-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JcU/MPvfz6rymEQu+hZNFDuvwzassLyoecGs11VJ4tgjjihqsW8wnl1bW8uV1BOK 4iN2VB2tGShVfBgwWKLwAg== 0000950128-98-000804.txt : 19980518 0000950128-98-000804.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950128-98-000804 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHM CORP CENTRAL INDEX KEY: 0000788964 STANDARD INDUSTRIAL CLASSIFICATION: HAZARDOUS WASTE MANAGEMENT [4955] IRS NUMBER: 341503050 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09654 FILM NUMBER: 98624159 BUSINESS ADDRESS: STREET 1: 16406 US RTE 224 EAST CITY: FINDLAY STATE: OH ZIP: 45840 BUSINESS PHONE: 4194233529 MAIL ADDRESS: STREET 1: P.O. BOX 551 CITY: FINDLAY STATE: OH ZIP: 45839-0551 FORMER COMPANY: FORMER CONFORMED NAME: ENVIRONMENTAL TREATMENT & TECHNOLOGIES CORP DATE OF NAME CHANGE: 19890209 FORMER COMPANY: FORMER CONFORMED NAME: ENVIRONMENTAL TREATMENT & TECHNOLOGY CORP DATE OF NAME CHANGE: 19880816 10-Q 1 OHM CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF --- THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF --- THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-9654 OHM CORPORATION (Exact name of registrant as specified in its charter) OHIO 34-1503050 (State of Incorporation) (I.R.S. Employer Identification Number) 16406 U.S. ROUTE 224 EAST, FINDLAY, OH. 45840 (Address of principal executive offices) (Zip Code) (419) 423-3529 (Registrant's telephone number, including area code) Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No --- --- The number of shares of Common Stock, par value $0.10 per share, outstanding on April 30, 1998 was 28,434,405. 2 OHM CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER MARCH 31, 1998 PART I FINANCIAL INFORMATION
Page Number ------ Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 1998 (Unaudited) and December 31, 1997........................................................................... 1 Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 1998 and 1997................................................................... 2 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 1998 and 1997................................................................... 3 Notes to Condensed Consolidated Financial Statements (Unaudited)................................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 8 PART II OTHER INFORMATION Item 1. Legal Proceedings................................................................................ 12 Item 6. Exhibits and Reports on Form 8-K................................................................. 12 Signatures ............................................................................................... 13
3 PART I -- FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS OHM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Per Share Data)
March 31, December 31, 1998 1997 ---- ---- ASSETS (Unaudited) Current Assets: Cash and cash equivalents....................................................... $ 5,790 $ 31,784 Accounts receivable............................................................. 68,468 70,627 Costs and estimated earnings on contracts in process in excess of billings...... 45,206 47,774 Materials and supply inventory, at cost......................................... 11,627 13,285 Prepaid expenses and other assets............................................... 12,934 15,111 Deferred income taxes........................................................... 11,166 11,166 Refundable income taxes......................................................... 264 259 --------- --------- 155,455 190,006 --------- --------- Property and Equipment, net........................................................ 29,207 56,610 --------- --------- Other Noncurrent Assets: Investments in affiliated company............................................... -- 5,637 Intangible assets relating to acquired businesses, net.......................... 46,038 46,364 Deferred debt issuance and financing costs...................................... 1,067 1,114 Deferred income taxes........................................................... 46,730 15,725 Other assets.................................................................... 1,006 1,587 --------- --------- 94,841 70,427 --------- --------- Total Assets.................................................................. $ 279,503 $ 317,043 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable................................................................ $ 50,299 $ 72,692 Billings on contracts in process in excess of costs and estimated earnings...... 1,243 1,530 Accrued compensation and related taxes.......................................... 7,052 8,646 Federal, state and local taxes.................................................. 184 86 Other accrued liabilities....................................................... 45,466 17,769 Current notes payable........................................................... 5,000 5,000 Current portion of noncurrent liabilities....................................... 2,427 3,064 --------- --------- 111,671 108,787 --------- --------- Noncurrent Liabilities: Long-term debt.................................................................. 82,637 50,041 Deferred gain from sale leaseback of equipment.................................. 2,124 2,890 Capital leases.................................................................. 16 65 Pension agreement............................................................... 1,105 1,100 --------- --------- 85,882 54,096 --------- --------- Commitments and Contingencies...................................................... -- -- Shareholders' Equity: Preferred stock, $10.00 par value, 2,000,000 shares authorized; None issued and outstanding................................................... -- -- Common stock, $.10 par value, 50,000,000 shares authorized; Shares issued: 1998 - 28,434,405; 1997 - 27,425,046.......................... 2,843 2,742 Additional paid-in capital...................................................... 151,467 142,453 Retained (deficit) earnings..................................................... (42,952) 8,965 ---------- --------- 111,358 154,160 Less treasury stock, 2,579,081 shares, at cost (29,408) -- ---------- --------- 81,950 154,160 --------- --------- Total Liabilities and Shareholders' Equity.................................... $ 279,503 $ 317,043 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 1 4 OHM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Share Data)
Three Months Ended March 31, --------------------------- 1998 1997 --------- --------- (Unaudited) Revenue........................................................................... $ 104,529 $ 108,498 Cost of services............................................................... 97,838 94,647 --------- --------- Gross Profit...................................................................... 6,691 13,851 Selling, general and administrative expenses................................... 82,499 10,409 --------- --------- Operating (Loss) Income........................................................... (75,808) 3,442 ---------- --------- Other (Income) Expenses: Investment income.............................................................. (393) (13) Interest expense............................................................... 1,717 1,333 Equity in net earnings of affiliate............................................ (6) (185) Miscellaneous (income) expense, net............................................ (53) 110 ---------- --------- 1,265 1,245 --------- --------- Income (Loss) Before Income Taxes................................................. (77,073) 2,197 Income taxes (benefit)......................................................... (30,848) 759 ---------- --------- Net (Loss) Income................................................................. $ (46,225) $ 1,438 ========== ========= Net Income (Loss) Per Common Share................................................ $ (1.65) $ 0.05 ========== ========= Weighted-Average Common Shares ................................................... 27,972 27,044 ========= ========= Net (Loss) Income Per Common Share--Assuming Dilution.............................. $ (1.65) $ 0.05 ========= ========= Adjusted Weighted-Average Common Shares--Assuming Dilution......................... 27,972 27,090 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 5 OHM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Three Months Ended March 31, -------------------------- 1998 1997 --------- --------- (Unaudited) Net cash flows (used in) provided by operating activities........................... $ (35,628) $ 805 ---------- --------- Cash flows from investing activities: Purchases of property and equipment............................................ (1,870) (5,550) Proceeds from sale of property and equipment................................... 348 94 Decrease in other noncurrent assets............................................ (442) (2,527) ---------- --------- Net cash used in investing activities........................................ (1,964) (7,983) ---------- ---------- Cash flows from financing activities: Payments on long-term debt and capital leases.................................. (1,290) (1,244) Proceeds from borrowing under revolving credit agreement and term loan......... 124,800 42,000 Payments on revolving credit agreement and term loan........................... (91,600) (42,000) Payments on pension agreement.................................................. (19) (28) Common stock issued for 401(k) funding and stock options....................... 9,115 713 Repurchase of treasury stock................................................... (29,408) -- --------- --------- Net cash provided by (used in) financing activities.......................... 11,598 (559) --------- --------- Net decrease in cash and cash equivalents.................................... (25,994) (7,737) Cash and cash equivalents at beginning of period.................................... 31,784 14,002 --------- --------- Cash and cash equivalents at end of period.......................................... $ 5,790 $ 6,265 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 6 OHM CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by OHM Corporation (the "Company") and reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of financial results for the three months ended March 31, 1998 and 1997, in accordance with generally accepted accounting principles for interim financial reporting and pursuant to Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The results of operations for the three months ended March 31, 1998 and 1997 are not necessarily indicative of the results for the full year. During the three months ended March 31, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". Total comprehensive income for the three months ended March 31, 1998 and 1997 equaled net income for the respective periods. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information". Statement No. 131, effective for the December 31, 1998 financial statements, establishes requirements for reporting information about operating segments in annual and interim statements. This statement may require a change in the Company's financial reporting, however, the extent of this change, if any, has not been determined. The unaudited condensed consolidated financial statements have been prepared on the Company's historical basis of accounting. The purchase method of accounting resulting from the acquisition of 54% of the issued and outstanding common stock of the Company by International Technology Corporation has not been pushed down to the financial statements of the Company. See "Note 3 - Merger." The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. The Company's 40% owned asbestos abatement affiliate, NSC Corporation ("NSC"), has been accounted for on the equity method prior to distribution to shareholders. See "Note 3 - Merger" regarding the Company's distribution of NSC stock to the Company's shareholders. All material intercompany transactions and balances have been eliminated in consolidation. NOTE 2 - SUPPLEMENTARY CASH FLOW INFORMATION Cash paid for interest was $927,000 and $564,000 and cash paid for income taxes was $93,000 and $335,000 for the three months ended March 31, 1998 and 1997, respectively. NOTE 3 - MERGER The Company has entered into an Agreement and Plan of Merger (the "Merger Agreement") dated January 15, 1998, by and among the Company, International Technology Corporation ("Parent") and IT-Ohio, Inc. ("Purchaser"). Pursuant to the Merger Agreement, on February 25, 1998, Purchaser, a wholly owned subsidiary of Parent, completed a tender offer (the "Offer") for 13,933,000 shares of Common Stock (each, a "Share" and collectively, the "Shares") by purchasing such Shares at a price of $11.50 per Share, net to the tendering shareholder in cash. The Offer was described in the Tender Offer Statement on Schedule 14D-1 filed by Purchaser on January 16, 1998, with the Securities and Exchange Commission. The Merger Agreement provides that, subject to the satisfaction or waiver of certain conditions precedent (including the approval of the Merger Agreement by holders of a majority of the outstanding Shares), Purchaser will merge with and into the Company (the "Merger"). Parent has filed Form S-4 Amendment No. 5, effective May 11, 1998, with the Securities and Exchange Commission to register shares issued in connection with the Merger. The Merger is the second and final step in the acquisition of the Company by Parent pursuant to the Merger Agreement. The first step was the Offer by the Purchaser described above. As a result of the Offer and related transactions, Parent currently owns indirectly through Purchaser 13,933,000 shares of the Company's common stock, representing 54% of the outstanding shares. Assuming shareholder approval, after consummation of the Merger, the Company will be a wholly owned subsidiary of Parent and the Company's shareholders will be stockholders of Parent, holding in the aggregate approximately 57% of the shares of Parent's common stock and 45% of the total voting power of Parent after the Merger. 4 7 Pursuant to the Merger Agreement and the Share Repurchase Agreement, dated as of January 15, 1998, and as amended and restated as of February 11, 1998 and as amended and restated as of February 17, 1998 (the "Repurchase Agreement") by and among the Company, Parent, WMX, Rust and Rust Remedial Services Holding Company, Inc., an affiliate of WMX, the Company repurchased from WMX and its affiliates 2,535,381 shares for $11.50 per share, concurrently with the payment for shares pursuant to the Offer (the "Repurchase"), and WMX and its affiliates tendered 7,111,543 shares in the Offer. Pursuant to the Repurchase Agreement, WMX and its affiliates also agreed to vote all shares held by them in favor of the Merger. WMX also agreed to cancel, without payment of any separate consideration, the Warrants and any rights it may have to purchase additional shares of common stock. In addition, the Guaranty Agreement and related guarantees as well as key provisions of the Standstill Agreement will terminate upon consummation of the Merger. The Company also had an approximate 40% interest in NSC Corporation ("NSC"), a provider of asbestos abatement and specialty contracting services. Pursuant to the Merger Agreement, the Company paid a pro rata distribution (the "NSC Distribution") to holders of record of the Shares as of the close of business on February 24, 1998, of all of the shares of Common Stock, par value $0.01 per share, of NSC held by the Company (the "NSC Shares"). The payment date for the NSC Distribution was March 6, 1998. In connection with the Company's entry into the Merger Agreement and by resolution of the Company's Board of Directors, the Company's 1986 Stock Option Plan and the Company's Nonqualified Stock Option Plan for Directors were amended to immediately vest each non-vested stock option issued under such plans and to give each of the option holders the right to cancel their options in exchange for a cash payment equal to the difference between $11.50 per share and the respective exercise price of each option. In addition, the Company's Board of Directors took action to allow holders of the restricted stock issued under the Company's Incentive Stock Plan to tender such stock in the Offer. As a result of the above actions, the Company has incurred $6,500,000 of compensation expense during the first quarter of 1998. In addition, pursuant to that certain letter agreement, dated as of January 15, 1998, by and between H. Wayne Huizenga and the Company, all of the outstanding options held by H. Wayne Huizenga were canceled as of February 25, 1998, in consideration of $1,500,000. The consummation of the transactions contemplated by the Merger Agreement is subject to the satisfaction of various conditions, including, without limitation: (i) the approval by the stockholders of Parent for the issuance of shares of Parent Common Stock pursuant to the Merger Agreement, and (ii) the approval of the Merger Agreement and the Merger by the shareholders of the Company. The Company received early termination of the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act during January 1998. The Company has retained the historical basis of accounting for the three months ended March 31, 1998. However, certain decisions by management of the Company and the Parent related to the merger require recognition of expense in the Company's financial statements for the three months ended March 31, 1998. In addition, significant expense associated with the transaction has been incurred by the Company during the three months ended March 31, 1998. These expenses will be reflected by the Parent in the purchase method of accounting as detailed in its Form S-4 Amendment No. 5, effective May 11, 1998 referred to above. Preliminary estimates include the following: (In Thousands) -------------- Writedown of property, plant and equipment $26,488 Change of control, employment, stock option, and severance agreements 19,600 Transition accrual including severance and lease commitments 12,800 Expenses associated with transaction 9,740 Writedown of inventory 1,600 Shareholder repurchase agreement 1,500 ------- $71,728 ======= 5 8 NOTE 4 - INCOME TAXES The reasons for differences between the provisions for income taxes and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows: Three Months Ended March 31, --------------------- 1998 1997 ----- ----- Federal statutory rate........................... 34.0% 34.0% Add (deduct): State income taxes, net of federal benefit.... 6.0 4.7 Goodwill...................................... (0.2) 3.4 Research and development tax credits.......... 0.3 (2.9) Equity in net earnings of affiliate........... -- (2.3) Other, net.................................... (0.1) (2.4) ---- ---- 40.0% 34.5% ==== ==== NOTE 5 - SEASONALITY The timing of revenue recognition is dependent on the Company's backlog, contract awards and the performance requirements of each contract. The Company's revenue is also affected by the timing of its clients' planned contract work which generally increases during the third and fourth quarters. Because of this variability in demand, the Company's quarterly revenue can fluctuate, and revenue for the first and second quarters of each year can normally be expected to be lower than the third and fourth quarters. Although the Company believes that the historical trend in quarterly 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 other interim results should not be considered indicative of results to be expected for any quarter or for the full year. NOTE 6 - LITIGATION AND CONTINGENCIES The Company is subject to a number of claims and litigation. These matters include the following items which were disclosed in the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The Company is 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 account receivables at March 31, 1998 include a claim receivable of $8,653,000 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 that 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 (inclusive of $8,653,000 of claim receivable) for damages arising from Occidental's breach of contract, misrepresentation and failure to pay outstanding contract amounts. The Company has established additional reserves for a portion of the receivables related to this matter. Management believes that it has established adequate reserves should the resolution of the above matter be lower than the amounts recorded. The Company is in litigation with General Motors Corp. in the U.S. District Court for the Northern District of New York. GM filed suit in January 1996 alleging that the Company breached a contract between Hughes Environmental Systems, Inc. (HESI), a GM subsidiary, for work in 1994 for the remediation of 22,000 cubic yards of PCB contaminated sediment in the St. Lawrence River in Massena. GM seeks damages for $3.8 million. The Company in turn filed suit against HESI and ERM Northeast, Inc. in U.S. District Court in Northern New York seeking $3.6 million in damages for breach of contract. The GM suit was later consolidated with the Company's suit against HESI and ERM. GM alleges that the Company abandoned the contract through inability to perform while the Company claims that performance was impacted by conditions at the site that were not as represented. 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 future results of operations or financial condition. 6 9 In the course of the Company's business there is always risk and uncertainty in pursuing and defending claims, litigation and arbitration proceedings 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. 7 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a diversified services firm for government and private sector clients and provides a broad range of outsourced services including environmental remediation and project, program and construction management services. 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 contract activities which generally increase during the third and fourth quarters. Because of this change in demand, the Company's quarterly revenue can fluctuate, and revenue for the first and second quarters of each year have historically been lower than for the third and fourth quarters, although there can be no assurance that this will occur in future years. Accordingly, quarterly or other interim results should not be considered indicative of results to be expected for any quarter or full fiscal year. See "Note 3 to the Condensed Consolidated Financial Statements" for a description of the Merger with International Technology Corporation. Effective June 1, 1997, the Company acquired all of the outstanding stock of Beneco Enterprises, Inc., a Utah corporation ("Beneco"), for an aggregate purchase price of $14,700,000. The purchase price was paid as follows: (i) $9,700,000 in cash and (ii) unsecured promissory notes in the aggregate of $5,000,000. The Company has agreed to make an additional payment in the year 2000 contingent upon the achievement of certain operating results and other contractual conditions. Beneco is a provider of project, program and construction management services to the Department of Defense ("DOD") and other government agencies throughout the United States. The acquisition of Beneco has been accounted for using the purchase method and, accordingly, the acquired assets and assumed liabilities, including goodwill, have been recorded at their estimated fair values as of June 1, 1997. The Company's consolidated statements of operations include the results of Beneco since June 1, 1997. RESULTS OF OPERATIONS REVENUE. The following table sets forth the Company's revenue by client type for the three months ended March 31, 1998 and 1997 (in thousands, except percentages):
Three Months Ended March 31, --------- 1998 1997 ----------------- ---------------- Federal, State, and Local Government... $ 80,917 77% $ 92,386 85% Industrial............................. 23,612 23% 16,112 15% -------- ---- -------- ---- Total Revenue................. $104,529 100% $108,498 100% ======== ==== ======== ====
Revenue decreased $3,969,000 or 4% for the three months ended March 31, 1998, when compared to the same period in 1997. Such decrease in revenue is primarily due to decreased environmental remediation revenues. Revenue from government agencies for the three months ended March 31, 1998 decreased $11,469,000 or 12% for the three months ended March 31, 1998, when compared to the same period in 1997. The environmental remediation business experienced a decrease in revenue from the Company's term contracts with the various DOD agencies, the Environmental Protection Agency and from state and local governments, during the three months ended March 31, 1998 when compared to the same period in 1997. During the three months ended March 31, 1998, the Company experienced delays in issuance of delivery orders from the various governmental agencies until March and April. The Company also experienced delays in performing work due to weather in the Western United States. In addition, the Company has experienced a decrease in revenue from its site specific thermal incineration project in Holbrook, Massachusetts with the United States Army Corps of Engineers as such project nears its completion. The Company expects to continue to receive funding under its federal contracts in the foreseeable future and is experiencing a significant amount of proposal activity for new contracts with the various DOD agencies, as well as the Department of Energy. However, 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 an increase in revenue from industrial clients of $7,500,000 or 47% for the three months ended March 31, 1998, when compared to the same period in 1997. Revenue from industrial sector clients is almost exclusively from environmental remediation and has increased due to the two large thermal incineration projects as well as other increased industrial sector work. Despite the increase in the current period, the Company believes that 8 11 demand for its services from the industrial sector has been negatively impacted due to anticipated changes in the Superfund law pending its reauthorization as well as current economic conditions in certain industry and geographic sectors. Although the Company cannot predict the impact upon the environmental industry of the failure of Congress to reauthorize the Superfund law, further delays in Superfund reauthorization will continue to have a material adverse impact upon the demand for the Company's services in the form of project delays as clients and potential clients wait for and anticipate changes in these regulations. The Company has been very selective in bidding industrial contracts and has established specific minimum criteria on profitability and risk in determining whether or not to compete for any given contract. The Company expects the current market conditions to continue in the industrial sector into the foreseeable future. COST OF SERVICES AND GROSS PROFIT. Cost of services increased $3,191,000 or 3% for the three months ended March 31, 1998, when compared to the same period in 1997. Gross profit decreased $7,160,000 or 52% for the three months ended March 31 1998 when compared to the same period in 1997. Such decreases in gross profit are the result of decreased revenue, delays in making the necessary reductions in costs that are consistent with decreased revenue, disruption resulting from Merger related activities and a higher mix of lower margin industrial sector work. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SGA") expenses increased significantly for the three months ended March 31, 1998, when compared to the same period in 1997 due to the inclusion of approximately $71,728,000 of expense associated with the Merger and the required accounting thereof. See "Note 3 to the Condensed Consolidated Financial Statements". SGA expense, excluding the expense associated with the Merger, as a percentage of revenue was 10% for the three months ended March 31, 1998 and 1997. PROVISIONS FOR BAD DEBTS. The Company's provision for bad debts was $750,000 and $650,000 for the three months ended March 31, 1998 and 1997, respectively. INTEREST EXPENSE. Interest expense increased 29% during the three months ended March 31, 1998, when compared to the same period in 1997. The increase in interest expense was a result of an increase in the average borrowings outstanding under the Company's revolving credit agreement during such periods in 1998 when compared to the same periods in 1997. The increase in borrowings resulted from transaction costs associated with the Merger. See "Note 3 to the Condensed Consolidated Financial Statements". EQUITY IN NET EARNINGS OF AFFILIATES. The Company's equity interest in NSC's net earnings decreased $179,000 to $6,000 for the three months ended March 31, 1998, from $185,000 in 1997. The decrease is primarily the result of the Company distributing its investment in NSC to shareholders. See "Note 3 to the Condensed Consolidated Financial Statements." NET INCOME(LOSS). Net loss for the three months ended March 31, 1998 was $46,225,000 or $1.65 per share compared to net income of $1,428,000 or $0.05 per share for the same period in 1997. Such losses were primarily a result of the aforementioned Merger. See "Note 3 to the Condensed Consolidated Financial Statements." The effective income tax rate was 40.0% and 34.5% for the three months ended March 31, 1998 and 1997, respectively. See "Note 4 to the Condensed Consolidated Financial Statements" for a reconciliation of the statutory federal income tax rate to the effective income tax rate. 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 otherwise scheduled to expire on May 30, 2000. Waste Management, Inc. ("WMX") has issued a guarantee of up to $62,000,000 outstanding under the credit agreement in favor of the Bank Group. Upon successful completion of the Merger, such revolving credit agreement and debt guarantee will be terminated. See "Note 3 to the Condensed 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 receivable, general intangibles and in the Company's investment in the common stock of NSC as well as the Company's other subsidiaries. The agreement also imposes, among other covenants, a minimum tangible net worth covenant, 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. Amounts outstanding for cash borrowing under the revolving credit facility at March 31, 1998 and December 31, 1997 were $31,800,000 and zero 9 12 respectively. Aggregate letters of credit outstanding at March 31, 1998 and December 31, 1997 were $13,014,000 and $13,300,000, respectively. Capital expenditures for the three months ended March 31, 1998 and 1997, were $1,870,000 and $5,550,000, respectively. The Company's capital expenditures are primarily related to the installation of computer systems and related equipment, the purchase of heavy equipment and the fabrication of custom equipment by the Company for the execution of remediation projects. Capital expenditures for the entire fiscal year 1998 are expected to range between $8,000,000 and $10,000,000. The Company's long-term capital expenditure requirements are dependent upon the type and size of future remediation projects awarded to the Company. The Company believes that the government sector will continue to be its primary source of revenue for the foreseeable future in light of its contract backlog with federal government agencies. Revenue from government agencies historically has required greater working capital, the major component of which is accounts receivable, than revenue from industrial sector clients. In addition, the Company is bidding on a number of large, long-term contract opportunities which, if awarded to the Company, would also increase working capital needs and capital expenditures. The Company believes it will be able to finance its working capital needs and capital expenditures in the short term through a combination of cash flows from operations, borrowing under its revolving credit facility, proceeds from permitted asset sales and other external sources. The Company's identified long-term capital needs consist of payments due upon the maturity of the Company's Revolving Credit Facility in 2000 and sinking fund payments which commenced in 1996 of 7.5% of the principal amount as well as payments due upon maturity of its Convertible Debentures in 2006. The Company has purchased and retired $10,736,000 of the outstanding Convertible Debentures during 1995 and 1996, sufficient to meet its annual sinking fund obligations through October 1, 1997, as 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. 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. 10 13 FORWARD-LOOKING STATEMENTS All statements, other than statements of historical facts, included in this Form 10-Q 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 this Form 10-Q, and in "Business -- Environmental Contractor Risks," "Business -- Regulation," "--Results of Operations" "--Environmental Matters and Government Contracting," and "Note 1 to Consolidated Financial Statements" of the Company's Annual Report on Form 10-K for the year ended December 31, 1996, which sections are incorporated herein by reference, and other general economic and business conditions, the business opportunities (or lack thereof) that may be presented to and pursued by the Company, changes in laws or regulations affecting the Company's operations and other factors, many of which are beyond the control of the Company. In addition, these risks and uncertainties include, without limitation, (i) the potential for fluctuations in funding of backlog, (ii) weather conditions affecting or delaying the Company's ability to perform or complete the services required by its contracts, (iii) the Company's ability to be awarded new contracts in its target markets or its ability to expand existing contracts, (iv) other industry-wide market factors, including the timing of client's planned remediation activities and (v) interpretation or enforcement by federal, state or local regulators of existing environmental regulations. Also, there is always risk and uncertainty in pursuing and defending litigation, arbitration proceedings and claims in the course of the Company's business. All of these risks and uncertainties could cause actual results to differ materially from those assumed in the forward-looking statements. These forward-looking statements reflect management's analysis, judgment, belief or expectation only as of the date of this Form 10-Q. The Company undertakes no obligations 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 Securities and Exchange Commission pursuant to the Securities and Exchange Act of 1934, including, without limitation, the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 11 14 PART II -- OTHER INFORMATION Item 1. Legal Proceedings See Note 6 to Consolidated Financial Statements for a discussion of legal proceedings. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K On January 21, 1998, the Company filed a Current Report on Form 8-K pursuant to Item 1 thereof in connection with the acquisition by IT-Ohio, Inc. of approximately 54% of the outstanding shares of the Company's common stock. On March 5, 1998, the Company filed a Current Report on Form 8-K pursuant to Item 5 thereof in connection with the reconstitution of the Board of Directors of the Company. On March 10, 1998, the Company filed a Current Report on Form 8-K pursuant to Item 5 thereof in connection with the execution of the Agreement and Plan of Merger, dated as of January 15, 1998, among the Company, International Technology Corporation and IT-Ohio, Inc. 12 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OHM CORPORATION Date: May 15, 1998 By /s/ ANTHONY J. DELUCA -------------------------------------- Anthony J. DeLuca President and Chief Executive Officer (Duly Authorized Officer) By /s/ PHILIP O. STRAWBRIDGE -------------------------------------- Philip O. Strawbridge Vice President and Chief Financial and Administrative Officer (Principal Financial Officer) 13 EX-27 2 OHM CORPORATION
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 5,790 0 133,843 21,412 11,627 155,455 69,498 40,291 279,503 111,671 82,653 0 0 2,843 108,515 279,503 0 104,529 0 97,838 82,047 0 1,717 (77,073) (30,848) (46,225) 0 0 0 (46,225) (1.65) (1.65)
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