ITEM 1. BUSINESS
OVERVIEW
OHM Corporation, an Ohio corporation, and its predecessors (the "Company"), is one of the largest providers of technology-based, on- site hazardous waste remediation services in the United States. The Company has been in the environmental services business since 1969. The Company has successfully completed approximately 31,000 projects involving contaminated groundwater, soil and facilities.
The Company provides a wide range of environmental services, primarily to government agencies and to large chemical, petroleum, transportation and industrial companies. The Company has worked for the United States Environmental Protection Agency ("EPA"), the Department of Defense ("DOD") (including the U.S. Army Corps of Engineers ("USACE") and the U.S. Departments of the Air Force, Army and Navy), the Department of Energy ("DOE"), a number of state and local governments and a majority of the Fortune 100 industrial and service companies. In addition to its technology-based, on-site remediation services, the Company also offers a broad range of other services, including site assessment, engineering, remedial design and analytical testing. Service is provided through 30 regional offices, one fixed laboratory at its headquarters in Findlay, Ohio, eight mobile laboratories, and approximately 2,800 pieces of mobile treatment and related field equipment.
Since the disposition by the Company in early 1993 of its interest in OHM Resource Recovery Corp., the operator of a hazardous waste treatment and disposal facility, the Company does not own or operate any hazardous waste disposal sites or other off-site waste treatment or disposal facilities. The Company generally coordinates through licensed subcontractors the transportation and disposal of any hazardous waste which is not remediated on-site.
On May 30, 1995, pursuant to an Agreement and Plan of Reorganization, the Company through its wholly-owned subsidiary, OHM Remediation Services Corp. ("OHMR"), acquired (the "Acquisition") in exchange for 9,668,000 shares of Common Stock of the Company, par value $.10 per share ("Common Stock"), substantially all of the assets and certain liabilities of the environmental remediation services business of Rust International Inc. ("Rust"), a majority-owned subsidiary of WMX Technologies, Inc. ("WMX"). In connection with the Acquisition, the Company and WMX entered into a Guarantee Agreement whereby in exchange for a warrant exercisable for five years, to purchase 700,000 shares of Common Stock at a price per share of $15.00, WMX agreed, until May 30, 2000, to guarantee indebtedness of the Company in an amount not to exceed $62,000,000 which will increase proportionately up to $75,000,000 upon issuance of shares under the warrant. In addition, the Company entered into a Standstill and Non-competition Agreement (the "Standstill Agreement") with WMX and its affiliates. As contemplated by the Standstill Agreement, three designees of WMX were elected to the Board of Directors of the Company.
The Company also has an approximately 40% interest in NSC Corporation ("NSC"), a provider of asbestos abatement and specialty contracting services.
OHM'S ENVIRONMENTAL REMEDIATION SERVICES
The Company assists its clients by providing comprehensive on-site treatment of toxic materials and hazardous wastes. By applying a broad range of biological, chemical, physical, soil vapor extraction and thermal treatment technologies, the Company performs on-site treatment and remediation services for the control, detoxification, decontamination, and volume reduction of hazardous and toxic material. Accordingly, the Company has designed a wide range of modular mobile treatment equipment, which can be used on-site, either independently or in a system, for removing, detoxifying, reducing the volume of, or stabilizing contaminants. This equipment includes thermal destruction units, dewatering presses, filters, separators, ion exchangers, stripping systems and mobile process equipment which apply various physical, chemical and biological technologies to remediate contaminants. Since 1970, the Company has completed approximately 31,000 projects throughout the United States, cleaning up hazardous wastes, removing toxic chemicals from groundwater and cleaning facilities of contaminants.
The Company endeavors to offer clients an increasingly broad array of on-site treatment services, either on a planned or emergency basis, from its 30 regional offices located throughout the country. On-site environmental remediation services provided by the Company include:
* Treatment, stabilization or removal of contaminants;
* Decontamination of industrial facilities;
* Assessment, characterization and treatment of contaminated soil and/or groundwater;
* Surface impoundment restoration, including volume reduction, stabilization and closure of contaminated lagoons;
* Management of underground and above ground storage tanks;
* Design, engineering, fabrication, installation and operation of on-site treatment equipment; and
* Emergency response to virtually any kind of industrial or transportation-related accident involving hazardous waste or materials.
The Company undertakes these projects on both a planned basis, which is scheduled in advance, and an emergency basis, which is performed in direct response to spills, fires and industrial accidents. The Company places its emphasis upon planned work because of its more predictable resource requirements, and because of its larger potential market. In 1996, planned projects accounted for approximately 98% of the Company's revenue.
The Company believes that professional project management and cost accounting systems are key factors in ensuring that projects are accurately and successfully completed on time and within prescribed cost estimates. The Company's project management structure combines the various functional areas performing work at the project, including technical, engineering, administrative and accounting specialists, into a coordinated team, reporting directly to the project manager. The project manager's responsibility for scheduling and project completion allows technical and operations specialists to operate efficiently with fewer distractions.
The Company also believes that professional project management is a critical element in limiting the significant risks and potential liabilities involved in environmental remediation projects due to the presence of hazardous and toxic substances. The Company has adopted a number of risk management policies and practices including special employee training and health monitoring programs. The Company's health and safety staff establish a safety plan for each project prior to the initiation of work, monitor compliance with the plan and administer the Company's medical monitoring program to staff involved. The Company believes that it has an excellent overall health and safety record.
TREATMENT TECHNOLOGIES
Designing, developing and implementing solutions to environmental hazards requires an interdisciplinary approach combining practical field experience with remediation processes and technical skills in fields such as chemistry, microbiology, hydrogeology, fluid mechanics, thermodynamics, and geotechnical, biochemical and process engineering. The Company employs scientific and engineering professionals in the environmental services field who enhance the Company's ability to effectively participate in larger, more technically complex remediation projects.
The Company has significant experience in the commercialization and practical field application of new and existing technologies for the treatment of hazardous wastes, with emphasis on the further development and application of existing technologies. To provide direct support for its efforts to place innovative technology in the field, in 1973, the Company built its own equipment fabrication facility; in 1978, the Company built a laboratory dedicated to developing commercial applications of biological treatment of hazardous wastes; and in 1993, the Company built a treatability laboratory to support testing and enhancement of a broad range of innovative technology applications. The Company also provides technology development services under contract to its clients.
The following represent the principal technologies used by the Company for remediation projects:
* BIOLOGICAL REMEDIATION: The Company's Bioremediation Department designs and tests bioremediation techniques for treating hazardous waste. Biological treatment technologies generally utilize enhanced microbiological activity to decompose and detoxify contaminants, often using a site's natural flora to remediate a problem. The Company's biological laboratories can "feed" the microorganisms, that destroy the pollutant, so that they grow at a faster rate than would occur in nature. The Company has developed considerable expertise in transferring innovative bioremediation techniques from the laboratory to the field. The Company utilizes the following biological treatment technologies:
Anaerobic Digestion Vessel -- degradation of organic contaminants in the absence of air.
Trickling Filters -- secondary treatment on large-scale treatment applications to enhance the oxygenation process.
Activated Sludge Reactor -- treatment utilizing holding tanks to enhance biological degradation.
Submerged Fixed Reactor Vessel -- combines a trickling filter and an activated sludge reactor for more efficient degradation of contaminants.
Aeration Lagoons -- secondary or tertiary treatment to remove carbon, nitrogen or phosphorous.
* CHEMICAL TREATMENT: The Company's mobile chemical treatment equipment utilizes the following technologies:
Carbon Adsorption -- passage of a liquid or vapor discharge stream through a bed of activated carbon which adsorbs certain contaminants.
Oxidation/Reduction -- conversion of complex components of the wastestream into simpler, less toxic materials through addition of oxidizing or reducing agents such as ozone, hydrogen peroxide and sodium bisulfate.
Clarification/Flocculation -- addition of chemicals which bond or interact with suspended solids and dissolved contaminants to form a flocculated product which can be separated through settling or filtration techniques.
Ion-Exchange -- ion-exchange resins used for the selective removal of heavy metals and hazardous ions.
Ultraviolet Treatment -- use of ultraviolet light to kill pathogens and convert or degrade some organic chemicals, especially when combined with the use of oxidants.
* PHYSICAL TREATMENT: The Company's physical treatment technologies generally involve removal of contaminants through osmosis, settlement or filtration. The Company's mobile physical treatment equipment utilizes the following technologies:
Heated Volatile Stripping -- removal of contaminants with low boiling points by passage of air under pressure through the wastestream.
Fume Scrubbing -- passage of a vaporized stream through an aerosol spray to remove contaminant particles from the vapor stream.
Immiscible Fraction Separation -- removal of a component of a wastestream which is immiscible in water through settling techniques.
Mixed Media Filtration -- removal of suspended particles by passage through selected filter media.
* SOIL VAPOR EXTRACTION AND SOIL FLUSHING: The Company has applied several innovative technologies, known generally as soil vapor extraction and soil flushing, based on a patent granted in 1984 for a portable method of soil decontamination above or below the groundwater table. The technologies generally involve the use of a system of pressurized injection and vacuum extraction wells to induce a pressure gradient and a fluid flow to extract contaminants and treat them in-situ or in an aboveground system. The technologies can be used to remove contaminants in soils and groundwater, in-situ or ex-situ, and can be combined with bioremediation to treat mixtures of volatile and non-volatile contaminants.
* THERMAL TREATMENT: The Company's thermal treatment technologies include infrared incineration, rotary kiln technology and thermal desorption. Infrared incineration uses electric powered resistance heaters as a source of radiant heat for removal and destruction of hazardous organic contaminants. Rotary kiln incineration is the traditional incineration process for destroying organic hazardous waste constituents in a refractory lined rotating
kiln. Thermal desorption is a thermal treatment technology which uses heat to remove volatile compounds from a waste without oxidation of the compounds. The Company has established a thermal treatment engineering group to assess, develop and commercialize thermal technologies for on-site remediation.
FOCUS ON LARGER PROJECTS AND GOVERNMENT CONTRACTS
The Company pursues larger projects and term contracts as a method to achieve more predictable revenue, more consistent utilization of equipment and personnel, and greater leverage of sales and marketing costs. Historically, the Company relied most heavily on private sector remediation projects in the Northeast and Midwest that typically involved planned cleanups of sites that were contaminated in the normal course of manufacturing activity and emergency cleanups of oil or chemical spills. Contract values typically were less than $1 million in size and less than one year in duration. The Company now targets more complex, multi-million dollar, multi-year private sector and government site-specific and term contracts. As a result of its shift in project focus, since the beginning of 1991 the Company has been awarded a large number of multi-million dollar government term contracts which, in some cases, may require several years to complete. Although the Company still performs private sector remediation projects, the Company currently derives a majority of its revenue from government term contracts and these larger projects. Larger site-specific projects impose heightened risks of loss in the event that actual costs are higher than those estimated at the time of bid due to unanticipated problems, inefficient project management, or disputes over the terms and specifications of the contracted performance.
Since the beginning of 1991, the Company has been awarded 30 government term contracts, and several large projects, including those acquired by the Company in connection with the Acquisition, with potential values ranging from $10 million to $250 million and terms ranging from one to ten years. Such government term contracts typically are performed by completing remediation work under delivery orders, issued by the contracting government entity, for a large number of small-to-medium-sized projects throughout the geographic area covered by the contract. Such government term contracts do not represent commitments with respect to the amount, if any, that will actually be expended pursuant to such contracts, may generally be canceled, delayed or modified at the sole option of the government, and are subject to annual funding limitations and public sector budget constraints. Accordingly, such government contracts represent the potential dollar value that may be expended under such contracts; therefore, no assurance can be provided that such amounts, if any, will be actually spent on any projects, or of the timing thereof.
For the fiscal year ended December 31, 1996, 77% of the Company's revenue was derived from federal, state and local government contracts. The Company expects that the percentage of its revenue attributable to such government clients will continue to represent a significant portion of its revenue. In addition to its dependence on government contracts, the Company also faces the risks associated with such contracting, which could include substantial civil and criminal fines and penalties. As a result of its government contracting business, the Company is, has been and may in the future be subject to audits and investigations by government agencies. In addition to potential damage to the Company's business reputation, the failure by the Company to comply with the terms of any of its government contracts could also result in the Company's suspension or debarment from future government contracts for a significant period of time. The fines and penalties which could result from noncompliance with appropriate standards and regulations, or the Company's suspension or debarment, could have a material adverse effect on the Company's business, particularly in light of the increasing importance to the Company of work for various government agencies.
ENVIRONMENTAL CONTRACTOR RISKS
Although the Company believes that it generally benefits from increased environmental regulations, and from enforcement of those regulations, increased regulation and enforcement also create significant risks for the Company. The assessment, remediation, analysis, handling and management of hazardous or radioactive substances necessarily involve significant risks, including the possibility of damages or injuries caused by the escape of hazardous materials into the environment, and the possibility of fines, penalties or other regulatory action. These risks include potentially large civil and criminal liabilities for violation of environmental laws and regulations, and liabilities to customers and to third parties, including governmental agencies, for damages arising from performing services for clients, which could have a material adverse effect on the Company.
Potential Liabilities Arising Out of Environmental Laws and Regulations. All facets of the Company's business are conducted in the context of a developing and changing statutory and regulatory framework. The Company's operations and services are affected by and subject to regulation by a number of federal agencies, including the EPA, the Occupational Safety
and Health Administration ("OSHA"), and in limited occasions, the Nuclear Regulatory Commission, as well as applicable state and local regulatory agencies. For a description of certain applicable laws and regulations, see "Regulation."
Potential Liabilities Involving Clients and Third Parties. In performing services for its clients, the Company could potentially be liable for breach of contract, personal injury, property damage and negligence, including claims for lack of timely performance and/or for failure to deliver the service promised (including improper or negligent performance or design, failure to meet specifications and breaches of express or implied warranties). The damages available to a client, should it prevail in its claims, are potentially large and could include consequential damages.
Environmental contractors, in connection with work performed for clients, also potentially face liabilities to third parties from various claims, including claims for property damage or personal injury stemming from a release of hazardous substances or otherwise. Claims for damage to third parties could arise in a number of ways, including through a sudden and accidental release or discharge of contaminants or pollutants during the performance of services, through the inability--despite reasonable care--of a remedial plan to contain or correct an ongoing seepage or release of pollutants, through the inadvertent exacerbation of an existing contamination problem, or through reliance on reports prepared by the Company. Personal injury claims could arise contemporaneously with performance of the work or long after completion of the project as a result of alleged exposure to toxic substances. In addition, increasing numbers of claimants assert that companies performing environmental remediation should be held strictly liable (i.e., liable for damages regardless of whether its services were performed using reasonable care) on the grounds that such services involved "abnormally dangerous activities."
Clients frequently attempt to shift various liabilities arising out of remediation of their own environmental problems to contractors through contractual indemnities. Such provisions seek to require the Company to assume liabilities for damage or injury to third parties and property and for environmental fines and penalties. The Company has adopted risk management policies designed to address these problems, but cannot assure their adequacy. In addition, the Company generally coordinates through subcontractors the transportation of any hazardous waste which is not remediated on-site to a licensed hazardous waste disposal or incineration facility.
Moreover, during the past several years, the EPA and other governmental agencies have constricted significantly the circumstances under which they will indemnify contractors against liabilities incurred in connection with remediation projects undertaken by contractors under contract with such governmental agencies.
DEPENDENCE ON ENVIRONMENTAL REGULATION
Much of the Company's business is generated either directly or indirectly as a result of federal and state laws, regulations and programs related to environmental issues. Accordingly, a reduction in the number or scope of these laws, regulations and programs, or changes in government policies regarding the funding, implementation or enforcement of such laws, regulations and programs, could have a material adverse effect on the Company's business. See "Regulation."
MARKETS AND CUSTOMERS
The Company provides its services to a broad base of clients in both the private and government sectors. Its private sector clients include large chemical, petroleum, manufacturing, transportation, real estate, electronics, automotive, aerospace and other industrial companies, as well as engineering and consulting firms. The Company has worked for a majority of the Fortune 100 industrial companies. Historically, the majority of the Company's private sector revenue was derived from projects with values typically less than $1 million in size and less than one year in duration. Revenue from industrial clients for 1996 was $124.7 million and constituted 23% of the Company's revenue.
In the government sector, the market for the Company's services primarily consists of federal government agencies. The Company has been a prime contractor to the EPA since 1984 under Emergency Response Cleanup Services ("ERCS") contracts administered under the Superfund Removal Program. In addition, through site specific and term contracts, the Company provides its services to the DOD, including USACE, the U.S. Departments of the Navy, Air Force and Army, at DOE facilities and to state and local governments. Revenue from government agencies in 1996 aggregated $426.3 million and accounted for 77% of revenue, of which the Department of the Navy and the USACE accounted for approximately $167.7 million or 30% and $127.1 million or 23% of revenue, respectively.
SEASONALITY AND FLUCTUATION IN QUARTERLY RESULTS
The timing of the Company's revenue is dependent on its backlog, contract awards and the performance requirements of each contract. The Company's revenue is also affected by the timing of its clients' planned remediation activities which generally increase during the third and fourth quarters. Because of this change in demand, the Company's quarterly revenue can fluctuate, and revenue for the first and second quarters of each year has historically been lower than for the third and fourth quarters. Although the Company believes that the historical trend in quarterly revenue for the third and fourth quarters of each year are generally higher than the first and second quarters, there can be no assurance that this will occur in future periods. Accordingly, quarterly or interim results should not be considered indicative of results to be expected for any quarter or for the full year.
COMPETITION
The environmental services industry is highly competitive with numerous companies of various size, geographic presence and capabilities participating. The Company believes that it has approximately a dozen principal competitors in the environmental remediation sector of the environmental services industry and numerous smaller competitors. The Company believes that the principal competitive factors in its business are operational experience, technical proficiency, breadth of services offered, local presence and price. In certain aspects of the Company's environmental remediation business, substantial capital investment is required for equipment. Certain of the Company's competitors have greater financial resources, which could allow for greater investment in equipment and provide better access to bonding and insurance markets to provide the financial assurance instruments which are often required by clients. Additionally, the relatively recent entry of several aerospace and defense contractors, as well as large construction and engineering firms, into the environmental services industry has increased the level of competition. The Company believes that the demand for environmental services is still developing and expanding and, as a result, many small and large firms will continue to be attracted to the industry.
INSURANCE
The Company maintains a comprehensive liability insurance program that is structured to provide coverage for major and catastrophic losses while essentially self-insuring losses that may occur in the ordinary course of business. The Company contracts with primary and excess insurance carriers and generally retains $250,000 to $500,000 of liability per occurrence through deductible programs, self-insured retentions or through reinsurance provided by a wholly-owned insurance captive which reinsures some of the Company's workers' compensation risks.
Although the Company believes its insurance program to be appropriate for the management of its risks, its insurance policies may not fully cover risks arising from the Company's operations. Policy coverage exclusions, retaining risks through deductible and self-insured retention programs, or losses in excess of the coverage may cause all or a portion of one or more losses not to be covered by such insurance.
EMPLOYEES
The Company had approximately 3,100 employees at December 31, 1996. Approximately 30 employees of the Company were covered by collective bargaining agreements. The Company considers relations with its employees to be satisfactory.
PATENTS
The Company currently owns two patents covering certain design features of equipment employed in its on-site remediation business. The first relates to a filtration system developed and used by the Company to remove pollutants from flowing creeks and streams and the second, known as a Portable Method for Decontaminating Earth, relates to a decontamination system used by the Company to remove contaminants from the soil through a process, commonly known as soil vapor extraction. The Company utilizes X*TRAX(R) and LT*X(R) to perform thermal desorption services. The X*TRAX(R) and LT*X(R) systems are waste treatment processes that thermally separate organic contaminants from soils or solids with subsequent treatment of the organic vapor stream. Although the Company considers its patents to be important, they are not a material factor in its business.
REGULATION
The environmental services business, including the remediation services segment of the industry, has benefited from extensive federal and state regulation of environmental matters. On the other hand, the Company's environmental services are also
subject to extensive federal and state legislation as well as regulation by the EPA, the OSHA and applicable state and local regulatory agencies. All facets of the Company's business are conducted in the context of a rapidly developing and changing statutory and regulatory framework and an aggressive enforcement and regulatory posture. The full impact of these laws and regulations, and the enforcement thereof, on the Company's business is difficult to predict, principally due to the complexity of the relatively new legislation, new and changing regulations, and the impact of political and economic pressures. The assessment, remediation, analysis, handling and management of hazardous substances necessarily involve significant risks, including the possibility of damages or injuries caused by the escape of hazardous materials into the environment, and the possibility of fines, penalties or other regulatory action.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") addresses cleanup of sites at which there has been a release or threatened release of hazardous substances or contaminants, including certain radioactive substances, into the environment. CERCLA assigns liability for costs of cleanup of such sites and for damage to natural resources to any person who, currently or at the time of disposal of a hazardous substance, owned or operated any facility at which hazardous substances were disposed of; and to any person who by agreement or otherwise arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment of hazardous substances owned or possessed by such person for disposal or treatment by others; and to any person who accepted hazardous substances for transport to disposal or treatment facilities or sites selected by such persons from which there is a release or threatened release of hazardous substances. CERCLA authorizes the federal government both to clean up these sites itself and to order persons responsible for the situation to do so. In addition, under the authority of Superfund and its implementing regulations, detailed requirements apply to the manner and degree of remediation of facilities and sites where hazardous substances have been or are threatened to be released into the environment. CERCLA created the Superfund to be used by the federal government to pay for the cleanup efforts. Where the federal government expends money for remedial activities, it may seek reimbursement from the "potentially responsible parties." CERCLA imposes strict, joint and several retroactive liability upon such parties. Increasingly, there are efforts to expand the reach of CERCLA to make environmental contractors responsible for cleanup costs by claiming that environmental contractors are owners or operators of hazardous waste facilities or that they arranged for treatment, transportation or disposal of hazardous substances. Several recent court decisions have accepted these claims. Should the Company be held responsible under CERCLA for damages caused while performing services or otherwise, it may be forced to bear such liability by itself, notwithstanding the potential availability of contribution or indemnity from other parties.
The statutory funding mechanism of CERCLA is comprised of contributions from the general revenue and tax on petrochemical feedstocks. The CERCLA tax expired December 31, 1995. However, an additional $1.4 billion was appropriated for fiscal year 1997 and the authority to tax and use the funds has been extended through September 30, 1997. Additionally, EPA has a large amount of appropriated, unobligated funds which are projected by the Congressional Budget Office to be sufficient for EPA to continue operating at current levels for approximately two years, should there be a lapse in the CERCLA tax after September 30, 1997.
The leadership of both the House of Representatives and the Senate have stressed that reauthorization of Superfund is one of their top priorities for 1997. A bill to reauthorize Superfund has been introduced to the Senate and the introduction of a House bill is pending. The Senate bill would maintain historic levels of funding for a period of five years beginning in fiscal year 1998. Support for environmental programs also remains strong in the Executive Branch. President Clinton's fiscal year 1998 budget included increases in funding for all EPA, Department of Defense and Department of Energy environmental programs.
Despite the priority given to reauthorization of Superfund, and the history of Congress never to allow an actual lapse in the tax, the perceived potential for this occurrence adversely impacts the environmental industry due to resultant funding uncertainties. Additional uncertainties arise from significant changes being considered for Superfund including shifting the current preference for permanent treatment to a wider acceptance of containment and other engineering/institutional controls. This change could lead to smaller volumes of waste being treated on-site, and the potential to qualify for less stringent remedies could cause clients to delay the initiation of remediation projects. However, many of the proposed changes to Superfund are beneficial to the environmental remediation industry including doubling the dollar amount and time period in which emergency removal actions take place; increasing contractor indemnification protections; streamlining the study phase of the process to accelerate actual remediation; and creating incentives for brownfield cleanups.
The Resource Conservation and Recovery Act of 1976, as amended in 1984 ("RCRA"), is the principal federal statute governing hazardous waste generation, treatment, storage and disposal. RCRA, or EPA-approved state programs at least as stringent, govern waste handling activities involving wastes classified as "hazardous." Under RCRA, liability and stringent operating requirements are imposed on a person who is either a "generator" or "transporter" of hazardous wastes, or an "owner"
or "operator" of a hazardous waste treatment, storage or disposal facility. The EPA has issued regulations under RCRA for hazardous waste generators, transporters and owners and operators of hazardous waste treatment, storage or disposal facilities. These regulations impose detailed operating, inspection, training, emergency preparedness and response standards, and requirements for closure, continuing financial responsibility, manifesting, recordkeeping and reporting. The Company's clients remain responsible by law for the generation or transportation of hazardous wastes or ownership or operation of hazardous waste treatment, storage or disposal facilities. Although the Company does not believe its conduct in performing environmental remediation services would cause it to be considered liable as an owner or operator of a hazardous waste treatment, storage or disposal facility, or a generator or transporter of hazardous wastes under RCRA, RCRA and similar state statutes regulate the Company's practices for the treatment, transportation and other handling of hazardous materials, and substantial fines and penalties may be imposed for any violation of such statutes and the regulations thereunder.
The Company's services are also utilized by its clients in complying with, and the Company's operations are subject to regulation under, among others, the following federal laws: the Toxic Substances Control Act, the Clean Water Act, the Safe Drinking Water Act, the Occupational Safety and Health Act and the Hazardous Materials Transportation Act. In addition, many states have passed Superfund-type legislation and other statutes, regulations and policies to cover more detailed aspects of hazardous materials management.
The Company, through its on-site treatment capabilities and the use of subcontractors, attempts to minimize its transportation of hazardous substances and wastes. However, there are occasions, especially in connection with its emergency response activities, when the Company does transport hazardous substances and wastes. Such transportation activities are closely regulated by the United States Department of Transportation, the Interstate Commerce Commission, and transportation regulatory bodies in each state. The applicable regulations include licensing requirements, truck safety requirements, weight limitations and, in some areas, rate limitations and operating conditions.
BACKLOG AND POTENTIAL VALUE OF TERM CONTRACTS
The following table lists at the dates indicated (i) the Company's backlog, defined as the unearned portion of the Company's existing contracts and unfilled orders, and (ii) the Company's term contracts, defined as the potential value of government term contracts (in thousands):
Backlog. In accordance with industry practice, substantially all of the Company's contracts in backlog may be terminated at the convenience of the client. In addition, the amount of the Company's backlog is subject to changes in the scope of services to be provided under any given contract. The Company estimates that approximately 80% of the backlog at December 31, 1996 will be realized within the next year.
Term Contracts. Term contracts typically are performed by completing remediation work under delivery orders, issued by the contracting government entity, for a large number of small-to-medium-sized projects throughout the geographic area covered by the contract. The Company's government term contracts generally may be canceled, delayed or modified at the sole option of the government, and typically are subject to annual funding limitations and public sector budget constraints. Accordingly, such government contracts represent the potential dollar value that may be expended under such contracts, but there is no assurance that such amounts, if any, will be actually spent on any projects, or of the timing thereof.
EQUITY INVESTMENT
NSC is a provider of asbestos-abatement and other specialty contracting services to a broad range of commercial, industrial and institutional clients located throughout the United States. NSC provides asbestos-abatement services through two of its wholly-owned subsidiaries, National Surface Cleaning, Inc. and National Service Cleaning Corp.; demolition and dismantling services through its wholly-owned subsidiary, Olshan Demolishing Management, Inc. ("ODMI"); and specialty coatings application and lead paint-abatement through its wholly-owned subsidiary, NSC Specialty Coatings, Inc. In May 1993, the Company's investment in NSC was reduced from 70% to 40% as a result of NSC's purchase of the asbestos abatement division of The Brand Companies, Inc. ("Brand") in exchange for its industrial cleaning and maintenance business and the issuance of
4,010,000 shares of NSC common stock. The Company accounts for NSC on the equity method. In April 1995, NSC entered into an agreement with Rust under which NSC, through ODMI, assumed the management of Olshan Demolishing Company, a Rust subsidiary specializing in demolition and dismantling, primarily in the industrial market. Rust owns another 40% of NSC and the remaining 20% is publicly held.
An asbestos-abatement or demolition and dismantling program is focused on meeting the needs of the facility owner or operator to properly manage the financial, regulatory and safety-related risks associated with a demolition or asbestos project. NSC's removal and demolition services require the coordination of several processes: marketing, bidding and contracting, project management, health and safety programs, and the actual asbestos removal or dismantling and demolition. NSC management maintains administrative and operational control over all phases of a project, from estimating and bidding through project completion.
Although some of NSC's contracts are directly entered into with its clients without a formal bidding process, NSC receives a significant portion of its contracts through a bidding process. The majority of NSC's projects are contracted on a fixed-price basis, while the remainder are contracted either on a time and materials or a unit-price basis. All work is done in accordance with applicable EPA and OSHA regulations and applicable state and local regulations. NSC is also subject to the regulations of the Mine Safety and Health Act when it conducts demolition and dismantling projects at mine locations.
The market for asbestos abatement services is highly competitive. NSC competes with large asbestos abatement firms, several of which provide services on a regional basis. NSC also competes, to a lesser extent, with smaller local and regional firms. While the demand for asbestos-abatement services has stabilized, demand is still dependent on the fluctuation of national and regional economies and the finite amount of asbestos remaining to be removed, there can be no assurance that such demand will remain steady. Through the diversification into the demolition, specialty coatings and lead paint-abatement markets, NSC is seeking to provide a full range of specialty contracting services to the performance-sensitive customer.
NSC's Board of Directors declared and NSC paid a cash dividend of $602,000 to the Company for each of the years ended December 31, 1996 and 1995. While NSC's Board of Directors has not established a policy concerning payment of regular dividends, it has stated its intention to review annually the feasibility of declaring additional dividends depending upon the results of NSC's operations and the financial condition and cash needs of NSC.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently owns property in four states and leases property in 18 states and the District of Columbia. The property owned by the Company includes approximately 26 acres in Findlay, Ohio, upon which are located the Company's 37,500 square foot corporate headquarters, a 39,600 square foot laboratory and technical facility, a 20,000 square foot support services facility, as well as its fabrication, maintenance and remediation service center and training facilities. The Company also owns remediation service centers in Covington, Georgia (approximately ten acres of land and an 8,200 square foot building), Clermont, Florida (approximately five acres of land and a 6,500 square foot building) and Baton Rouge, Louisiana (approximately ten acres of land and a 52,500 square foot building).
The Company operates other offices and remediation service centers in the following states: California, Colorado, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Iowa, Massachusetts, Minnesota, Missouri, New Jersey, New York, Ohio, Pennsylvania, Tennessee, Texas, Virginia and Washington. All of these offices and service center facilities are leased. Under these leases, the Company is required to pay base rentals, real estate taxes, utilities and other operating expenses. Annual rental payments for the remediation service centers and office properties are approximately $4,500,000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently in litigation in the U.S. District Court for the Western District of Louisiana with Citgo Petroleum Corporation ("Citgo"), Oxy USA Inc., and Occidental Oil & Gas (collectively "Oxy") relating to cost overruns and production shortfalls on a remediation project which was performed by the Company for Citgo at its Lake Charles, Louisiana refinery during 1993 and 1994. The Company has recorded in its financial statements approximately $27,609,000 as a claim receivable and $5,381,000 of accounts receivable that are in dispute for work performed under the terms of the Company's base contract with Citgo. The Company is seeking damages in excess of $35,000,000. Citgo's second amended complaint seeks 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 has filed a third party complaint against Oxy for negligent misrepresentation and
detrimental reliance as a result of Oxy's involvement with the development of sample and analytical data relied upon by the Company in preparation of its bid and cost estimates for work at the Lake Charles refinery. In December 1996 and January 1997, Oxy and Citgo, respectively, filed motions for summary judgment and partial summary judgment on the Company's claims. The Company filed briefs in opposition to these motions. These motions for summary judgment and partial summary judgment are still pending.
The Company is currently in litigation in the U.S. District Court for the Western District of New York with Occidental Chemical Corporation ("Occidental") relating to the Durez Inlet Project performed in 1993 and 1994 for Occidental in North Tonawanda, New York. The Company's accounts receivable at December 31, 1996 include a claim receivable of $8,618,000 related to this matter. The Company's work was substantially delayed and its costs of performance were substantially increased as a result of conditions at the site which the Company believes were materially different than as represented by Occidental. Occidental's amended complaint seeks $8,806,000 in damages primarily for alleged costs incurred as a result of project delays and added volumes of incinerated waste. The Company's counterclaim seeks an amount in excess of $9,200,000 for damages arising from Occidental's breach of contract, misrepresentation and failure to pay outstanding contract amounts.
The Company is currently in arbitration proceedings with Separation and Recovery Systems, Inc. ("SRS") resulting from SRS's failure to adequately perform it's subcontract obligations to the Company for thermal desorption services at the Hilton- Davis project in Cincinnati, Ohio. The Company's financial statements on December 31, 1996 include a back charge receivable of approximately $7,345,000 representing additional costs the Company has and will incur as a result of completing SRS's scope of work under its thermal desorption subcontract with the Company. SRS has filed a counterclaim against the Company for approximately $2,500,000 alleging wrongful termination of the subcontract.
Management believes that it has established adequate reserves should the resolution of the above matters be lower than the amounts recorded. There is, however, always risk and uncertainty in pursuing and defending litigation and arbitration proceedings in the course of the Company's business and, notwithstanding the reserves currently established, adverse future results in litigation or other proceedings could have a material adverse impact upon the Company's consolidated future results of operations or financial condition.
In addition to the above, the 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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are listed below:
James L. Kirk - Chairman of the Board, President and Chief Executive Officer. Mr. Kirk was elected President and Chief Executive Officer of the Company in July 1986, and was elected Chairman of the Board in January 1987. Mr. Kirk has been Chairman of the Board and Chief Executive Officer of OHMR since April 1985. Mr. Kirk is a founder of OHMR and has served in various capacities as an officer and director of OHMR.
Joseph R. Kirk - Executive Vice President and Director. Mr. Kirk assumed his current position in July 1986 and previously served as Vice Chairman of OHMR. He is a founder of OHMR and has served in various capacities as an officer and director of OHMR.
Pamela K.M. Beall - Vice President, Treasurer and Assistant Secretary. Ms. Beall joined the Company in June 1985 as Director of Finance of OHMR, became Treasurer and Assistant Secretary of OHMR in September 1985, and became Treasurer and Assistant Secretary of the Company in January 1986. Ms. Beall assumed her current position in August 1994. Prior to joining the Company, Ms. Beall was General Manager, Treasury Services for USX Corporation and previous to that with Marathon Oil Company. Ms. Beall also serves as a director of NSC.
Robert J. Blackwell - Vice President, Marketing and Strategic Planning. Mr. Blackwell joined the Company in July 1993 as Vice President, Government Business Development of OHMR, and has served as Senior Vice President, Marketing of OHMR since October 1995. Prior to joining the Company, Mr. Blackwell was Vice President for Federal Marketing and Legislative Affairs, from January 1993 to July 1993, and Director of Marketing and Federal Relations, from January 1989 to December 1992, of Ebasco Services Incorporated. Mr. Blackwell also serves as a director of NSC.
Fred H. Halvorsen - Vice President, Health and Safety. Dr. Halvorsen joined the Company in July 1984 as Director of Health and Safety of OHMR and assumed his current position in May 1987.
Kris E. Hansel - Vice President and Controller. Mr. Hansel joined the Company as General Accounting Manager in November 1988 of OHMR, became Assistant Controller in October 1991 of the Company, and became Controller in October 1992. Mr. Hansel assumed his current position in August 1994. Prior to joining the Company, Mr. Hansel was General Accounting Manager of WearEver-ProctorSilex, Inc.
Steven E. Harbour - Vice President, Legal and Secretary. Mr. Harbour joined the Company in December 1996. Prior to joining the Company, Mr. Harbour served in various management and legal capacities with The Coca-Cola Company from 1983 to 1993, was Vice President, The Coca-Cola Bottling Company of New York, Inc., from 1993 to 1995, and most recently was affiliated with the law firm of Sumner & Anderson.
Gene J. Ostrow - Vice President of Corporate Development of OHM Corporation since March of 1997. From November 1994 to March of 1997, Mr. Ostrow was a Senior Vice President, Corporate Finance with Raymond James and Associates and Co-head of that firm's mergers and acquisitions practice. Mr. Ostrow was employed by OHM Corporation and its affiliates from February 1986 to October 1993 in various positions, including Vice President and Chief Financial Officer of OHM Corporation from February 1986 through September 1991, as Executive Vice President, Corporate Development from October 1991 to May 1993 and as Vice President and Chief Financial Officer of NSC Corporation from July 1988 through October 1993. From November 1993 to October 1994, Mr. Ostrow was Vice President and Chief Financial Officer and Acting Chief Operating Officer of Ecoscience Corp., an agricultural biotechnology firm in Worcester, Massachusetts.
Phillip V. Petrocelli - Vice President, Western Operations. Mr. Petrocelli joined the Company in August 1993 as Vice President, Western Region of OHMR, and since October 1995 has served as Senior Vice President, Western Operations of OHMR. Mr. Petrocelli assumed his current position with the Company in May 1995. Prior to joining the Company, Mr. Petrocelli was Regional Director and previous to that was Acting Vice President - Analytical Labs, with IT Corporation.
Philip O. Strawbridge - Vice President, Chief Financial and Administrative Officer. Mr. Strawbridge joined the Company in February 1996. Prior to joining the Company, Mr. Strawbridge was Senior Director of Government Contracts and Compliance with Fluor Daniel, Inc.
Michael A. Szomjassy - Vice President, Eastern Operations. Mr. Szomjassy joined the Company in November 1989 as Vice President, Southeast Region of OHMR and since October 1995 has served as Senior Vice President, Eastern Operations of OHMR. Prior to joining OHM, Mr. Szomjassy was Regional Manager, Remediation Services of Ebasco Services, Inc.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on The New York Stock Exchange under the symbol "OHM." The table sets forth by quarter, for the last two fiscal years, the high and low sales prices of the Company's common stock on The New York Stock Exchange Composite Tape as reported by The Wall Street Journal (Midwest Edition):
NOTE:
(1) As of December 31, 1996, the Company has approximately 875 shareholders of record.
(2) The Company has not declared any cash dividends on its Common Stock and has bank covenants that restrict the amount of cash dividends that can be paid in the future. See "Note 7 to the Consolidated Financial Statements."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(a) The Five Year Summary of Results of Operations for each of the five years ended December 31 is set forth below:
NOTES:
(1) The results of operations for the year ended December 31, 1992 reflect the accounting for discontinued operations of certain business units.
(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 Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
(3) Special and nonrecurring charges include: (i) for the year ended December 31, 1995, the Company recorded a $2,312,000 charge (net of income tax benefit of $1,542,000) for integration costs related to the acquisition of the hazardous and nuclear waste remediation service business (the "Division") of Rust International Inc. ("Rust"); (ii) 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; and (iii) 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 The Brand Companies, Inc. (completed on May 4, 1993), and which include provisions for legal and insurance reserves, and for certain other matters.
(4) On May 30, 1995, the Company completed the acquisition of substantially all of the assets and certain liabilities of the Division in exchange for 9,668,000 shares of Common Stock of the Company, or approximately 37% of the outstanding shares of the Company's Common Stock. The acquisition of the Division has been accounted for using the purchase method and, accordingly, the acquired assets and assumed liabilities, including goodwill, have been recorded at their estimated fair values as of May 30, 1995. The Company's consolidated financial statements for the year ended December 31, 1995, include the results of operations for the Division since May 30, 1995. See "Note 2 to the Consolidated Financial Statements."
(b) The Five Year Summary of Financial Position as of December 31 is set forth below (In Thousands):
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(a) RESULTS OF OPERATIONS
GENERAL
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 revenue is dependent on its backlog, contract awards and the performance requirements of each contract. The Company's revenue is also affected by the timing of its clients' planned remediation activities which generally increase during the third and fourth quarters. Because of this change in demand, the Company's quarterly revenue can fluctuate, and revenue for the first and second quarters of each year have historically been lower than for the third and fourth quarters, although there can be no assurance that this will occur in future years. Accordingly, quarterly or other interim results should not be considered indicative of results to be expected for any quarter or full fiscal year.
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"), provided the Company with a credit enhancement in the form of guarantees, issued from time to time upon request of the Company, of up to $62,000,000 of the Company's indebtedness, which will increase proportionately up to $75,000,000 upon issuance of shares under the warrant. The acquisition of the Division has been accounted for using the purchase method and, accordingly, the acquired assets and assumed liabilities, including goodwill, have been recorded at their estimated fair values as of May 30, 1995. See "Note 2 to the Consolidated Financial Statements." The Company's consolidated financial statements include the results of operation for the Division since May 30, 1995.
During the second quarter of 1995, the Company recorded a $3,854,000 pre-tax, $2,312,000 after-tax or $0.10 per share, charge for integration costs related to the acquisition of the Division. The charge was recorded as a selling, general and administrative expense and was primarily for severance and relocation costs for certain of the Company's personnel and the closing of certain of the Company's offices as a result of combining the operations of the Division and the Company.
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 against revenue, $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"). See "Note 15 to the Consolidated Financial Statements."
The following table sets forth, for the periods indicated, the percentage relationship that items in the statement of operations bear to revenue:
TWELVE MONTHS ENDED DECEMBER 31, 1996 VS. TWELVE MONTHS ENDED DECEMBER 31, 1995
Revenue. The following table sets forth the Company's revenue by client type for the twelve months ended December 31, 1996 and 1995 (in thousands, except percentages):
Total revenue for the year ended December 31, 1996, increased 20% to $550,984,000 from $457,925,000 in 1995. Such improvement resulted primarily from increased revenue from federal government agencies. In addition, revenue from industrial sector clients was favorably impacted by the acquisition of the Division, which was included for a full year in 1996 compared to only seven months of 1995.
Revenue from government agencies for the twelve months ended December 31, 1996 increased $77,204,000 or 22% from $349,052,000 in 1995. This improvement resulted primarily from an increase in revenue from the Company's term contracts with the United States Air Force ("Air Force"), the United States Army Corps of Engineers ("USACE"), the Department of Energy ("DOE") and the United States Navy ("Navy"). Such increases were partially offset by a decrease in revenue from state and local governments and the Environmental Protection Agency ("EPA") during 1996. The federal government shutdown during the first quarter of 1996 negatively impacted the Company's revenue from the EPA and delayed delivery orders issued under the Company's existing federal term contracts. The Company expects to continue to receive funding under its federal contracts into the foreseeable future and continues to experience a significant amount of proposal activity for new contracts with the various Department of Defense ("DOD") agencies, as well as the DOE. However, no assurance can be given that the Company will be awarded any new contracts with the DOD or DOE. In addition, reductions by Congress in future environmental remediation budgets of government agencies may have a material adverse impact upon future revenue from such agencies and the funding of the Company's government term contracts included in contract backlog.
The Company experienced a $15,855,000 or 15% increase in revenue from industrial clients for the year ended December 31, 1996 as compared to 1995. Such increase is primarily a result of the acquisition of the Division during May 1995. The Company believes that revenue growth from the industrial sector has been negatively impacted due to anticipated changes in the Superfund law pending its reauthorization as well as current economic conditions in certain industry and geographic sectors. Although the Company cannot predict the impact upon the environmental industry of the failure of Congress to reauthorize the Superfund law, further delays in Superfund reauthorization may have a material impact upon the demand for the Company's services in the form of project delays as clients and potential clients wait for and anticipate changes in these regulations. In addition, demand for the Company's services from the industrial sector will also remain dependant on general economic conditions.
During 1996, the Company's government revenue as a percent of total revenue was 77%. The Company believes that the government sector will continue to be its primary source of revenue for the foreseeable future in light of the factors discussed above.
Cost of Services and Gross Profit. Cost of services for the year ended December 31, 1996 increased 22% to $478,924,000 from $393,149,000 in 1995 primarily due to increased revenue. Cost of services as a percentage of revenue increased to 87% for the year ended December 31, 1996 from 86% for 1995.
Gross profit increased 11% to $72,060,000 in 1996 from $64,776,000 in 1995. The increase in gross profit is primarily due to increased revenues. Gross profit as a percentage of revenue decreased to 13% for the year ended December 31, 1996 from 14% in 1995. The Company's gross profit on its fixed-price contracts has been negatively impacted by competitive market conditions and, during the first quarter of 1996, by the severe winter weather in the midwest and northeast regions of the country. In addition, the Company has experienced a decrease in the overall gross margin it has received on its government projects as a result of the nature of the projects that have been awarded to the Company under its term contracts which has required an increase in the use of subcontracted services and materials over levels historically experienced. Under the terms of such contracts, the Company receives minimal markups on such subcontracted services and materials.
The Company believes the trend towards the use of subcontracted services and materials for government projects will continue. In addition, competitive pressure for future industrial sector projects will continue due to the lack of regulatory enforcement, and resultant diminished number of contract opportunities, as a result of the failure of Congress to reauthorize the Superfund law. Both of these factors will continue to impact the Company's gross profit margin on its contracts into the foreseeable future.
Selling, General and Administrative Expenses. Selling, general and administrative ("SGA") expenses for the year ended December 31, 1996 increased 9% to $49,250,000 from $45,223,000 in 1995. SGA expenses for the year ended December 31, 1995 include the aforementioned charge of $3,854,000 for integration costs related to the acquisition of the Division. Without such charge, SGA expenses increased 19% primarily as a result of the acquisition of the Division and the growth in revenue. In addition, the Company has made a substantial investment in personnel and systems in support of its government contracts and related compliance issues. SGA expense as a percent of revenue was 9% for the twelve months ended December 31, 1996 and 1995, exclusive of the integration charge in 1995.
Interest expense. Interest expense, net of investment income, decreased 27% to $6,963,000 for the year ended December 31, 1996 from $9,564,000 for 1995. The decrease in interest expense was a result of a decrease in the average borrowings outstanding, as well as interest rates charged, under the Company's revolving credit agreement during 1996 compared to 1995. The decrease in interest rates charged under the revolving credit agreement primarily is a result of the WMX guarantee of the Company's debt in exchange for the warrant described above. Investment income for the twelve months ended December 31, 1995 included income earned on certain outstanding receivables guaranteed by Rust pursuant to the agreement for the acquisition of the Division. Such receivables were paid to the Company on September 30, 1995.
Equity in Net Earnings of Affiliate. The Company's equity interest in NSC's net earnings increased $461,000 to $748,000 in 1996 from $287,000 in 1995. The twelve months ended December 31, 1995 was negatively impacted by the settlement of claims with certain clients of NSC as well as increases in insurance reserves. NSC has experienced a decrease in revenues from asbestos abatement contracts for the twelve months ended December 31, 1996 compared to 1995. Such decrease in revenue was more than offset by increases in revenue from its specialty contractor services subsidiary, Olshan Demolishing Management, Inc. The asbestos abatement industry in general continues to experience competitive pressures in the marketplace which have negatively impacted the gross margin on NSC's projects.
Net Income. Net income for the year ended December 31, 1996 was $11,515,000 or $0.43 per share compared to $6,807,000 or $0.30 per share in 1995. The improvement in net income is primarily due to increased revenue, the integration charge recorded during 1995, decreased interest expense and other factors discussed above.
TWELVE MONTHS ENDED DECEMBER 31, 1995 VS. TWELVE MONTHS ENDED DECEMBER 31, 1994
Revenue. The following table sets forth the Company's revenue by client type for the twelve months ended December 31, 1995 and 1994 (in thousands, except percentages):
Total revenue for the year ended December 31, 1995, increased 42% to $457,925,000 from $323,381,000 in 1994. Such improvement resulted primarily from increased revenue from federal government agencies and the acquisition of the Division.
During 1995, the Company experienced a $140,442,000 or a 67% increase in revenue from government agencies. This improvement resulted primarily from an increase in revenue from the Company's term contracts with the Navy, the USACE and the Air Force, as well as increased revenue from other federal government agencies. Such increases were partially offset by a decrease in revenue from state and local governments for the year ended December 31, 1995 when compared to 1994.
The Company experienced a $5,898,000 or 5% decrease in revenue from industrial clients for the year ended December 31, 1995 as compared to 1994. Such revenue would have decreased further if not for the Company's acquisition of the Division during May 1995. The Company believes that revenue from the industrial sector has been negatively impacted due to anticipated changes in the Superfund law pending its reauthorization as well as economic conditions in certain industry and geographic
sectors. Industrial sector revenue was negatively impacted for the year ended December 31, 1994 by the previously discussed $25,000,000 accounts receivable reserve which was primarily related to industrial clients. Industrial sector revenue as a percentage of total revenue decreased to 24% for 1995 from 35% in 1994.
Cost of Services and Gross Profit. Cost of services for the year ended December 31, 1995 increased 33% to $393,149,000 from $296,159,000 in 1994 primarily due to increased revenue. Cost of services as a percentage of revenue decreased to 86% for the year ended December 31, 1995 from 92% for 1994. Such decrease is primarily due to the aforementioned charge for accounts receivable recorded during the fourth quarter of 1994. Cost of services as a percentage of revenue for 1994 would have been 85% without the accounts receivable charge.
Gross profit increased 138% to $64,776,000 in 1995 from $27,222,000 in 1994. The increase in gross profit is primarily due to the increase in revenue and the accounts receivable charge recorded in 1994. The Company has experienced a slight decrease in the overall gross margin it has received on its government projects than it has historically experienced. Such decrease is due to the nature of the projects that have been awarded to the Company under its term contracts which has required an increase in the use of subcontracted services and materials over levels historically experienced. Under the terms of such contracts, the Company receives minimal markups on such subcontracted services and materials.
In addition, cost of services and gross profit have been negatively impacted by the acquisition of the Division during 1995. The Company has incurred additional indirect cost of services for the Division's offices and employees, while revenue from the Division's projects were significantly lower than expected during 1995.
Selling, General and Administrative Expenses. SGA expenses for the year ended December 31, 1995 increased 40% to $45,223,000 from $32,281,000 in 1994. SGA expenses for the year ended December 31, 1995 include the previously discussed charge of $3,854,000 for integration costs related to the acquisition of the Division. Without such charge, SGA expenses increased 28% primarily as a result of the acquisition of the Division and the growth in revenue.
Interest expense. Interest expense, net of investment income, increased 5% to $9,564,000 for the year ended December 31, 1995 from $9,149,000 for 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. Such receivables guaranteed by Rust were paid to the Company on September 30, 1995. The increase in interest expense was primarily 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 decreased $745,000 to $287,000 in 1995 from $1,032,000 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 and an increase in insurance reserves. The asbestos abatement industry in general continues to experience competitive pressures in the marketplace which have negatively impacted the gross margin on NSC's projects.
Net Income (Loss). Net income for the year ended December 31, 1995 was $6,807,000 or $0.30 per share compared to a net loss of $(7,616,000) or $(0.49) per share in 1994. The improvement in net income is primarily due to the reserve recorded for accounts receivable during 1994 and other factors discussed above.
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):
Backlog. In accordance with industry practice, substantially all of the Company's contracts in backlog may be terminated at the convenience of the client. In addition, the amount of the Company's backlog is subject to changes in the scope of services to be provided under any given contract. The Company estimates that approximately 80% of the backlog at December 31, 1996 will be realized within the next year.
Term Contracts. 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 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 revenue from such agencies and the funding of the Company's government term contracts included in contract backlog.
(b) LIQUIDITY AND CAPITAL RESOURCES
On May 31, 1995, the Company entered into a $150,000,000 revolving credit agreement with a group of banks (the "Bank Group") to provide letters of credit and cash borrowings. The agreement has a five year term and is scheduled to expire on May 30, 2000. WMX has issued a guarantee of up to $62,000,000 outstanding under the credit agreement in favor of the Bank Group. See "Note 2 to the Consolidated Financial Statements." Under the terms of the agreement the entire credit facility can be used for either cash borrowings or letters of credit. Cash borrowings bear interest at either the prime rate plus a percentage up to 0.625% or, at the Company's option, the Eurodollar market rate plus a percentage ranging from 0.325% to 1.625%. The percentage over the prime rate or the Eurodollar market rate is based on the aggregate amount borrowed under the facility, the presence of the guarantee, and the Company's financial performance as measured by an interest coverage ratio and a total funded debt ratio. The agreement provides the participating banks with a security interest in the Company's equipment, inventories, accounts receivables, general intangibles and in the Company's investment in the common stock of NSC as well as the Company's other subsidiaries. The agreement also imposes, among other covenants, a minimum tangible net worth covenant, a restriction on all of the Company's retained earnings including the declaration and payment of cash dividends and a restriction on the ratio of total funded debt to earnings before income taxes, depreciation and amortization. The amounts outstanding for cash borrowing under the revolving credit facility at December 31, 1996 and 1995 were $0 and $42,100,000, respectively, and aggregate letters of credit outstanding at December 31, 1996 and 1995 were $12,223,000 and $14,655,000, respectively.
Capital expenditures for the years ended December 31, 1996, 1995, and 1994 were $23,279,000, $14,276,000, and $13,354,000, respectively. The Company's capital expenditures are primarily related to the installation of computer systems and related equipment, the purchase of heavy construction equipment and the fabrication of custom equipment by the Company for the execution of remediation projects. Capital expenditures for fiscal year 1997 are expected to range between $20,000,000 and $25,000,000. The Company's long-term capital expenditure requirements are dependent upon the type and size of future remediation projects awarded to the Company.
During 1996, the Company derived 77% of its revenue from government agencies. Revenue from government agencies historically has required greater working capital, the major component of which is accounts receivable, than revenue from industrial sector clients. In addition, the Company is bidding on a number of large, long-term contract opportunities with industrial sector clients, the DOD and the DOE 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 operations, borrowings under its Revolving Credit Facility, proceeds from permitted asset sales, utilization of operating leases and other external sources. In addition, under the terms of the 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. See "Note 2 to the Consolidated Financial Statements." 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, from time to time, evaluates potential acquisitions of companies in the environmental remediation industry and industries related to the core skills of the Company. While the Company believes that there are currently available a number of potential acquisition candidates that would be complementary to its business, the Company currently has no agreements, understandings or arrangements to acquire a specific business or other material assets. The Company cannot predict whether it will be successful in pursuing such acquisition opportunities or what the consequences of any such acquisition would be. Future
acquisitions may involve the expenditure of significant funds and management time. Depending upon the nature, size and timing of future acquisitions, the Company may be required to raise additional capital through financings, including public or private equity or debt offerings or additional bank financing. There is no assurance that such additional financing will be available to the Company on acceptable terms.
The Company's identified long-term capital needs consist of payments due upon the maturity of the Company's Revolving Credit Facility in 2000 and sinking fund payments which commenced in 1996 of 7.5% of the principal amount as well as payments due upon maturity of its Convertible Debentures in 2006. The Company has purchased and retired $10,736,000 of the outstanding Convertible Debentures during 1995 and 1996, sufficient to meet its annual sinking fund obligations through October 1, 1997, as well as a portion of the sinking fund obligation due October 1, 1998. The Company believes that it will be able to refinance the remaining indebtedness as necessary. See "Note 7 to the Consolidated Financial Statements."
(c) INFLATION
Historically, inflation has not been a significant factor to the Company or to the cost of its operations.
(d) DEFERRED TAX ASSETS
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 the future taxable income of approximately $36,092,000 necessary to realize the deferred tax assets is more likely than not to occur because of its substantial backlog and term contracts from which the Company has historically realized sufficient margin to produce consolidated net income. The principal uncertainty of realization of the deferred tax assets is the Company's ability to convert its backlog to revenue and margin. See "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. See "Note 9 to the Consolidated Financial Statements."
(e) ENVIRONMENTAL MATTERS AND GOVERNMENT CONTRACTING
Although the Company believes that it generally benefits from increased environmental regulations and from enforcement of those regulations, increased regulation and enforcement also create significant risks for the Company. The assessment, remediation, analysis, handling and management of hazardous substances necessarily involve significant risks, including the possibility of damages or injuries caused by the escape of hazardous materials into the environment, and the possibility of fines, penalties or other regulatory action. These risks include potentially large civil and criminal liabilities for violations of environmental laws and regulations, and liabilities to customers and to third parties for damages arising from performing services for clients, which could have a material adverse effect on the Company.
The Company does not believe there are currently any material environmental liabilities which should be recorded or disclosed in its financial statements. The Company anticipates that its compliance with various laws and regulations relating to the protection of the environment will not have a material effect on its capital expenditures, future earnings or competitive position.
Because of its dependence on government contracts, the Company also faces the risks associated with such contracting, which could include civil and criminal fines and penalties. As a result of its government contracting business, the Company has been, is, and may in the future be subject to audits and investigations by government agencies. The fines and penalties which could result from noncompliance with the Company's government contracts or appropriate standards and regulations, or the Company's suspension or debarment from future government contracting, could have a material adverse effect on the Company's business.
(f) FORWARD LOOKING STATEMENTS
All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future, including such matters as future capital expenditures, including the amount and nature thereof, potential acquisitions by the Company, trends affecting the Company's financial condition or results of operations, and the Company's business and growth strategies are forward-looking
statements. Such statements are subject to a number of risks and uncertainties, including risks and uncertainties identified in "Business -- Environmental Contractor Risks," " Business -- Regulation," "-- Results of Operation," "-- Environmental Matters and Government Contracting," "Note 1 to Consolidated Financial Statements" and other general economic and business conditions, the business opportunities (or lack thereof) that may be presented to and pursued by the Company, changes in laws or regulations affecting the Company's operations and other factors, many of which are beyond the control of the Company. In addition, these risks and uncertainties include, without limitation, (i) the potential for fluctuations in funding of backlog, (ii) weather conditions affecting or delaying the Company's ability to perform or complete the services required by its contracts, (iii) the Company's ability to be awarded new contracts in its target markets or its ability to expand existing contracts, (iv) other industry-wide market factors, including the timing of client's planned remediation activities, (v) interpretation or enforcement by federal, state or local regulators of existing environmental regulations. Also, there is always risk and uncertainty in pursuing and defending litigation, arbitration proceedings and claims in the course of the Company's business. All of these risks and uncertainties could cause actual results to differ materially from those assumed in the forward-looking statements. These forward- looking statements reflect management's analysis, judgment, belief or expectation only as of the date of this Form 10-K. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. In addition to the disclosure contained herein, readers should carefully review risks and uncertainties contained in other documents the Company files or has filed from time to time with the Commission pursuant to the Exchange Act that are incorporated by reference herein.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and supplementary quarterly financial data of the Company and its subsidiaries for the years ended December 31, 1996, 1995 and 1994, are set forth on pages 22 through 39.
OHM CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
OHM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
OHM CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
OHM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
OHM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
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.
USE OF ESTIMATES. The preparation of the accompanying consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES. The Company provides a broad range of environmental and hazardous waste remediation services to its clients located primarily in the United States. The assessment, remediation, analysis, handling and management of hazardous substances necessarily involve significant risks, including the possibility of damages or injuries caused by the escape of hazardous material into the environment, and the possibility of fines, penalties or other regulatory action. These risks include potentially large civil and criminal liabilities for violations or environmental laws and regulations, and liability to customers and to third parties for damages arising from performing services for clients, which could have a material adverse effect on the Company. Although the Company believes that it generally benefits from increased environmental regulations, and from enforcement of those regulations, increased regulation and enforcement also create significant risks for the Company.
The Company does not believe there are currently any material environmental liabilities which should be recorded or disclosed in its financial statements. The Company anticipates that its compliance with various laws and regulations relating to the protection of the environment will not have a material effect on its capital expenditures, future earnings or competitive position.
The Company's revenue from government agencies accounted for 77%, 76% and 65% of revenue for the years ended December 31, 1996, 1995 and 1994, respectively. Because of its dependence on government contracts, the Company also faces the risks associated with such contracting, which could include civil and criminal fines and penalties. As a result of its government contracting business, the Company has been, is and may in the future be subject to audits and investigations by government agencies. The fines and penalties which could result from noncompliance with the Company's government contracts or appropriate standards and regulations, or the Company's suspension or debarment from future government contracting, could have a material adverse effect on the Company's business. The dependence on government contracts will also continue to subject the Company to significant financial risk and an uncertain business environment caused by the strain of the federal budget deficit and the lengthy budget negotiations each year.
In addition to the above, there are other risks and uncertainties that involve the use of estimates in the preparation of the Company's consolidated financial statements. See "Note 2 - Acquisition" and "Note 15 - Litigation and Contingencies."
STOCK-BASED COMPENSATION. The Company grants stock options for a fixed number of shares to employees and members of the Board of Directors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock compensation arrangements in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and accordingly, recognizes no compensation expense for the stock compensation arrangements. The Company has no intention of changing this accounting practice. The pro forma information regarding net income and earnings per share as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") is disclosed in "Note 13 - Stock Option Plan."
REVENUE AND COST RECOGNITION. The Company primarily derives its revenue from providing environmental services under cost plus fee, time and materials, fixed price and unit price contracts. The Company records revenue and related income from its 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 revenue when realization is probable and the amount can be reliably estimated. Back charges to subcontractors are recorded as receivables to the extent considered collectible. Revenue from time and materials and cost plus fee type contracts is 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. Revenue derived from non-contract activities is recorded when the services are performed.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost and include expenditures which substantially increase the useful lives of the assets. Maintenance, repairs and minor renewals are expensed as incurred. Depreciation and amortization, including amortization of assets under capital leases, are provided on a specific item basis net of salvage value over the estimated useful lives of the respective assets, using the units of production method on thermal destruction equipment and the straight-line method on all other fixed assets.
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 $8,085,000, $11,205,000 and $10,127,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Total interest capitalized was $998,000, $792,000 and $950,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
INTANGIBLE ASSETS. Intangible assets consist principally of goodwill and other intangible assets resulting primarily from acquisitions accounted for using the purchase method of accounting. Goodwill is amortized using the straight-line method over forty years. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of cash flows. Other intangible assets relating to acquired businesses consist principally of proprietary processes, and other deferred costs, and are amortized on a straight-line basis over nine to ten years. The accumulated amortization of intangible assets, including goodwill, relating to acquired businesses, was $1,938,000 and $1,159,000 at December 31, 1996 and 1995, 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" ("SFAS No. 109"). Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
STATEMENT OF CASH FLOWS. The Company considers all short-term deposits and highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash paid for income taxes for the years ended December 31, 1996, 1995 and 1994 was $482,000, $986,000 and $550,000, respectively. Cash paid for interest was $8,137,000, $10,937,000 and $9,171,000 for each of the years ended December 31, 1996, 1995 and 1994, respectively.
With respect to non-cash investing and financing activities, the Company acquired $1,870,000, $29,000 and $91,000 of fixed assets under financial obligations for the years ended December 31, 1996, 1995 and 1994, respectively. In addition, the Company issued 9,668,000 shares of its common stock in fiscal 1995 for an acquisition. See "Note 2 - Acquisition."
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, 1995 and 1994 have been reclassified to conform to the 1996 presentation.
NOTE 2 - 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 their subsidiaries. In addition to the net assets of the
Division, the Company received $16,636,000 in cash pursuant to provisions of the Reorganization Agreement that provided for an adjustment based on the average per share price of the Company's common stock for a 20 trading day period prior to closing. Also, under terms of the Reorganization Agreement, as amended on March 22, 1996, the Company received an additional $15,000,000 on March 25, 1996. For purposes of calculating the consideration given by the Company for the Division, such 20 trading day average per share price of $11.25 was used, adjusted to reflect a 40% discount for the restricted nature of the common stock issued. Consideration for the Division aggregated $65,259,000, which includes $3,143,000 of direct costs related to the acquisition.
In exchange for a warrant to purchase up to 700,000 shares of the Company's common stock at an exercise price of $15.00 per share during the five years following the closing date, Rust's parent company, WMX Technologies, Inc. ("WMX"), will provide the Company with a credit enhancement in the form of guarantees, issued from time to time upon request of the Company, of up to $62,000,000 of the Company's indebtedness, which will increase proportionately up to $75,000,000 upon issuance of shares under the warrant.
The acquisition of the Division has been accounted for using the purchase method and, accordingly, the acquired assets and assumed liabilities have been recorded at their estimated fair values as of May 30, 1995. The acquired operations of the Division included contracts in process for which the Company recognizes revenue using the percentage of completion method of accounting. The valuation of the contracts in process require estimates relating to the costs to complete certain large contracts in process which require provisions for losses. The Company has estimated the fair value of contracts acquired at amounts which will allow the Company to achieve reasonable operating margins on the effort it expends to complete these contracts. The Company resolved certain preacquisition contingencies pending at December 31, 1995 and finalized the purchase accounting adjustments during the second quarter of 1996. As a result of the final purchase accounting adjustments, goodwill was increased by $12,700,000. The Company's consolidated financial statements include the results of operations for the Division since May 30, 1995. The following table sets forth the unaudited combined pro forma results of operations for the year ended December 31, 1995 and 1994 giving effect to the acquisition of the Division as if such acquisition had occurred on January 1, 1994.
The combined pro forma results of operations for the year ended December 31, 1995 and 1994 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.
The estimated fair value of the assets acquired and liabilities assumed at the date of acquisition are as follows (in thousands):
NOTE 3 - ACCOUNTS RECEIVABLE AND COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROCESS
Accounts receivable are summarized as follows:
The consolidated balance sheets include the following amounts:
Unbilled receivables and costs and estimated earnings on contracts in process typically represent: (i) amounts earned under the Company's contracts but not yet billable to clients according to contract terms, which usually consider passage of time, achievement of certain project milestones or completion of the project; and (ii) amounts equal to contract costs attributable to claims included in revenue. In addition, unbilled receivables and costs and estimated earnings on contracts in process include amounts relating to contracts with federal government agencies which require services performed by the Company's subcontractors to be paid prior to billing.
The Company 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 44%, 52%, and 4%, respectively, of total accounts receivable and costs and estimated earnings on contracts in process at December 31, 1996.
NOTE 4 - PROPERTY AND EQUIPMENT
NOTE 5 - INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANY
The combined summarized financial information of the Company's 40% owned asbestos abatement and specialty contracting subsidary, NSC, is set forth below:
The Company's accumulated equity in the undistributed earnings of NSC included in consolidated retained earnings was $6,000,000 at December 31, 1996. The Company received cash dividends from NSC aggregating $602,000 for each of the years ended December 31, 1996 and 1995.
NOTE 6 - OTHER ACCRUED LIABILITIES
Other accrued liabilities are summarized as follows:
The reserve for loss projects is related to certain contracts in process of the acquired Division. The reduction in such reserve during 1996 was a result of losses incurred on projects of the Division and a $4,687,000 reclassification recorded as a reduction to goodwill, which resulted from the final purchase accounting adjustments recorded in the second quarter of 1996. See "Note 2 - Acquisition."
NOTE 7 - LONG-TERM DEBT
The long-term debt of the Company is summarized below:
The convertible subordinated debentures are convertible into 41.67 shares of common stock per $1,000 unit with interest payable semiannually on April 1 and October 1, and are redeemable at the option of the Company. The convertible subordinated debentures require annual mandatory sinking fund payments of 7.5% of the principal amount which commenced in 1996, and continue through October 1, 2005. The Company purchased and retired $5,736,000 and $5,000,000 of the outstanding debentures during 1996 and 1995, respectively, sufficient to meet the first and second annual sinking fund obligations due October 1, 1996 and 1997 which resulted in a gain of $492,000 and $222,000 and have been included in miscellaneous income in the Company's statement of operations for the years ended December 31, 1996 and 1995, respectively. The fair value of the convertible subordinated debentures, based on a quoted market price, approximates $43,491,000 at December 31, 1996. The amortization of debt issuance costs related to the convertible subordinated debentures was $97,000, $108,000 and $108,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
On May 31, 1995, the Company entered into a $150,000,000 revolving credit agreement with a group of banks (the"Bank Group") to provide letters of credit and cash borrowings. The agreement has a five year term and is scheduled to expire on May 30, 2000. WMX has issued a guarantee of up to $62,000,000 outstanding under the credit agreement in favor of the Bank Group. See "Note 2 - Acquisition." Under the terms of the agreement the entire credit facility can be used for either cash borrowings or letters of credit subject to certain covenants. Cash borrowings bear interest at either the prime rate plus a percentage up to 0.625% or, at the Company's option, the Eurodollar market rate plus a percentage ranging from 0.325% to 1.625%. The percentage over the prime rate or the Eurodollar market is based on the aggregate amount borrowed under the facility, the presence of the WMX guarantee, and the Company's financial performance as measured by an interest coverage ratio and a total funded debt ratio. The arrangement provides the participating banks and WMX with a security interest in the Company's equipment, inventories, accounts receivables, general intangibles and in the Company's investment in the common stock of NSC as well as the Company's other subsidiaries. The agreement also imposes, among other covenants, a minimum tangible net worth covenant, a restriction on all of the Company's retained earnings including the declaration and payment of cash dividends and a restriction on the ratio of total funded debt to earnings before income taxes, depreciation and amortization. The Company had $12,223,000 and $14,655,000 of letters of credit outstanding under its revolving credit facility at December 31, 1996 and 1995, respectively.
Notes payable to financial institutions consist of: (i) a $3,246,000 note payable bearing interest at 7.24% payable in equal monthly installments of $146,000 with the final payment due in December 1998, (ii) a $772,000 note payable bearing interest at 9.25% payable in equal monthly installments of $35,000 with the final payment due in December 1998, (iii) a $3,927,000 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 $489,000 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 $767,000 interest bearing note at a rate of 9.50% payable in equal monthly installments of $48,000, due in April 1998, (ii) a $235,000 interest bearing note at a rate of 9.22% payable in equal monthly installments of $13,000, due in June 1998, (iii), a $203,000 interest bearing note at a rate of 7.50% payable in equal monthly installments of $8,000, due in December 1998, (iv) a $1,503,000 interest bearing note at a rate of 8.67% payable in equal monthly installments of $48,000, due in July 1999, (v) a $106,000 interest bearing note at a rate of 8.70% per schedule payable in equal installments of $5,000, due in June 1999, (vi) a $251,000 interest bearing note at a rate of 7.51% per schedule payable in equal monthly installments of $8,000, due in July 1999.
The aggregate maturity of long-term debt for the five years ending December 31 is: 1997, $5,292,000; 1998, $6,472,000; 1999, $6,252,000; 2000, $4,313,000; 2001, $4,313,000; 2002 and thereafter, $31,622,000.
NOTE 8 - LEASES
Future minimum lease payments under noncancelable operating leases total $13,390,000, $10,203,000, $8,876,000, $7,419,000 and $4,733,000 for the years ended December 31, 1997, 1998, 1999, 2000 and 2001, respectively. Lease payments under noncancelable operating leases subsequent to the year ended December 31, 2001 aggregate $7,637,000.
On December 24, 1996, the Company entered into an agreement for the sale and leaseback of the Company's self constructed thermal destruction unit located at the Drake Chemical project in Lockhaven, Pennsylvania. The lease is a one year lease with annual renewals at the option of the Company. The lease calls for rental payments which total $3,214,000, $3,214,000, $3,214,000 and $5,784,000 for the years ended December 31, 1997, 1998, 1999 and 2000, respectively, with required early termination payments of $9,179,000, $6,962,000 or $5,956,000 in the event the lease is canceled on or before December 24, 1997, 1998 or 1999, respectively. The lease is classified as an operating lease in accordance with Statement of Financial Accounting Standards No. 13, "Accounting for Leases". The cost and accumulated depreciation of $11,579,000 and $4,181,000 were removed from the accounts and gain realized on the sale of $5,452,000 was deferred. The deferred gain is being amortized to income as adjustments to lease expense over the term of the lease.
Rental expense under operating leases totaled $14,029,000, $8,858,000 and $5,906,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 9 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets as of December 31, 1996 and 1995 are as follows:
The net foreign long-term deferred tax assets of $158,000 and $200,000 at December 31, 1996 and 1995, respectively, are attributable to the foreign operations of the Company and cannot be offset with the net long term deferred tax liabilities resulting from the Company's domestic operations.
The provisions for income taxes (benefit) consist of the following:
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:
Net operating loss, capital loss and tax credit carryforward amounts and their respective expiration dates for income tax purposes are as follows (in thousands):
The valuation allowance for deferred tax assets is $12,970,000 and $8,196,000 at December 31, 1996 and 1995, respectively. The change in valuation allowance for the current year is due to the final purchase accounting adjustments for the Rust acquisition recorded in the second quarter of 1996. The increase in the valuation allowance reduces the net deferred tax asset recorded from the acquisition of the Division. See "Note 2 - Acquisition." In the event the valuation allowance is not required, a reduction to goodwill will occur in accordance with SFAS No. 109.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company has a policy whereby transactions with directors, executive officers and related parties require the approval of a disinterested majority of the Board of Directors.
The Company has been reimbursed by NSC for certain third party charges paid on NSC's behalf, such as letter of credit fees, insurance and bonding costs and legal fees. The costs charged to NSC for general liability and other insurance coverages were $1,774,000, $981,000 and $363,000 for the years ended December 31, 1996, 1995 and 1994, 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 $40,000, $212,000 and $1,377,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company has provided remediation services to NSC in the amount of $121,000 for the year ended December 31, 1996.
In the normal course of business, the Company has provided to WMX and its affiliates certain subcontractor services on remediation and construction projects, the cost of these services, in the aggregate, were $12,959,000 and $10,242,000 for the years ended December 31, 1996 and 1995, respectively. The Company has purchased from WMX and its affiliates, hazardous waste disposal services, the cost of these services, in the aggregate, were $7,536,000 and $6,636,000 for the years ended December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, the Company has $6,873,000 and $3,871,000 of accounts receivable and $968,000 and $806,000 of accounts payable, respectively, recorded related to such activities. In addition to the above, the Company's financial statements at December 31, 1995 included a receivable from WMX for $15,000,000, which was related to final payments due under terms of the Reorganization Agreement, as amended March 22, 1996. Such amount was paid to the Company on March 25, 1996.
The Company rents certain buildings and contracts certain services from The KDC Company and Findlay Machine and Tool, Inc. Such expenses totaled $348,000, $94,000 and $38,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The principal shareholders of the companies are certain officers and directors of the Company.
The Company has purchased general contractor services and equipment from Alvada Construction, Inc. which totaled $957,000, $226,000 and $24,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The principal shareholder of the company is directly related to certain officers and directors of the Company.
In the normal course of business, the Company has purchased subcontractor services on certain of its projects from Kirk Brothers Co., Inc. which totaled $2,265,000, $615,000 and $2,055,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The principal shareholders of the company are directly related to certain officers and 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 $124,000, $102,000 and $109,000 pursuant to this agreement during the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 12 - CAPTIAL STOCK
The Company has authorized 2,000,000 shares of preferred stock at a $10.00 par value. No shares of preferred stock had been issued at December 31, 1996. 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. 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.
On March 28, 1995, the Company sold to H. Wayne Huizenga and an affiliated family foundation 1,000,000 shares of its common stock and options for an aggregate purchase price of $10,000,000, less issuance expenses of $25,000. The options are exercisable over five years for the purchase of 620,000 shares of common stock upon payment of $10.00 per share and 380,000 shares of common stock upon payment of $12.00 per share.
On May 30, 1995, the Company issued 9,668,000 shares of common stock in exchange for substantially all of the assets and certain liabilities of the hazardous and nuclear waste remediation service business of Rust. In addition, the Company issued a warrant to purchase up to 700,000 shares of common stock at an exercise price of $15.00 per share to Rust's parent company, WMX, in exchange for a $62,000,000 guarantee of the Company's indebtedness by WMX. The warrant is exercisable until May 30, 2000. See "Note 2 - Acquisition."
NOTE 13 - STOCK OPTION PLAN
The Company has elected to follow APB No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The Company's 1986 Incentive Stock Option Plan ("1986 Plan") as amended by vote of the shareholders at the 1994 and 1996 Annual Meetings, has authorized the grant of options to officers and key employees for up to 3,850,000 shares of the Company's common stock. All options granted have 10 year terms and vest and become fully exercisable at the end of up to 6 years of continued employment. The number of shares available for grants of additional options under the 1986 Plan were 1,161,674 and 254,844 at December 31, 1996 and 1995, respectively.
On August 6, 1992, the Company's Board of Directors approved a stock option plan for the Board of Directors (the "Directors' Plan"), which was subsequently approved by the Company's shareholders at the 1993 Annual Meeting. The Directors' Stock Option Plan provides for the immediate grant to each non-employee director a stock option for 15,000 shares of the Company's common stock, less the number of shares held by any such director under the 1986 Stock Option Plan. Additionally, the Directors' Plan provides for additional grants of stock options for 5,000 shares of the Company's common stock, at prices not less than the fair value, to each non-employee director annually. Options granted under the Directors' Plan may not be exercised for a period of six months following the date of grant and terminate up to eleven years after the date of grant or eighteen months after the holder ceases to be a member of the Board of Directors, whichever occurs earlier. The total number of shares available for grants of additional options under the Directors' Plan at December 31, 1996 and 1995 was 805,000 and 850,000, respectively.
On August 15, 1996, the Board of Directors of the Company approved the OHM Corporation Incentive Stock Plan ("ISP") which permits the Board to grant shares of common stock of the Company to officers of the Company under restrictions set forth with the grant. Shares issued under the ISP are subject to substantial risk of forfeiture within the meaning of Section 83 of the Internal Revenue Code of 1986. There have been 105,000 shares of common stock issued under the ISP with a vesting date of August 15, 2001 for 100% of the shares.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1995 and 1996: risk-free interest rate of 6.0%; no dividend yield; volatility factor of the expected market price of the Company's common stock of 0.46; and a weighted-average expected life of each option of 7 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures of net income and earnings per share, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
Because SFAS No. 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1997.
The following is a summary of the stock option activity:
The weighted-average fair value of options granted during the year ended December 31, 1996 and 1995 was $4.20 and $5.40, respectively. Exercise prices for options outstanding as of December 31, 1996 for the 1996 Plan and the Director's Plan ranged from $6.38 to $11.88 and $7.38 to $15.63, respectively. The weighted-average remaining contractual life of those options is 7.2 and 8.2 years, respectively.
NOTE 14 - RETIREMENT AND PROFIT-SHARING PLANS
The Company has a Retirement Savings Plan (the "Plan") which allows each of its eligible employees to make contributions, up to a certain limit, to the Plan on a tax-deferred basis under Section 401(k) of the Internal Revenue Code of 1986, as amended. Eligible employees are those who are employed full-time, are over twenty-one years of age, and have one year of service with the Company. The Company may, at its discretion, make matching contributions and profit sharing contributions to the Plan out of its profits for the plan year. The Company made matching contributions of $2,691,000, $1,643,000 and $1,225,000 to the Plan for the years ended December 31, 1996, 1995 and 1994, respectively.
Effective January 1, 1996, the Board of Directors of the Company approved the Retirement and Incentive Compensation Plan ("RICP") which provides eligible employees an election to defer a specified percentage of their cash compensation. The obligations of the Company under the RICP will be unsecured general obligations to pay the deferred compensation under the terms of the RICP. Participants may elect under the plan to invest deferrals in an OHM Common Stock Deferral Account for which contributions will be treated as if such amounts had been used to purchase shares of the Company's stock and not as actual purchases of the Company's stock. At the discretion of the compensation committee of the Board of Directors, contributions to the plan will be matched by the Company and all amounts invested in the plan will earn interest at the prime rate published by the Wall Street Journal if not invested in the OHM Common Stock Deferral Account.
NOTE 15 - LITIGATION AND CONTINGENCIES
The Company is currently in litigation in the U.S. District Court for the Western District of Louisiana with Citgo Petroleum Corporation ("Citgo"), Oxy USA Inc., and Occidental Oil & Gas (collectively "Oxy") relating to cost overruns and production shortfalls on a remediation project which was performed by the Company for Citgo at its Lake Charles, Louisiana refinery during 1993 and 1994. The Company has recorded in its financial statements approximately $27,609,000 as a claim receivable and $5,381,000 of accounts receivable that are in dispute for work performed under the terms of the Company's base contract with Citgo. The Company is seeking damages in excess of $35,000,000. Citgo's second amended complaint seeks 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 has filed a third party complaint against Oxy for negligent misrepresentation and detrimental reliance as a result of Oxy's involvement with the development of sample and analytical data relied upon by the Company in preparation of its bid and cost estimates for work at the Lake Charles refinery. In December 1996 and January 1997, Oxy and Citgo, respectively, filed motions for summary judgment and partial summary judgment on the Company's claims. The Company filed briefs in opposition to these motions. These motions for summary judgment and partial summary judgment are still pending.
The Company is currently in litigation in the U.S. District Court for the Western District of New York with Occidental Chemical Corporation ("Occidental") relating to the Durez Inlet Project performed in 1993 and 1994 for Occidental in North Tonawanda, New York. The Company's accounts receivable at December 31, 1996 include a claim receivable of $8,618,000 related to this matter. The Company's work was substantially delayed and its costs of performance were substantially increased as a result of conditions at the site which the Company believes were materially different than as represented by Occidental. Occidental's amended complaint seeks $8,806,000 in damages primarily for alleged costs incurred as a result of project delays and added volumes of incinerated waste. The Company's counterclaim seeks an amount in excess of $9,200,000 for damages arising from Occidental's breach of contract, misrepresentation and failure to pay outstanding contract amounts.
The Company is currently in arbitration proceedings with Separation and Recovery Systems, Inc. ("SRS") resulting from SRS's failure to adequately perform it's subcontract obligations to the Company for thermal desorption services at the Hilton-Davis project in Cincinnati, Ohio. The Company's financial statements on December 31, 1996 include a back charge receivable of approximately $7,345,000 representing additional costs the Company has and will incur as a result of completing SRS's scope of work under its thermal desorption subcontract with the Company. SRS has filed a counterclaim against the Company for approximatley $2,500,000 alleging wrongful termination of the subcontract.
Management believes that it has established adequate reserves should the resolution of the above matters be lower than the amounts recorded. There is, however, always risk and uncertainty in pursuing and defending litigation and arbitration proceedings in the course of the Company's business and, notwithstanding the reserves currently established, adverse future results in litigation or other proceedings could have a material adverse impact upon the Company's consolidated future results of operations or financial condition.
In addition to the above, the 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 other reserves, or if not insured or reserved, will not, in the aggregate, have a material adverse impact upon the Company's consolidated financial position or the results of future operations.
NOTE 16 - MAJOR CUSTOMERS
Revenue from federal government agencies accounted for 72%, 71% and 55% of total revenue from continuing operations for the years ended December 31, 1996, 1995 and 1994, respectively. Revenue from state and local government agencies accounted for 5%, 5% and 10% of total revenue from continuing operations for the years ended December 31, 1996, 1995 and 1994, respectively. There were no industrial customers which accounted for more than 10% of total revenue for the years ended December 31, 1996, 1995 and 1994.
NOTE 17 - SPECIAL CHARGES
The Company's consolidated statement of operations for the year ended December 31, 1995 includes a $2,312,000 (net of $1,542,000 income tax benefit) or $0.10 per share, charge for integration costs related to the acquisition of the Division. The charge was recorded as a selling, general and administrative expense and was primarily for severance and relocation costs
for certain of the Company's personnel and the closing of certain of the Company's offices as a result of combining the operations of the Division and the Company.
The Company's consolidated statement of operations for the year ended December 31, 1994 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. Such charge was recorded as a reduction of revenue.
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the Company's condensed consolidated statements of operations by quarter for 1996 and 1995.
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, 1996 and 1995, 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, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OHM Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Columbus, Ohio February 7, 1997
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item, in addition to that set forth above in Part I under the caption "Executive Officers of the Registrant," is set forth in the section entitled "Election of Directors" of the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission (the "Proxy Statement") in connection with the Company's 1997 Annual Meeting of Shareholders, and such information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Proxy Statement under the caption "Executive Compensation and Other Information," and such information is incorporated herein by reference except that the information included under the headings "Board Compensation and Stock Option Committee Report" and "Performance Graph" is not incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANANGEMENT
The information required by this item is contained in the Proxy Statement under the caption "Voting Securities and Principal Holders Thereof," and such information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Proxy Statement under the caption "Certain Relationships and Related Transactions," and such information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company and its subsidiaries are included in Item 8:
Consolidated Balance Sheets -As of December 31, 1996 and 1995
Consolidated Statements of Operations -For the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity -For the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -For the Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) The following consolidated financial statement schedule of the Company and its subsidiaries is submitted herewith:
Schedule II Valuation and Qualifying Accounts -- For the Years Ended December 31, 1996, 1995 and 1994
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(a)(3) Exhibits
The following Exhibits are included in this Annual Report on Form 10-K:
Exhibit Exhibit Number Description - ------ -----------
2.1 Agreement of Merger dated as of May 6, 1994 by and between OHM Corporation, a Delaware corporation and the Registrant [incorporated by reference to Exhibit 2(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994].
2.2 Agreement and Plan of Reorganization among OHM Corporation, Rust Remedial Services, Inc., Enclean Environmental Services Group, Inc., Rust Environmental, Inc., and Rust International Inc. dated December 5, 1994 [incorporated by reference to Appendix B to the Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held May 11, 1995].
2.3 Amendment dated as of May 4, 1995 to the Agreement and Plan of Reorganization dated as of December 5, 1994 by and among OHM Corporation, Rust Remedial Services Inc., Enclean Environmental Services Group, Inc., Rust Environmental, Inc., and Rust International Inc. [incorporated by reference to Exhibit 2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995].
2.4 Amendment No. 2 dated as of July 27, 1995 to the Agreement and Plan of Reorganization dated as of December 5, 1994 by and among OHM Corporation, Rust Remedial Services Inc., Enclean Environmental Services Group, Inc., Rust Environmental, Inc., and Rust International Inc. [incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 31, 1995].
2.5 Amendment No. 3, Settlement and Release Agreement dated as of March 22, 1996 to the Agreement and Plan of Reorganization dated December 5, 1994 by and among OHM Corporation, OHM Remediation Services Corp., Rust Remedial Services Inc., Rust International Inc. and WMX Technologies, Inc. [incorporated by reference to Exhibit 2.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995].
2.6 Standstill and Non-Competition Agreement by and among the Registrant, WMX Technologies, Inc., and Rust International Inc., dated May 30, 1995 [incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
2.7 Warrant Agreement by and between WMX Technologies, Inc., and the Registrant dated May 30, 1995 [incorporated by reference to Exhibit 10(d) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
2.8 Stock Purchase Agreement by and between the Huizenga Family Foundation, Inc. and OHM Corporation dated as of March 28, 1995 [incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995].
2.9 Stock Purchase Agreement by and between H. Wayne Huizenga and OHM Corporation dated as of March 28, 1995 [incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995].
3.1 Amended and Restated Articles of Incorporation of the Registrant dated May 19, 1994 [incorporated by reference to Exhibit 3(i) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994].
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* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14 of Form 10-K.
Exhibit Exhibit Number Description - ------ -----------
3.2 Regulations of the Registrant [incorporated by reference to Exhibit 3(ii) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994].
4.1 Indenture dated as of October 1, 1986 between Registrant and United States Trust Company of New York, Trustee, relating to the Registrant's 8% Convertible Subordinated Debentures due October 1, 2006 [incorporated by reference to Exhibit 4(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1986].
4.2 Specimen Debenture Certificate [incorporated by reference to Exhibit 4(b) to the Registrant's Amendment No. 1 to Registration Statement on Form S-1, No. 33-8296].
4.3 First Supplemental Indenture dated as of May 20, 1994 by and among the Registrant and United States Trust Company of New York [incorporated by reference to Exhibit 4(c) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994].
4.4 Specimen Common Stock Certificate [incorporated by reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996].
10.1* OHM Corporation 1986 Stock Option Plan, as amended and restated as of May 10, 1994 [incorporated by reference to Appendix 2 to the Registrant's Proxy Statement for its Annual Meeting held May 10, 1994].
10.2* OHM Corporation Nonqualified Stock Option Plan for Directors [incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992].
10.3* OHM Corporation Retirement Savings Plan, as amended and restated as of January 1, 1994 [incorporated by reference to Exhibit 10(c) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994].
10.4* Amendment No. 1 to OHM Corporation Retirement Savings Plan, as amended and restated as of January 1, 1994 [incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
10.5* Amendment No. 2 to OHM Corporation Retirement Savings Plan, as amended and restated as of January 1, 1994 [incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995].
10.6* OHM Corporation Retirement Savings Plan Trust Agreement between Registrant and National City Bank, as Trustee, as amended and restated effective July 1, 1994 [incorporated by reference to Exhibit 10(d) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994].
10.7* OHM Corporation Directors' Deferred Fee Plan [incorporated by reference to Exhibit 10(e) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994].
10.8* Amendment No. 1 to OHM Corporation Directors' Deferred Fee Plan [incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
10.9* Form of Amended and Restated Indemnification Agreements entered into between Registrant and its Directors and Executive Officers [incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995].
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* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14 of Form 10-K.
Exhibit Exhibit Number Description - ------ -----------
10.10* Form of Employment Agreements providing certain severance benefits in the event of a change of control entered into between Registrant and certain of its executive officers [incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995].
10.11 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 [incorporated by reference to Exhibit 10(e) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
10.12 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 [incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 31, 1995].
10.13 Security Agreement dated as of May 11, 1993, among OHM Corporation, OHM Remediation Services Corp. and Continental Bank N.A., as Administrative Agent [incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993].
10.14 First Amendment dated as of May 4, 1994 to Security Agreement dated as of May 11, 1993 by and between the Registrant, OHM Remediation Services Corp., and Bank of America Illinois as Issuing and Paying Agent [incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995].
10.15 Second Amendment dated as of May 31, 1995 to Security Agreement dated as of May 11, 1993 by and between the Registrant, OHM Remediation Services Corp., and Bank of America Illinois as Issuing and Paying Agent [incorporated by reference to Exhibit 10(g) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
10.16 Pledge Agreement dated as of May 11, 1993, executed by the Registrant in favor of Continental Bank N.A., as Administrative Agent [incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993].
10.17 First Amendment dated as of May 31, 1995 to Pledge Agreement dated as of May 11, 1993 by and between the Registrant and Bank of America Illinois as Issuing and Paying Agent [incorporated by reference to Exhibit 10(f) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
10.18 Intercreditor Agreement dated May 31, 1995 by and among Citicorp USA, Inc., as administrative agent, Bank of America Illinois, as issuing and paying agent and WMX Technologies, Inc. [incorporated by reference to Exhibit 10(h) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
10.19 Guarantee Agreement by and among the Registrant and WMX Technologies, Inc., dated May 30, 1995 [incorporated by reference to Exhibit 10(i) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
10.20 Reimbursement Agreement dated as of May 31, 1995 among WMX Technologies, Inc., OHM Corporation, and OHM Remediation Services Corp. [incorporated by reference to Exhibit 10(j) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
10.21 Security Agreement dated as of May 31, 1995 by and between the Registrant, OHM Remediation Services Corp., and WMX Technologies, Inc. [incorporated by reference to Exhibit 10(k) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
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* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14 of Form 10-K.
Exhibit Exhibit Number Description - ------ -----------
10.22 Pledge Agreement dated as of May 31, 1995 by and between the Registrant and WMX Technologies, Inc. [incorporated by reference to Exhibit 10(l) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
10.23 Master Loan and Security Agreement dated May 11, 1993, between OHM Remediation Services Corp. and BOT Financial Corporation [incorporated by reference to Exhibit 10(d) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993].
10.24 Amendment No. 1 to Master Loan and Security Agreement dated as of January 19, 1995 between BOT Financial Corporation and OHM Remediation Services Corp. [incorporated by reference to Exhibit 10(g) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995].
10.25 Promissory Note dated December 23, 1993 executed by OHM Remediation Services Corp. in favor of BOT Financial Corporation [incorporated by reference to Exhibit 10(m) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993].
10.26 Promissory Note dated December 28, 1994 executed by OHM Remediation Services Corp. in favor of BOT Financial Corporation [incorporated by reference to Exhibit 10(r) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994].
10.27 Loan and Security Agreement dated as of August 1, 1994 by and between OHM Remediation Services Corp. and Internationale Nederlanden Lease Structured Finance B.V. [incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994].
10.28 Promissory Note dated August 31, 1994 executed by OHM Remediation Services Corp. in favor of Internationale Nederlanden Lease Structured Finance B.V. [incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994].
10.29 Continuing Corporate Guaranty dated as of August 1, 1994 executed by OHM Corporation in favor of Internationale Nederlanden Lease Structured Finance B.V. [incorporated by reference to Exhibit 10(d) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994].
10.30 Purchase Agreement dated as of December 15, 1992, among OHM Corporation, NSC Corporation, NSC Industrial Services Corp., Waste Management, Inc., and The Brand Companies, Inc. [incorporated by reference to Exhibit 10(j) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992].
10.31 Stock Purchase Agreement dated December 17, 1992, among OHM Corporation and Chemical Waste Management, Inc. [incorporated by reference to Exhibit 10(k) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992].
10.32* OHM Corporation 1996 Management Incentive Plan [incorporated by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995].
10.33* OHM Corporation Executive Retirement Plan, dated as of January 1, 1996 [incorporated by reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995].
10.34* OHM Corporation Retirement and Incentive Compensation Plan [incorporated by reference to Exhibit 10.33 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996].
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* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14 of Form 10-K.
Exhibit Exhibit Number Description - ------ -----------
10.35* OHM Corporation Incentive Stock Plan [incorporated by reference to Exhibit 10.34 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996].
10.36* Employment Agreement, dated August 21, 1996, between Joseph R. Kirk and OHM Corporation [incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996].
10.37 Equipment Agreement, dated as of December 24, 1996, between BTM Capital Corporation and OHM Remediation Services Corp.
10.38 Supplement No. 01 to the Equipment Agreement, dated as of December 24, 1996, between BTM Capital Corporation and OHM Remediation Services Corp.
11 Statement Re Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
24 Powers of Attorney of certain directors of the Company.
27 Financial Data Schedule.
(b) There were no reports on Form 8-K filed during the three months ended December 31, 1996.
(c) The response to this portion of Item 14 is included as Exhibits to this report.
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* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14 of Form 10-K.
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
By: /s/ STEVEN E. HARBOUR ---------------------------------------- Steven E. Harbour-Vice President, Legal and Secretary
March 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on March 18, 1997.
/s/ JAMES L. KIRK - ----------------------------------------------------------------------------- James L. Kirk-Chairman of the Board, President and Chief Executive Officer
/s/ PHILIP O. STRAWBRIDGE - ----------------------------------------------------------------------------- Philip O. Strawbridge-Vice President and Chief Financial and Administrative Officer (Principal Financial Officer)
/s/ KRIS E. HANSEL - ----------------------------------------------------------------------------- Kris E. Hansel-Vice President and Controller (Principal Accounting Officer)
* WILLIAM P. HULLIGAN - ----------------------------------------------------------------------------- William P. Hulligan-Director
* HERBERT A. GETZ - ----------------------------------------------------------------------------- Herbert A. Getz-Director
* IVAN W. GORR - ----------------------------------------------------------------------------- Ivan W. Gorr-Director
* CHARLES D. HOLLISTER - ----------------------------------------------------------------------------- Charles D. Hollister-Director
* JOSEPH R. KIRK - ----------------------------------------------------------------------------- Joseph R. Kirk-Director
* JAMES E. KOENIG - ----------------------------------------------------------------------------- James E. Koenig-Director
* RICHARD W. POGUE - ----------------------------------------------------------------------------- Richard W. Pogue-Director
* CHARLES W. SCHMIDT - ----------------------------------------------------------------------------- Charles W. Schmidt-Director
* The undersigned, by signing his name hereto does sign and execute this report pursuant to Powers of Attorney executed on behalf of the above-named directors and contemporaneously herewith filed with the Securities and Exchange Commission.
/s/ STEVEN E. HARBOUR March 18, 1997 - ----------------------------------------------------------------------------- Steven E. Harbour, Attorney-in-Fact
OHM CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS