies and the funding of the
Company's government term contracts included in contract backlog.
LIQUIDITY AND CAPITAL RESOURCES
On May 31, 1995, the Company entered into a $150,000,000 revolving
credit agreement with a group of banks (the "Bank Group") to provide letters of
credit and cash borrowings. The agreement has a five year term and is scheduled
to expire on May 30, 2000. WMX has issued a guarantee of up to $62,000,000
outstanding under the credit agreement in favor of the Bank Group (See Note 9 -
Acquisition). Under the terms of the agreement the entire credit facility can be
used for either cash borrowings or letters of credit. Cash borrowings bear
interest at either the prime rate plus a percentage up to 0.625% or, at the
Company's option, the Eurodollar market rate plus a percentage ranging from
0.325% to 1.625%. The percentage over the prime rate or the Eurodollar market
rate is based on the aggregate amount borrowed under the facility, the presence
of the guaranty, and the Company's financial performance as measured by an
interest coverage ratio and a total funded debt ratio. The agreement provides
the participating banks with a security interest in the Company's equipment,
inventories, accounts receivables, general intangibles and in the Company's
investment in the common stock of NSC as well as the Company's other
subsidiaries. The agreement also imposes, among other covenants, a minimum
tangible net worth covenant, a restriction on all of the Company's retained
earnings including the declaration and payment of cash dividends and a
restriction on the ratio of total funded debt to earnings before income taxes,
depreciation and amortization. The Company had $14,757,000 and $34,771,000 of
letters of credit and $50,900,000 and $57,700,000 of cash borrowings outstanding
under its revolving credit facility at September 30, 1995 and December 31, 1994,
respectively. The Company had $29,341,000 and $4,930,000 of cash and cash
equivalents at September 30, 1995 and December 31, 1994 respectively. The
increase in cash at September 30, 1995 when compared to December 31, 1994 is
primarily due to the receipt of cash on September 30, 1995 from Rust for certain
of the Division's receivables that were guaranteed under the terms of the merger
agreement.
Capital expenditures for the nine months ended September 30, 1995 and
1994 were $8,971,000 and $8,755,000, respectively. 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. Capital expenditures for fiscal year 1995 are expected to range
between $10,000,000 and $12,000,000. The Company's long-term capital expenditure
requirements are dependent upon the type and size of future remediation projects
awarded to the Company.
During the first nine months of 1995, the Company derived 74% of its
gross revenues from government agencies compared to 56% during the same period
in 1994. Revenues from government agencies historically have required greater
working capital, the major component of which is accounts receivable, than
revenues from industrial sector clients. In addition, the Company is bidding on
a number of large, long-term contract opportunities which, if awarded to the
Company, would also increase working capital needs and capital expenditures. The
Company believes it will be able to finance its increased working capital needs
and capital expenditures in the short term through a combination of cash flows
from continuing operations, borrowing under its Revolving Credit Facility,
proceeds from permitted asset sales and other external sources. In addition,
under the terms of its recently completed acquisition of Rust's hazardous and
nuclear waste remediation business, Rust's parent company, WMX, has provided the
Company with a credit guarantee of up to $62,000,000 of the Company's
indebtedness outstanding until May 30, 2000. Such credit guarantee has allowed
the Company to expand its borrowing capacity and lower its cost of capital under
its new credit facility entered into on May 31, 1995.
The Company's identified long-term capital needs consist of payments
due upon the maturity of the Company's Revolving Credit Facility in 2000 and
sinking fund payments commencing in 1996 as well as payments due upon maturity
of its Convertible Debentures in 2006. The Company purchased and retired
$5,000,000 of the outstanding Convertible Debentures during October 1995,
sufficient to meet its first annual sinking fund obligation due October 1, 1996.
The Company believes that it will be able to refinance the remaining
indebtedness as necessary.
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ENVIRONMENTAL MATTERS AND GOVERNMENT CONTRACTING
Although the Company believes that it generally benefits from increased
environmental regulations and from enforcement of those regulations, increased
regulation and enforcement also create significant risks for the Company. The
assessment, remediation, analysis, handling and management of hazardous
substances necessarily involve significant risks, including the possibility of
damages or injuries caused by the escape of hazardous materials into the
environment, and the possibility of fines, penalties or other regulatory action.
These risks include potentially large civil and criminal liabilities for
violations of environmental laws and regulations, and liabilities to customers
and to third parties for damages arising from performing services for clients,
which could have a material adverse effect on the Company.
The Company does not believe there are currently any material
environmental liabilities which should be recorded or disclosed in its financial
statements. The Company anticipates that its compliance with various laws and
regulations relating to the protection of the environment will not have a
material effect on its capital expenditures, future earnings or competitive
position.
Because of its dependence on government contracts, the Company also
faces the risks associated with such contracting, which could include civil and
criminal fines and penalties. As a result of its government contracting
business, the Company has been, is, and may in the future be subject to audits
and investigations by government agencies. See "Note 12 to the Consolidated
Financial Statements." 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 for future government
contracting, could have a material adverse effect on the Company's business.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
In October 1993, the Company was retained by Citgo for the removal of
surface impoundment sludge at its Lake Charles, Louisiana refinery. Based
on information provided to the Company by Citgo and Oxy USA, Inc. ("Oxy"),
the Company bid and was awarded a contract for approximately $28,600,000.
During April 1994, the Company submitted to Citgo a request for a
substantial equitable adjustment to the contract as a result of deficient
project specifications provided by Citgo as well as other unplanned events
controlled by Citgo. On April 29, 1994, Citgo filed a declaratory judgment
action in the United States District Court for the Western District of
Louisiana requesting a declaratory judgement that the Company is not
entitled to additional compensation and requesting an order for specific
performance requiring the Company to perform the contract. The Company
accounts receivable as of September 30, 1995 reflect a claim receivable and
other accounts receivable relating to performance of the Citgo project
aggregating approximately $30,704,000. The Company's answer to the
declaratory judgement action was filed on July 28, 1994, together with
counterclaims against Citgo for negligent misrepresentation, breach of
contract and quantum meruit seeking damages in excess of $35,000,000.
Subsequent to filing of the Company's answer and counterclaim, Citgo
amended its complaint seeking damages under the contract for production
shortfalls, which Citgo has asserted in answer to the Company's
interrogatories to be approximately $27,600,000. The Company believes that
such assertion of damages is totally without merit since the contract
expressly provides that Citgo's sole remedy for production shortfalls by
the Company are liquidated damages not to exceed $500,000. In January 1995,
Citgo filed a third party complaint against Occidental Oil and Gas
Corporation and Oxy asserting various claims relating to their prior
involvement with the Citgo site and its contract specifications.
Additionally, in July 1995, the Company filed a complaint against Oxy for
negligent misrepresentation as a result of its involvement with the
development of sampling and analytical data relied upon by the Company in
preparation of its bid and cost estimates for work at the site.
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
Superfund cost recovery 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 waste 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 contractors 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 operations and financial
condition of the Company. The Company has also been subject to an
investigation by the government relating to the Company's billings to the
EPA for its work at the Site. The investigation was prompted by allegations
made by certain of the PRPs in defense of the main cost recovery action.
Those PRPs also filed a qui tam suit against the Company under seal. The
Company cooperated fully with the investigation and has been informed that
the government will not be proceeding criminally against the Company. The
Company is in the process of discussing with the government the potential
disposition of any civil or administrative action by the government,
including the qui tam suit. See "Managements Discussion and Analysis of
Financial Condition and Results of Operation - Environmental Matters and
Government Contracting."
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(a) Amendment No. 2 dated July 27, 1995 to Agreement and
Plan of Reorganization dated December 5, 1994 by and
among OHM Corporation, Rust Remedial Services, Inc.,
Enclean Environmental Services Group, Inc., Rust
Environmental Inc., and Rust International, Inc.
10(b) Amendment No. 1 dated as of October 16, 1995 to the
Revolving Credit Agreement dated as of May 31, 1995
among OHM Corporation and OHM Remediation Services
Corp., and the banks named therein, Citicorp USA,
Inc., as Administrative Agent and Bank of America
Illinois, as Issuing and Paying Agent and Co-Agent
11 Statement Re Computation of Per Share Earnings
15 Letter Re Unaudited Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on form 8-K were filed during the quarter ended
September 30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHM CORPORATION
Date: November 14, 1995 By /s/ JAMES L. KIRK
-----------------------------
James L. Kirk
Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Officer)
Date: November 14, 1995 By /s/ Harold W. Ingalls
-----------------------------
Harold W. Ingalls
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 1995 By /s/ KRIS E. HANSEL
-----------------------------
Kris E. Hansel
Vice President and Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Exhibit
Number Description
- ------- -----------
10(a) Amendment No. 2 dated July 27, 1995 to Agreement and Plan of
Reorganization dated December 5, 1994 by and among OHM
Corporation, Rust Remedial Services, Inc., Enclean Environmental
Services Group, Inc., Rust Environmental Inc., and Rust
International, Inc.
10(b) Amendment No. 1 dated as of October 16, 1995 to the Revolving
Credit Agreement dated as of May 31, 1995 among OHM Corporation
and OHM Remediation Services Corp., and the banks named therein,
Citicorp USA, Inc., as Administrative Agent and Bank of America
Illinois, as Issuing and Paying Agent and Co-Agent
11 Statement Re Computation of Per Share Earnings
15 Letter Re Unaudited Financial Information
27 Financial Data Schedule