Thermo TerraTech Inc.
Consolidated Financial Statements
Fiscal 1999
Thermo TerraTech Inc. 1999 Financial Statements
Consolidated Statement of Operations
Year Ended
April 3, April 4, March 29,
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ---------- ----------
Revenues (Note 12):
Service revenues $310,039 $281,456 $251,384
Product revenues - 17,330 27,119
-------- -------- -------
310,039 298,786 278,503
-------- -------- -------
Costs and Operating Expenses:
Cost of service revenues 247,610 230,376 204,724
Cost of product revenues - 14,735 22,677
Selling, general, and administrative expenses (Note 8) 46,224 41,941 39,191
Restructuring and nonrecurring items (Notes 3 and 13) 10,217 - 9,282
-------- -------- -------
304,051 287,052 275,874
-------- -------- -------
Operating Income 5,988 11,734 2,629
Interest Income 2,185 4,163 7,253
Interest Expense (includes $162, $593, and $2,638 to parent (8,981) (10,778) (12,914)
company)
Gain on Issuance of Stock by Subsidiary (Note 10) - - 1,475
Gain on Sale of Unconsolidated Subsidiary (Note 3) - 3,012 -
Equity in Earnings of Unconsolidated Subsidiary - 174 865
Other Income, Net - 209 401
-------- -------- -------
Income (Loss) Before Provision for Income Taxes and Minority (808) 8,514 (291)
Interest
Provision for Income Taxes (Note 5) 1,786 5,146 1,705
Minority Interest (Income) Expense (1,173) 95 (1,834)
-------- -------- -------
Net Income (Loss) $ (1,421) $ 3,273 $ (162)
======== ======== =======
Earnings (Loss) per Share (Note 16)
Basic $ (.07) $ .18 $ (.01)
======= ======== =======
Diluted $ (.07) $ .17 $ (.01)
======= ======== =======
Weighted Average Shares (Note 16)
Basic 19,402 18,700 18,090
======== ======== =======
Diluted 19,402 18,978 18,090
======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
Thermo TerraTech Inc. 1999 Financial Statements
Consolidated Balance Sheet
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Assets
Current Assets:
Cash and cash equivalents (includes $41,667 and $29,583 under $ 43,013 $34,711
repurchase agreements with parent company; Note 19)
Available-for-sale investments, at quoted market value (amortized cost - 2,003
of $2,008; Note 2)
Short-term held-to-maturity investments, at amortized cost (quoted - 13,939
market value of $13,979; Note 2)
Accounts receivable, less allowances of $3,577 and $4,450 59,377 60,050
Unbilled contract costs and fees 21,207 20,547
Inventories 1,869 1,498
Prepaid and refundable income taxes (Note 5) 6,946 6,224
Prepaid expenses 3,196 3,810
-------- --------
135,608 142,782
-------- --------
Property, Plant, and Equipment, at Cost, Net 91,514 91,709
-------- --------
Other Assets 15,949 18,227
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Notes 3 and 13) 108,627 107,808
-------- --------
$351,698 $360,526
======== ========
4
Thermo TerraTech Inc. 1999 Financial Statements
Consolidated Balance Sheet (continued)
April 3, April 4,
(In thousands except share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturities of long-term obligations $ 17,618 $27,165
(includes $9,228 under overdraft facility with related party; Note 6)
Accounts payable 17,404 17,728
Accrued payroll and employee benefits 12,771 11,359
Deferred revenue 3,908 3,394
Other accrued expenses (Note 13) 14,342 11,476
Due to parent company and affiliated companies 2,522 2,341
-------- --------
68,565 73,463
-------- --------
Deferred Income Taxes (Note 5) 3,538 2,901
-------- --------
Other Deferred Items 1,076 1,049
-------- --------
Long-term Obligations (Notes 6 and 11):
Subordinated convertible debentures (includes $4,695 and $3,000 of 156,799 149,800
related-party debt)
Other 1,818 3,344
-------- --------
158,617 153,144
-------- --------
Minority Interest 27,745 32,839
-------- --------
Commitments and Contingencies (Note 7)
Shareholders' Investment (Notes 4 and 9):
Common stock, $.10 par value, 75,000,000 shares authorized; 19,583,773 1,958 1,958
shares issued
Capital in excess of par value 70,633 70,437
Retained earnings 25,898 27,319
Treasury stock at cost, 543,319 and 51,188 shares (4,130) (484)
Deferred compensation (Note 4) (252) -
Accumulated other comprehensive items (1,950) (2,100)
-------- --------
92,157 97,130
-------- --------
$351,698 $360,526
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
Thermo TerraTech Inc. 1999 Financial Statements
Consolidated Statement of Cash Flows
Year Ended
April 3, April 4, March 29,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Operating Activities
Net income (loss) $ (1,421) $ 3,273 $ (162)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 16,823 14,784 12,900
Noncash restructuring and nonrecurring items (Note 13) 8,122 - 9,282
Gain on sale of unconsolidated subsidiary (Note 3) - (3,012) -
Equity in earnings of unconsolidated subsidiary - (174) (865)
Minority interest (income) expense (1,173) 95 (1,834)
Provision for losses on accounts receivable 2,085 1,141 625
Other noncash items 199 327 430
Increase (decrease) in deferred income taxes 443 (1,583) (43)
Gain on issuance of stock by subsidiary (Note 10) - - (1,475)
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable (643) (11,154) (6,818)
Inventories and unbilled contract costs and fees (2,026) (3,353) (7,784)
Other current assets (176) 1,715 403
Accounts payable 55 5,507 895
Other current liabilities 7,653 (1,038) 3,399
-------- -------- --------
Net cash provided by operating activities 29,941 6,528 8,953
-------- -------- --------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (643) (12,746) (5,156)
Purchases of available-for-sale investments - - (38,913)
Proceeds from sale and maturities of available-for-sale 2,006 16,372 29,822
investments (Note 2)
Proceeds from maturity of held-to-maturity investments (Note 2) 14,065 13,935 -
Purchases of property, plant, and equipment (17,415) (18,460) (15,426)
Proceeds from sale of businesses (Note 3) - 19,722 347
Issuances of notes receivable - (569) -
Purchases of other assets (1,570) (1,993) (450)
Other, net 474 2,464 1,356
-------- -------- --------
Net cash provided by (used in) investing activities $ (3,083) $ 18,725 $(28,420)
-------- -------- --------
6
Thermo TerraTech Inc. 1999 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
April 3, April 4, March 29,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Financing Activities
Net proceeds from issuance of subordinated convertible debentures $ - $ - $112,398
Repayment of notes payable to parent company - (38,000) (50,000)
Proceeds from issuance of Company and subsidiaries' common 58 1,148 5,346
stock (Note 10)
Repurchase of Company and subsidiaries' common stock and (3,390) (7,355) (14,984)
subordinated convertible debentures
Issuance of short-term obligations - 6,171 803
Repayment of notes payable (Note 2) (14,748) (14,878) (736)
Dividends paid by subsidiary to minority shareholders (805) (751) (847)
Other, net 425 - (266)
-------- -------- --------
Net cash provided by (used in) financing activities (18,460) (53,665) 51,714
-------- -------- --------
Exchange Rate Effect on Cash (96) (49) (257)
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents 8,302 (28,461) 31,990
Cash and Cash Equivalents at Beginning of Year 34,711 63,172 31,182
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 43,013 $ 34,711 $ 63,172
======== ======== ========
See Note 14 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
7
Thermo TerraTech Inc. 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
Year Ended
April 3, April 4, March 29,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ----------- ---------- ---------
Comprehensive Income
Net Income (Loss) $(1,421) $ 3,273 $ (162)
------- ------- -------
Other Comprehensive Items:
Foreign currency translation adjustment 147 (1,071) (1,661)
Unrealized gains (losses) on available-for-sale investments 3 (10) 15
------- ------- -------
150 (1,081) (1,646)
------- ------- -------
Minority Interest Income (Expense) (284) 461 724
------- ------- -------
$(1,555) $ 2,653 $(1,084)
======= ======= =======
Shareholders' Investment
Common Stock, $.10 Par Value:
Balance at beginning of year $ 1,958 $ 1,830 $ 1,760
Issuance of stock under employees' and directors' stock plans - - 24
Conversions of subordinated convertible debentures - 128 46
------- ------- -------
Balance at end of year 1,958 1,958 1,830
------- ------- -------
Capital in Excess of Par Value:
Balance at beginning of year 70,437 62,610 59,419
Activity under employees' and directors' stock plans (130) (5,490) 264
Tax benefit related to employees' and directors' stock plans 181 655 461
Effect of outstanding put rights (1,271) - -
Conversions of subordinated convertible debentures (Note 6) - 13,092 4,766
Effect of majority-owned subsidiaries' equity transactions 1,416 (430) (2,300)
------- ------- -------
Balance at end of year 70,633 70,437 62,610
------- ------- -------
Retained Earnings:
Balance at beginning of year 27,319 24,046 24,474
Net income (loss) (1,421) 3,273 (162)
Metal Treating, Inc. transfer of cash to parent company (Note 3) - - (266)
------- ------- -------
Balance at end of year 25,898 27,319 24,046
------- ------- -------
Treasury Stock:
Balance at beginning of year (484) (3,941) (410)
Activity under employees' and directors' stock plans 411 6,637 260
Purchases of Company common stock (4,057) (3,180) (3,791)
------- ------- -------
Balance at end of year $(4,130) $ (484) $(3,941)
------- ------- -------
8
Thermo TerraTech Inc. 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
Year Ended
April 3, April 4, March 29,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ----------- ---------- ---------
Deferred Compensation (Note 4):
Balance at beginning of year $ - $ - $ -
Activity under employees' stock plans (252) - -
------- ------- -------
Balance at end of year (252) - -
------- ------- -------
Accumulated Other Comprehensive Items:
Balance at beginning of year (2,100) (1,019) 627
Other comprehensive items 150 (1,081) (1,646)
------- ------- -------
Balance at end of year (1,950) (2,100) (1,019)
------- ------- -------
$92,157 $97,130 $83,526
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
9
Thermo TerraTech Inc. 1999 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo TerraTech Inc. (the Company) provides industrial outsourcing
services and manufacturing support encompassing a broad range of
specializations. The Company operates in four segments: environmental-liability
management, engineering and design, laboratory testing, and metal treating.
Relationship with Thermo Electron Corporation
The Company was incorporated on May 30, 1986, as an indirect, wholly owned
subsidiary of Thermo Electron Corporation. As of April 3, 1999, Thermo Electron
owned 16,605,831 shares of the Company's common stock, representing 87% of such
stock outstanding.
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company and its majority-owned subsidiaries, ThermoRetec Corporation (formerly
Thermo Remediation Inc.) and The Randers Killam Group Inc. (formerly The Randers
Group Incorporated), would be merged into Thermo Electron (Note 17).
Principles of Consolidation
The accompanying financial statements include the accounts of the Company;
its wholly owned subsidiaries; its majority-owned public subsidiaries,
ThermoRetec and Randers Killam; and its majority-owned, privately held Thermo
EuroTech N.V. subsidiary. All material intercompany accounts and transactions
have been eliminated. The Company accounted for its investment in a business in
which it owned 50% using the equity method. In October 1997, the Company sold
this investment (Note 3).
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest March
31. References to fiscal 1999, 1998, and 1997 are for the fiscal years ended
April 3, 1999, April 4, 1998, and March 29, 1997, respectively. Fiscal years
1999 and 1997 each included 52 weeks; fiscal 1998 included 53 weeks.
Revenue Recognition
For the majority of its operations, the Company recognizes revenues upon
completion of the services it renders. Revenues and profits on substantially all
contracts are recognized using the percentage-of-completion method. Revenues
recorded under the percentage-of-completion method were $109,798,000 in fiscal
1999, $117,464,000 in fiscal 1998, and $113,481,000 in fiscal 1997. The
percentage of completion is determined by relating either the actual costs or
actual labor incurred to date to management's estimate of total costs or total
labor, respectively, to be incurred on each contract. If a loss is indicated on
any contract in process, a provision is made currently for the entire loss. The
Company's contracts generally provide for billing of customers upon the
attainment of certain milestones specified in each contract. Revenues earned on
contracts in process in excess of billings are classified as unbilled contract
costs and fees in the accompanying balance sheet. There are no significant
amounts included in the accompanying balance sheet that are not expected to be
recovered from existing contracts at current contract values, or that are not
expected to be collected within one year, including amounts that are billed but
not paid under retainage provisions. Amounts billed in excess of revenues
recognized are included in other accrued expenses in the accompanying balance
sheet. Revenues from soil-remediation services are recognized as soil is
processed and the Company bills customers upon receipt of contaminated soil at
its remediation centers.
10
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Gain on Issuance of Stock by Subsidiary
At the time a subsidiary sells its stock to unrelated parties at a price
in excess of its book value, the Company's net investment in that subsidiary
increases. If at that time the subsidiary is an operating entity and not engaged
principally in research and development, the Company records the increase as a
gain (Note 10).
If gains have been recognized on issuances of a subsidiary's stock and
shares of the subsidiary are subsequently repurchased either by the subsidiary,
the Company, or Thermo Electron, gain recognition does not occur on issuances
subsequent to the date of a repurchase until such time as shares have been
issued in an amount equivalent to the number of repurchased shares. Such
transactions are reflected as equity transactions and the net effect of these
transactions is reflected in the accompanying statement of comprehensive income
and shareholders' investment as effect of majority-owned subsidiaries' equity
transactions.
Equity in Earnings of Unconsolidated Subsidiary
Equity in earnings of unconsolidated subsidiary in the accompanying
statement of operations represents the Company's proportionate share of income
from a 50% investment in RETEC/TETRA L.C., acquired in December 1995 through
ThermoRetec's acquisition of RETEC. In October 1997, ThermoRetec sold its 50%
limited-liability interest in RETEC/TETRA to TETRA Thermal, Inc. (Note 3).
For the year ended December 31, 1996, RETEC/TETRA reported revenues of
$12,066,000, cost of revenues of $9,040,000, gross profit of $3,026,000, and net
income of $981,000.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
Income Taxes
The Company and Thermo Electron have a tax allocation agreement under
which the Company and certain of its subsidiaries, exclusive of foreign
operations, are included in Thermo Electron's consolidated federal and certain
state income tax returns. The agreement provides that in years in which the
Company has taxable income, it will pay to Thermo Electron amounts comparable to
the taxes the Company would have paid if it had filed separate tax returns. If
Thermo Electron's equity ownership of the Company were to drop below 80%, the
Company would be required to file its own federal income tax return.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities calculated
using enacted tax rates in effect for the year in which the differences are
expected to be reflected in the tax return.
Earnings (Loss) per Share
Basic earnings (loss) per share have been computed by dividing net income
(loss) by the weighted average number of shares outstanding during the year.
Except where the result would be antidilutive, diluted earnings (loss) per share
have been computed assuming the exercise of stock options and warrants, as well
as their related income tax effects. Diluted earnings (loss) per share for all
periods exclude the effect of assuming the conversion of convertible obligations
and the elimination of the related interest expense and the exercise of put
rights, because the result would be antidilutive.
11
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
At fiscal year-end 1999 and 1998, $40,625,000 and $29,583,000,
respectively, of the Company's cash equivalents were invested in a repurchase
agreement with Thermo Electron. Under this agreement, the Company in effect
lends excess cash to Thermo Electron, which Thermo Electron collateralizes with
investments principally consisting of corporate notes, U.S. government-agency
securities, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter (Note 19).
At fiscal year-end 1999, $1,042,000 of the Company's cash equivalents,
denominated in Dutch guilders, were invested in a repurchase agreement with a
wholly owned subsidiary of Thermo Electron. Under this agreement, the Company in
effect lends excess cash to the subsidiary, which Thermo Electron collateralizes
with investments principally consisting of corporate notes, U.S.
government-agency securities, commercial paper, money market funds, and other
marketable securities, in the amount of at least 103% of such obligation. The
Company's funds subject to the repurchase agreement are readily convertible into
cash by the Company. The repurchase agreement earns a rate based on the
Netherlands market rates, set at the beginning of each month.
At fiscal year-end 1999 and 1998, the Company's cash equivalents also
included investments in a money market fund, which has an original maturity of
three months or less. Cash equivalents are carried at cost, which approximates
market value.
Inventories
Inventories are stated at the lower of cost (on an average-cost basis) or
market value and include materials, labor, and overhead. The components of
inventories are:
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Raw Materials and Supplies $ 640 $ 618
Work in Process and Finished Goods 1,229 880
-------- -------
$ 1,869 $ 1,498
======== =======
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization primarily using the straight-line method over the
estimated useful lives of the property as follows: buildings and improvements, 5
to 40 years; machinery and equipment, 2 to 15 years; and leasehold improvements,
the shorter of the term of the lease or the life of the asset. Soil-remediation
units, which accounted for 8% and 12% of the Company's machinery and equipment,
net, at fiscal year-end 1999 and 1998, respectively, are depreciated based on an
hourly rate that is computed by estimating total hours of operation for each
unit. Property, plant, and equipment consists of:
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Land $ 7,741 $ 7,743
Buildings 42,161 38,785
Machinery, Equipment, and Leasehold Improvements 101,317 95,840
-------- -------
151,219 142,368
Less: Accumulated Depreciation and Amortization 59,705 50,659
-------- -------
$ 91,514 $91,709
======== =======
12
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Other Assets
Other assets in the accompanying balance sheet includes the costs of
acquired technology and other specifically identifiable intangible assets that
are being amortized using the straight-line method over their estimated useful
lives, which range from 5 to 20 years. These assets were $3,291,000 and
$5,212,000, net of accumulated amortization of $6,771,000 and $5,716,000, at
fiscal year-end 1999 and 1998, respectively. In fiscal 1999, the Company wrote
off $1,169,000 of other assets in connection with restructuring actions (Note
13).
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over periods ranging from 20 to 40
years. Accumulated amortization was $16,725,000 and $13,651,000 at fiscal
year-end 1999 and 1998, respectively. The Company assesses the future useful
life of this asset whenever events or changes in circumstances indicate that the
current useful life has diminished (Note 13). The Company considers the future
undiscounted cash flows of the acquired companies in assessing the
recoverability of this asset. If impairment has occurred, any excess of carrying
value over fair value is recorded as a loss.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment.
Foreign currency transaction gains and losses are included in the accompanying
statement of operations and are not material for the three years presented.
Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"other comprehensive items," which represents certain amounts that are reported
as components of shareholders' investment in the accompanying balance sheet,
including foreign currency translation adjustments and unrealized net of tax
gains and losses on available-for-sale investments. At fiscal year-end 1999, the
balance of accumulated other comprehensive items represents the Company's
cumulative translation adjustment. At fiscal year-end 1998, the balance also
includes net unrealized losses on available-for-sale investments of $3,000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in fiscal 1998 and 1997 have been reclassified to conform
to the presentation in the fiscal 1999 financial statements.
13
2. Available-for-sale and Held-to-maturity Investments
The Company's debt securities are considered available-for-sale
investments in the accompanying balance sheet and are carried at market value,
with the difference between cost and market value, net of related tax effects,
recorded in the "Accumulated other comprehensive items" component of
shareholders' investment. The aggregate market value and cost basis of
available-for-sale investments in the accompanying fiscal 1998 balance sheet,
which represents investments in corporate bonds, were $2,003,000 and $2,008,000,
respectively. The gross unrealized loss on these investments was $5,000.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded in the
accompanying statement of operations. In fiscal 1997, the Company recorded gross
realized gains of $204,000 and gross realized losses of $9,000 relating to the
sale of available-for-sale investments.
In order to secure the Company's obligation to the former owner of a
business acquired in fiscal 1995, the Company purchased U.S. treasury bonds. In
May 1998 and February 1998, $13,939,000 and $13,935,000 principal amounts,
respectively, of the U.S. treasury bonds matured and the proceeds were used to
repay the Company's zero coupon promissory note to the seller. The unmatured
portion of these securities was classified as short-term held-to-maturity
investments in the accompanying fiscal 1998 balance sheet and was carried at
amortized cost.
3. Acquisitions and Dispositions
Acquisitions
During fiscal 1999, the Company, through ThermoRetec, acquired one company
for $576,000 in cash and paid an additional $67,000 for a post-closing
adjustment relating to a fiscal 1998 acquisition.
In May 1997, the Company purchased a controlling interest in The Randers
Group Incorporated, a publicly traded provider of design, engineering, project
management, and construction services for industrial clients in the
manufacturing, pharmaceutical, and chemical-processing industries. The Company
purchased 1,420,000 shares of Randers' common stock from certain members of
Randers' management, and 84,000 shares from Thermo Power Corporation, an
affiliate of the Company, at a price of $3.125 per share, for an aggregate cost
of $4,700,000. Following these transactions, the Company owned approximately
53.3% of Randers' outstanding common stock. In addition, Thermo Electron owned
approximately 8.9% of Randers' outstanding common stock.
Subsequently, in September 1997, the Company entered into a definitive
agreement to transfer The Killam Group Inc., its wholly owned engineering and
consulting businesses, to Randers in exchange for newly issued shares of
Randers' common stock. Effective April 4, 1998, the agreement was amended to
provide that the price for these businesses would equal $70,644,407, the book
value of the transferred businesses as of April 4, 1998. The number of new
shares of Randers' common stock issued to the Company equaled such book value
divided by $3.125, or 22,606,210 shares. In January 1999, the Randers
shareholders approved the listing of these shares on the American Stock Exchange
and an amendment to Randers' certificate of incorporation changing Randers' name
to The Randers Killam Group Inc. Upon such issuance, the Company and Thermo
Electron owned approximately 94.8% and 1.0%, respectively, of Randers Killam's
outstanding common stock.
In addition, during fiscal 1998, ThermoRetec made three acquisitions for
an aggregate purchase price of $5,665,000 in cash and 459,613 shares of
ThermoRetec's common stock, valued at $2,850,000. In fiscal 1998, Thermo
EuroTech made an acquisition of 70% of the outstanding shares of a business for
$4,400,000 in cash and a commitment to issue 69,200 shares of Thermo EuroTech's
common stock valued at $275,000. As of April 3, 1999, these shares had not been
issued.
In October 1996, the Company acquired Metal Treating, Inc. from Thermo
Electron in exchange for $1,600,000 in cash. Metal Treating provides heat
treating services, including carburizing, vacuum hardening, silver and copper
brazing, and aluminum heat treating, primarily in the Milwaukee and southeastern
Wisconsin areas. Because the Company and Metal Treating were deemed for
accounting purposes to be under control of their common majority owner, Thermo
Electron, the transaction has been accounted for at historical cost in a manner
similar to a pooling-of-interests and the results of Metal Treating are included
in the accompanying statement of operations from the beginning of fiscal 1997.
14
3. Acquisitions and Dispositions (continued)
In addition, during fiscal 1997, the Company, directly and through
ThermoRetec, acquired two companies for an aggregate of $3,865,000 in cash,
311,040 shares of ThermoRetec's common stock valued at $2,006,000, and the
issuance of $1,300,000 of short- and long-term obligations.
These acquisitions, except for Metal Treating, have been accounted for
using the purchase method of accounting, and their results have been included in
the accompanying financial statements from their respective dates of
acquisition. The aggregate cost of these acquisitions exceeded the estimated
fair value of the acquired net assets by $27,181,000, which is being amortized
over periods ranging from 20 to 40 years. Allocation of the purchase price for
these acquisitions was based on estimates of the fair value of the net assets
acquired. Pro forma data is not presented since the acquisitions were not
material to the Company's results of operations.
Dispositions
In October 1997, ThermoRetec sold its 50% limited-liability interest in
RETEC/TETRA L.C. to TETRA Thermal, Inc. for $8,825,000 in cash. The Company
realized a pretax gain of $3,012,000 on the sale, which is classified as "gain
on sale of unconsolidated subsidiary" in the accompanying statement of
operations.
In addition, in October 1997, the Company sold substantially all of the
assets of its Holcroft Division, its thermal-processing equipment business,
excluding certain accounts receivable, to Holcroft L.L.C., an affiliate of
Madison Capital Partners. The sale price for the transferred assets consisted of
$10,897,000 in cash, two promissory notes for principal amounts aggregating
$2,881,000, which is generally payable in annual installments through fiscal
2003, and the assumption by Holcroft L.L.C. of certain liabilities of the
Holcroft Division. After recording a post-closing purchase price adjustment, the
Company incurred a nominal loss on the sale. This business represented the
Company's product revenues in the accompanying statement of operations and
contributed $893,000 and $1,765,000 of operating income in fiscal 1998 and 1997,
respectively.
In fiscal 1997, the Company sold its J. Amerika division, resulting in a
loss of $1,482,000, which is included in restructuring and other nonrecurring
items in the accompanying statement of operations. J. Amerika's revenues and
operating loss were $3,970,000 and $552,000, respectively, in fiscal 1997.
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans permit the grant of nonqualified and
incentive stock options. A third plan permits the grant of a variety of stock
and stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under these plans are determined by
the Board Committee. Generally, options granted to date are exercisable
immediately, but are subject to certain transfer restrictions and the right of
the Company to repurchase shares issued upon exercise of the options at the
exercise price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over a one- to ten-year period, depending on the term of
the option, which may range from five to twelve years. Nonqualified stock
options may be granted at any price determined by the Board Committee, although
incentive stock options must be granted at not less than the fair market value
of the Company's stock on the date of grant. Generally, all options have been
granted at fair market value. The Company also has a directors' stock option
plan that provides for the grant of stock options to outside directors pursuant
to a formula approved by the Company's shareholders. Options awarded under this
plan are exercisable six months after the date of grant and expire three to
seven years after the date of grant. In addition to the Company's stock-based
compensation plans, certain officers and key employees may also participate in
the stock-based compensation plans of Thermo Electron.
15
4. Employee Benefit Plans (continued)
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 1,182,000 shares at a weighted average exercise price of $8.80 elected
to participate in this exchange and, as a result, received options to purchase
591,000 shares of Company common stock at $4.50 per share, which are included in
the fiscal 1999 grants in the table below. The other terms of the new options
are the same as the exchanged options except that the holders may not sell
shares purchased pursuant to such new options for six months from the exchange
date. The options exchanged were canceled by the Company.
In February 1999, the Company awarded 50,400 shares of restricted Company
common stock to certain key employees. The shares had an aggregate value of
$252,000 and vest three years from the date of award, assuming continued
employment, with certain exceptions. The Company has recorded the fair value of
the restricted stock as deferred compensation in the accompanying balance sheet
and is amortizing such amount over the vesting period.
A summary of the Company's stock option activity is:
1999 1998 1997
------------------ ------------------ ------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
- --------------------------------------------- -------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 1,986 $ 8.87 2,558 $ 6.99 2,561 $ 6.13
Granted 1,111 4.78 296 7.67 288 10.10
Exercised - - (696) 1.36 (242) 1.16
Forfeited (158) 8.28 (172) 9.35 (49) 8.79
Canceled due to exchange (1,182) 8.80 - - - -
----- ----- ------
Options Outstanding, End of Year 1,757 $ 6.38 1,986 $ 8.87 2,558 $ 6.99
===== ====== ===== ====== ====== ======
Options Exercisable 1,757 $ 6.38 1,986 $ 8.87 2,558 $ 6.99
===== ====== ===== ====== ====== ======
Options Available for Grant 351 327 483
===== ===== ======
A summary of the status of the Company's stock options at April 3, 1999,
is:
Options Outstanding and Exercisable
---------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- --------------------------------------------- -------------------- ------------------- ------------------
$ 4.16 - $ 5.85 1,065 6.9 years $4.74
5.86 - 7.55 55 4.5 years 6.62
7.56 - 9.24 230 3.6 years 8.40
9.25 - 10.93 407 4.6 years 9.49
------
$ 4.16 - $ 10.93 1,757 5.9 years $6.38
======
16
4. Employee Benefit Plans (continued)
Employee Stock Purchase Program
Substantially all of the Company's full-time employees are eligible to
participate in an employee stock purchase program sponsored by the Company and
Thermo Electron. Prior to November 1, 1998, the applicable shares of common
stock could be purchased at the end of a 12-month period at 95% of the fair
market value at the beginning of the period and the shares purchased were
subject to a six-month resale restriction. Effective November 1, 1998, the
applicable shares of common stock may be purchased at 85% of the lower of the
fair market value at the beginning or end of the plan year, and the shares
purchased are subject to a one-year resale restriction. Shares are purchased
through payroll deductions of up to 10% of each participating employee's gross
wages. No shares were issued under this program during fiscal 1999. During
fiscal 1998 and 1997, the Company issued 13,976 shares and 25,053 shares,
respectively, of its common stock under this program.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after fiscal 1995 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net income (loss) and
earnings (loss) per share would have been:
(In thousands except per share amounts) 1999 1998 1997
- ----------------------------------------------------------------------- ----------- ----------- ----------
Net Income (Loss):
As reported $(1,421) $ 3,273 $ (162)
Pro forma (3,172) 2,218 (866)
Basic Earnings (Loss) per Share:
As reported (.07) .18 (.01)
Pro forma (.16) .12 (.05)
Diluted Earnings (Loss) per Share:
As reported (.07) .17 (.01)
Pro forma (.16) .12 (.05)
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to April 2, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $1.45,
$2.27, and $4.15 in fiscal 1999, 1998, and 1997, respectively. The fair value of
each option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1999 1998 1997
- ----------------------------------------------------------------------- ----------- ----------- ---------
Volatility 28% 27% 29%
Risk-free Interest Rate 4.9% 5.6% 6.2%
Expected Life of Options 4.0 years 3.6 years 6.1 years
17
4. Employee Benefit Plans (continued)
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions, including 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.
401(k) Savings Plan
The majority of the Company's full-time U.S. employees are eligible to
participate in Thermo Electron's 401(k) savings plan. Contributions to this
401(k) savings plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. For this plan,
the Company contributed and charged to expense $650,000, $955,000, and $975,000
in fiscal 1999, 1998, and 1997, respectively.
Other Retirement Plans
Certain of the Company's subsidiaries offer other retirement plans in lieu
of participation in the Thermo Electron 401(k) savings plan. Company
contributions to these plans are based on formulas determined by the Company.
For these plans, the Company contributed and charged to expense $4,258,000,
$3,585,000, and $2,872,000 in fiscal 1999, 1998, and 1997, respectively.
5. Income Taxes
The components of income (loss) before provision for income taxes and
minority interest are:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------- ----------- ------------ -----------
Domestic $ 179 $ 8,812 $ 3,149
Foreign (987) (298) (3,440)
------- ------- -------
$ (808) $ 8,514 $ (291)
======= ======= =======
The Company's foreign results of operations prior to fiscal 1998 include
losses associated with its J. Amerika division, which was sold during the fourth
quarter of fiscal 1997 (Note 3).
18
5. Income Taxes (continued)
The components of the provision for income taxes are:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------- ------------ ----------- -----------
Currently Payable (Prepaid):
Federal $ 2,232 $2,688 $ 1,271
State 1,415 1,330 1,122
Foreign (78) (110) (234)
------- ------ -------
3,569 3,908 2,159
------- ------ -------
Net Deferred (Prepaid):
Federal (1,365) 1,035 389
State (201) 203 88
Foreign (217) - (931)
------- ------ -------
(1,783) 1,238 (454)
------- ------ -------
$ 1,786 $5,146 $ 1,705
======= ====== =======
The Company and its majority-owned subsidiaries receive a tax deduction
upon exercise of nonqualified stock options by employees for the difference
between the exercise price and the market price of the underlying common stock
on the date of exercise. The provision for income taxes that is currently
payable does not reflect $676,000, $928,000, and $659,000 in fiscal 1999, 1998,
and 1997, respectively, of such benefits of the Company and its majority-owned
subsidiaries that have been allocated to capital in excess of par value,
directly or through the effect of majority-owned subsidiaries' equity
transactions.
The provision for income taxes in the accompanying statement of operations
differs from the provision calculated by applying the statutory federal income
tax rate of 34% to income (loss) before provision for income taxes and minority
interest due to:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------- ------------ ----------- -----------
Provision (Benefit) for Income Taxes at Statutory Rate $ (275) $2,895 $ (99)
Differences Resulting From:
State income taxes, net of federal tax 801 1,012 764
Amortization and write-off of cost in excess of net assets 898 739 1,344
of acquired companies
Gain on issuance of stock by subsidiary - - (501)
Nondeductible expenses 90 64 62
Dividend from less than 80%-owned subsidiary 122 118 115
Other, net 150 318 20
------- ------ -------
$ 1,786 $5,146 $ 1,705
======= ====== =======
19
5. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of:
(In thousands) 1999 1998
- --------------------------------------------------------------------- ------------ ----------- -----------
Prepaid Income Taxes:
Accrued compensation $2,315 $ 2,220
Reserves and accruals 3,519 3,640
Net operating loss and tax credit carryforward 3,111 1,934
Allowance for doubtful accounts 212 (137)
Other 179 -
------ -------
9,336 7,657
Less: Valuation allowance 1,328 739
------ -------
$8,008 $ 6,918
====== =======
Deferred Income Taxes:
Depreciation $3,637 $ 2,785
Other deferred items (99) 116
------ -------
$3,538 $ 2,901
====== =======
The valuation allowance relates to the uncertainty surrounding the
realization of the tax benefits attributable primarily to state operating loss
carryforwards. The valuation allowance increased in fiscal 1999 as a result of
certain losses that arose during the year. Of the total fiscal 1999 valuation
allowance, $168,000 will be used to reduce cost in excess of net assets of
acquired companies when any portion of the related deferred tax asset is
recognized.
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of its investment in the common stock of
its domestic subsidiaries (such difference relates primarily to unremitted
earnings and gains on issuance of stock by subsidiaries) because the Company
does not expect this basis difference to become subject to tax at the parent
level. The Company believes it can implement certain tax strategies to recover
its investment in its domestic subsidiaries tax-free.
The net operating loss carryforward primarily consists of $10,600,000 of
foreign carryforwards, which do not expire, and $11,050,000 of state
carryforwards, substantially all of which expire in 2003.
6. Short- and Long-term Obligations
Short-term Obligations
Effective in fiscal 1999, Thermo EuroTech has an agreement with a wholly
owned subsidiary of Thermo Electron under which Thermo EuroTech can borrow funds
that bear interest at a rate based on the Netherlands market rates, set at the
beginning of each month. At fiscal year-end 1999, $9,228,000 was outstanding
under this arrangement, bearing interest at 4.00%. Borrowings under this
overdraft facility are guaranteed by Thermo Electron. Available borrowings at
fiscal year-end 1999 were $632,000.
Prior to fiscal 1999, Thermo EuroTech had a line of credit, denominated in
Dutch guilders, under which approximately $6,700,000 could be borrowed at the
Dutch discount rate plus 125 basis points. At fiscal year-end 1998, $6,346,000
was outstanding under this arrangement, bearing interest at 4.02%.
20
6. Short- and Long-term Obligations (continued)
In addition, in fiscal 1998, Thermo EuroTech entered into a line of
credit, denominated in Irish punts. Borrowings, which are due in February 2000,
were $6,705,000 and $6,052,000 at fiscal year-end 1999 and 1998, respectively,
bearing interest at 3.60% and 5.75%, respectively. There are no additional
amounts available under this line of credit.
Long-term Obligations
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
4 5/8% Subordinated Convertible Debentures, Due 2003, Convertible at $111,850 $111,850
$15.90 per Share (includes $515 held by Thermo Electron in fiscal 1999)
4 7/8% Subordinated Convertible Debentures, Due May 2000, Convertible 37,950 37,950
into Shares of ThermoRetec at $17.92 per Share (includes $4,180 and
$3,000 held by Thermo Electron)
2 1/2% Subordinated Convertible Debentures, Due 2001, Convertible into 6,999 -
Shares of Thermo EuroTech (Delaware) Inc. at $5.25 per Share
Zero Coupon Promissory Note (Note 2) - 13,939
6.25% Mortgage Loan, Payable in Monthly Installments of $9, With 1,063 1,173
Balloon Payment in May 1999
Mortgage Loan, Payable in Monthly Installments of $5, With Final 856 949
Payment in 2003 (a)
Other 1,584 2,050
-------- --------
160,302 167,911
Less: Current Maturities 1,685 14,767
-------- --------
$158,617 $153,144
======== ========
(a) Bears interest at Prime Rate, which was 7.75% at April 3, 1999.
During fiscal 1999, the Company reorganized the capital structure of
Thermo EuroTech by offering shareholders the right to exchange their common
shares in Thermo EuroTech for 2 1/2% subordinated convertible debentures due
2001 (the Debentures) issued by a new wholly owned Delaware subsidiary of the
Company, known as Thermo EuroTech (Delaware) Inc. (TETD). As of October 31,
1998, when the exchange offer expired, 1,646,854 common shares had been
exchanged by Thermo EuroTech's shareholders, subject to certain conditions, for
Debentures having an aggregate principal amount equal to $6,999,000. The
reacquisition of these shares was accounted for using the purchase method of
accounting. The Debentures are not redeemable prior to maturity, and are
convertible into common stock of TETD at an initial conversion price of $5.25
per share. The Debentures are guaranteed on a subordinated basis by Thermo
Electron. Following the transaction, the Company owned 78% of Thermo EuroTech's
outstanding common shares.
The 4 5/8% and 4 7/8% subordinated convertible debentures are guaranteed
on a subordinated basis by Thermo Electron. The Company has agreed to reimburse
Thermo Electron in the event Thermo Electron is required to make a payment under
the guarantees. During fiscal 1999, none of the 4 5/8% debentures were converted
into shares of the Company's common stock.
The annual requirements for long-term obligations as of April 3, 1999, are
$1,685,000 in fiscal 2000; $38,490,000 in fiscal 2001; $7,492,000 in fiscal
2002; $652,000 in fiscal 2003; $111,912,000 in fiscal 2004; and $71,000 in
fiscal 2005 and thereafter. Total requirements of long-term obligations are
$160,302,000. See Note 11 for information pertaining to the fair value of the
Company's long-term obligations.
21
7. Commitments and Contingencies
Operating Leases
The Company leases land, office, operating facilities, and equipment under
operating leases expiring at various dates through fiscal 2008. The accompanying
statement of operations includes expenses from operating leases of $6,273,000,
$5,822,000, and $5,424,000 in fiscal 1999, 1998, and 1997, respectively. Future
minimum payments due under noncancelable operating leases at April 3, 1999, are
$5,217,000 in fiscal 2000; $4,228,000 in fiscal 2001; $3,030,000 in fiscal 2002;
$1,625,000 in fiscal 2003; $427,000 in fiscal 2004; and $311,000 in 2005 and
thereafter. Total future minimum lease payments are $14,838,000. See Note 8 for
an office and manufacturing facility leased from Thermo Electron.
Contingencies
The Company is contingently liable with respect to lawsuits and other
matters that arose in the ordinary course of business. In the opinion of
management, these contingencies will not have a material adverse effect upon the
financial position of the Company or its results of operations.
8. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In calendar 1997 and 1996, the Company paid an amount
equal to 1.0% of the Company's revenues. For these services, the Company was
charged $2,480,000, $2,845,000, and $2,785,000 in fiscal 1999, 1998, and 1997,
respectively. The fee is reviewed and adjusted annually by mutual agreement of
the parties. The corporate services agreement is renewed annually but can be
terminated upon 30 days' prior notice by the Company or upon the Company's
withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron
Corporate Charter defines the relationship among Thermo Electron and its
majority-owned subsidiaries). Management believes that the service fee charged
by Thermo Electron is reasonable and that such fees are representative of the
expenses the Company would have incurred on a stand-alone basis. For additional
items such as employee benefit plans, insurance coverage, and other identifiable
costs, Thermo Electron charges the Company based upon costs attributable to the
Company. In fiscal 1999, Thermo Electron billed the Company an additional
$157,000 for certain administrative services required by the Company that were
not covered by the corporate services agreement.
Development Agreement
The Company and Thermo Electron entered into a development agreement under
which Thermo Electron agreed to fund up to $4,000,000 of the direct and indirect
costs of the Company's development of soil-remediation centers. As of October 2,
1993, all such funding under this agreement was completed. In exchange for this
funding, the Company granted Thermo Electron a royalty equal to approximately 3%
of net revenues from soil-remediation services performed at the centers
developed under the agreement. The royalty payments may cease if the amounts
paid by the Company yield a certain internal rate of return to Thermo Electron
on the funds advanced to the Company under the agreement. Two sites were
developed under this agreement. The Company paid royalties of $186,000,
$115,000, and $186,000 in fiscal 1999, 1998, and 1997, respectively, relating to
this agreement, which are included in selling, general, and administrative
expenses in the accompanying statement of operations.
Operating Lease
In addition to the operating leases discussed in Note 7, the Company
leases an office and operating facility from Thermo Electron. The accompanying
statement of operations includes expenses from this operating lease of $166,000
in fiscal 1999 and 1998 and $106,000 in fiscal 1997. The future minimum payments
due under the lease as of April 3, 1999, are $166,000 in fiscal 2000 through
2005 and thereafter. Total future minimum lease payments are $996,000.
22
8. Related-party Transactions (continued)
Other Related-party Transactions
The Company purchases and sells products and services in the ordinary
course of business with other companies affiliated with Thermo Electron. Sales
of services to such affiliated companies totaled $379,000, $320,000, and $49,000
in fiscal 1999, 1998, and 1997, respectively. Purchases of products and services
from such affiliated companies total $231,000, $938,000, and $455,000 in fiscal
1999, 1998, and 1997, respectively.
Repurchase Agreements
The Company invests excess cash in repurchase agreements with Thermo
Electron as discussed in Notes 1 and 19.
Short- and Long-term Obligations
See Note 6 for a description of short- and long-term obligations of the
Company held by Thermo Electron.
9. Common Stock
Put rights are attached to certain shares of Company common stock which
were previously issued in connection with an acquisition. The put rights
obligate the Company, at the holders' option, to purchase shares of the
Company's common stock for $8.00 per share at any time through January 2002. At
the time a holder elects to tender shares, the Company has the option to net
cash settle the obligation in lieu of purchasing the shares. At April 3, 1999,
put rights with respect to 423,854 shares were outstanding. During fiscal 1999,
the Company repurchased 423,824 shares of common stock under such arrangements.
At April 3, 1999, the Company had 700,500 warrants outstanding to purchase
shares of its common stock, which are exercisable at prices ranging from $10.00
to $11.34 per share and expire in fiscal 2001. The warrants were issued in
fiscal 1992 and 1993 in connection with private placements completed by three of
ThermoRetec's soil-remediation subsidiaries.
At April 3, 1999, the Company had reserved 9,926,347 unissued shares of
its common stock for possible issuance under stock-based compensation plans,
conversion of the 4 5/8% subordinated convertible debentures, and exercise of
warrants.
10. Transactions in Stock of Subsidiaries
During fiscal 1997, Thermo EuroTech sold 1,105,000 shares of its common
stock in a private placement at $4.25 per share for net proceeds of $4,314,000,
resulting in a gain of $1,475,000.
Dividends declared by ThermoRetec were $2,610,000, $2,504,000, and
$2,557,000 in fiscal 1999, 1998, and 1997, respectively. Dividends declared by
ThermoRetec include $1,798,000, $1,736,000, and $1,694,000 in fiscal 1999, 1998,
and 1997, respectively, that were allocated to the Company and reinvested in
611,957 shares, 254,833 shares, and 194,961 shares, respectively, of
ThermoRetec's common stock pursuant to ThermoRetec's Dividend Reinvestment Plan.
The Company's percentage ownership of its majority-owned subsidiaries at
year end was:
1999 1998 1997
- -------------------------------------------------------------------------- --------- --------- ----------
ThermoRetec 70% 69% 69%
Randers Killam (a) 95% 53% 100%
Thermo EuroTech 78% 56% 53%
(a) Upon issuance of 22,606,210 shares of Randers Killam common stock to the
Company, as described in Note 3, the Company owned approximately 95% of
Randers Killam outstanding common stock. Fiscal 1997 represents the
Company's ownership of The Killam Group prior to its transfer to Randers in
fiscal 1998.
23
11. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, available-for-sale and held-to-maturity investments, accounts
receivable, notes payable and current maturities of long-term obligations,
accounts payable, due to parent company and affiliated companies, and long-term
obligations. The carrying amounts of these financial instruments, with the
exception of available-for-sale and held-to-maturity investments and long-term
obligations, approximate fair value due to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying fiscal 1998 balance sheet. The fair values were determined based on
quoted market prices. See Note 2 for fair value information pertaining to these
financial instruments. Held-to-maturity investments are carried at amortized
cost in the accompanying fiscal 1998 balance sheet. The fair values are
disclosed on the accompanying balance sheet and were determined based on quoted
market prices.
The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the respective
year ends. The carrying amount and fair value of the Company's long-term
obligations are:
1999 1998
-------------------- --------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
Subordinated Convertible Debentures $156,799 $139,587 $149,800 $ 143,416
Other 1,818 1,818 3,344 3,344
-------- -------- -------- ---------
$158,617 $141,405 $153,144 $ 146,760
======== ======== ======== =========
12. Significant Customers
During fiscal 1999, 1998, and 1997, revenues derived from U.S. government
agencies accounted for 6%, 4%, and 13%, respectively, of the Company's total
revenues.
13. Restructuring Costs
During fiscal 1999, the Company recorded $10,217,000 of restructuring
costs, which were accounted for in accordance with Emerging Issues Task Force
Pronouncement 94-3. Of these restructuring costs, $9,176,000 was recorded by
ThermoRetec in connection with the closure of two soil-recycling facilities. The
costs include a $6,238,000 write-down of fixed assets to their estimated
disposal value of $895,000 and a $1,884,000 write-off of intangible assets,
including $715,000 of cost in excess of net assets of acquired companies, as
well as $1,054,000 for ongoing lease costs and severance for 13 employees, 6 of
whom were terminated in fiscal 1999. ThermoRetec closed one soil-recycling
facility in March 1999 and is actively seeking a buyer for the second
soil-recycling facility. If no buyer is found, ThermoRetec will close the
facility. In addition, the Company recorded $1,041,000 of restructuring costs
for abandoned-facility payments relating to the consolidation of the facilities
of another business.
24
13. Restructuring Costs (continued)
A summary of the changes in accrued restructuring costs, which are
included in other accrued expenses in the accompanying balance sheet, is:
Facility
(In thousands) Severance Costs Total
- ------------------------------------------------------------------------- ----------- ---------- ---------
Balance at April 4, 1998 $ - $ - $ -
Provision charged to expense 213 1,882 2,095
Usage (101) (275) (376)
-------- -------- --------
Balance at April 3, 1999 $ 112 $ 1,607 $ 1,719
======== ======== ========
During fiscal 1997, ThermoRetec recorded $7,800,000 of restructuring costs
to write-down certain capital equipment and intangible assets in response to a
severe downturn in its soil-recycling business, which resulted in the closure of
two soil-remediation sites. The charge included a $2,206,000 write-down of cost
in excess of net assets of acquired companies, which was nondeductible for tax
purposes. In addition, the Company's analysis indicated that the future
undiscounted cash flows from certain other soil-remediation sites that remained
open would be insufficient to recover ThermoRetec's investment in these business
units, thus requiring a write-down of certain assets, which is also included in
the $7,800,000 charge.
In May 1999, the Company announced certain other restructuring actions
(Note 19).
14. Supplemental Cash Flow Information
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ----------- ---------- ---------
Cash Paid For:
Interest $ 8,244 $ 10,363 $ 10,255
Income taxes $ 3,025 $ 4,041 $ 1,958
Noncash Activities:
Fair value of assets of acquired companies $ 643 $ 29,477 $ 12,996
Cash paid for acquired companies (643) (14,765) (5,465)
Issuance of notes payable for acquired company - - (1,300)
Issuance of subsidiary common stock for acquired companies - (3,125) (2,006)
--------- -------- --------
Liabilities assumed of acquired companies $ - $ 11,587 $ 4,225
========= ======== ========
Issuance of subsidiary subordinated convertible debentures in $ 6,999 $ - $ -
exchange for subsidiary common stock (Note 6)
Conversions of subordinated convertible debentures $ - $ 13,220 $ 4,812
Company common stock received in settlement of a note $ 668 $ - $ -
receivable
Notes receivable received upon sale of business (Note 3) $ - $ 2,881 $ -
25
15. Business Segment Information
The Company organizes and manages its businesses by individual functional
operating entity. The Company has combined its operating entities into four
segments: Environmental-liability Management, Engineering and Design, Laboratory
Testing, and Metal Treating. In classifying entities into a particular segment,
the Company aggregates businesses with similar economic characteristics,
services, methods of providing services, customers, and regulatory environments.
The Environmental-liability Management segment is a national provider of
environmental-liability and resource-management services, offering these and
related consulting services in four areas: consulting and engineering, nuclear
remediation, soil remediation, and fluids recycling.
The Engineering and Design segment provides comprehensive engineering and
outsourcing services such as water and wastewater treatment, process engineering
and construction, highway and bridge engineering, and infrastructure
engineering. In addition, this segment provides consulting services that address
natural resource management issues.
The Laboratory Testing segment operates analytical laboratories that
provide environmental- and pharmaceutical-testing services.
The Metal Treating segment performs metallurgical processing services
using thermal-treatment equipment. Until the October 1997 sale of its equipment
division (Note 3), this segment also designed, manufactured, and installed
advanced custom-engineered, thermal-processing systems.
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- --------- ---------
Revenues:
Environmental-liability Management (a) $ 159,094 $141,115 $ 126,811
Engineering and Design (b) 91,839 84,566 74,832
Laboratory Testing (c) 40,523 37,485 35,431
Metal Treating 19,274 36,618 44,342
Intersegment sales elimination (d) (691) (998) (2,913)
--------- -------- ---------
$ 310,039 $298,786 $ 278,503
========= ======== =========
Income (Loss) Before Provision for Income Taxes and Minority Interest:
Environmental-liability Management (e) $ (3,644) $ (454) $ (6,254)
Engineering and Design (f) 4,406 6,303 6,689
Laboratory Testing 5,206 4,363 1,494
Metal Treating 2,493 4,278 4,326
Corporate (g) (2,473) (2,756) (3,626)
--------- ------- ---------
Total operating income 5,988 11,734 2,629
Interest and other expense, net (6,796) (3,220) (2,920)
--------- ------- ---------
$ (808) $ 8,514 $ (291)
========= ======= =========
Total Assets:
Environmental-liability Management $ 169,956 $166,925 $ 150,362
Engineering and Design 106,301 102,394 85,679
Laboratory Testing 48,434 43,557 39,795
Metal Treating 11,509 12,795 34,338
Corporate (h) 15,498 34,855 83,610
--------- ------- ---------
$ 351,698 $360,526 $ 393,784
========= ======== =========
26
15. Business Segment Information (continued)
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ---------- ----------
Depreciation and Amortization:
Environmental-liability Management $ 9,245 $7,672 $ 7,049
Engineering and Design 3,117 3,003 2,245
Laboratory Testing 3,527 2,865 2,484
Metal Treating 834 1,007 1,089
Corporate 100 237 33
------- ------ -------
$16,823 $14,784 $12,900
======= ======= =======
Capital Expenditures:
Environmental-liability Management $ 8,385 $8,916 $ 9,008
Engineering and Design 1,632 1,759 1,157
Laboratory Testing 6,463 7,018 3,321
Metal Treating 1,053 764 1,839
Corporate (118) 3 101
------- ------ -------
$17,415 $18,460 $15,426
======= ======= =======
(a) Includes intersegment sales of $7,000, $82,000, and $1,799,000 in fiscal
1999, 1998, and 1997, respectively.
(b) Includes intersegment sales of $60,000, $73,000, and $4,000 in fiscal 1999,
1998, and 1997, respectively.
(c) Includes intersegment sales of $624,000, $843,000, and $1,110,000 in fiscal
1999, 1998, and 1997, respectively.
(d) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(e) Includes restructuring costs of $9,176,000 and $7,800,000 in fiscal 1999 and
1997, respectively (Note 13). In addition, fiscal 1997 includes loss on sale
of business of $1,482,000 (Note 3).
(f) Includes restructuring costs of $1,023,000 in fiscal 1999 (Note 13).
(g) Primarily general and administrative expenses.
(h) Primarily cash, cash equivalents, and available-for-sale investments.
16. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ---------- ----------
Basic
Net Income (Loss) $(1,421) $ 3,273 $ (162)
------- ------- -------
Weighted Average Shares 19,402 18,700 18,090
------- ------- -------
Basic Earnings (Loss) per Share $ (.07) $ .18 $ (.01)
======= ======= =======
27
16. Earnings (Loss) per Share (continued)
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------- ----------- ---------- ---------
Diluted
Net Income (Loss) $(1,421) $ 3,273 $ (162)
Effect of Majority-owned Subsidiaries' Dilutive Securities (2) (13) -
------- ------- -------
Income (Loss) Available to Common Shareholders, as Adjusted $(1,423) $ 3,260 $ (162)
------- ------- -------
Weighted Average Shares 19,402 18,700 18,090
Effect of Stock Options - 278 -
------- ------- -------
Weighted Average Shares, as Adjusted 19,402 18,978 18,090
------- ------- -------
Diluted Earnings (Loss) per Share $ (.07) $ .17 $ (.01)
======= ======= =======
The computation of diluted earnings (loss) per share for each period
excludes the effect of assuming the exercise of certain outstanding stock
options, warrants, and put rights because the effect would be antidilutive. As
of April 3, 1999, there were 2,464,925 of such options and warrants outstanding,
with exercise prices ranging from $4.16 to $11.34 per share. As of April 3,
1999, put rights with respect to an aggregate 423,854 shares were outstanding.
The put rights obligate the Company, at the holder's option, to purchase shares
of the Company's common stock for $8.00 per share.
In addition, the computation of diluted earnings (loss) per share for each
period excludes the effect of assuming the conversion of convertible obligations
because the effect would be antidilutive. As of April 3, 1999, the calculation
excluded $111,850,000 principal amount of 4 5/8% subordinated convertible
debentures, convertible at $15.90 per share.
17. Proposed Reorganization
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company, ThermoRetec, and Randers Killam would be merged into Thermo Electron.
As a result, all three companies would become wholly owned subsidiaries of
Thermo Electron. The public shareholders of all three companies would receive
common stock in Thermo Electron in exchange for their shares. The completion of
these transactions is subject to numerous conditions, including the
establishment of prices and exchange ratios; confirmation of anticipated tax
consequences; the approval of the Board of Directors of ThermoRetec and Randers
Killam; the negotiation and execution of definitive merger agreements; the
receipt of fairness opinions from investment banking firms that the transactions
are fair to the Company's and subsidiaries' shareholders (other than the Company
and Thermo Electron) from a financial point of view; the approval of the
Company's Board of Directors, including its independent directors; and
completion of review by the Securities and Exchange Commission of any necessary
documents regarding the proposed transactions.
28
18. Unaudited Quarterly Information
(In thousands except per share amounts)
1999 First Second (a) Third Fourth
- ---------------------------------------------------------------- ---------- ---------- ---------- ---------
Revenues $76,693 $77,177 $80,400 $75,769
Gross Profit 15,648 15,143 15,851 15,787
Net Income (Loss) 1,001 (3,696) 771 503
Basic and Diluted Earnings (Loss) per Share .05 (.19) .04 .03
1998 First Second Third (b) Fourth
- ---------------------------------------------------------------- ---------- ---------- ---------- ---------
Revenues $72,519 $81,161 $73,875 $71,231
Gross Profit 14,568 15,485 14,001 9,621
Net Income (Loss) 1,332 1,567 1,656 (1,282)
Earnings (Loss) per Share:
Basic .08 .09 .09 (.07)
Diluted .07 .08 .09 (.07)
(a) Reflects a pretax charge of $10,217,000 for restructuring costs.
(b) Reflects a pretax gain of $3,012,000 from ThermoRetec's sale of its
investment in a joint venture.
19. Subsequent Events
Restructuring Actions
In May 1999, the Company announced the planned sale of several businesses
by its majority-owned subsidiaries. These include the following:
-- The used-oil processing business by Thermo EuroTech.
-- Three soil-recycling facilities by ThermoRetec.
-- The businesses of BAC Killam Inc., the Randers division, and E3-Killam
Inc. by Randers Killam.
In connection with these actions, the Company expects to incur
approximately $65 million in pretax charges, primarily during the first quarter
of fiscal 2000. These charges primarily represent the excess of book value of
the businesses to be sold over the estimated proceeds from the sale. As a result
of the sale of the businesses, the Company also expects to incur costs for
ongoing lease obligations, severance, and other exit costs, which have been
provided for in the estimate of $65 million. Revenues and operating loss from
these businesses aggregated $49,627,000 and $112,000, respectively, in fiscal
1999.
Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement (Note 1). Under the new arrangement,
amounts advanced to Thermo Electron by the Company for domestic cash management
purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis
points, set at the beginning of each month. Thermo Electron is contractually
required to maintain cash, cash equivalents, and/or immediately available bank
lines of credit equal to at least 50% of all funds invested under this cash
management arrangement by all Thermo Electron subsidiaries other than wholly
owned subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice. The
Company will report amounts invested in this arrangement as "advance to
affiliate" in its balance sheet, beginning in the first quarter of fiscal 2000.
29
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo TerraTech Inc.:
We have audited the accompanying consolidated balance sheet of Thermo
TerraTech Inc. (a Delaware corporation and an 87%-owned subsidiary of Thermo
Electron Corporation) and subsidiaries as of April 3, 1999, and April 4, 1998,
and the related consolidated statements of operations, cash flows, and
comprehensive income and shareholders' investment for each of the three years in
the period ended April 3, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 financial position of Thermo
TerraTech Inc. and subsidiaries as of April 3, 1999, and April 4, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended April 3, 1999, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
May 11, 1999 (except with respect
to the matters discussed
in Note 19,
as to which the date is June 1, 1999)
30
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company provides industrial outsourcing services and manufacturing
support encompassing a broad range of specializations. The Company operates in
four segments: environmental-liability management, engineering and design,
laboratory testing, and metal treating.
Environmental-liability Management
The Company's majority-owned ThermoRetec Corporation subsidiary is a
national provider of environmental-liability and resource-management services.
ThermoRetec offers these and related consulting services in four areas:
consulting and engineering, nuclear remediation, soil remediation, and fluids
recycling. The Company's majority-owned Thermo EuroTech N.V. subsidiary, located
in the Netherlands, specializes in converting "off-spec" and contaminated
petroleum fluids into useable oil products. Thermo EuroTech also provides
in-plant waste management and recycling services through its Ireland-based Green
Sunrise Holdings Ltd. subsidiary, acquired in February 1998. Through December
1996, this segment also included the results of the Company's J. Amerika
division, an underground tank and groundwater treatment services company.
Engineering and Design
The Company's majority-owned The Randers Killam Group Inc. subsidiary
provides comprehensive engineering and outsourcing services such as water and
wastewater treatment, process engineering and construction, highway and bridge
engineering, and infrastructure engineering. The Company's wholly owned
Normandeau Associates Inc. subsidiary provides consulting services that address
natural resource management issues.
Laboratory Testing
The Company's wholly owned Thermo Analytical Inc. subsidiary operates
analytical laboratories that provide environmental- and pharmaceutical-testing
services, primarily to commercial clients throughout the U.S.
Metal Treating
The Company performs metallurgical processing services using
thermal-treatment equipment at locations in California, Minnesota, and
Wisconsin. Until the October 1997 sale of its equipment division located in
Michigan (Note 3), the Company also designed, manufactured, and installed
advanced custom-engineered, thermal-processing systems.
In May 1999, the Company announced the planned sale of several businesses
by its majority-owned subsidiaries. These include the used-oil processing
business by Thermo EuroTech; three soil-recycling facilities by ThermoRetec; and
the businesses of BAC Killam Inc., the Randers division, and E3-Killam Inc. by
Randers Killam. In connection with these actions, the Company expects to incur
approximately $65 million in pretax charges, primarily during the first quarter
of fiscal 2000. These charges primarily represent the excess of book value of
the businesses to be sold over the estimated proceeds from the sale. As a result
of the sale of the businesses, the Company also expects to incur costs for
ongoing lease obligations, severance, and other exit costs, which have been
provided for in the estimate of $65 million. Revenues and operating loss from
these businesses aggregated $49.6 million and $0.1 million, respectively, in
fiscal 1999.
31
Results of Operations
Fiscal 1999 Compared With Fiscal 1998
Total revenues were $310.0 million in fiscal 1999, compared with $298.8
million in fiscal 1998. Metal Treating segment revenues decreased to $19.3
million in fiscal 1999 from $36.6 million in fiscal 1998, due to the sale of the
Company's thermal-processing equipment business in October 1997, which
contributed revenues of $17.3 million in fiscal 1998 (Note 3). Revenues from the
Environmental-liability Management segment increased 13% to $159.1 million in
fiscal 1999 from $141.1 million in fiscal 1998. Excluding intrasegment sales,
revenues at ThermoRetec increased to $141.6 million in fiscal 1999 from $127.1
million in fiscal 1998, primarily due to $8.6 million of higher revenues from
consulting and engineering services at RETEC and, to a lesser extent, the
inclusion of $6.2 million of revenues from businesses acquired in fiscal 1998.
Revenues from ThermoRetec's soil-remediation services increased $6.4 million in
fiscal 1999, resulting from higher volumes of soil processed. These increases
were offset in part by a decrease in revenues resulting from a decline in the
number of contracts in process at ThermoRetec's eastern construction operations.
Revenues from Thermo EuroTech increased $3.5 million to $17.5 million due to the
inclusion for the full fiscal 1999 period of revenues from Green Sunrise, which
was acquired in February 1998 and added incremental revenues of $6.4 million,
offset in part by a decrease in sales of useable oil products. Revenues from the
Engineering and Design segment increased to $91.8 million in fiscal 1999 from
$84.6 million in fiscal 1998, primarily due to increased revenues from two
construction and labor management contracts, which are expected to be completed
by the end of the first quarter of fiscal 2000. Engineering and Design segment
revenues also increased $3.5 million due to the inclusion for the full fiscal
1999 period of revenues from Randers, acquired May 1997. Revenues from the
Laboratory Testing segment increased to $40.5 million in fiscal 1999 from $37.5
million in fiscal 1998 due to higher demand.
The gross profit margin increased to 20% in fiscal 1999 from 18% in fiscal
1998. The gross profit margin from the Environmental-liability Management
segment increased in fiscal 1999 primarily due to a reduction of losses on
certain remedial-construction contracts, higher utilization of billable
personnel, and higher volumes of soil processed at RETEC and, to a lesser
extent, higher gross profit margin at Thermo EuroTech due to the inclusion of
higher-margin revenue at Green Sunrise. The gross profit margin from the
Engineering and Design segment decreased in fiscal 1999, primarily due to a
change in the mix of contracts.
Selling, general, and administrative expenses as a percentage of revenues
increased slightly to 15% in fiscal 1999 from 14% in fiscal 1998, primarily due
to the absence in fiscal 1999 of lower relative expenses at the Company's Metal
Treating segment due to the fiscal 1998 sale of the thermal-processing equipment
business and higher relative expenses at Green Sunrise, which was acquired in
February 1998. In addition, selling, general, and administrative expenses at the
Environmental-liability Management segment increased due to higher provisions
for uncollectible accounts, increased administrative costs associated with
ThermoRetec's name change, higher insurance costs, and inclusion for the full
period of expenses from acquired businesses.
During fiscal 1999, the Company recorded $10.2 million of restructuring
costs. Of these restructuring costs, $9.2 million was recorded by ThermoRetec in
connection with the closure of two soil-recycling facilities. The costs include
a write-down of fixed assets to their estimated disposal value and a write-off
of intangible assets, including cost in excess of net assets of acquired
companies, as well as other closure costs. The closure was in response to
changes in market conditions, which resulted in lower-priced disposal
alternatives. These facilities reported aggregated revenues and operating losses
of $2.2 million and $0.8 million, respectively, in fiscal 1998, and aggregated
revenues and operating losses prior to the decision to close the facilities of
$1.8 million and $0.1 million, respectively, in fiscal 1999. In addition, the
Company recorded $1.0 million of restructuring costs for abandoned-facility
payments relating to the consolidation of the facilities of another business
(Note 13).
Interest income decreased to $2.2 million in fiscal 1999 from $4.2 million
in fiscal 1998, primarily as a result of lower average invested cash balances.
Interest expense decreased to $9.0 million in fiscal 1999 from $10.8 million in
fiscal 1998, primarily due to the repayment of a note payable in February and
May 1998, the repayment of a
32
Fiscal 1999 Compared With Fiscal 1998 (continued)
promissory note to Thermo Electron Corporation, and the conversion of the
Company's 6 1/2% subordinated convertible debentures during fiscal 1998, offset
in part by increased borrowings at Thermo EuroTech during fiscal 1999 and the
issuance of $7.0 million principal amount of 2 1/2% convertible subordinated
debentures due 2001 (Note 6).
Equity in earnings of unconsolidated subsidiary in fiscal 1998 represented
ThermoRetec's proportionate share of income from a joint venture. Gain on sale
of unconsolidated subsidiary in fiscal 1998 resulted from ThermoRetec's sale of
its interest in this joint venture (Note 3).
The Company recorded income tax expense of $1.8 million in fiscal 1999 on
a pretax loss primarily due to the effect of nondeductible amortization and
write off of cost in excess of net assets of acquired companies. The effective
tax rate in fiscal 1998 was 60%. This rate exceeded the statutory federal income
tax rate primarily due to the impact of state income taxes and the nondeductible
amortization of cost in excess of net assets of acquired companies.
The Company recorded minority interest income of $1.2 million in fiscal
1999, compared with minority interest expense of $0.1 million in fiscal 1998,
primarily due to the effect of a net loss at ThermoRetec in fiscal 1999.
Fiscal 1998 Compared With Fiscal 1997
Total revenues increased 7% to $298.8 million in fiscal 1998 from $278.5
million in fiscal 1997. Revenues from the Environmental-liability Management
segment increased 11% to $141.1 million in fiscal 1998 from $126.8 million in
fiscal 1997. Excluding intrasegment sales, revenues at ThermoRetec increased to
$127.1 million in fiscal 1998 from $114.8 million in fiscal 1997, primarily due
to the inclusion of $20.1 million of revenues from acquired businesses and, to a
lesser extent, increased revenues from construction, consulting, and engineering
services at RETEC. These increases were offset in part by an $11.1 million
decrease in revenues resulting from a decline in the number of contracts in
process at ThermoRetec's eastern construction operations. Revenues from
soil-remediation services decreased $3.5 million, resulting from the closure of
two sites, as well as heavy rains, which unfavorably affected operations at
certain west coast sites, and, to a lesser extent, competitive pricing
pressures. Revenues from Thermo EuroTech increased 17% to $14.0 million,
primarily due to increased revenues relating to contracts to process oil-based
muds and perform soil-remediation services overseas and the inclusion of $1.2
million of revenues from Green Sunrise, acquired in February 1998, offset in
part by a decrease in revenues as a result of the sale of the Company's J.
Amerika division in the fourth quarter of fiscal 1997 (Note 3). Revenues from
the Engineering and Design segment increased to $84.6 million in fiscal 1998
from $74.8 million in fiscal 1997. The inclusion of an aggregate of $15.0
million of revenues from CarlanKillam Consulting Group, Inc. and Randers,
acquired in November 1996 and May 1997, respectively, was offset in part by a
decrease in revenues due to the completion of two major contracts in fiscal
1997. Revenues from the Laboratory Testing segment increased to $37.5 million in
fiscal 1998 from $35.4 million in fiscal 1997 due to higher demand. Metal
Treating segment revenues decreased to $36.6 million in fiscal 1998 from $44.3
million in fiscal 1997, primarily due to the sale of the Company's
thermal-processing equipment business in October 1997 (Note 3), offset in part
by an increase in demand for the Company's metallurgical-processing services in
fiscal 1998.
The gross profit margin remained constant at 18% in fiscal 1998 and 1997.
The gross profit margin for the Laboratory Testing segment increased in fiscal
1998 due to lower margins in fiscal 1997 as a result of costs incurred related
to efforts to eliminate redundant capabilities at regional laboratories. The
gross profit margin from the Environmental-liability Management segment
decreased in fiscal 1998 primarily due to losses on certain
remedial-construction contracts at ThermoRetec's eastern construction operations
as a result of poorly bid and executed contracts, and an increase in
lower-margin revenues at RETEC, offset in part by increased margins at Thermo
EuroTech due to a shift to higher-margin contracts in fiscal 1998.
Selling, general, and administrative expenses as a percentage of revenues
remained constant at 14% in fiscal 1998 and 1997. Selling, general, and
administrative expenses increased primarily due to the inclusion of costs from
acquired companies.
33
Fiscal 1998 Compared With Fiscal 1997 (continued)
Restructuring and nonrecurring items of $9.3 million in fiscal 1997
includes a charge at ThermoRetec of $7.8 million to write down certain capital
equipment and intangible assets in response to a severe downturn in its
soil-recycling business, which resulted in the closure of two soil-remediation
sites. The charge included a $2.2 million write-down of cost in excess of net
assets of acquired companies, which was nondeductible for tax purposes. In
addition, the Company's analysis indicated that the future undiscounted cash
flows from certain other soil-remediation sites that remained open would be
insufficient to recover ThermoRetec's investment in these business units, thus
requiring a write-down of certain assets, which is included in the $7.8 million
charge. In addition, restructuring and nonrecurring items in fiscal 1997
includes a $1.5 million loss on the sale of the Company's J. Amerika division
(Note 3).
Interest income decreased to $4.2 million in fiscal 1998 from $7.3 million
in fiscal 1997 as a result of lower average investment balances following the
repayment of a $38.0 million promissory note to Thermo Electron, the repurchase
of Company and subsidiary common stock, as well as cash expended for
acquisitions. These decreases were offset in part by cash received from the sale
of the Company's thermal-processing equipment business and ThermoRetec's
interest in a joint venture (Note 3). Interest expense decreased to $10.8
million in fiscal 1998 from $12.9 million in fiscal 1997, primarily due to the
repayment of a promissory note to Thermo Electron and the conversion of the
Company's 6 1/2% subordinated convertible debentures during fiscal 1998.
The Company adopted a strategy of spinning out certain of its businesses
into separate subsidiaries and having these subsidiaries sell a minority
interest to outside investors. The Company believes that this strategy provides
additional motivation and incentives for the management of the subsidiaries
through the establishment of subsidiary-level stock option incentive programs,
as well as capital to support the subsidiaries' growth. As a result of the
issuance of common stock by Thermo EuroTech in fiscal 1997, the Company recorded
a gain of $1.5 million. This gain represents an increase in the Company's net
investment in the subsidiary and is classified as gain on issuance of stock by
subsidiary in the accompanying statement of operations. The Company does not
expect to have transactions that will result in such gains in the future.
Equity in earnings of unconsolidated subsidiary represents ThermoRetec's
proportionate share of income from a joint venture. Gain on sale of
unconsolidated subsidiary in fiscal 1998 resulted from ThermoRetec's sale of its
interest in this joint venture (Note 3).
The effective tax rates in fiscal 1998 and 1997 exceeded the statutory
federal income tax rate primarily due to the nondeductible amortization of cost
in excess of net assets of acquired companies and the impact of state income
taxes. The effective tax rate in fiscal 1997 was reduced by the effect of a
nontaxable gain on issuance of stock by subsidiary.
The Company recorded minority interest expense of $0.1 million in fiscal
1998, compared with minority interest income of $1.8 million in fiscal 1997,
primarily due to higher earnings from the Company's majority-owned subsidiaries
and the inclusion of minority interest expense associated with Randers (Note 3).
Liquidity and Capital Resources
Consolidated working capital was $67.0 million at April 3, 1999, compared
with $69.3 million at April 4, 1998. Cash, cash equivalents, and
available-for-sale investments were $43.0 million at April 3, 1999, compared
with $36.7 million at April 4, 1998. Of the $43.0 million balance at April 3,
1999, $37.6 million was held by the Company's majority-owned subsidiaries and
the remainder was held by the Company and its wholly owned subsidiaries. During
fiscal 1999, $29.9 million of cash was provided by operating activities. During
this period, $7.7 million of cash was provided by an increase in other current
liabilities due to increased subcontract work at Randers Killam, as well as the
timing of payments, including restructuring costs (Note 13). This effect was
offset in part by an increase in unbilled contract costs and fees of $1.5
million, primarily due to the timing of billings on certain contracts.
Excluding available-for-sale and held-to-maturity investment activity, the
Company's investing activities in fiscal 1999 primarily consisted of capital
additions. The Company expended $17.4 million for purchases of property, plant,
and equipment in fiscal 1999 and expects to spend approximately $13.0 million
for capital additions during fiscal 2000.
34
Liquidity and Capital Resources (continued)
The Company's financing activities used cash of $18.5 million in fiscal
1999. During fiscal 1999, the Company repaid notes payable totaling $14.7
million. In October 1998, the Company, through Thermo EuroTech (Delaware) Inc.,
issued $7.0 million principal amount of 2 1/2% subordinated convertible
debentures due 2001 in exchange for 1,646,854 common shares of the Company's
Thermo EuroTech N.V. subsidiary (Note 6). During fiscal 1999, the Company used
cash of $3.4 million to repurchase Company common stock pursuant to certain put
rights on shares issued in connection with an acquisition. The Company has cash
obligations to purchase additional shares under such arrangement aggregating
$3.4 million through fiscal 2002 (Note 9).
The Company generally expects to have positive cash flow from its existing
operations. Although the Company does not presently intend to actively seek to
acquire additional businesses in the near future, it may acquire one or more
complimentary businesses if they are presented to the Company on terms the
Company believes to be attractive. Such acquisitions may require significant
amounts of cash. In addition, ThermoRetec's $38.0 million principal amount 4
7/8% subordinated convertible debentures mature on May 1, 2000. The maturity of
ThermoRetec's debentures could adversely affect the Company's liquidity in the
first quarter of fiscal 2001. The Company expects that it will finance any such
acquisitions and the redemption of such debentures through a combination of
internal funds and/or short-term borrowings from Thermo Electron, although it
has no agreement with Thermo Electron to ensure that funds will be available on
acceptable terms or at all. Except as described in this paragraph with respect
to ThermoRetec's debentures, the Company believes that its existing resources
are sufficient to meet the capital requirements of its existing businesses for
the foreseeable future.
Market Risk
The Company is exposed to market risk from changes in interest rates,
foreign currency exchange rates, and equity prices, which could affect its
future results of operations and financial condition. The Company manages its
exposure to these risks through its regular operating and financing activities.
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in Dutch guilders. The effect
of a change in foreign exchange rates on the Company's net investment in foreign
subsidiaries is reflected in the "Accumulated other comprehensive items"
component of shareholders' investment. A 10% depreciation in fiscal year-end
1999 functional currencies, relative to the U.S. dollar, would result in a $1.1
million reduction of shareholders' investment.
Equity Prices
The Company's and its subsidiaries' subordinated convertible debentures
are sensitive to fluctuations in the price of Company or subsidiary common stock
into which the debentures are convertible. Changes in equity prices would result
in changes in the fair value of the Company's and its subsidiaries' subordinated
convertible debentures due to the difference between the current market price
and the market price at the date of issuance of the debentures. A 10% increase
in fiscal year-end 1999 market equity prices would result in a negative impact
to the Company of $1.0 million on the fair value of its subordinated convertible
debentures.
Interest Rates
The Company's subordinated convertible debentures are sensitive to changes
in interest rates. Interest rate changes would result in a change in the fair
value of the Company's and its subsidiaries' subordinated convertible debentures
due to the difference between the market interest rate and the rate at the date
of issuance of the debentures. A 10% decrease in fiscal year-end 1999 market
interest rates would result in a negative impact to the Company of $0.2 million
on the fair value of its subordinated convertible debentures.
35
Market Risk (continued)
The Company's cash, cash equivalents, and variable-rate short- and
long-term obligations are sensitive to changes in interest rates. Interest rate
changes would result in a change in interest income and expense due to the
difference between the current interest rates on cash, cash equivalents, and the
variable-rate short- and long-term obligations and the rate that these financial
instruments may adjust to in the future. A 10% decrease in fiscal year-end 1999
interest rates would result in a negative impact of $0.1 million on the
Company's net income.
Year 2000
The following constitutes a "Year 2000 Readiness Disclosure" under the
Year 2000 Information and Readiness Disclosure Act. The Company continues to
assess the potential impact of the year 2000 date recognition issue on the
Company's internal business systems, services, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) assessing the year 2000 readiness of its
key suppliers and vendors; and (iii) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company's efforts included testing the
year 2000 readiness of the utility and telecommunications systems at its
critical facilities. The Company is currently in phase two of its program,
during which any noncompliant systems or facilities that were identified during
phase one are prioritized and remediated. Based on its evaluations of its
critical facilities, the Company does not believe that any material upgrades or
modifications are required. The Company is currently upgrading or replacing its
material noncompliant information technology systems, and this process was
approximately 80% complete as of April 3, 1999. In many cases, such upgrades or
replacements are being made in the ordinary course of business, without
accelerating previously scheduled upgrades or replacements. The Company expects
that all of its material information technology systems and critical facilities
will be year 2000 compliant by October 1999.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. To date, no significant supplier or
vendor has indicated that its business operations will be materially disrupted
by the year 2000 issue. The Company has started to follow up with significant
suppliers and vendors that have not responded to the Company's questionnaires.
The Company has not completed the majority of its assessment of third-party
risk, but expects to be substantially completed by October 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying manual or backup systems in the event of a
failure of the Company's material information technology systems. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities and significant suppliers and vendors, it will modify and adjust its
contingency plan as may be required.
36
Year 2000 (continued)
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred third-party expenses (external costs) related to
year 2000 issues of approximately $325,000 as of April 3, 1999, and the total
external costs of year 2000 remediation are expected to be approximately
$620,000. All of the external costs incurred as of April 3, 1999, were spent on
testing and upgrading information technology systems. In fiscal year 1999, an
immaterial amount of the Company's total information technology budget was spent
on year 2000 issues. All internal costs and related external costs, other than
capital additions, related to year 2000 remediation have been and will continue
to be expensed as incurred.
The Company does not track the internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that the Company experiences year 2000
problems in its material information technology systems that cause the Company
to be unable to access data, to process transactions, and to maintain accurate
books and records. In such an event, the Company's operations could be delayed
or temporarily shut down, and it could be unable to meet its obligations to
customers in a timely fashion. The Company's business, operations, and financial
condition could be adversely affected in amounts that cannot be reasonably
estimated at this time.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Some services provided by the Company involve the delivery to clients of
third-party software and hardware. In addition, certain older third-party
products, which the Company no longer uses in providing its services to clients,
may not be year 2000 compliant, which may expose the Company to claims. As
discussed above, if any of the Company's key suppliers or vendors experience
business disruptions due to year 2000 issues, the Company might also be
materially adversely affected. There is expected to be a significant amount of
litigation relating to the year 2000 issue and there can be no assurance that
the Company will not incur material costs in defending or bringing lawsuits. In
addition, if any year 2000 issues are identified, there can be no assurance that
the Company will be able to retain qualified personnel to remedy such issues.
Any unexpected costs or delays arising from the year 2000 issue could have a
material adverse impact on the Company's business, operations, and financial
condition in amounts that cannot be reasonably estimated at this time.
37
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in fiscal 2000 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.
Dependence on Environmental Regulation. Federal, state, and local
environmental laws govern each of the markets in which the Company conducts
business, as well as many of the Company's operations. The markets for many of
the Company's services, including industrial-remediation services,
nuclear-remediation services, hazardous waste-remedial construction services,
soil-remediation services, waste-fluids recycling services, engineering and
design services, and laboratory services, and the standards governing most
aspects of the construction and operation of the Company's facilities, were
directly or indirectly created by, and are dependent on, the existence and
enforcement of those laws. There can be no assurance that these laws and
regulations will not change in the future, requiring new technologies or
stricter standards with which the Company must comply. In addition, there can be
no assurance that these laws and regulations will not be made more lenient in
the future, thereby reducing the size of the markets addressed by the Company.
Any such change in such federal, state, and local environmental laws and
regulations may have a material adverse effect on the Company's business.
Responsibility for establishing and enforcing certain federal policies,
such as the federal underground storage tank policy, has been delegated to the
states, which are not only required to establish regulatory programs, but are
also permitted to mandate more stringent requirements than are otherwise
required by federal law. Recently, certain states have adopted a "risk-based"
approach to prioritizing site cleanups and setting cleanup standards, which
attempts to balance the costs of remediation against the potential harm to human
health and the environment from leaving sites unremediated. There can be no
assurance that additional states will not adopt these policies or that these
policies will not reduce the size of the potential market addressed by the
Company.
Potential Environmental and Regulatory Liability. The Company's operations
are subject to comprehensive laws and regulations related to the protection of
the environment. Among other things, these laws and regulations impose
requirements to control air, soil, and water pollution, and regulate health,
safety, zoning, land use, and the handling and transportation of hazardous and
nonhazardous materials. Such laws and regulations also impose liability for
remediation and cleanup of environmental contamination, both on-site and
off-site, resulting from past and present operations. These requirements may
also be imposed as conditions to operating permits or licenses that are subject
to renewal, modification, or revocation. Existing laws and regulations, and new
laws and regulations, may require the Company to modify, supplement, replace, or
curtail its operating methods, facilities, or equipment at costs which may be
substantial without any corresponding increase in revenue. The Company is also
potentially subject to monetary fines, penalties, remediation, cleanup or stop
orders, injunctions, or orders to cease or suspend certain of its practices. The
outcome of any proceedings and associated costs and expenses could have a
material adverse impact on the Company's business. In addition, the Company is
subject to numerous laws and regulations related to the protection of human
health and safety. Such laws and regulations may pose liability on the Company
for exposure of its employees to radiation or other hazardous contamination or
failure to isolate and remove radioactive or other hazardous contaminants from
soil.
The Company endeavors to operate its business to minimize its exposure to
environmental and other regulatory liabilities. Although no claims giving rise
to such liabilities have been asserted by the Company's customers or employees
to date, there can be no assurance that such claims cannot or will not be
asserted against the Company.
Uncertainty of Funding. Remediation compliance requirements and attendant
costs are often beyond the financial capabilities of individuals and small
companies. To address this problem, some states have established tax-supported
trust funds to assist in the financing of compliance and site remediation. As a
consequence, in many of the states in which the Company markets its soil
remediation services, the majority, and in some cases virtually all, of the soil
remediated by the Company is paid for by large companies and/or these state
trust funds. Any substantial decrease
38
in this funding could have a material adverse effect on the Company's business
and financial performance. Many states have realized that the number of sites
requiring remediation and the costs of compliance are substantially higher than
were originally estimated. As a result, several states have relaxed enforcement
activities and others have reduced compliance requirements in order to reduce
the costs of cleanup. These factors have already resulted in lower levels of
cleanup activity in some states and have had a material adverse effect on the
Company's business. Continued de-emphasis on enforcement activities and/or
further reductions in compliance requirements will have an even more severe
adverse effect on the Company's business.
The Company depends on funding from the federal and state governments, and
their agencies and instrumentalities, for compensation for its services. For
example, ThermoRetec's nuclear-remediation business provides a large portion of
its services directly or indirectly to the U.S. Department of Energy (DOE) and
the Company's engineering and design businesses perform significant amounts of
services for state and municipal governments. Thermo NUtech has experienced a
decrease in its radiochemistry laboratory work as a result of ongoing reductions
in spending at the DOE as well as a shift in DOE spending from investigative
work to cleanup work. Continued declines in spending by DOE and other
governmental agencies could have a material adverse effect on the Company's
business.
Competition. The markets for many of the Company's services are regional
and are characterized by intense competition from numerous local competitors.
Some of the Company's competitors have greater technical and financial resources
than those of the Company. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the promotion and sale of their services than the
Company. Competition could increase if new companies enter the market or its
existing competitors expand their service lines. There can be no assurance that
the Company's current technology, technology under development, or ability to
develop new technologies will be sufficient to enable it to compete effectively
with its competitors.
Seasonal Influences. A majority of the Company's businesses experience
seasonal fluctuations. A majority of the Company's soil-remediation sites, as
well as the Company's fluids-recycling sites, experience declines in revenues if
severe weather conditions occur. Site remediation work and certain environmental
testing services, such as the services provided by Lancaster Laboratories,
RETEC, Randers, IEM Sealand, and Thermo NUtech, may decline in winter months as
a result of severe weather conditions. In Europe, Thermo EuroTech may experience
a decline in the feedstock delivered to and from its facilities during winter
months due to frozen waterways.
Possible Obsolescence Due to Technological Change. Technological
developments are expected to continue at a rapid pace in the environmental
services industry. The Company's technologies could be rendered obsolete or
uneconomical by technological advances by one or more companies that address the
Company's markets or by future entrants into the industry. There can be no
assurance that the Company would have the resources to, or otherwise would be
successful in, developing responses to technological advances by others.
Dependence of Thermo EuroTech on Availability of Waste Oil Supplies.
Thermo EuroTech's North Refinery facility has historically received a large
percentage of its oil feedstock from the former Soviet Union. North Refinery no
longer receives any oil from that nation, due to political and economic changes
that have made the transportation of waste oil difficult. To overcome this loss
of supply, North Refinery has taken steps to replace and diversify its feedstock
suppliers. No assurance can be given, however, that North Refinery will not
experience future disruptions in deliveries. Any such disruptions could have a
material adverse effect on the Company's results of operations.
39
Potential Professional Liability. The Company's business exposes it to
potential liability for the negligent performance of its services, and the
Company could face substantial liability to clients and third parties for
damages resulting from faulty designs or other professional services. The
Company currently maintains professional errors and omissions insurance, but
there can be no assurance that this insurance will provide sufficient coverage
in the event of a claim, that the Company will be able to maintain such coverage
on acceptable terms, if at all, or that a professional liability claim would not
result in a material adverse effect on the Company's business, financial
condition, and results of operations.
Dependence on Sales to Government Entities. A significant portion of the
Company's revenues is derived from municipalities, state governments, and
government utility authorities. Any decreases in purchases by these entities,
including, without limitation, decreases resulting from shifts in priorities or
overall budgeting limitations, could have a material adverse effect on the
Company's business, financial condition, and results of operations. In addition,
most of the Company's contracts require the Company to perform specific services
for a fixed fee. Contracts with governmental entities often permit the purchaser
to cancel the agreement at any time. A significant overrun in the Company's
expenses or cancellation of a significant contract could also result in a
material adverse effect on the Company's business, financial condition, and
results of operations. The Company's contracts with governmental entities are
also subject to other risks, including contract suspensions; protests by
disappointed bidders of contract awards, which can result in the re-opening of
the bidding process; and changes in government policies or regulations.
Risks Associated with Acquisition Strategy. The Company's strategy
includes the acquisition of businesses that complement or augment the Company's
existing services. The Company does not presently intend to actively seek to
make additional acquisitions in the near future, and expects instead to
concentrate its resources on strengthening its core businesses. The Company may,
however, acquire one or more additional businesses if they are presented to the
Company on terms the Company believes to be attractive.
Promising acquisitions are difficult to identify and complete for a number
of reasons, including competition among prospective buyers and the need for
regulatory approvals. Any acquisitions completed by the Company may be made at
substantial premiums over the fair value of the net assets of the acquired
companies. There can be no assurance that the Company will be able to complete
future acquisitions or that the Company will be able to successfully integrate
any acquired businesses. In order to finance such acquisitions, it may be
necessary for the Company to raise additional funds through public or private
financings. Any equity or debt financing, if available at all, may be on terms
that are not favorable to the Company and, in the case of equity financing, may
result in dilution to the Company's shareholders.
Risks Associated with Spin-out of Subsidiaries. The Company adopted a
strategy of spinning out certain of its businesses into separate subsidiaries
and having these subsidiaries sell a minority interest to outside investors. As
a result of the sale of stock by subsidiaries, the issuance of stock by
subsidiaries upon conversion of convertible debentures, and similar
transactions, the Company records gains that represent the increase in the
Company's net investment in the subsidiaries. These gains have represented a
substantial portion of the net income reported by the Company in certain
periods. The Company does not expect to have transactions that will result in
such gains in the future.
40
No Assurance of Development and Commercialization of Technology Under
Development. The Company is currently engaged in the development of several
technologies that may ultimately be commercialized to provide services to
customers. There are a number of technological challenges that the Company must
successfully address to complete any of its development efforts. Technology
development involves a high degree of risk, and returns to investors are
dependent upon successful development and commercialization of such technology.
There can be no assurance that any of the technologies currently being developed
by the Company, or those to be developed in the future by the Company, will be
technologically feasible or accepted by the marketplace, or that any such
development will be completed in any particular timeframe.
Risks Associated with Cash Management Arrangement with the Parent Company.
The Company participates in a cash management arrangement with its parent
company, Thermo Electron. Under this cash management arrangement, the Company
lends its excess cash to Thermo Electron on an unsecured basis. The Company has
the contractual right to withdraw its funds invested in the cash management
arrangement upon 30 days' prior notice. Thermo Electron is contractually
required to maintain cash, cash equivalents, and/or immediately available bank
lines of credit equal to at least 50% of all funds invested under the cash
management arrangement by all Thermo Electron subsidiaries other than wholly
owned subsidiaries. The funds are held on an unsecured basis and therefore are
subject to the credit risk of Thermo Electron. The Company's ability to receive
its cash upon notice of withdrawal could be adversely affected if participants
in the cash management arrangement demand withdrawal of their funds in an
aggregate amount in excess of the 50% reserve required to be maintained by
Thermo Electron. In the event of a bankruptcy of Thermo Electron, the Company
would be treated as an unsecured creditor and its right to receive funds from
the bankruptcy estate would be subordinated to secure creditors and would be
treated on a pari passu basis with all other unsecured creditors. Further, all
cash withdrawn by the Company from the cash management arrangement within one
year before the bankruptcy would be subject to rescission. The inability of
Thermo Electron to return the Company's cash on a timely basis or at all could
have a material adverse effect on the Company's results of operations and
financial position.
Potential Impact of Year 2000 on Processing Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays. Some
services provided by the Company involve the delivery to clients of third-party
software and hardware. In addition, certain older third-party products, which
the Company no longer uses in providing its services to clients, may not be year
2000 compliant, which may expose the Company to claims. As discussed above, if
any of the Company's key suppliers or vendors experience business disruptions
due to year 2000 issues, the Company might also be materially adversely
affected. There is expected to be a significant amount of litigation relating to
the year 2000 issue and there can be no assurance that the Company will not
incur material costs in defending or bringing lawsuits. In addition, if any year
2000 issues are identified, there can be no assurance that the Company will be
able to retain qualified personnel to remedy such issues. Any unexpected costs
or delays arising from the year 2000 issue could have a material adverse impact
on the Company's business, operations, and financial condition in amounts that
cannot be reasonably estimated at this time.
41
Selected Financial Information
(In thousands except per share amounts) 1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995
- -------------------------------------------------- ---------- ----------- ---------- ---------- ---------
Statement of Operations Data
Revenues $310,039 $ 298,786 $278,503 $220,484 $136,985
Net Income (Loss) (1,421) 3,273 (162) 3,447 4,476
Earnings (Loss) per Share:
Basic (.07) .18 (.01) .20 .26
Diluted (.07) .17 (.01) .18 .26
Balance Sheet Data
Working Capital $ 67,043 $ 69,319 $ 77,315 $ 66,008 $ 63,459
Total Assets 351,698 360,526 393,784 333,656 273,298
Long-term Obligations 158,617 153,144 165,186 155,384 96,851
Shareholders' Investment 92,157 97,130 83,526 85,870 77,217
(a) Reflects a $10.2 million pretax charge for restructuring costs.
(b) Reflects a pretax gain of $3.0 million from ThermoRetec's sale of its
investment in a joint venture.
(c) Reflects $7.8 million of nonrecurring costs and a loss $1.5 million relating
to the sale of the Company's J. Amerika division. Also reflects the issuance
of $115.0 million principal amount of 4 7/8% subordinated convertible debentures,
and a gain on issuance of stock by subsidiary of $1.5 million.
(d) Reflects the acquisition of Lancaster Laboratories in May 1995, the purchase
of the businesses formerly operated by the environmental services joint
venture from Thermo Instrument Systems Inc., and the issuance of a $35.0
million promissory note to Thermo Electron to fund the purchase. Reflects
ThermoRetec's acquisition of RETEC in December 1995, the issuance of $38.0
million principal amount of 4 7/8% subordinated convertible debentures by
ThermoRetec, and a gain on issuance of stock by subsidiaries of $4.1
million. Also reflects the write-off of goodwill of $5.0 million and a loss
on the sale of assets of $0.6 million.
42
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TTT. The following table sets forth the high and low sales prices of
the Company's common stock for fiscal 1999 and 1998, as reported in the
consolidated transaction reporting system.
Fiscal 1999 Fiscal 1998
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
First $6 3/4 $4 1/2 $11 1/8 $8 1/8
Second 5 3 3/4 12 1/16 9 7/8
Third 4 5/8 3 15/16 9 15/16 8
Fourth 5 3/4 4 3/8 8 3/16 6 5/8
As of April 30, 1999, the Company had 923 holders of record of its common
stock. This does not include holdings in street or nominee names. The closing
market price on the American Stock Exchange for the Company's common stock on
April 30, 1999, was $4 3/16 per share.
Common stock of ThermoRetec Corporation and The Randers Killam Group Inc.,
the Company's majority-owned public subsidiaries, are traded on the American
Stock Exchange (symbols THN and RGI, respectively).
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Company's Board of Directors and will depend upon, among other
factors, the Company's earnings, capital requirements, and financial condition.
43