Exhibit 13
THERMO REMEDIATION INC.
Consolidated Financial Statements
Fiscal 1998
Thermo Remediation Inc. 1998 Financial Statements
Consolidated Statement of Operations
Year Ended
April 4, March 29, March 30,
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------
Revenues (Note 11) $128,409 $114,849 $ 66,957
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues 114,011 96,901 49,114
Selling, general, and administrative
expenses (Note 8) 13,630 12,058 8,903
New business development expenses 1,148 1,040 1,084
Nonrecurring costs (Note 12) - 7,800 -
-------- -------- --------
128,789 117,799 59,101
-------- -------- --------
Operating Income (Loss) (380) (2,950) 7,856
Interest Income 970 1,896 2,539
Interest Expense (includes $259, $259,
and $295 to related party; Note 6) (2,209) (2,251) (1,999)
Gain on Sale of Unconsolidated Subsidiary
(Note 13) 3,012 - -
Other Income, Net (Note 2) 209 136 180
Equity in Earnings of Unconsolidated
Subsidiary (Note 13) 174 865 -
-------- -------- --------
Income (Loss) Before Provision for
Income Taxes 1,776 (2,304) 8,576
Provision for Income Taxes (Note 5) 1,536 377 3,132
-------- -------- --------
Net Income (Loss) $ 240 $ (2,681) $ 5,444
======== ======== ========
Earnings (Loss) per Share (Note 14):
Basic $ .02 $ (.21) $ .44
======== ======== ========
Diluted $ .02 $ (.21) $ .42
======== ======== ========
Weighted Average Shares (Note 14):
Basic 12,609 12,821 12,394
======== ======== ========
Diluted 12,758 12,821 12,984
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
Thermo Remediation Inc. 1998 Financial Statements
Consolidated Balance Sheet
April 4, March 29,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents (includes $8,000
and $19,674 under repurchase agreement with
affiliated company) $ 8,912 $ 19,703
Available-for-sale investments, at quoted
market value (amortized cost of $2,008 and
$4,096; Note 2) 2,003 4,101
Accounts receivable, less allowances of $1,690
and $1,557 30,529 21,631
Unbilled contract costs and fees 8,154 5,685
Prepaid and refundable income taxes (Note 5) 2,256 3,348
Prepaid expenses 2,257 1,820
Due from parent company and Thermo Electron 667 321
-------- --------
54,778 56,609
-------- --------
Property, Plant, and Equipment, at Cost, Net 37,011 36,514
-------- --------
Other Assets (Note 13) 10,954 13,403
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Notes 3 and 12) 37,568 29,588
-------- --------
$140,311 $136,114
======== ========
3
Thermo Remediation Inc. 1998 Financial Statements
Consolidated Balance Sheet (continued)
April 4, March 29,
(In thousands except share amounts) 1998 1997
- --------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 10,936 $ 8,462
Accrued payroll and employee benefits 4,875 3,566
Deferred revenue 3,374 1,391
Billings in excess of revenues earned 1,277 879
Other accrued expenses 4,375 3,351
-------- --------
24,837 17,649
-------- --------
Deferred Income Taxes (Note 5) 407 3,035
-------- --------
Subordinated Convertible Obligations (includes
$5,650 of related-party debt; Note 6) 40,600 40,600
-------- --------
Commitments and Contingencies (Note 7)
Shareholders' Investment (Notes 3, 4, and 9):
Common stock, $.01 par value, 50,000,000
shares authorized; 14,019,918 and 13,388,073
shares issued 140 134
Capital in excess of par value 89,103 85,402
Accumulated deficit (5,592) (3,328)
Treasury stock at cost, 1,089,085 and 823,741
shares (9,181) (7,382)
Net unrealized gain (loss) on available-for-sale
investments (Note 2) (3) 4
-------- --------
74,467 74,830
-------- --------
$140,311 $136,114
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Thermo Remediation Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows
Year Ended
April 4, March 29, March 30,
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Operating Activities:
Net income (loss) $ 240 $ (2,681) $ 5,444
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Nonrecurring costs (Note 12) - 7,800 -
Depreciation and amortization 7,278 6,815 6,061
Gain on sale of unconsolidated
subsidiary (Note 13) (3,012) - -
Equity in earnings of unconsolidated
subsidiary (Note 13) (174) (865) -
Deferred income tax expense (benefit) (1,243) 602 (858)
Gain on sale of investments (Note 2) - (136) (180)
Provision for losses on accounts
receivable 193 162 (184)
Other noncash items (263) - -
Changes in current accounts,
excluding the effects of
acquisitions:
Accounts receivable and unbilled
contract costs and fees (9,284) (6,008) 4,755
Other current assets 529 (3,055) 860
Accounts payable 998 3,558 505
Other current liabilities (1,030) (1,685) (5,454)
Due to (from) parent company and
Thermo Electron (346) 243 (3,570)
-------- -------- --------
Net Cash Provided By (Used in) Operating
Activities (6,114) 4,750 7,379
-------- -------- --------
Investing Activities:
Acquisitions, net of cash acquired
(Note 3) (5,163) (1,681) (17,713)
Proceeds from sale and maturities of
available-for-sale investments 2,088 20,908 37,795
Purchases of available-for-sale
investments - (15,753) (30,863)
Purchases of property, plant, and
equipment (6,318) (6,036) (9,489)
Proceeds from sale of unconsolidated
subsidiary (Note 13) 8,825 - -
Increase in other assets (1,119) (788) (1,090)
Proceeds from sale of property, plant,
and equipment 455 113 579
Other - - (130)
-------- -------- --------
Net Cash Used in Investing Activities $ (1,232) $ (3,237) $(20,911)
-------- -------- --------
5
Thermo Remediation Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
April 4, March 29, March 30,
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of
subordinated convertible debentures
(Note 6) $ - $ - $ 36,889
Repurchases of Company common stock (3,055) (8,317) -
Net proceeds from issuance of Company
common stock (Note 9) 179 313 6,908
Repayment of obligations to Thermo
Electron - - (4,000)
Dividends paid (Note 9) (751) (847) (810)
Other 182 794 -
-------- -------- --------
Net Cash Provided by (Used in) Financing
Activities (3,445) (8,057) 38,987
-------- -------- --------
Increase (Decrease) in Cash and Cash
Equivalents (10,791) (6,544) 25,455
Cash and Cash Equivalents at Beginning
of Year 19,703 26,247 792
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 8,912 $ 19,703 $ 26,247
======== ======== ========
Cash Paid For:
Interest $ 1,996 $ 2,031 $ 1,060
Income taxes $ 2,113 $ 1,490 $ 2,809
Noncash Activities:
Fair value of assets of acquired
companies $ 13,772 $ 6,961 $ 39,349
Cash paid for acquired companies (5,665) (1,705) (18,462)
Issuance of common stock, stock options,
and warrants for acquired companies (2,850) (2,006) (11,210)
-------- -------- --------
Liabilities assumed of acquired
companies $ 5,257 $ 3,250 $ 9,677
======== ======== ========
Dividends reinvested in Company common
stock (Note 9) $ 1,753 $ 1,710 $ 1,681
Issuance of common stock to parent
company for acquired companies $ - $ - $ 7,713
The accompanying notes are an integral part of these consolidated financial
statements.
6
Thermo Remediation Inc. 1998 Financial Statements
Consolidated Statement of Shareholders' Investment
Year Ended
April 4, March 29, March 30,
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------
Common Stock, $.01 Par Value
Balance at beginning of year $ 134 $ 128 $ 118
Dividends declared and partially
reinvested in Company common
stock (Note 9) 2 2 1
Issuance of stock under employees' and
directors' stock plans - 1 2
Net proceeds from private placement
of common stock (Note 9) - - 5
Issuance of common stock for acquired
companies (Note 3) 4 3 2
------- ------- -------
Balance at end of year 140 134 128
------- ------- -------
Capital in Excess of Par Value
Balance at beginning of year 85,402 81,353 61,333
Dividends declared and partially
reinvested in Company common
stock (Note 9) 1,751 1,708 1,680
Activity under employees' and
directors' stock plans (359) (654) 312
Tax benefit related to employees'
and directors' stock plans 181 198 200
Net proceeds from private placement
of common stock (Note 9) - - 6,620
Issuance of common stock for acquired
companies (Note 3) 2,128 2,003 11,208
Capital contribution from parent
company - 794 -
------- ------- -------
Balance at end of year 89,103 85,402 81,353
------- ------- -------
Retained Earnings (Accumulated Deficit)
Balance at beginning of year (3,328) 1,910 (1,043)
Net income (loss) 240 (2,681) 5,444
Dividends declared and partially
reinvested in Company common
stock (Note 9) (2,504) (2,557) (2,491)
------- ------- -------
Balance at end of year $(5,592) $(3,328) $ 1,910
------- ------- -------
7
Thermo Remediation Inc. 1998 Financial Statements
Consolidated Statement of Shareholders' Investment (continued)
Year Ended
April 4, March 29, March 30,
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------
Treasury Stock
Balance at beginning of year $(7,382) $ (31) $ -
Activity under employees' and
directors' stock plans 538 966 (31)
Repurchases of Company common stock (3,055) (8,317) -
Issuance of common stock for acquired
companies (Note 3) 718 - -
------- ------- -------
Balance at end of year (9,181) (7,382) (31)
------- ------- -------
Net Unrealized Gain (Loss) on Available-
for-sale Investments
Balance at beginning of year 4 (8) (88)
Change in net unrealized gain (loss)
on available-for-sale investments
(Note 2) (7) 12 80
------- ------- -------
Balance at end of year (3) 4 (8)
------- ------- -------
Total Shareholders' Investment $74,467 $74,830 $83,352
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
8
Thermo Remediation Inc. 1998 Financial Statements
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 national provider of
environmental-liability management services and related consulting
services, primarily in five areas: industrial remediation, nuclear
remediation, waste-fluids collection and recycling, soil remediation, and
environmental-management and information-technology systems.
Principles of Consolidation and Relationship with Thermo TerraTech Inc.
The Company was incorporated in November 1991 and commenced
operation in June 1992. As of April 4, 1998, Thermo TerraTech Inc. owned
8,874,551 shares of the Company's common stock, representing 69% of such stock
outstanding. Thermo TerraTech is an 82%-owned subsidiary of Thermo Electron
Corporation. As of April 4, 1998, Thermo Electron owned 193,900 shares of the
Company's common stock, representing 1.5% of such stock outstanding.
The accompanying financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated. The Company accounted for its investment in a business in which
it owned 50% through October 1997 using the equity method (Note 13).
Presentation
Certain amounts in prior years have been reclassified to conform to the
fiscal 1998 financial statement presentation.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest March 31.
References to fiscal 1998, 1997, and 1996 are for the fiscal years ended April
4, 1998, March 29, 1997, and March 30, 1996, respectively. Fiscal 1998 included
53 weeks; fiscal 1997 and 1996 each included 52 weeks.
Revenue Recognition
Revenues from certain environmental-liability management and consulting
services are recognized upon completion of services rendered. The Company's
industrial- and nuclear-remediation businesses also perform services pursuant to
long-term contracts. Revenues and profits on substantially all long-term
contracts are recognized using the percentage-of-completion method. Revenues
recorded under the percentage-of-completion method were $77,052,000,
$65,217,000, and $2,278,000 in fiscal 1998, 1997, and 1996, respectively. 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 projected 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
9
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
existing contracts at current contract values, or that are not expected to be
collected within one year. Revenues from soil-remediation services are
recognized as soil is processed, and 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.
New Business Development Expenses
Costs classified as new business development expenses in the accompanying
statement of operations represent costs associated with the development of the
Company's environmental-services businesses.
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 equity.
Income Taxes
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
During the quarter ended January 3, 1998, the Company adopted SFAS No. 128,
"Earnings per Share" (Note 14). As a result, all previously reported earnings
per share have been restated; however, basic and diluted earnings per share
equals the Company's previously reported primary and fully diluted earnings per
share, respectively, for the periods presented. Basic earnings per share have
been computed by dividing net income by the weighted average number of shares
outstanding during the year. Except where the result would be antidilutive,
diluted earnings per share have been computed assuming the conversion of
convertible obligations and the elimination of the related interest expense, and
the exercise of stock options and warrants, as well as their related income tax
effects.
Cash and Cash Equivalents
At fiscal year-end 1998 and 1997, $8,000,000 and $19,674,000, 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
10
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Electron collateralizes with investments principally consisting of corporate
notes, commercial paper, U.S. government-agency securities, 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. Cash equivalents are carried at cost, which
approximates fair 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, 7
to 30 years; machinery and equipment, 2 to 12 years; and leasehold improvements,
the shorter of the term of the lease or the life of the asset. Soil-remediation
units, which accounted for 36% and 41% of the Company's machinery and equipment,
net, at fiscal year-end 1998 and 1997, 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 the following:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------
Land $ 4,554 $ 4,592
Buildings and Leasehold Improvements 20,108 17,833
Machinery and Equipment 32,378 32,533
------- -------
57,040 54,958
Less: Accumulated Depreciation and Amortization 20,029 18,444
------- -------
$37,011 $36,514
======= =======
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 12 years. These assets were $5,200,000 and
$6,137,000, net of accumulated amortization of $5,706,000 and $4,647,000, at
fiscal year-end 1998 and 1997, respectively.
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 $2,836,000 and $1,899,000 at fiscal
year-end 1998 and 1997, respectively. The Company assesses the future useful
life of this asset whenever events or changes
11
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
in circumstances indicate that the current useful life has diminished (Note 12).
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.
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.
2. Available-for-sale Investments
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," 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 as a component of shareholders' investment titled
"Net unrealized gain (loss) on available-for-sale investments."
Available-for-sale investments in the accompanying fiscal 1998 balance
sheet represents corporate bonds with contractual maturities of one year or
less. The difference between the market value and the cost basis of
available-for-sale investments was $5,000 of gross unrealized losses and $5,000
of gross unrealized gains at fiscal year-end 1998 and 1997, respectively.
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. Gains on sales of investments resulted
from gross realized gains of $145,000 and $180,000 in fiscal 1997 and 1996,
respectively, and gross realized losses of $9,000 in fiscal 1997, related to the
sale of available-for-sale investments.
3. Acquisitions
In November 1997, the Company acquired Benchmark Environmental Corporation
for 85,106 shares of the Company's common stock, valued at $450,000, and
$2,900,000 in cash. The shares of the Company's common stock issued in
connection with the acquisition are subject to certain restrictions on transfer.
The restrictions lapse with respect to one-third of the shares on each of the
second, third, and fourth anniversaries of the closing. Benchmark provides
nuclear-remediation and waste-management services to government agencies and
private industry.
12
3. Acquisitions (continued)
In August 1997, the Company, through its Remediation Technologies, Inc.
(RETEC) subsidiary, acquired substantially all of the assets, subject to certain
liabilities, of RPM Systems, Inc. for 374,507 shares of the Company's common
stock, valued at $2,400,000, and $600,000 in cash. Certain shares of the
Company's common stock issued in connection with the acquisition are subject to
restrictions on transfer. Thirty percent of such shares have no transfer
restrictions; while the restrictions lapse with respect to one half of the
remaining shares on each of the second and third anniversaries of the closing.
RPM provides consulting services in the areas of environmental management,
planning, and information technology.
In May 1997, the Company, also through RETEC, acquired substantially all of
the assets, subject to certain liabilities, of TriTechnics Corporation for
$1,600,000 in cash. TriTechnics provides comprehensive consulting and remedial
services at refinery and chemical-plant sites.
During fiscal 1997, the Company also acquired an additional business for
$565,000 in cash.
In September 1996, the Company acquired IEM Sealand Corporation for 311,040
shares of the Company's common stock, valued at $2,006,000, and $1,705,000 in
cash. The shares of the Company's common stock issued in connection with the
acquisition are subject to certain restrictions on transfer. The restrictions
lapse with respect to one-third of the shares on each of the third, fourth, and
fifth anniversaries of the closing. IEM Sealand performs cleanups of hazardous
waste sites for government and industry as a prime construction contractor and
completes predesigned remedial action contracts at sites containing hazardous,
toxic, and radioactive wastes.
In December 1995, the Company acquired 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 of equivalent intrinsic
value at the date of the acquisition.
In June 1995, the Company acquired Eberline Analytical Corporation (which
conducts business under the name 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 TerraTech's financial statements
consolidated the assets and liabilities of the Joint Venture and its
13
3. Acquisitions (continued)
results of 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 a
pooling-of-interests, with the accounting followed by the Company conforming to
that of Thermo TerraTech. Accordingly, all historical financial information
presented, except for weighted average shares, was restated to reflect the
acquisition of Thermo NUtech.
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.
These acquisitions, except for Thermo NUtech, 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 exceeded the estimated fair
value of the acquired net assets by $33,550,000, 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
and, for acquisitions completed in fiscal 1998, is subject to adjustment upon
finalization of the purchase price allocation. The Company has gathered no
information that indicates the final purchase price allocation will differ
materially from preliminary estimates.
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 1996. 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.
(In thousands except per share amounts) 1996
- -------------------------------------------------------------------------
Revenues $98,183
Net Income 5,855
Earnings per Share:
Basic .47
Diluted .45
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of RETEC been
made at the beginning of fiscal 1996.
14
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has an equity incentive plan for key employees, directors, and
others, adopted in October 1993. In February 1997, the Company also adopted an
employee equity incentive plan, similar to its equity incentive plan adopted in
1993, except that neither executive officers nor directors are eligible to
participate in the plan. Both plans permit 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 these plans. 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 five to ten year period, 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 Thermo TerraTech.
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.
15
4. Employee Benefit Plans (continued)
A summary of the Company's stock option information is as follows:
1998 1997 1996
---------------- ---------------- ----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
(Shares in of Exercise of Exercise of Exercise
thousands) Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------
Options
Outstanding,
Beginning
of Year 1,897 $ 7.92 1,559 $ 6.95 695 $ 7.62
Granted 438 6.52 556 8.65 144 5.74
Exercised (61) 2.58 (168) 1.47 (149) 1.59
Forfeited (223) 12.18 (50) 7.43 (28) 6.96
Assumed upon
acquisition
of RETEC - - - - 897 4.25
----- ----- -----
Options
Outstanding,
End of Year 2,051 $ 7.32 1,897 $ 7.92 1,559 $ 6.95
===== ====== ===== ====== ===== ======
Options
Exercisable 2,045 $ 7.31 1,826 $ 7.79 1,416 $ 6.58
===== ====== ===== ====== ===== ======
Options
Available
for Grant 196 415 449
===== ===== =====
A summary of the status of the Company's stock options at April 4, 1998, is
as follows:
Options Outstanding
Number Weighted Weighted
of Average Average
Shares Remaining Exercise
Range of Exercise Prices (In thousands) Contractual Life Price
- -------------------------------------------------------------------------
$ 2.52-$ 5.74 279 2.5 years $ 3.61
5.75- 8.96 1,302 4.3 years 6.81
8.97- 12.18 407 7.7 years 10.31
12.19- 15.40 63 4.2 years 15.04
-----
$ 2.52-$15.40 2,051 4.7 years $ 7.32
=====
The information disclosed above for options outstanding at April 4, 1998,
does not differ materially for options exercisable.
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. Under this program, shares of the Company's and Thermo
Electron's common stock can 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 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 1998, 1997, and 1996, the Company issued 3,367 shares,
5,792 shares, and 9,040 shares, respectively, of its common stock under this
program. Employees of the Company's Thermo NUtech subsidiary participated in an
employee stock purchase program sponsored by Thermo TerraTech through November
1996.
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 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 as follows:
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------
Net Income (Loss):
As reported $ 240 $(2,681) $ 5,444
Pro forma (286) (2,946) 5,352
Basic Earnings (Loss) per Share:
As reported .02 (.21) .44
Pro forma (.02) (.23) .43
Diluted Earnings (Loss) per Share:
As reported .02 (.21) .42
Pro forma (.02) (.23) .42
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.
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 $1.82,
$3.58, and $5.58 in fiscal 1998, 1997, and 1996, respectively. The fair value of
each option grant was estimated on the grant date using the
17
4. Employee Benefit Plans (continued)
Black-Scholes option-pricing model with the following weighted-average
assumptions:
1998 1997 1996
- --------------------------------------------------------------------------
Volatility 27% 29% 29%
Risk-free Interest Rate 5.5% 6.3% 5.9%
Expected Life of Options 3.4 years 5.9 years 5.1 years
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 Plans
The majority of the Company's full-time employees are eligible to
participate in 401(k) savings plans sponsored by certain subsidiaries and Thermo
Electron. 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 and for certain plans are based on subsidiary profits. The Company
contributed and charged to expense for these plans $2,016,000, $1,572,000, and
$919,000 in fiscal 1998, 1997, and 1996, respectively.
5. Income Taxes
The components of the provision for income taxes are as follows:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------
Currently (Refundable) Payable:
Federal $ 1,947 $ (510) $ 3,400
State 832 285 590
------- ------- -------
2,779 (225) 3,990
------- ------- -------
Deferred (Prepaid), Net:
Federal (1,074) 491 (708)
State (169) 111 (150)
------- ------- -------
(1,243) 602 (858)
------- ------- -------
$ 1,536 $ 377 $ 3,132
======= ======= =======
18
5. Income Taxes (continued)
The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the Company's stock on the date of exercise. The provision for
income taxes that is currently payable does not reflect $181,000, $198,000, and
$200,000 of such benefits of the Company allocated to capital in excess of par
value in fiscal 1998, 1997, and 1996, respectively.
The provision for income taxes in the accompanying statement of operations
differs from the amounts calculated by applying the statutory federal income tax
rate of 34% to income (loss) before provision for income taxes due to the
following:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------
Income Tax Provision (Benefit) at
Statutory Rate $ 604 $ (783) $2,916
Differences Resulting From:
State income taxes, net of federal tax 438 261 290
Amortization and write-off of cost in
excess of net assets of acquired
companies 267 979 140
Nondeductible expenses 27 27 21
Tax-exempt investment income - (33) (185)
Other 200 (74) (50)
------ ------ ------
$1,536 $ 377 $3,132
====== ====== ======
Prepaid and deferred income taxes in the accompanying balance sheet consist
of the following:
(In thousands) 1998 1997
- -----------------------------------------------------------------
Prepaid Income Taxes:
Reserves and accruals $1,057 $2,750
Accrued compensation 897 357
Net operating loss carryforwards 714 103
Allowance for doubtful accounts 9 315
Other 25 23
------ ------
2,702 3,548
Less: Valuation allowance 739 200
------ ------
$1,963 $3,348
====== ======
Deferred Income Taxes:
Depreciation $ 407 $3,035
====== ======
19
5. Income Taxes (continued)
The valuation allowance relates to uncertainty surrounding the realization
of tax benefits attributable to federal and state operating losses and credit
carryforwards. The valuation allowance increased in fiscal 1998 as a result of
certain losses that arose during the year. Of the total 1998 valuation
allowance, $126,000 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.
6. Subordinated Convertible Obligations
In May 1995, the Company issued and sold $37,950,000 principal amount of 4
7/8% subordinated convertible debentures due 2000, including $3,000,000
principal amount of such debentures sold to Thermo Electron. 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, the Company issued to Thermo TerraTech $2,650,000 principal
amount of a 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 10 for fair value information pertaining to the Company's
subordinated convertible obligations.
7. Commitments and Contingencies
Operating Leases
The Company leases land, office facilities, and equipment under operating
leases expiring at various dates through fiscal 2006. The accompanying statement
of operations includes expenses from operating leases of $2,707,000, $1,943,000,
and $1,319,000 in fiscal 1998, 1997, and 1996, respectively. Future minimum
payments due under noncancellable operating leases at April 4, 1998, are
$2,329,000 in fiscal 1999; $1,546,000 in fiscal 2000; $935,000 in fiscal 2001;
$662,000 in fiscal 2002; $169,000 in fiscal 2003, and $277,000 in 2004 and
thereafter. Total future minimum lease payments are $5,918,000.
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.
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,
20
8. Related-party Transactions (continued)
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 0.8% of the Company's revenues in calendar 1998. In calendar
1997 and 1996 the Company paid 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. For these services, the Company was charged
$1,220,000, $1,148,000, and $767,000 in fiscal 1998, 1997, and 1996,
respectively. The annual fee is reviewed and adjusted annually by mutual
agreement of the parties. 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. 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). 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.
Subordinated Convertible Obligations
See Note 6 for obligations of the Company held by Thermo Electron and
Thermo TerraTech.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
9. 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.
Dividends to common shareholders of the Company of $2,504,000 were
declared in fiscal 1998, of which $1,753,000, including $1,736,000 paid to
Thermo TerraTech, was reinvested in 257,338 shares of the Company's common stock
pursuant to the Company's Dividend Reinvestment Plan. Dividends to common
shareholders of the Company of $2,557,000 were declared in fiscal 1997, of which
$1,710,000, including $1,694,000 paid to Thermo TerraTech, was reinvested in
196,806 shares of the Company's common stock. 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 paid to Thermo TerraTech, was reinvested in 118,778 shares
of the Company's common stock.
At April 4, 1998, the Company had reserved 5,067,206 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.
21
10. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable, due from
parent company and Thermo Electron, accounts payable, and subordinated
convertible obligations. The carrying amounts of these financial instruments,
with the exception of available-for-sale investments and subordinated
convertible 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 subordinated convertible obligations
was $39,395,000 and $37,674,000 at fiscal year-end 1998 and 1997, respectively.
11. Significant Customers and Concentration of Credit Risk
A substantial portion of the Company's nuclear-remediation services has
been provided to the U.S. government. One subcontract for the U.S. government
accounted for approximately 5% and 10% of the Company's total revenues in fiscal
1997 and 1996, respectively. All other U.S. government agencies accounted for
10%, 25%, and 16% of the Company's total revenues in fiscal 1998, 1997, and
1996, respectively. Management does not believe that this concentration of
credit risk has or will have a significant negative impact on the Company.
12. Nonrecurring Costs
During fiscal 1997, the Company recorded $7,800,000 of nonrecurring costs
to write-down certain capital equipment and intangible assets, including cost in
excess of net assets of acquired companies, in response to a severe downturn in
the Company's soil-recycling business, which resulted in the closure of two
soil-remediation sites. 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 the Company's investment in those
business units, thus requiring a write-down of certain assets included in the
$7,800,000 charge. Of the total charge, $2,206,000 was nondeductible for tax
purposes.
13. Equity in Earnings of Unconsolidated Subsidiary
The Company's equity in earnings of unconsolidated subsidiary in the
accompanying statement of operations represented the Company's proportionate
share of income from a 50% investment in RETEC/TETRA L.C., acquired in December
1995 through the acquisition of RETEC.
22
13. Equity in Earnings of Unconsolidated Subsidiary (continued)
Summary financial information for RETEC/TETRA as of December 31, 1996, is
as follows:
(In thousands) 1996
- -------------------------------------------------------------------------
Current Assets $ 3,072
Noncurrent Assets 12,644
-------
Total assets $15,716
=======
Current Liabilities $ 2,016
Noncurrent Liabilities 2,635
Members' Equity 11,065
-------
Total liabilities and members' equity $15,716
=======
Year Ended
Dec. 31,
(In thousands) 1996
- -------------------------------------------------------------------------
Revenues $12,066
Cost of Revenues 9,040
-------
Gross Profit $ 3,026
=======
Net Income $ 981
=======
In October 1997, the Company sold its 50% limited-liability interest
in RETEC/TETRA to TETRA Thermal, Inc., for $8,825,000 in cash. The Company
realized a pretax gain of $3,012,000 on the sale.
The carrying value of the unconsolidated subsidiary was $5,650,000 at
fiscal year-end 1997 and was included in other assets in the accompanying
balance sheet.
23
14. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------
Basic
Net Income (Loss) $ 240 $(2,681) $ 5,444
------- ------- -------
Weighted Average Shares 12,609 12,821 12,394
------- ------- -------
Basic Earnings (Loss) per Share $ .02 $ (.21) $ .44
======= ======= =======
Diluted
Net Income (Loss) $ 240 $(2,681) $ 5,444
Effect of convertible obligations - - 62
------- ------- -------
Income (Loss) Available to Common
Shareholders, as Adjusted $ 240 $(2,681) $ 5,506
------- ------- -------
Weighted Average Shares 12,609 12,821 12,394
Effect of:
Convertible obligations - - 269
Stock options 149 - 321
------- ------- -------
Weighted Average Shares, as Adjusted 12,758 12,821 12,984
------- ------- -------
Diluted Earnings (Loss) per Share $ .02 $ (.21) $ .42
======= ======= =======
The computation of diluted earnings per share for fiscal 1998 and 1997
excludes the effect of assuming the exercise of certain outstanding stock
options and warrants because the effect would be antidilutive. As of April 4,
1998, there were 1,768,000 of such options and warrants outstanding, with
exercise prices ranging from $6.51 to $15.40 per share.
In addition, the computation of diluted earnings per share for fiscal
1998 and 1997 excludes the effect of assuming the conversion of convertible
obligations because the effect would be antidilutive. As of April 4, 1998, the
Company had $37,950,000 principal amount of 4 7/8% subordinated convertible
debentures, convertible at $17.92 per share, and $2,650,000 principal amount
of a 3 7/8% subordinated convertible note, convertible at $9.83 per share, that
were excluded from the calculation of diluted earnings per share.
24
15. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 First(a) Second(b) Third(c) Fourth
- ------------------------------------------------------------------------
Revenues $28,204 $33,639 $34,620 $31,946
Gross Profit 4,371 5,274 3,947 806
Net Income (Loss) 576 696 1,701 (2,733)
Earnings (Loss) per Share:
Basic .05 .06 .13 (.21)
Diluted .05 .06 .13 (.21)
1997 First Second Third(d) Fourth(e)
- -------------------------------------------------------------------------
Revenues $23,520 $27,913 $34,252 $29,164
Gross Profit 4,482 4,428 4,714 4,324
Net Income (Loss) 1,028 974 620 (5,303)
Earnings (Loss) per Share:
Basic .08 .08 .05 (.42)
Diluted .08 .07 .05 (.42)
(a) Reflects the May 1997 acquisition of TriTechnics.
(b) Reflects the August 1997 acquisition of RPM.
(c) Reflects the November 1997 acquisition of Benchmark and includes a pre-tax
gain of $3,012,000 from the sale of an investment in a joint venture.
(d) Reflects the September 1996 acquisition of IEM Sealand.
(e) Reflects
$7,800,000 of nonrecurring costs.
25
Thermo Remediation Inc. 1998 Financial Statements
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 69%-owned subsidiary of Thermo
TerraTech Inc.) and subsidiaries as of April 4, 1998, and March 29, 1997, and
the related consolidated statements of operations, shareholders' investment, and
cash flows for each of the three years in the period ended April 4, 1998. 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 April 4, 1998, and March 29, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended April 4, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
May 12, 1998
26
Thermo Remediation Inc. 1998 Financial Statements
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 Operation under
the heading "Forward-looking Statements."
Overview
The Company is a national provider of environmental-liability management.
Through a nationwide network of offices, the Company offers these and related
consulting services in five areas: industrial remediation, nuclear remediation,
waste-fluids collection and recycling, soil remediation, and
environmental-management and information-technology systems.
The Company's industrial remediation businesses provide consultation,
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 and inorganic wastes and residues. In
May 1997, the Company's RETEC subsidiary acquired TriTechnics Corporation, an
environmental engineering and consulting firm. The Company's IEM Sealand
subsidiary, acquired in September 1996, performs the cleanup of hazardous waste
sites for government and industry as a prime construction contractor and
completes predesigned remedial action contracts at sites containing hazardous,
toxic, and radioactive wastes.
In the nuclear-remediation area, the Company 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. In November 1997, the Company acquired Benchmark Environmental
Corporation, a provider of nuclear-remediation and waste-management services to
government and private sector clients.
The Company also collects, tests, processes, and recycles used motor oil
and other industrial fluids.
The Company designs and operates facilities for the remediation of
nonhazardous soil and mobile equipment for the on-site remediation of such
wastes. The Company's soil-remediation centers are environmentally secure
facilities for receiving, storing, and processing petroleum- contaminated soils.
27
Overview (continued)
Through its RPM Systems, Inc. subsidiary, acquired in August 1997, the
Company develops and implements management and computer-based systems that aid
in the collection and application of environmental data, helping to establish or
improve a customer's environmental-compliance program while controlling the
related costs.
The Company's businesses are affected by several factors, particularly
extreme weather variations, government spending, enactment and enforcement of
environmental legislation, economic cycles, regulation and enforcement of
remediation activities, the availability of federal and state funding for
environmental cleanup, and local competition.
The Company has acquired a number of businesses in the last three years.
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.
Results of Operations
Fiscal 1998 Compared With Fiscal 1997
Revenues in fiscal 1998 increased 12% to $128,409,000 from $114,849,000 in
fiscal 1997. Revenues increased due to the inclusion of $20,061,000 in revenues
from acquired businesses (Note 3) and, to a lesser extent, higher revenues from
construction, consulting, and engineering services at RETEC. This increase was
offset in part by an $11,104,000 decrease in revenues resulting from a decline
in the number of contracts in process at IEM Sealand. Revenues from
soil-remediation services decreased $3,461,000, 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 nuclear remediation and fluids-recycling services
increased $1,728,000 in fiscal 1998.
The gross profit margin decreased to 11% in fiscal 1998 from 16% in fiscal
1997, primarily due to losses on certain remedial-construction contracts at IEM
Sealand, resulting from poorly bid and executed projects, and increased
lower-margin revenues at RETEC. This decrease was offset in part by a greater
percentage of soil-remediation revenues earned at certain higher-margin
soil-remediation facilities.
Selling, general, and administrative expenses as a percentage of revenues
remained relatively unchanged at 10.6% and 10.5% in fiscal 1998 and 1997,
respectively.
During fiscal 1997, the Company recorded $7,800,000 of nonrecurring costs
to write-down certain capital equipment and intangible assets, including cost in
excess of net assets of acquired companies (Note 12). The write-down was in
response to a severe downturn in the Company's soil-recycling business, which
resulted in the closure of two soil-remediation sites. In addition, the
Company's analysis indicated
28
Fiscal 1998 Compared With Fiscal 1997 (continued)
that the future undiscounted cash flows from certain other soil-remediation
sites that remained open would be insufficient to recover the Company's
investment in these business units, thus requiring a write-down of certain
assets, included in the $7,800,000 charge.
Interest income decreased to $970,000 in fiscal 1998 from $1,896,000 in
fiscal 1997 as a result of lower average invested balances due to the use of
$11,372,000 to repurchase Company common stock in fiscal 1998 and 1997 and the
Company's funding of an increase in accounts receivable.
Equity in earnings of unconsolidated subsidiary represents the Company's
proportionate share of income from a joint venture (Note 13). "Gain on sale of
unconsolidated subsidiary" results from the Company's sale of its interest in
this joint venture in October 1997.
The effective tax rate for fiscal 1998 exceeded the statutory federal
income tax rate, primarily due to the impact of state income taxes and
nondeductible amortization of cost in excess of net assets of acquired
companies. The Company recorded an income tax provision on a pretax loss in
fiscal 1997 primarily due to the amortization and write-off of nondeductible
costs in excess of net assets of acquired companies and, to a lesser extent, the
impact of state income taxes.
The Company is currently assessing the potential impact of the year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems as well as products purchased by the Company. The Company
believes that its internal information systems are either year 2000 compliant or
will be so prior to the year 2000 without incurring material costs. There can be
no assurance, however, that the Company will not experience unexpected costs and
delays in achieving year 2000 compliance for its internal information systems,
which could result in a material adverse effect on the Company's future results
of operations.
The Company is presently assessing whether its key suppliers are adequately
addressing the year 2000 issue and the effect this might have on the Company.
The Company has not completed its analysis and is unable to conclude at this
time that the year 2000 problem as it relates to products purchased from key
suppliers is not reasonably likely to have a material adverse effect on the
Company's future results of operations.
Fiscal 1997 Compared With Fiscal 1996
Revenues in fiscal 1997 increased 72% to $114,849,000 from $66,957,000 in
fiscal 1996. Revenues increased due to the inclusion of $50,033,000 of revenues
from RETEC and IEM Sealand, acquired in December 1995 and September 1996,
respectively (Note 3). Revenues from soil-remediation services decreased 21% in
response to a severe downturn in this business, which resulted in a decline in
the volume of soil processed due to overcapacity in the industry and competitive
pricing pressures.
The gross profit margin decreased to 16% in fiscal 1997 from 27% in fiscal
1996, primarily due to lower margins on soil processed as a result of
competitive pricing pressures and, to a lesser extent, lower volumes of soil
processed at the Company's traditionally higher-margin soil-
29
Fiscal 1997 Compared With Fiscal 1996 (continued)
remediation centers. The gross profit margin also decreased due to the inclusion
of lower-margin revenues from RETEC and IEM Sealand.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 10% in fiscal 1997 from 13% in fiscal 1996, primarily due to lower
expenses as a percentage of revenues at acquired companies.
During fiscal 1997, the Company recorded $7,800,000 of nonrecurring costs
to write-down certain capital equipment and intangible assets, including cost in
excess of net assets of acquired companies, as described in the results of
operations for fiscal 1998 compared with fiscal 1997.
Interest income decreased to $1,896,000 in fiscal 1997 from $2,539,000 in
fiscal 1996 as a result of lower average invested balances following the
acquisition of RETEC in December 1995 (Note 3) and the use of $8,317,000 to
repurchase Company common stock in fiscal 1997. Interest expense increased to
$2,251,000 in fiscal 1997 from $1,999,000 in fiscal 1996, primarily due to the
issuance of the 4 7/8% subordinated convertible debentures in May 1995 (Note 6).
Equity in earnings of unconsolidated subsidiary represents the Company's
proportionate share of income from a joint venture (Note 13).
The Company recorded an income tax provision on a pretax loss in fiscal
1997 primarily due to the amortization and write-off of nondeductible cost in
excess of net assets of acquired companies and, to a lesser extent, the impact
of state income taxes. The effective tax rate in fiscal 1996 was higher than the
statutory federal income tax rate primarily due to the impact of state income
taxes and nondeductible amortization of cost in excess of net assets of acquired
companies, offset in part by tax-exempt investment income.
Liquidity and Capital Resources
Consolidated working capital, including cash, cash equivalents, and
short-term available-for-sale investments, was $29,941,000 at April 4, 1998,
compared with $38,960,000 at March 29, 1997. Cash, cash equivalents, and
available-for-sale investments were $10,915,000 at April 4, 1998, compared with
$23,804,000 at March 29, 1997. During fiscal 1998, the Company used $6,114,000
of cash for operating activities. The Company used cash to fund an increase in
accounts receivable of $9,284,000, primarily as a result of delays in the
pursuit of collections on accounts receivable at certain of the Company's
subsidiaries and, to a lesser extent, higher revenues at certain business units.
The Company expects to address this matter by increasing collection efforts over
the next several quarters.
The Company's investing activities used $1,232,000 of cash during fiscal
1998. The Company expended $5,163,000, net of cash acquired, for acquisitions
(Note 3) and $6,318,000 for purchases of property, plant, and equipment. The
Company plans to make capital expenditures of approximately $5,000,000 during
fiscal 1999. In October 1997, the Company sold its 50% limited-liability
interest in RETEC/TETRA L.C. for $8,825,000 in cash (Note 13).
30
Liquidity and Capital Resources (continued)
In fiscal 1998, the Company's financing activities used $3,445,000 of cash.
The Company's Board of Directors has authorized the repurchase, through July
1998, of up to $15,000,000 of its own securities. Through April 4, 1998, the
Company had expended $11,372,000 under this authorization, of which $3,055,000
was expended during fiscal 1998. All such purchases are funded from working
capital. In fiscal 1998, the Company paid $751,000 in cash dividends. The amount
of cash dividends ultimately paid by the Company is dependent on the number of
shareholders participating in the Company's Dividend Reinvestment Plan.
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
complementary businesses if they are presented to the Company on terms the
Company believes to be attractive. Such acquisitions may require significant
amounts of cash. The Company expects that it will finance any such acquisitions
through a combination of internal funds, additional debt or equity financing
from the capital markets, or short-term borrowings from Thermo TerraTech Inc. or
Thermo Electron Corporation, although it has no agreement with these companies
to ensure that funds will be available on acceptable terms, or at all.
31
Thermo Remediation Inc. 1998 Financial Statements
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 1999 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 each of
the Company's services, including industrial remediation services, nuclear
remediation services, hazardous waste remedial construction services,
soil-remediation services, and waste-fluids recycling 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 also
are 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 attempt 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 similar 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 of 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
32
Thermo Remediation Inc. 1998 Financial Statements
Forward-looking Statements
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's divisions are subject to
numerous laws and regulations related to the protection of human health
and safety. Such laws and regulations may impose 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 many 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 state trust
funds. Any substantial decrease 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, Thermo NUtech provides a large portion of its services directly or
indirectly to the U.S. Department of Energy (DOE). Declines in spending by the
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 if
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.
33
Thermo Remediation Inc. 1998 Financial Statements
Forward-looking Statements
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 severe weather conditions. Site remediation work
and certain environmental testing services, such as the services provided by
RETEC, IEM Sealand, and Thermo NUtech, may decline in winter months as
a result of severe weather conditions.
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.
Risks Associated with Acquisition Strategy. The Company's strategy
has included 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 which are not favorable to the
Company and, in the case of equity financing, may result in dilution to
the Company's stockholders.
No Assurance of Development and Commercialization of Technology
Under Development. The Company is currently engaged in the development of
several technologies which 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, will be technologically feasible or accepted
by the marketplace, or that any such development will be completed in any
particular timeframe.
34
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
The Company is currently assessing the potential impact of the year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems as well as products purchased by the Company. The Company
believes that its internal information systems are either year 2000 compliant or
will be so prior to the year 2000 without incurring material costs. There can be
no assurance, however, that the Company will not experience unexpected costs and
delays in achieving year 2000 compliance for its internal information systems,
which could result in a material adverse effect on the Company's future results
of operations.
The Company is presently assessing whether its key suppliers are adequately
addressing the year 2000 issue and the effect this might have on the Company.
The Company has not completed its analysis and is unable to conclude at this
time that the year 2000 problem as it relates to products purchased from key
suppliers is not reasonably likely to have a material adverse effect on the
Company's future results of operations.
35
Thermo Remediation Inc. 1998 Financial Statements
Selected Financial Information
(In thousands except
per share amounts) 1998(a) 1997(b) 1996(c) 1995(d) 1994
- ----------------------------------------------------------------------
Statement of
Operations Data:
Revenues $128,409 $114,849 $ 66,957 $ 51,504 $ 43,488
Income (Loss)
Before Cumulative
Effect of Change
in Accounting
Principle 240 (2,681) 5,444 3,643 2,510
Net Income (Loss) 240 (2,681) 5,444 3,643 2,567
Earnings (Loss) per
Share:
Basic .02 (.21) .44 .36 .26
Diluted .02 (.21) .42 .35 .26
Balance Sheet Data:
Working Capital $ 29,941 $ 38,960 $ 46,343 $ 3,384 $ 12,676
Total Assets 140,311 136,114 135,802 79,156 68,939
Subordinated
Convertible
Obligations 40,600 40,600 40,600 2,650 2,650
Shareholders'
Investment 74,467 74,830 83,352 60,320 47,638
Other Data:
Cash Dividends
Declared $ 2,504 $ 2,557 $ 2,491 $ 2,012 $ 2,127
(a) Reflects the November 1997 acquisition of Benchmark, the August 1997
acquisition of RPM, and the May 1997 acquisition of TriTechnics and
includes a pre-tax gain of $3,012,000 from the sale of an investment in a
joint venture.
(b) Reflects the September 1996 acquisition of IEM Sealand and $7.8 million of
nonrecurring costs.
(c) 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. Also
reflects the December 1995 acquisition of RETEC.
(d) Reflects the October 1994 acquisition of TPST Woodworth and the December
1994 acquisition of TPST Maryland.
36
Thermo Remediation Inc. 1998 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol THN. The following table sets forth the high and low sale prices of
the Company's common stock for fiscal 1998 and 1997, as reported in the
consolidated transaction reporting system.
Fiscal 1998 Fiscal 1997
------------------- --------------------
Quarter High Low High Low
- --------------------------------------------------------------------------
First $7 9/16 $6 1/2 $15 $11 7/8
Second 8 1/8 6 7/8 13 1/4 9 7/8
Third 7 11/16 5 1/2 11 1/2 7 7/8
Fourth 7 3/8 5 5/8 8 7/8 6 3/4
As of May 29, 1998, the Company had 181 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 29, 1998, was $5 1/2 per share.
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, (781) 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.
Distribution of printed quarterly reports is limited to the second quarter only.
All material will be available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/thn1.html).
Stock Transfer Agent
BankBoston is the stock transfer agent and maintains shareholder activity
records. The agent will respond to questions on issuance of stock certificates,
change of ownership, lost stock certificates, and change of address. For these
and similar matters, please direct inquires to:
BankBoston
c/o Boston EquiServe Limited Partnership
P.O. Box 8040
Boston, Massachusetts 02266-8040
(617) 575-3120
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 July 24, 1997, and February 12, 1998, the Board of
Directors declared semiannual
37
Dividend Policy (continued)
dividends of $.10 per share, which were paid on September 10, 1997, and March
23, 1998, to shareholders of record as of August 15, 1997, and March 2, 1998,
respectively.
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:
BankBoston
c/o Boston EquiServe Limited Partnership
Investor Relations Department
P.O. Box 8040
Boston, Massachusetts 02266-8040
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended April 4,
1998, 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 Tuesday,
September 15, 1998, at 2:00 p.m. at Thermo Electron Corporation,
81 Wyman Street, Waltham, Massachusetts.