Exhibit 13
THERMO REMEDIATION INC.
Consolidated Financial Statements as of March 30, 1996
PAGE
Thermo Remediation Inc.
Consolidated Statement of Income
Year Ended
-----------------------------
March 30, April 1, April 2,
(In thousands except per share amounts) 1996 1995 1994
-------------------------------------------------------------------------
Revenues (Note 11):
Service revenues $66,957 $51,504 $42,882
Revenues from related party (Note 10) - - 606
------- ------- -------
66,957 51,504 43,488
------- ------- -------
Costs and Operating Expenses:
Cost of service revenues 49,114 33,764 27,109
Cost of revenues from related party (Note 10) - - 606
Selling, general and administrative
expenses (Note 10) 8,903 8,299 7,437
New business development expenses 1,084 883 447
------- ------- -------
59,101 42,946 35,599
------- ------- -------
Operating Income 7,856 8,558 7,889
Interest Income 2,539 1,002 443
Interest Expense (1,850) (68) (73)
Interest Expense, Related Party (Note 3) (149) (171) (100)
Gain on Sale of Investments (Note 2) 180 - -
Unrealized Loss on Investments (Note 2) - - (92)
------- ------ -------
Income Before Provision for Income Taxes,
Minority Interest and Cumulative Effect of
Change in Accounting Principle 8,576 9,321 8,067
Provision for Income Taxes (Note 8) 3,132 3,576 3,241
Minority Interest Expense (Note 3) - 2,102 2,316
------- ------- -------
Income Before Cumulative Effect of Change
in Accounting Principle 5,444 3,643 2,510
Cumulative Effect of Change in Accounting
Principle, Net of Tax (Note 2) - - 57
------- ------- -------
Net Income $ 5,444 $ 3,643 $ 2,567
======= ======= =======
Earnings per Share:
Primary $ .44 $ .36
======= =======
Fully diluted $ .42 $ .35
======= =======
Weighted Average Shares:
Primary 12,394 10,234
======= =======
Fully diluted 13,156 10,559
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
2PAGE
Thermo Remediation Inc.
Consolidated Balance Sheet
March 30, April 1,
(In thousands) 1996 1995
--------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 26,247 $ 792
Short-term available-for-sale investments,
at quoted market value (amortized cost
of $7,007 and $5,179) (Note 2) 7,004 5,155
Accounts receivable, less allowances of
$786 and $394 15,115 7,078
Unbilled contract costs and fees 2,094 1,867
Prepaid income taxes (Note 8) 2,836 1,011
Prepaid expenses 2,196 1,858
Due from parent company and Thermo Electron 564 -
-------- --------
56,056 17,761
-------- --------
Property, Plant and Equipment, at Cost, Net 37,603 31,238
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost of
$2,108 and $10,687) (Note 2) 2,098 10,564
-------- --------
Other Assets 11,724 11,294
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Note 3) 28,321 8,299
-------- --------
$135,802 $ 79,156
======== ========
3PAGE
Thermo Remediation Inc.
Consolidated Balance Sheet (continued)
March 30, April 1,
(In thousands except share amounts) 1996 1995
--------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Note payable due to Thermo Electron (Note 3) $ - $ 4,000
Accounts payable 3,362 2,285
Billings in excess of revenues earned 1,566 1,340
Accrued payroll and employee benefits 2,539 1,697
Accrued income taxes 57 911
Accrued interest 776 -
Other accrued expenses (Note 3) 1,413 1,138
Due to parent company and Thermo Electron - 3,006
-------- --------
9,713 14,377
-------- --------
Deferred Income Taxes (Note 8) 2,137 1,809
-------- --------
Long-term Obligations:
4 7/8% Subordinated convertible
debentures (Note 4) 37,950 -
3 7/8% Subordinated convertible note,
due to parent company (Note 3) 2,650 2,650
-------- --------
40,600 2,650
-------- --------
Commitments and Contingencies (Note 9)
Shareholders' Investment (Notes 5 and 6):
Common stock, $.01 par value, 20,000,000
shares authorized; 12,800,189 and 11,796,252
shares issued 128 118
Capital in excess of par value 81,353 61,333
Retained earnings (accumulated deficit) 1,910 (1,043)
Treasury stock at cost, 2,154 shares in
fiscal 1996 (31) -
Net unrealized loss on available-for-sale
investments (Note 2) (8) (88)
-------- --------
83,352 60,320
-------- --------
$135,802 $ 79,156
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4PAGE
Thermo Remediation Inc.
Consolidated Statement of Cash Flows
Year Ended
-----------------------------
March 30, April 1, April 2,
(In thousands) 1996 1995 1994
-------------------------------------------------------------------------
Operating Activities:
Net income $ 5,444 $ 3,643 $ 2,567
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect of change in
accounting principle (Note 2) - - (57)
Depreciation and amortization 4,392 3,411 2,870
Gain on sale of investments (Note 2) (180) - -
Minority interest expense - 2,102 2,316
Provision for losses on accounts
receivable (184) 15 298
Other noncash expenses 1,669 1,264 831
Increase (decrease) in deferred
income taxes 328 (70) 818
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable 4,755 1,458 (2,753)
Other current assets 860 (705) (547)
Billings in excess of revenues
earned 59 (1,312) 503
Due to (from) parent company and
Thermo Electron (3,570) (117) 1,187
Other current liabilities (6,194) (30) 1,049
-------- -------- --------
Net cash provided by operating
activities 7,379 9,659 9,082
-------- -------- --------
Investing Activities:
Acquisitions, net of cash acquired
(Note 3) (17,713) (13,391) -
Purchases of available-for-sale
investments (30,863) - (16,878)
Proceeds from sale and maturities of
available-for-sale investments 37,795 1,012 -
Purchases of property, plant and equipment (9,489) (4,806) (3,908)
Proceeds from sale of property, plant
and equipment 579 - -
Issuance of note receivable (Note 3) - (700) -
Purchase of other assets (1,090) - -
Other (130) (739) (371)
-------- -------- ---------
Net cash used in investing
activities $(20,911) $(18,624) $(21,157)
-------- -------- ---------
5PAGE
Thermo Remediation Inc.
Consolidated Statement of Cash Flows (continued)
Year Ended
-----------------------------
March 30, April 1, April 2,
(In thousands) 1996 1995 1994
-------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of subordinated
convertible debentures (Note 4) $ 36,889 $ - $ -
Net proceeds from issuance of Company
common stock (Note 5) 6,908 752 15,582
Proceeds from issuance (repayment) of
obligations to parent company and
Thermo Electron (Note 3) (4,000) 4,000 (2,000)
Repayment of debt - (975) (14)
Thermo Nutech transfer of cash (to) from
parent company - 82 (2,669)
Net parent company funding - - 1,753
Dividends paid (810) (685) (2,127)
-------- -------- -------
Net cash provided by financing
activities 38,987 3,174 10,525
-------- -------- --------
Increase (Decrease) in Cash and Cash
Equivalents 25,455 (5,791) (1,550)
Cash and Cash Equivalents at Beginning
of Year 792 6,583 7,846
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 26,247 $ 792 $ 6,296
======== ======== ========
Cash Paid For:
Interest $ 1,060 $ 239 $ 181
Income taxes $ 2,809 $ 3,110 $ 1,664
Noncash Activities:
Fair value of assets of acquired companies $ 39,349 $ 15,187 $ 2,650
Cash paid for acquired companies (18,462) (13,391) -
Issuance of common stock, stock options,
and warrants for acquired company (11,210) - -
Issuance of notes payable for acquired
company - - (2,650)
-------- -------- --------
Liabilities assumed of acquired
companies $ 9,677 $ 1,796 $ -
======== ======== ========
Dividends reinvested in Company common
stock (Note 5) $ 1,681 $ 1,327 $ -
Issuance of common stock to parent
company for acquired companies (Note 3) $ 7,713 $ 840 $ -
The accompanying notes are an integral part of these consolidated financial
statements.
6PAGE
Thermo Remediation Inc.
Consolidated Statement of Shareholders' Investment
Retained
Common Capital in Earnings
Stock, $.01 Excess of (Accumulated
(In thousands) Par Value Par Value Deficit)
--------------------------------------------------------------------------
Balance April 3, 1993 $ - $ - $(3,114)
Net income - - 2,567
Dividends declared (Note 5) - - (2,127)
Adjustment to fair value of
the minority shareholders'
interest in the Company (Note 1) - - -
Transfer from parent company - - -
Reorganization of the Company 52 34,800 -
Net proceeds from private
placement and initial public
offering of common stock (Note 5) 14 15,568 -
Net unrealized loss on long-term
investments - - -
Cumulative effect of change in
accounting principle (Note 2) - - -
------- ------- -------
Balance April 2, 1994 66 50,368 (2,674)
Net income - - 3,643
Dividends declared and partially
reinvested in Company common
stock (Note 5) 1 1,326 (2,012)
Issuance of stock under employees'
and directors' stock plans - 37 -
Tax benefit related to employees'
and directors' stock plans - 385 -
Net proceeds from private placement
of common stock (Note 5) - 715 -
Issuance of common stock to parent
company (Note 3) 1 839 -
Change in net unrealized loss on
available-for-sale investments
(Note 2) - - -
Effect of three-for-two stock split 34 (34) -
------- ------- -------
Balance April 1, 1995, as previously
reported 102 53,636 (1,043)
Issuance of stock to acquire Thermo
Nutech (Note 3) 16 7,697 -
------- ------- -------
Balance April 1, 1995, as restated $ 118 $61,333 $(1,043)
------- ------- -------
7PAGE
Thermo Remediation Inc.
Consolidated Statement of Shareholders' Investment (continued)
Retained
Common Capital in Earnings
Stock, $.01 Excess of (Accumulated
(In thousands) Par Value Par Value Deficit)
--------------------------------------------------------------------------
Net income $ - $ - $ 5,444
Dividends declared and partially
reinvested in Company common
stock (Note 5) 1 1,680 (2,491)
Issuance of stock under employees'
and directors' stock plans 2 312 -
Tax benefit related to employees'
and directors' stock plans - 200 -
Net proceeds from private placement
of common stock (Note 5) 5 6,620 -
Issuance of common stock for acquired
company (Note 3) 2 11,208 -
Change in net unrealized loss on
available-for-sale investments
(Note 2) - - -
------- ------- -------
Balance March 30, 1996 $ 128 $81,353 $ 1,910
======= ======= =======
8PAGE
Thermo Remediation Inc.
Consolidated Statement of Shareholders' Investment (continued)
Net
Unrealized
Loss on
Available-
Treasury Owner's for-sale
(In thousands) Stock Investment Investments
--------------------------------------------------------------------------
Balance April 3, 1993 $ - $ 29,714 $ -
Net income - - -
Dividends declared (Note 5) - - -
Adjustment to fair value of
the minority shareholders'
interest in the Company (Note 1) - 3,235 -
Transfer from parent company - 1,903 -
Reorganization of the Company - (34,852) -
Net proceeds from private
placement and initial public
offering of common stock (Note 5) - - -
Net unrealized loss on long-term
investments - - (65)
Cumulative effect of change in
accounting principle (Note 2) - - (57)
-------- -------- --------
Balance April 2, 1994 - - (122)
Net income - - -
Dividends declared and partially
reinvested in Company common
stock (Note 5) - - -
Issuance of stock under employees'
and directors' stock plans - - -
Tax benefit related to employees'
and directors' stock plans - - -
Net proceeds from private placement
of common stock (Note 5) - - -
Issuance of common stock to parent
company (Note 3) - - -
Change in net unrealized loss on
available-for-sale investments
(Note 2) - - 34
Effect of three-for-two stock split - - -
-------- -------- --------
Balance April 1, 1995, as previously
reported - - (88)
Issuance of stock to acquire Thermo
Nutech (Note 3) - -
-------- -------- --------
Balance April 1, 1995, as restated $ - $ - (88)
-------- -------- --------
9PAGE
Thermo Remediation Inc.
Consolidated Statement of Shareholders' Investment (continued)
Net
Unrealized
Loss on
Available-
Treasury Owner's for-sale
(In thousands) Stock Investment Investments
--------------------------------------------------------------------------
Net income $ - $ - $ -
Dividends declared and partially
reinvested in Company common
stock (Note 5) - - -
Issuance of stock under employees'
and directors' stock plans (31) - -
Tax benefit related to employees'
and directors' stock plans - - -
Net proceeds from private placement
of common stock (Note 5) - - -
Issuance of common stock for acquired
company (Note 3) - - -
Change in net unrealized loss on
available-for-sale investments
(Note 2) - - 80
-------- -------- --------
Balance March 30, 1996 $ (31) $ - $ (8)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
10PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Remediation Inc. (the Company) is a leading national provider
of services for the recycling of contaminated soils and fluids. The Company
is also a major supplier of nuclear remediation and safety services at
radioactively contaminated sites and provides services for on-site
remediation of industrial sites, brownfields development, and cleanup of
manufactured-gas and refinery wastes.
Basis of Presentation and Relationship with Thermo TerraTech Inc.
TPST Soil Recyclers of Southern California Inc. (TPST Southern
California) was incorporated in November 1991 and commenced operation in
June 1992. On October 1, 1993, pursuant to a reorganization (the
Reorganization), TPST Southern California exchanged shares of its common
stock for all of the outstanding shares of the capital stock of TPST Soil
Recyclers of South Carolina Inc. (TPST South Carolina), TPST Soil Recyclers
of Virginia Inc. (TPST Virginia), TPST Soil Recyclers of Florida Inc. (TPST
Florida) held by private shareholders and by Thermo TerraTech Inc. (Thermo
TerraTech, formerly Thermo Process Systems Inc.) and all of the outstanding
shares of the capital stock of TPST Soil Recyclers of Oregon Inc. (TPST
Oregon) held by Thermo TerraTech (collectively, the Affiliates). In
connection with the Reorganization, Thermo TerraTech contributed to TPST
Southern California certain assets and liabilities pertaining to its
soil-remediation business (the Remediation Business). At the time of the
Reorganization, TPST Southern California changed its name to Thermo
Remediation Inc. Pursuant to Financial Accounting Standards Board Technical
Bulletin No. 85-5, the exchange of TPST Southern California common stock
has been accounted for as an acquisition using the purchase method of
accounting, and $3,235,000 of cost in excess of net assets of acquired
companies was recorded to adjust the minority shareholders' interest in the
Company to fair value. As of March 30, 1996, Thermo TerraTech owned
8,427,657 shares of the Company's common stock, representing 66% of such
stock outstanding. Thermo TerraTech is an 83%-owned subsidiary of Thermo
Electron Corporation (Thermo Electron). As of March 30, 1996, Thermo
Electron owned 155,400 shares of the Company's common stock.
For the periods prior to the Reorganization, the accompanying
financial statements reflect the assets, liabilities, income, and expenses
as included in the separate historical financial statements of TPST
Southern California, the Affiliates, and the Remediation Business for the
periods from the dates of their commencement of commercial operations or
acquisition by Thermo TerraTech. Subsequent to the Reorganization, the
accompanying financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions have
been eliminated.
11PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Presentation
The historical financial information presented for fiscal 1994 and
1995, except for weighted average shares, has been restated to reflect the
acquisition of Thermo Nutech (formerly the Nuclear Services Group) from
Thermo TerraTech. The acquisition has been accounted for in a manner
similar to the pooling-of-interests method. Because prior to April 2, 1995,
Thermo Nutech was held in a joint venture which resulted in the allocation
of its operating results to a minority partner, the consolidated results
reflect such allocation as minority interest through the date the joint
venture was dissolved and Thermo Nutech became wholly owned by Thermo
TerraTech. The restated statements of income and cash flows for fiscal 1994
have been prepared using Thermo Nutech's statements of income and cash
flows for its fiscal year ended January 1, 1994. Effective January 2, 1994,
Thermo Nutech's fiscal year was changed to conform to that of the Company.
Certain amounts in fiscal 1995 have been reclassified to conform to
the fiscal 1996 financial statement presentation.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
March 31. References to fiscal 1996, 1995, and 1994 are for the fiscal
years ended March 30, 1996, April 1, 1995, and April 2, 1994, respectively.
Revenue Recognition
Revenues from soil-remediation services are recognized as soil is
processed, and revenues from environmental and nuclear-remediation services
are recognized upon completion of services rendered. With respect to
soil-remediation services, the Company bills customers upon receipt of the
contaminated soil at its remediation centers. Amounts billed in excess of
revenues recognized are classified as billings in excess of revenues earned
in the accompanying balance sheet. Revenues on cost-plus-fixed-fee
contracts are recognized as costs are incurred. The Company generally
provides for billing of customers in accordance with contract terms, which
are most commonly in the month following incurrance of costs. 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.
New Business Development Expenses
Costs classified as new business development expenses in the
accompanying statement of income represent costs associated with the
development of the Company's soil-remediation business. For the period from
July 1, 1991 through October 2, 1993, these costs were funded under a
development agreement with Thermo Electron and are classified as revenues
and cost of revenues from related party in the accompanying fiscal 1994
statement of income (Note 10).
12PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Income Taxes
For the periods presented in the financial statements prior to
December 1993, the profits of certain of the Company's Affiliates were
included in Thermo TerraTech's consolidated income tax returns. Income
taxes were allocated to the Company based on income taxes that such
Affiliates would have provided for on a separate company basis. Certain
other Affiliates were not eligible for this treatment and have filed
separate returns for periods presented prior to the Company's initial
public offering. Subsequent to the Company's initial public offering in
December 1993, Thermo TerraTech's equity ownership of the Company was
reduced below 80% and, as a result, the Company is 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 its tax returns.
Earnings per Share
Earnings per share have been computed based on the weighted average
number of shares outstanding during the year. Weighted average shares
include the assumed exercise of stock options and warrants that were
computed using the treasury stock method. Fully diluted earnings per share
include the assumed exercise of stock options and warrants and the assumed
effect of the conversion of the Company's subordinated convertible
obligations. Earnings per share and weighted average shares for the periods
prior to the Reorganization are not considered measurable and, therefore,
are not reported.
Stock Split
All share and per share information was restated in fiscal 1995 to
reflect a three-for-two stock split, effected in the form of a 50% stock
dividend, that was distributed in March 1995.
Cash and Cash Equivalents
As of March 30, 1996, 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 U.S.
government agency securities, corporate notes, 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 and have an
original maturity of three months or less. 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. Cash equivalents are carried
at cost, which approximates fair market value.
13PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Cash and Cash Equivalents (continued)
Cash transfers between the Company and Thermo TerraTech are classified
in the accompanying statement of shareholders' investment as "Transfer from
parent company." Cash transfers between Thermo Nutech and Thermo TerraTech
are classified in the accompanying statement of cash flows as "Thermo
Nutech transfer of cash (to) from parent company."
Available-for-sale Investments
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," the Company's short- and long-term debt and
marketable equity securities are accounted for at market value (Note 2).
Prior to fiscal 1994, these investments were carried at the lower of cost
or market value.
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 - 20 to 30 years; machinery and
equipment - 3 to 12 years; and leasehold improvements - the shorter of the
term of the lease or the life of the asset. Soil-remediation units, which
account for the majority of the Company's machinery and equipment, are
depreciated based on an hourly rate that is computed by estimating total
hours of operation for each unit. Property, plant and equipment consist of
the following:
(In thousands) 1996 1995
--------------------------------------------------------------------------
Land $ 4,216 $ 3,727
Buildings and leasehold improvements 14,245 9,657
Machinery and equipment 33,658 29,394
------- -------
52,119 42,778
Less: Accumulated depreciation and amortization 14,516 11,540
------- -------
$37,603 $31,238
======= =======
Other Assets
Other assets in the accompanying balance sheet include the cost 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 12 years. These assets were
$9,492,000 and $9,978,000, net of accumulated amortization of $4,785,000
and $3,211,000, at fiscal year-end 1996 and 1995, respectively.
14PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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 not
exceeding 40 years. Accumulated amortization was $1,314,000 and $907,000 at
fiscal year-end 1996 and 1995, 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. The
Company considers the future undiscounted cash flows of the acquired
companies in assessing the recoverability of this asset.
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 and
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.
2. Available-for-sale Investments
Effective April 2, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." In accordance with
SFAS No. 115, the Company's debt and marketable equity 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 as a component of
shareholders' investment titled "Net unrealized loss on available-for-sale
investments." Cumulative effect of change in accounting principle in the
accompanying fiscal 1994 financial statements represents the unrealized
loss, net of related tax effects, pertaining to short-term
available-for-sale investments held by the Company on April 2, 1994.
The unrealized loss on short-term investments of $92,000 in fiscal
1994 was recorded as unrealized loss on investments in the accompanying
statement of income and the net unrealized loss on long-term investments of
$105,000 in fiscal 1994 was recorded, net of related tax effects, as a
component of shareholders' investment.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains recorded in the
accompanying statement of income. Gain on sale of investments in fiscal
1996 resulted from gross realized gains of $180,000 relating to the sale of
available-for-sale investments.
15PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
2. Available-for-sale Investments (continued)
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term available-for-sale investments by major
security type, as of March 30, 1996 and April 1, 1995, are as follows:
1996
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
--------------------------------------------------------------------------
Tax-exempt securities $ 5,009 $ 4,998 $ 11 $ -
Corporate bonds 1,985 2,000 - (15)
Money market preferred stock 2,098 2,107 - (9)
Other 10 10 - -
------- ------- ------- -------
$ 9,102 $ 9,115 $ 11 $ (24)
======= ======= ======= =======
1995
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
--------------------------------------------------------------------------
Tax-exempt securities $11,545 $11,594 $ - $ (49)
Corporate bonds 1,980 2,000 - (20)
Money market preferred stock 2,087 2,165 - (78)
Other 107 107 - -
------- ------- ------- -------
$15,719 $15,866 $ - $ (147)
======= ======= ======= =======
Short- and long-term available-for-sale investments in the
accompanying fiscal 1996 balance sheet include $5,012,000 with contractual
maturities of one year or less and $4,090,000 with contractual maturities
of more than one year through five years. Actual maturities may differ from
contractual maturities as a result of the Company's intent to sell these
securities prior to maturity and as a result of put and call options that
enable the Company and/or the issuer to redeem these securities at an
earlier date.
3. Acquisitions
In December 1995, the Company acquired Remediation Technologies, Inc.
(ReTec), a provider of integrated environmental services such as the
remediation of industrial sites contaminated with organic wastes and
residues. The purchase price of $29,672,000 consisted of $18,462,000 in
cash, 227,250 shares of the Company's common stock and 75,750 warrants to
purchase shares of the Company's common stock at $14.85 per share, valued
in the aggregate at $3,716,000, and approximately $7,494,000 attributable
to the conversion of outstanding ReTec stock options into Company stock
options of equivalent intrinsic value at the date of the acquisition.
16PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
3. Acquisitions (continued)
In December 1994, the Company acquired a soil-remediation facility in
Baltimore County, Maryland (renamed TPST Maryland) from the principals of
Bryn Awel Corporation (Bryn Awel). The purchase price for TPST Maryland was
$6,820,000 in cash and the assumption of $686,000 of a net liability. In
October 1994, the Company acquired a soil-remediation facility in South
Tacoma, Washington (renamed TPST Woodworth) from Woodworth & Company, Inc.
for $4,701,000 in cash. The Company entered into a land lease with the
former owners of TPST Woodworth for the land on which TPST Woodworth
operates the business. During fiscal 1995, the Company made two other
acquisitions for a total of $1,870,000 in cash. In connection with the
financing of acquisitions, the Company issued to Thermo Electron a
$4,000,000 promissory note bearing interest at the 90-day Commercial Paper
Composite Rate plus 25 basis points, set at the beginning of each quarter.
The promissory note had an average interest rate of 6.4% and 6.5% in fiscal
1996 and 1995, respectively. The Company repaid the note payable to Thermo
Electron in June 1995.
In November 1993, Thermo TerraTech acquired a fluids recovery company
based in Mesa, Arizona (renamed Thermo Fluids) and immediately transferred
it to the Company. Thermo Fluids collects and recycles used motor oil and
provides services such as wastewater processing. In consideration of the
transfer of Thermo Fluids, the Company issued to Thermo TerraTech a
$2,650,000 principal amount 3 7/8% subordinated convertible note due 2000
(Note 4). In addition, due to Thermo Fluids having met certain performance
criteria, on February 1, 1995, Thermo TerraTech issued to the former owner
of Thermo Fluids restricted shares of its common stock valued at $840,000.
The Company in turn issued to Thermo TerraTech 127,369 restricted shares of
the Company's common stock valued at $840,000. In August 1994, the Company
loaned $700,000, included in other assets in the accompanying balance
sheet, to the former owner of Thermo Fluids in connection with his
termination of employment with Thermo Fluids and the settlement of the
parties' respective obligations to one another. This obligation is
represented by a promissory note bearing interest at a rate equal to the
rate of interest on one-year U.S. treasury notes, adjusted on an annual
basis, and is secured by a pledge of the Thermo TerraTech common stock
issued to the former owner. The note is payable in three equal installments
due March 1997, December 1997, and December 1998.
These acquisitions have been accounted for using the purchase method
of accounting and their results of operations have been included in the
accompanying financial statements from their respective dates of
acquisition. The aggregate cost of the acquisitions in fiscal 1996, 1995,
and 1994 exceeded the estimated fair value of the acquired net assets by
$22,684,000, which is being amortized over 40 years. Allocation of the
purchase price for these acquisitions was based on estimates of the fair
value of the net assets acquired and, for acquisitions completed in fiscal
1996, is subject to adjustment upon finalization of the purchase price
allocation.
17PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
3. Acquisitions (continued)
Based on unaudited data, the following table presents selected
financial information for the Company and ReTec on a pro forma basis,
assuming the companies had been combined since the beginning of fiscal
1995, and the Company, TPST Maryland, and TPST Woodworth on a pro forma
basis, assuming the companies had been combined since the beginning of
fiscal 1994. The effect on the Company's financial statements of the
acquisitions not included in the pro forma data was not material to the
Company's results of operations and financial position.
(In thousands except per share amounts) 1996 1995 1994
-------------------------------------------------------------------------
Revenues $98,183 $93,176 $47,482
Net income 5,855 4,987 2,984
Earnings per share:
Primary .47 .45
Fully diluted .45 .45
The pro forma results are not necessarily indicative of future
operations or the actual results that would have occurred had the
acquisitions been made at the beginning of fiscal 1995 or 1994, as
appropriate.
On June 30, 1995, the Company acquired Thermo Nutech from Thermo
TerraTech in exchange for 1,583,360 shares of the Company's common stock,
with a fair market value of $24,740,000 as of such date. Thermo Nutech
provides services to remove radioactive contaminants from sand, gravel and
soil, as well as health physics services, radiochemistry laboratory
services, radiation dosimetry services, radiation instrument calibration
and repair services, and radiation source production. During the fiscal
year ended April 1, 1995, Thermo Nutech's assets were held in a joint
venture (the Joint Venture) between Thermo TerraTech and Thermo Instrument
Systems Inc. (Thermo Instrument). On Thermo TerraTech's financial
statements, the assets and liabilities of the Joint Venture were
consolidated as were the operations, net of minority interest related to
Thermo Instrument's allocable share of operations. Effective April 2, 1995,
Thermo TerraTech and Thermo Instrument agreed to dissolve the Joint Venture
and Thermo TerraTech purchased the businesses formerly operated by the
Joint Venture from Thermo Instrument.
Because the Company and Thermo Nutech were deemed for accounting
purposes to be under control of their common majority owner, Thermo
TerraTech, the transaction has been accounted for at historical cost in a
manner similar to the pooling-of-interests method, with the accounting
followed by the Company conforming to that of Thermo TerraTech.
Accordingly, all historical financial information presented, except for
weighted average shares, has been restated to reflect the acquisition of
Thermo Nutech.
18PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
3. Acquisitions (continued)
The 1,583,360 shares of the Company's common stock issued in exchange
for Thermo Nutech are considered to be outstanding as of April 2, 1995 for
purposes of computing weighted average shares. Revenues and net income for
the separate entities are as follows:
(In thousands) 1995 1994
-------------------------------------------------------------------------
Revenues:
Historical $29,871 $23,945
Thermo Nutech 21,633 19,543
------- -------
$51,504 $43,488
======= =======
Net Income:
Historical $ 3,643 $ 2,567
Thermo Nutech 2,102 2,316
Minority interest expense not previously reported (2,102) (2,316)
------- -------
$ 3,643 $ 2,567
======= =======
Had the dissolution of the Joint Venture occurred as of April 4, 1993,
the Company would have reported the following net income and earnings per
share:
(In thousands except per share amounts) 1995 1994
-------------------------------------------------------------------------
Pro forma net income $ 5,745 $ 4,883
Pro forma earnings per share .49
4. Long-term Obligations
In May 1995, the Company issued and sold in Europe $37,950,000
principal amount of 4 7/8% subordinated convertible debentures due 2000.
The debentures are convertible into shares of the Company's common stock at
a conversion price of $17.92 per share and are guaranteed on a subordinated
basis by Thermo Electron. Thermo TerraTech has agreed to reimburse Thermo
Electron in the event Thermo Electron is required to make a payment under
the guarantee.
In fiscal 1994, in connection with the acquisition of Thermo Fluids,
the Company issued to Thermo TerraTech a $2,650,000 principal amount 3 7/8%
subordinated convertible note due 2000. The note is convertible into shares
of the Company's common stock at a conversion price of $9.83 per share.
See Note 12 for fair value information pertaining to the Company's
long-term obligations.
19PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
5. Owner's Investment and Common Stock
During fiscal 1996, the Company issued 500,000 shares of its common
stock at $13.25 per share in a private placement for net proceeds of
$6,625,000.
During fiscal 1995, the Company issued 75,000 shares of its common
stock at $9.67 per share in a private placement for net proceeds of
$715,000.
During fiscal 1994, the Company completed an initial public offering
of 1,785,000 shares of its common stock at $8.33 per share for net proceeds
of $13,505,000. During fiscal 1994, the Company also completed a private
placement consisting of 300,000 units, comprising an aggregate of 300,000
shares of the Company's common stock and warrants to purchase 300,000
shares of the Company's common stock, at $6.93 per unit for net proceeds of
$2,077,000. The warrants expired in whole upon the closing of the Company's
initial public offering at a price above the warrants' exercise price of
$6.93 per share.
Dividends to common shareholders of the Company of $2,491,000 were
declared in fiscal 1996, of which $1,681,000, including $1,667,000
allocated to Thermo TerraTech, was reinvested in 118,778 shares of the
Company's common stock pursuant to the Company's Dividend Reinvestment Plan
adopted in fiscal 1995. Dividends to common shareholders of the Company of
$2,012,000 were declared in fiscal 1995, of which $1,327,000, including
$1,316,000 allocated to Thermo TerraTech, was reinvested in 113,491 shares
of the Company's common stock pursuant to the Company's Dividend
Reinvestment Plan. Dividends to common shareholders of the Company of
$989,000 were declared in fiscal 1994, of which $648,000 was paid to Thermo
TerraTech.
Dividends to common shareholders of TPST Southern California of
$984,000 were declared in fiscal 1994, of which $840,000 was paid to Thermo
TerraTech. Dividends to common shareholders of TPST Virginia of $154,000
were declared in fiscal 1994, of which $120,000 was paid to Thermo
TerraTech.
At March 30, 1996, the Company had reserved 5,182,594 unissued shares
of its common stock for possible issuance under stock-based compensation
plans, outstanding warrants, and possible issuance upon conversion of the
Company's convertible obligations.
20PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
6. Stock-based Compensation Plans
The Company has an equity incentive plan for key employees, directors,
and others. The equity incentive plan, adopted in October 1993, 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. To date, only nonqualified stock options have
been awarded under this plan. The option recipients and the terms of
options granted under this plan 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 five to ten years after the first anniversary
of the grant date depending on the term of the option, which may range from
seven 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 stock on the
date of grant. The Company also has a directors' stock option plan, adopted
in October 1993, which 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 be granted options under the stock-based
compensation plans of Thermo Electron or its majority-owned subsidiaries.
In connection with the acquisition of ReTec in December 1995, the
Company assumed certain outstanding options granted under ReTec's
nonqualified and incentive stock option plans. Such options were converted
into options to purchase shares of the Company's common stock, in
accordance with the original terms of the options. Options issued in
connection with the acquisition of ReTec vest ratably over three years from
their original date of grant, and expire ten years from the date of grant.
21PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
6. Stock-based Compensation Plans (continued)
No accounting recognition is given to options granted at fair market
value until they are exercised. Upon exercise, net proceeds, including tax
benefits realized, are credited to equity. A summary of the Company's stock
option information is as follows:
1996 1995 1994
---------------- ---------------- -----------------
Range of Range of Range of
Option Option Option
(In thousands Number Prices Number Prices Number Prices
except per of per of per of per
share amounts) Shares Share Shares Share Shares Share
-------------------------------------------------------------------------
Options
outstanding,
beginning $ 6.93- $ 6.93-
of year 695 $ 11.43 605 $ 9.43 - $ -
Assumed upon
acquisition .40-
of ReTec 897 12.39 - - - -
14.93- 9.09- 6.93-
Granted 144 15.40 114 11.43 605 9.43
.40-
Exercised (149) 6.93 (5) 6.93 - -
Lapsed or 6.29-
cancelled (28) 12.39 (19) 6.93 - -
----- --- ---
Options
outstanding, $ .40- $ 6.93- $ 6.93-
end of year 1,559 $ 15.40 695 $11.43 605 $ 8.43
===== === ===
Options $ .40- $ 6.93-
exercisable 1,416 $ 15.40 670 $11.43 560 $ 6.93
===== === ===
Options
available
for grant 449 575 670
===== === ===
22PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
7. Employee Benefit Plans
Employee Stock Purchase Plan
Effective November 1994, the majority of the Company's full-time
employees were eligible to participate in an employee stock purchase plan
sponsored by the Company. Prior to the November 1995 plan year, shares of
the Company's and Thermo Electron's common stock could be purchased at the
end of a 12-month plan year at 85% of the fair market value at the
beginning of the plan year, and the shares purchased were subject to a
one-year resale restriction. Effective November 1, 1995, the applicable
shares of common stock may be purchased at 95% of the fair market value at
the beginning of the plan year, and the shares purchased are subject to a
six-month resale restriction. Shares are purchased through payroll
deductions of up to 10% of each participating employee's gross wages.
During fiscal 1996, the Company issued 9,040 shares of its common stock
under this plan. Prior to November 1994, the Company's eligible employees
participated in an employee stock purchase plan sponsored by Thermo
TerraTech. Employees of Thermo Nutech participated in an employee stock
purchase plan sponsored by Thermo Instrument through November 1994 and
participate in an employee stock purchase plan sponsored by Thermo
TerraTech through November 1996.
401(k) Savings Plan and Employee Stock Ownership Plan
The majority of the Company's full-time employees are eligible to
participate in Thermo Electron's 401(k) savings plan and, prior to January
1, 1995, in Thermo Electron's employee stock ownership plan (ESOP).
Contributions to the 401(k) savings plan are made by both the employee and
the Company. Company contributions are based upon the level of employee
contributions. ReTec also offers a 401(k) savings plan, and a subsidiary of
Thermo Nutech offers a 401(k) savings plan, separate from the Company's
plan. The Company contributed and charged to expense for these plans
$639,000, $472,000, and $415,000 in fiscal 1996, 1995, and 1994,
respectively. Effective December 31, 1994, the ESOP was split into two
plans: ESOP I, covering employees of Thermo Electron's corporate office and
its wholly owned subsidiaries and ESOP II, covering employees of certain of
Thermo Electron's majority-owned subsidiaries, including the Company. Also,
effective December 31, 1994, the ESOP II plan was terminated and as a
result, the Company's employees are no longer eligible to participate in an
ESOP.
23PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
8. Income Taxes
The components of the provision for income taxes are as follows:
(In thousands) 1996 1995 1994
-------------------------------------------------------------------------
Currently payable:
Federal $3,400 $3,245 $2,155
State 590 658 433
------ ------ ------
3,990 3,903 2,588
------ ------ ------
Deferred (prepaid), net:
Federal (708) (263) 527
State (150) (64) 126
------ ------ ------
(858) (327) 653
------ ------ ------
$3,132 $3,576 $3,241
====== ====== ======
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal
income tax rate of 34% to income before provision for income taxes,
minority interest and cumulative effect of change in accounting principle
due to the following:
(In thousands) 1996 1995 1994
-------------------------------------------------------------------------
Provision for income taxes at statutory rate $2,916 $3,169 $2,742
Increases (decreases) resulting from:
State income taxes, net of federal tax 290 392 382
Tax-exempt investment income (185) (180) -
Nondeductible expenses 161 96 67
Other (50) 99 50
------ ------ ------
$3,132 $3,576 $3,241
====== ====== ======
24PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1996 1995
-------------------------------------------------------------------------
Prepaid income taxes:
Reserves and accruals $ 682 $ 592
Allowance for doubtful accounts 756 168
Accrued compensation 1,446 204
Available-for-sale investments 7 57
Intangible assets - 45
Net operating loss carryforward 106 106
Federal tax credit carryforward 39 39
------ ------
3,036 1,211
Less: Valuation allowance 200 200
------ ------
$2,836 $1,011
====== ======
Deferred income taxes:
Depreciation $2,137 $1,809
====== ======
The valuation allowance relates to the uncertainty surrounding the
realization of the tax benefits attributable to federal operating losses,
credit carryforwards, and purchase accounting reserves related to various
acquisitions. The valuation allowance 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.
9. Commitments and Contingencies
Operating Leases
The Company leases land, office facilities, and equipment under
operating leases expiring at various dates through fiscal 2005. The
accompanying statement of income includes expenses from operating leases of
$1,319,000, $543,000, and $497,000 in fiscal 1996, 1995, and 1994,
respectively. Future minimum payments due under noncancellable operating
leases at March 30, 1996, are $1,321,000 in fiscal 1997; $988,000 in fiscal
1998; $866,000 in fiscal 1999; $497,000 in fiscal 2000; and $213,000 in
fiscal 2001 and thereafter. Total future minimum lease payments are
$3,885,000.
In March 1991, the Company's TPST Virginia affiliate entered into a
seven-year agreement, terminable at the Company's option with 90 days'
notice, to operate one or more of its soil-remediation units at a site
owned by a third party. Under the terms of the agreement, the Company pays
a fee based on the gross remediation revenues generated from the operations
at the site, less certain operating costs incurred by the Company. The
accompanying statement of income includes expenses relating to this
agreement of $147,000, $307,000, and $410,000 in fiscal 1996, 1995, and
1994, respectively.
25PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
9. Commitments and Contingencies (continued)
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 effect upon the
financial position of the Company or its results of operations.
10. 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 pays Thermo Electron
annually an amount equal to 1.0% of the Company's revenues. Prior to
January 1, 1996, the Company paid an annual fee equal to 1.20% of the
Company's revenues. Prior to January 1, 1995, the Company paid an annual
fee equal to 1.25% of the Company's revenues. The annual fee is reviewed
and adjusted annually by mutual agreement of the parties. For these
services, the Company was charged $767,000, $637,000, and $494,000 in
fiscal 1996, 1995, and 1994, respectively. 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.
Revenues from Related Party
In fiscal 1992, Thermo TerraTech and Thermo Electron entered into a
development agreement (the Thermo Electron Development Agreement) under
which Thermo Electron agreed to fund up to $4.0 million of the direct and
indirect costs of Thermo TerraTech's development of soil-remediation
centers. The Company provided a substantial portion of the development
services contemplated under the Thermo Electron Development Agreement in
exchange for reimbursement of costs incurred by the Company in performing
such services. Under this agreement, the Company recorded contract revenues
of $606,000 for development costs expended in fiscal 1994. As of October 2,
1993, funding under this agreement was completed.
Short- and Long-term Obligations
See Notes 3 and 4 for short- and long-term obligations of the Company
held by Thermo Electron and Thermo TerraTech.
26PAGE
Thermo Remediation Inc.
Notes to Consolidated Financial Statements
10. Related Party Transactions (continued)
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
11. Significant Customers and Concentration of Credit Risk
A substantial portion of the Company's nuclear services has been
provided to the U.S. government. One subcontract for the U.S. government
accounted for approximately 4%, 4%, and 10% of the Company's total revenues
in fiscal 1996, 1995, and 1994, respectively, and a second accounted for
10% and 4% of the Company's total revenues in fiscal 1996 and 1995,
respectively. All other U.S. government agencies accounted for 12%, 22%,
and 13% of the Company's total revenues in fiscal 1996, 1995, and 1994,
respectively. Management does not believe that this concentration of credit
risk has or will have a significant negative impact on the Company.
12. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable, and
long-term obligations. The carrying amounts of these financial instruments,
with the exception of available-for-sale investments and long-term
obligations, approximates fair value due to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices. See Note 2 for fair value information pertaining to these
financial instruments.
Based on quoted market prices and on borrowing rates available to the
Company, the fair value of the Company's long-term obligations was
$42,877,000 and $2,650,000 in fiscal 1996 and 1995, respectively.
27PAGE
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Remediation Inc.:
We have audited the accompanying consolidated balance sheet of Thermo
Remediation Inc. (a Delaware corporation and 66%-owned subsidiary of Thermo
TerraTech Inc.) and subsidiaries as of March 30, 1996 and April 1, 1995,
and the related consolidated statements of income, shareholders' investment
and cash flows for each of the three years in the period ended March 30,
1996. 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 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 Remediation Inc. and subsidiaries as of March 30, 1996 and April 1,
1995, and the results of their operations and their cash flows for each of
the three years in the period ended March 30, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
effective April 2, 1994, the Company changed its method of accounting for
investments in debt and marketable equity securities.
Arthur Andersen LLP
Boston, Massachusetts
May 7, 1996
28PAGE
Thermo Remediation Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company is a leading national provider of contaminated
soil-remediation services, industrial-remediation services,
nuclear-remediation services, and waste-fluids recycling services.
The Company is a national leader in the design and operation of
nonhazardous soil-remediation facilities and operates a network of such
facilities serving customers in more than a dozen states along the East and
West Coasts.
In December 1995, the Company acquired Remediation Technologies, Inc.
(ReTec), a provider of consulting, engineering, and on-site services to
help clients manage problems associated with environmental compliance,
waste management, and the remediation of industrial sites contaminated with
organic wastes and residues.
The Company's Thermo Nutech division provides services to remove
radioactive contaminants from sand, gravel, and soil, as well as health
physics services, radiochemistry laboratory services, and radiation
dosimetry services.
The Company's Thermo Fluids subsidiary collects, tests, processes, and
recycles used motor oil and other industrial oils.
The Company's soil-remediation business is affected by several
factors, including enactment and enforcement of environmental legislation
regarding underground storage tanks, the availability of state funding for
environmental cleanup, economic cycles, extreme weather variations, and
local competition. Since the soil-remediation centers compete locally,
these factors vary from site to site. The Company's ReTec and Thermo Nutech
businesses are affected by several factors, most particularly, extreme
weather variations, government spending, and deregulation of remediation
activities.
Results of Operations
Fiscal 1996 Compared With Fiscal 1995
Total revenues in fiscal 1996 were $66,957,000, compared with
$51,504,000 in fiscal 1995, an increase of 30%. Revenues increased due to
the inclusion of $21,304,000 in revenues from ReTec, acquired in December
1995, and the inclusion of revenues from soil-remediation businesses
acquired or constructed in late fiscal 1995 and in fiscal 1996. These
increases were offset in part by lower revenues from the Company's
soil-remediation services resulting from a decrease in the volume and price
of soil processed as a result of regulatory uncertainties at several sites,
competitive pricing pressures, and severe weather conditions primarily in
the fourth quarter of fiscal 1996. Revenues from nuclear services declined
due to a decrease in radiochemistry laboratory work, reflecting a reduction
in spending at the DOE and delays in federal government budget
appropriations, largely offset by increased revenues from a long-term
environmental restoration contract for the U.S. Department of Energy's
(DOE) Hanford site (Hanford), which began in the second quarter of fiscal
1995.
29PAGE
Thermo Remediation Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Fiscal 1996 Compared With Fiscal 1995 (continued)
The gross profit margin decreased to 27% in fiscal 1996 from 34% in
fiscal 1995. The gross profit margin on soil-remediation services revenues
decreased primarily due to competitive pricing pressures, offset in part by
operational savings. The gross profit margin on nuclear services decreased
primarily due to lower revenues from higher-margin radiochemistry
laboratory work and increased revenues from the lower-margin Hanford
contract. The gross profit margin on fluids-recycling services improved to
40% during fiscal 1996 from 29% in fiscal 1995, primarily due to
operational efficiencies. The addition of the ReTec business is expected to
negatively affect the Company's gross profit margin as margins on ReTec's
revenues are typically lower than the margins obtained from the Company's
existing soil-remediation services business.
Selling, general and administrative expenses as a percentage of
revenues decreased to 13% in fiscal 1996 from 16% in fiscal 1995, due to an
increase in total revenues and, to a lesser extent, operational
efficiencies.
Interest income increased to $2,539,000 in fiscal 1996 from $1,002,000
in fiscal 1995 as a result of interest income earned on invested proceeds
from the issuance of the 4 7/8% subordinated convertible debentures and
shares of the Company's common stock in May 1995 (Notes 4 and 5). Interest
expense increased to $1,850,000 in fiscal 1996 from $68,000 in fiscal 1995
primarily due to the issuance of the subordinated convertible debentures in
May 1995 (Note 4). Interest expense, related party, decreased in fiscal
1996 due to the repayment of the $4,000,000 promissory note to Thermo
Electron Corporation (Thermo Electron) in June 1995 and a decrease in the
average interest rate related to this note.
The effective tax rate was 37% in fiscal 1996, compared with 38% in
fiscal 1995. The effective tax rates were higher than the statutory federal
income tax rate primarily due to the impact of state income taxes, offset
in part by tax-exempt investment income.
Minority interest expense in fiscal 1995 represents Thermo Nutech's
net income which was allocated to the joint venture partner (Note 3).
Fiscal 1995 Compared With Fiscal 1994
Total revenues in fiscal 1995 were $51,504,000, compared with
$43,488,000 in fiscal 1994. Service revenues increased 20% to $51,504,000
in fiscal 1995 from $42,882,000 in fiscal 1994. Higher revenues resulted
primarily from an increase in the volume of soil processed at the Company's
soil-remediation centers located in Southern California and Florida and, to
a lesser extent, additional revenues of $1,620,000 from businesses acquired
in late fiscal 1994 and in fiscal 1995. These increases were offset in part
by competitive pricing pressures at several of the Company's soil-
remediation centers.
30PAGE
Thermo Remediation Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Fiscal 1995 Compared With Fiscal 1994 (continued)
Revenues from related party in fiscal 1994 represent reimbursements
for services provided by the Company under an agreement between Thermo
Electron and Thermo TerraTech Inc. (Thermo TerraTech) to develop new
soil-remediation centers (Note 10). The Company earned no profit from this
funding. As of October 2, 1993, funding under this agreement was completed.
Expenses incurred in connection with the development of additional
soil-remediation centers subsequent to October 2, 1993 are classified as
new business development expenses in the accompanying statement of income.
The gross profit margin on service revenues was 34% in fiscal 1995,
compared with 37% in fiscal 1994. The decline was primarily due to a
decrease in the higher-margin radiochemistry laboratory revenues in the
nuclear services business, offset in part by higher-margin revenue
associated with the start-up of the Hanford contract.
Selling, general and administrative expenses as a percentage of
service revenues decreased to 16% in fiscal 1995 from 17% in fiscal 1994,
due to the efficiencies associated with increased revenues.
Interest income increased to $1,002,000 in fiscal 1995 from $443,000
in fiscal 1994 as a result of higher average invested balances. Interest
expense in fiscal 1995 and fiscal 1994 represents interest on promissory
notes with an original aggregate principal amount of $1,000,000 issued in
connection with the acquisition of a soil-remediation center in Portland,
Oregon. The Company repaid the remaining balance of $975,000 relating to
these promissory notes in full in March 1995. Interest expense, related
party in fiscal 1995 represents interest on the $2,650,000 subordinated
convertible note issued to Thermo TerraTech in November 1993 in connection
with the acquisition of Thermo Fluids and interest on the $4,000,000
promissory note issued to Thermo Electron in December 1994 in connection
with acquisitions completed during fiscal 1995.
The effective tax rate was 38% in fiscal 1995, compared with 40% in
fiscal 1994. The effective tax rates were higher than the statutory federal
income tax rate primarily due to the impact of state income taxes in fiscal
1995 and 1994, offset in part by tax-exempt investment income in fiscal
1995.
Minority interest expense in fiscal 1995 and 1994 represents Thermo
Nutech's net income which was allocated to the joint venture partner
(Note 3).
Liquidity and Capital Resources
Working capital, including cash, cash equivalents, and short-term
available-for-sale investments, increased to $46,343,000 at March 30, 1996
from $3,384,000 at April 1, 1995. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $35,349,000 at March 30, 1996
from $16,511,000 at April 1, 1995. During the year ended March 30, 1996,
cash provided by operating activities was $7,379,000. Cash used to reduce
current liabilities was offset in part by cash provided by a decrease in
accounts receivable.
31PAGE
Thermo Remediation Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Liquidity and Capital Resources (continued)
During fiscal 1996, the Company expended $17,713,000, net of cash
acquired, for the acquisition of ReTec and $9,489,000 for purchases of
property, plant and equipment, primarily relating to two soil-remediation
sites constructed in fiscal 1996.
In May 1995, the Company issued and sold $37,950,000 principal amount
of 4 7/8% subordinated convertible debentures due 2000. In addition, in May
1995, the Company sold 500,000 shares of its common stock in a private
placement for net proceeds of $6,625,000. In June 1995, the Company repaid
a $4,000,000 note payable to Thermo Electron with proceeds from the
offerings.
On September 15, 1995, and March 20, 1996, the Company paid cash
dividends of $.10 per share of common stock to shareholders of record as of
August 30, 1995, and March 1, 1996, respectively. The Company paid
approximately $418,000 and $392,000, respectively, in connection with such
dividends. The amount of cash paid by the Company was dependent on the
number of shareholders participating in the Company's Dividend Reinvestment
Plan.
Although the Company has no material commitments for capital
expenditures, such expenditures will largely be affected by the number of
soil-remediation centers and fluid-collection businesses that can be
developed or acquired during the year. The Company believes that it has
adequate resources to meet its financial needs for the foreseeable future.
32PAGE
Thermo Remediation Inc.
Quarterly Information (Unaudited)
(In thousands except per share amounts)
Fiscal 1996 First Second Third(b) Fourth
---------------------------------------------------------------------------
Revenues $ 13,181 $ 14,466 $ 16,308 $ 23,002
Gross profit 4,024 4,244 4,540 5,035
Net income 1,180 1,330 1,533 1,401
Earnings per share:
Primary .10 .11 .12 .11
Fully diluted .09 .11 .12 .11
Fiscal 1995 (a) First Second Third(c) Fourth
---------------------------------------------------------------------------
Revenues $ 11,541 $ 12,559 $ 13,933 $ 13,471
Gross profit 4,161 4,361 4,860 4,358
Net income 781 866 984 1,012
Earnings per share:
Primary .08 .08 .10 .10
Fully diluted .08 .08 .09 .10
(a)Financial data has been restated to reflect the June 1995 acquisition
of Thermo Nutech, accounted for in a manner similar to the
pooling-of-interests method.
(b)Reflects the December 1995 acquisition of Remediation Technologies,
Inc.
(c)Reflects the October 1994 acquisition of TPST Woodworth and the
December 1994 acquisition of TPST Maryland.
33PAGE
Thermo Remediation Inc.
Selected Financial Information (a)
(In thousands except
per share amounts) 1996(b)(c) 1995(d) 1994(e)(f) 1993(g) 1992
---------------------------------------------------------------------------
Statement of Income Data:
Revenues $ 66,957 $ 51,504 $ 43,488 $ 34,615 $ 23,359
Income (loss) before
cumulative effect of
change in accounting
principle 5,444 3,643 2,510 1,868 (75)
Net income (loss) 5,444 3,643 2,567 1,868 (75)
Earnings per share:
Primary .44 .36
Fully diluted .42 .35
Balance Sheet Data:
Working capital 46,343 3,384 12,676 7,052 3,420
Total assets 135,802 79,156 68,939 43,637 25,336
Long-term obligations 40,600 2,650 2,650 - -
Shareholders' investment 83,352 60,320 47,638 26,600 13,161
Other Data:
Cash dividends declared $ 2,491 $ 2,012 $ 2,127 $ 1,586 $ 69
(a) Financial data has been restated to reflect the June 1995 acquisition
of Thermo Nutech, accounted for in a manner similar to the
pooling-of-interests method.
(b) Reflects the May 1995 issuance of $38 million principal amount of
4 7/8% subordinated convertible debentures and a private placement of
500,000 shares of the Company's common stock for net proceeds of $6.6
million.
(c) Reflects the December 1995 acquisition of Remediation Technologies,
Inc.
(d) Reflects the October 1994 acquisition of TPST Woodworth and the
December 1994 acquisition of TPST Maryland.
(e) Reflects the December 1993 initial public offering of the Company's
common stock for net proceeds of $13.5 million, and the November 1993
acquisition of Thermo Fluids and issuance of a $2.7 million principal
amount 3 7/8% subordinated convertible note.
(f) Reflects the adoption of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
(g) Reflects the December 1992 acquisitions of Oregon Hydrocarbon Inc. and
Soil Remediation Company and the operations from the Company's centers
in Adelanto, California and West Palm Beach, Florida, which opened in
fiscal 1993.
34PAGE
Thermo Remediation Inc.
Common Stock Market Information
The following table shows the market range for the Company's common
stock based on reported sales prices on the American Stock Exchange (symbol
THN). Prices were restated in fiscal 1995 to reflect a three-for-two stock
split distributed in March 1995.
Fiscal 1996 Fiscal 1995
-------------------- -----------------
Quarter High Low High Low
-------------------------------------------------------------------------
First $17 3/8 $12 7/8 $10 1/3 $ 8 11/12
Second 16 5/8 14 10 5/12 9 1/12
Third 15 1/2 13 1/8 11 1/6 10
Fourth 16 1/4 13 1/4 13 7/12 10 3/4
As of May 24, 1996, the Company had 139 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 May 24, 1996, was $13 3/4 per share.
Stock Transfer Agent
The First National Bank of Boston is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions
on issuances of stock certificates, changes of ownership, lost stock
certificates, and changes of address. For these and similar matters, please
direct inquires to:
The First National Bank of Boston
c/o Boston EquiServe Limited Partnership
P.O. Box 644
Mail Stop: 45-02-09
Boston, Massachusetts 02102-0644
(617) 575-3120
Shareholder Services
Shareholders of Thermo Remediation Inc. who desire information about
the Company are invited to contact John N. Hatsopoulos, Chief Financial
Officer, Thermo Remediation Inc., 81 Wyman Street, P.O. Box 9046, Waltham,
Massachusetts 02254-9046, (617) 622-1111. A mailing list is maintained to
enable shareholders whose stock is held in street name, and other
interested individuals, to receive quarterly reports, annual reports, and
press releases as quickly as possible. Quarterly reports and press releases
are also available through the Internet at Thermo Electron's home page on
the World Wide Web (http://www.thermo.com).
Dividend Policy
The Company intends to pay cash dividends from time to time to the
holders of the Company's common stock out of funds legally available
therefor. The Company currently expects that such dividends will be paid
semiannually. No assurance can be given, however, as to whether the Company
will continue to pay dividends in the future. On August 1, 1995 and
February 8, 1996, the Board of Directors declared semiannual dividends of
$.10 per share, which were paid on September 15, 1995 and March 20, 1996,
to shareholders of record on August 30, 1995 and March 1, 1996,
respectively.
35PAGE
Thermo Remediation Inc.
Dividend Reinvestment Plan
The Thermo Remediation Inc. Dividend Reinvestment Plan permits
shareholders to have their dividends reinvested automatically in additional
shares of the Company's common stock without paying service charges or
brokerage fees. For more details about this service, please write to:
The First National Bank of Boston
c/o Boston EquiServe Limited Partnership
Investor Relations Department
P.O. Box 644
Mail Stop: 45-02-09
Boston, Massachusetts 02102-0644
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended
March 30, 1996, as filed with the Securities and Exchange Commission, may
be obtained without charge by writing to John N. Hatsopoulos, Chief
Financial Officer, Thermo Remediation Inc., 81 Wyman Street, P.O. Box 9046,
Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Wednesday,
September 25, 1996, at 10:00 a.m. at Thermo Electron Corporation, 81 Wyman
Street, Waltham, Massachusetts.
36