Exhibit 13
Thermo TerraTech Inc.
Consolidated Financial Statements
Fiscal 2000
<PAGE>
<TABLE>
Thermo TerraTech Inc. 2000 Financial Statements
Consolidated Statement of Operations
Year Ended
April 1, April 3, April 4,
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 2000 1999 1998
------------------------------------------------------------------------- ---------- ----------- ---------
Revenues $307,329 $ 310,039 $298,786
-------- --------- --------
Costs and Operating Expenses:
Cost of revenues (Note 11) 243,382 247,610 245,111
Selling, general, and administrative expenses (Note 7) 44,891 46,224 41,941
Restructuring costs (Note 11) 56,981 10,217 -
-------- --------- --------
345,254 304,051 287,052
-------- --------- --------
Operating Income (Loss) (37,925) 5,988 11,734
Interest Income 2,810 2,185 4,163
Interest Expense (includes $243, $162, and $593 to parent company) (8,743) (8,981) (10,778)
Gain on Sale of Unconsolidated Subsidiary (Note 2) - - 3,012
Equity in Earnings of Unconsolidated Subsidiary - - 174
Other Income, Net - - 209
-------- --------- --------
Income (Loss) Before Provision for Income Taxes, Minority (43,858) (808) 8,514
Interest, and Extraordinary Item
Provision for Income Taxes (Notes 4 and 11) 2,522 1,786 5,146
Minority Interest (Income) Expense (3,054) (1,173) 95
-------- --------- --------
Income (Loss) Before Extraordinary Item (43,326) (1,421) 3,273
Extraordinary Item, Net of Provision for Income Taxes of $71 (Note 5) 107 - -
-------- --------- --------
Net Income (Loss) $(43,219) $ (1,421) $ 3,273
======== ========= ========
Earnings (Loss) per Share (Note 14)
Basic $ (2.27) $ (.07) $ .18
======= ======== ========
Diluted $ (2.27) $ (.07) $ .17
======= ======== ========
Weighted Average Shares (Note 14)
Basic 19,033 19,402 18,700
======== ========= ========
Diluted 19,033 19,402 18,978
======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Thermo TerraTech Inc. 2000 Financial Statements
Consolidated Balance Sheet
April 1, April 3,
<S> <C> <C>
(In thousands) 2000 1999
----------------------------------------------------------------------------------- ----------- ---------
Assets
Current Assets:
Cash and cash equivalents (includes $41,667 under repurchase $ 4,157 $ 43,013
agreements with parent company in fiscal 1999)
Advance to affiliate 47,748 -
Accounts receivable, less allowances of $2,695 and $3,577 51,537 58,933
Unbilled contract costs and fees 20,875 19,974
Inventories 2,001 1,869
Deferred tax asset (Note 4) 8,075 6,921
Other current assets 3,304 3,665
-------- --------
137,697 134,375
-------- --------
Property, Plant, and Equipment, at Cost, Net (Note 11) 69,956 91,514
-------- --------
Other Assets (Note 11) 8,971 15,949
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Notes 2 and 11) 87,929 108,627
-------- --------
$304,553 $350,465
======== ========
3
<PAGE>
Thermo TerraTech Inc. 2000 Financial Statements
Consolidated Balance Sheet (continued)
April 1, April 3,
(In thousands except share amounts) 2000 1999
----------------------------------------------------------------------------------- ----------- ---------
Liabilities and Shareholders' Investment
Current Liabilities:
Short-term obligations and current maturities of long-term $ 19,322 $ 17,618
obligations (includes borrowings from affiliate of
$8,965 and $9,228; Note 5)
Advance from affiliate 1,158 -
Subordinated convertible debentures (includes $4,300 of 37,950 -
related-party debt; Note 5)
Accounts payable 15,164 17,404
Accrued payroll and employee benefits 12,443 12,771
Accrued restructuring costs (Note 11) 5,907 1,719
Other accrued expenses 12,617 15,298
Due to parent company and affiliated companies 2,403 2,522
-------- --------
106,964 67,332
-------- --------
Deferred Income Taxes (Note 4) 1,451 3,538
-------- --------
Other Deferred Items 1,118 1,076
-------- --------
Long-term Obligations (Notes 5 and 10):
Subordinated convertible debentures (includes $1,659 and 116,637 156,799
$4,695 of related-party debt)
Other 1,476 1,818
-------- --------
118,113 158,617
-------- --------
Minority Interest 25,337 27,745
-------- --------
Commitments and Contingencies (Note 6)
Shareholders' Investment (Notes 3 and 8):
Common stock, $.10 par value, 75,000,000 shares authorized; 1,961 1,958
19,607,752 and 19,583,773 shares issued
Capital in excess of par value 71,220 70,633
Retained earnings (accumulated deficit) (17,321) 25,898
Treasury stock at cost, 653,647 and 543,319 shares (5,042) (4,130)
Deferred compensation (Note 3) (189) (252)
Accumulated other comprehensive items 941 (1,950)
-------- --------
51,570 92,157
-------- --------
$304,553 $350,465
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Thermo TerraTech Inc. 2000 Financial Statements
Consolidated Statement of Cash Flows
Year Ended
April 1, April 3, April 4,
<S> <C> <C> <C>
(In thousands) 2000 1999 1998
------------------------------------------------------------------------- -------- ---------- --------
Operating Activities
Net income (loss) $(43,219) $ (1,421) $ 3,273
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 14,215 16,823 14,784
Noncash restructuring costs (Note 11) 50,762 8,122 -
Gain on sale of unconsolidated subsidiary (Note 2) - - (3,012)
Equity in earnings of unconsolidated subsidiary - - (174)
Minority interest (income) expense (3,054) (1,173) 95
Provision for losses on accounts receivable 715 2,085 1,141
Other noncash items 2,523 199 327
Change in deferred income taxes (3,328) 443 (1,583)
Gain on purchase of subordinated convertible debentures (Note 5) (107) - -
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 5,985 (643) (11,154)
Inventories and unbilled contract costs and fees (4,139) (2,026) (3,353)
Other current assets (446) (176) 1,715
Accounts payable (1,934) 55 5,507
Other current liabilities 4,793 7,653 (1,038)
-------- --------- -------
Net cash provided by operating activities 22,766 29,941 6,528
-------- --------- -------
Investing Activities
Acquisitions, net of cash acquired (Note 2) (2,016) (643) (12,746)
Advances to affiliate, net (46,590) - -
Proceeds from maturities of available-for-sale investments - 2,006 16,372
Proceeds from maturity of held-to-maturity investments - 14,065 13,935
Purchases of property, plant, and equipment (13,265) (17,415) (18,460)
Proceeds from sale of businesses (Note 2) - - 19,722
Issuances of notes receivable - - (569)
Collection of long-term notes receivable 3,807 605 -
Purchases of other assets (859) (1,570) (1,993)
Other, net 1,418 474 2,464
-------- --------- -------
Net cash provided by (used in) investing activities $(57,505) $ (2,478) $18,725
-------- --------- -------
5
<PAGE>
Thermo TerraTech Inc. 2000 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
April 1, April 3, April 4,
(In thousands) 2000 1999 1998
------------------------------------------------------------------------- ---------- ----------- ---------
Financing Activities
Increase in short-term obligations to fund an acquisition (Note 2) $ 2,286 $ - $ -
Repayment of notes payable (includes $38,000 to parent company (1,640) (14,748) (52,878)
in fiscal 1998)
Proceeds from issuance of Company and subsidiaries' common 1,028 58 1,148
stock (Note 9)
Repurchase of Company and subsidiaries' common stock and (5,857) (3,390) (7,355)
subordinated convertible debentures
Issuance of short-term obligations - - 6,171
Dividends paid by subsidiary to minority shareholders (409) (805) (751)
Other, net 295 (180) -
-------- --------- -------
Net cash used in financing activities (4,297) (19,065) (53,665)
-------- --------- -------
Exchange Rate Effect on Cash 180 (96) (49)
-------- --------- -------
Increase (Decrease) in Cash and Cash Equivalents (38,856) 8,302 (28,461)
Cash and Cash Equivalents at Beginning of Year 43,013 34,711 63,172
-------- --------- -------
Cash and Cash Equivalents at End of Year $ 4,157 $ 43,013 $34,711
======== ========= =======
See Note 12 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Thermo TerraTech Inc. 2000 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
Year Ended
April 1, April 3, April 4,
(In thousands) 2000 1999 1998
------------------------------------------------------------------------- ---------- ----------- ---------
Comprehensive Income
Net Income (Loss) $(43,219) $ (1,421) $ 3,273
-------- -------- -------
Other Comprehensive Items:
Foreign currency translation adjustment 986 147 (1,071)
Unrealized gains (losses) on available-for-sale investments - 3 (10)
-------- -------- -------
986 150 (1,081)
-------- -------- -------
Minority Interest Income (Expense) 74 (284) 461
-------- -------- -------
$(42,159) $ (1,555) $ 2,653
======== ======== =======
Shareholders' Investment
Common Stock, $.10 Par Value:
Balance at beginning of year $ 1,958 $ 1,958 $ 1,830
Issuance of stock under employees' and directors' stock plans 3 - -
Conversions of subordinated convertible debentures - - 128
------- -------- -------
Balance at end of year 1,961 1,958 1,958
------- -------- -------
Capital in Excess of Par Value:
Balance at beginning of year 70,633 70,437 62,610
Activity under employees' and directors' stock plans (152) (130) (5,490)
Tax benefit related to employees' and directors' stock plans 50 181 655
Effect of outstanding put rights 1,271 (1,271) -
Conversions of subordinated convertible debentures (Note 5) - - 13,092
Effect of majority-owned subsidiaries' equity transactions (582) 1,416 (430)
------- -------- -------
Balance at end of year 71,220 70,633 70,437
------- -------- -------
Retained Earnings (Accumulated Deficit):
Balance at beginning of year 25,898 27,319 24,046
Net income (loss) (43,219) (1,421) 3,273
------- -------- -------
Balance at end of year (17,321) 25,898 27,319
------- -------- -------
Treasury Stock:
Balance at beginning of year (4,130) (484) (3,941)
Activity under employees' and directors' stock plans 653 411 6,637
Purchases of Company common stock (1,565) (4,057) (3,180)
------- -------- -------
Balance at end of year $(5,042) $ (4,130) $ (484)
------- -------- -------
7
<PAGE>
Thermo TerraTech Inc. 2000 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
Year Ended
April 1, April 3, April 4,
(In thousands) 2000 1999 1998
------------------------------------------------------------------------- ---------- ----------- ---------
Deferred Compensation (Note 3):
Balance at beginning of year $ (252) $ - $ -
Activity under employees' stock plans (45) (252) -
Amortization of deferred compensation 108 - -
------- ------- -------
Balance at end of year (189) (252) -
------- ------- -------
Accumulated Other Comprehensive Items:
Balance at beginning of year (1,950) (2,100) (1,019)
Other comprehensive items 986 150 (1,081)
Write-off of cumulative foreign currency translation adjustment (Note 11) 1,905 - -
------- ------- -------
Balance at end of year 941 (1,950) (2,100)
------- ------- -------
$51,570 $92,157 $97,130
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
Thermo TerraTech Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo TerraTech Inc. (the Company) provides industrial outsourcing
services and manufacturing support encompassing a broad range of
specializations. The Company operates in four segments: environmental-liability
management, engineering and design, laboratory testing, and metal treating.
Relationship with Thermo Electron Corporation
The Company was incorporated on May 30, 1986, as an indirect, wholly owned
subsidiary of Thermo Electron Corporation. As of April 1, 2000, Thermo Electron
owned 16,605,286 shares of the Company's common stock, representing 88% of such
stock outstanding.
On October 19, 1999, the Company entered into a definitive agreement and
plan of merger with Thermo Electron, pursuant to which Thermo Electron would
acquire all of the outstanding shares of Company common stock held by
shareholders other than Thermo Electron in exchange for Thermo Electron common
stock (Note 15).
On January 31, 2000, Thermo Electron announced that it plans to sell all
of the businesses of the Company. This action is part of a major reorganization
plan under which Thermo Electron will spin in, spin off, and sell various
businesses to focus solely on its core measurement and detection instruments
business.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company;
its wholly owned subsidiaries; its majority-owned public subsidiaries,
ThermoRetec Corporation and The Randers Killam Group Inc.; and its
majority-owned, privately held Thermo EuroTech N.V. subsidiary. All material
intercompany accounts and transactions have been eliminated. The Company
accounted for its investment in a business in which it owned 50% using the
equity method. In October 1997, the Company sold this investment (Note 2).
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest March
31. References to fiscal 2000, 1999, and 1998 are for the fiscal years ended
April 1, 2000, April 3, 1999, and April 4, 1998, respectively. Fiscal years 2000
and 1999 each included 52 weeks; fiscal 1998 included 53 weeks.
Revenue Recognition
For the majority of its operations, the Company recognizes revenues upon
completion of the services it renders. Revenues and profits on substantially all
contracts are recognized using the percentage-of-completion method. Revenues
recorded under the percentage-of-completion method were $112,388,000 in fiscal
2000, $109,798,000 in fiscal 1999, and $117,464,000 in fiscal 1998. The
percentage of completion is determined by relating either the actual costs or
actual labor incurred to date to management's estimate of total costs or total
labor, respectively, to be incurred on each contract. If a loss is indicated on
any contract in process, a provision is made currently for the entire loss. The
Company's contracts generally provide for billing of customers upon the
attainment of certain milestones specified in each contract. Revenues earned on
contracts in process in excess of billings are classified as unbilled contract
costs and fees in the accompanying balance sheet. There are no significant
amounts included in the accompanying balance sheet that are not expected to be
recovered from existing contracts at current contract values, or that are not
expected to be collected within one year, including amounts that are billed but
not paid under retainage provisions. Amounts billed in excess of revenues
recognized are included in other accrued expenses in the accompanying balance
sheet. Revenues from soil-remediation services are recognized as soil is
processed and the Company bills customers upon receipt of contaminated soil at
its remediation centers.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Equity in Earnings of Unconsolidated Subsidiary
Equity in earnings of unconsolidated subsidiary in the accompanying
statement of operations represents the Company's proportionate share of income
from a 50% investment in RETEC/TETRA L.C., acquired in December 1995 through
ThermoRetec's acquisition of RETEC. In October 1997, ThermoRetec sold its 50%
limited-liability interest in RETEC/TETRA to TETRA Thermal, Inc. (Note 2).
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 3). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
Income Taxes
The Company and Thermo Electron have a tax allocation agreement under
which the Company and certain of its subsidiaries, exclusive of foreign
operations, are included in Thermo Electron's consolidated federal and certain
state income tax returns. The agreement provides that in years in which the
Company has taxable income, it will pay to Thermo Electron amounts comparable to
the taxes the Company would have paid if it had filed separate tax returns. If
Thermo Electron's equity ownership of the Company were to drop below 80%, the
Company would be required to file its own federal income tax return.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities calculated
using enacted tax rates in effect for the year in which the differences are
expected to be reflected in the tax return.
Earnings (Loss) per Share
Basic earnings (loss) per share have been computed by dividing net income
(loss) by the weighted average number of shares outstanding during the year.
Except where the result would be antidilutive, diluted earnings (loss) per share
have been computed assuming the exercise of stock options and warrants, as well
as their related income tax effects. Diluted earnings (loss) per share for all
periods exclude the effect of assuming the conversion of convertible obligations
and the elimination of the related interest expense and the exercise of put
rights, because the result would be antidilutive.
Cash and Cash Equivalents
The Company, along with other European-based subsidiaries of Thermo
Electron, participates in a cash management arrangement in the Netherlands with
a wholly owned subsidiary of Thermo Electron. Under this arrangement,
participants' balances are pooled for interest calculation purposes. Interest
under this arrangement is based on Euro market rates. The Company has access to
a $9,020,000 line of credit under this arrangement. Thermo Electron guarantees
all of the obligations of each participant in this arrangement. At fiscal
year-end 2000, the Company had $2,228,000 invested and $8,965,000 borrowed under
this arrangement (Note 5).
At fiscal year-end 1999, $40,625,000 of the Company's cash equivalents
were invested in a repurchase agreement with Thermo Electron. Under this
agreement, the Company in effect lent excess cash to Thermo Electron, which
Thermo Electron collateralized with investments principally consisting of
corporate notes, U.S. government-agency securities, commercial paper, money
market funds, and other marketable securities, in the amount of at least 103% of
such obligation. The Company's funds subject to the repurchase agreement were
readily convertible into cash by the Company. The repurchase agreement earned a
rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points,
set at the beginning of each quarter. Effective June 1999, the Company adopted a
new cash management arrangement with Thermo Electron, described below, that
replaces the repurchase agreement. At fiscal year-end 1999, the Company had
$1,042,000 invested and $9,228,000 borrowed under a similar arrangement in the
Netherlands.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
At fiscal year-end 2000 and 1999, the Company's cash equivalents also
included investments in a money market fund, which has an original maturity of
three months or less. Cash equivalents are carried at cost, which approximates
market value.
Advance to/from Affiliate
Effective June 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points,
set at the beginning of each month. Thermo Electron is contractually required to
maintain cash, cash equivalents, and/or immediately available bank lines of
credit equal to at least 50% of all funds invested under this cash management
arrangement by all Thermo Electron subsidiaries other than wholly owned
subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice.
In addition, under the new domestic cash management arrangement, amounts
borrowed from Thermo Electron for domestic cash management purposes bear
interest at the 30-day Dealer Commercial Paper Rate plus 150 basis points, set
at the beginning of each month. The Company had $1,158,000 of borrowings under
this arrangement at fiscal year-end 2000 (Note 5).
Inventories
Inventories are stated at the lower of cost (on an average-cost basis) or
market value and include materials, labor, and overhead. The components of
inventories are:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 2000 1999
----------------------------------------------------------------------------------- ----------- ----------
Raw Materials and Supplies $ 239 $ 640
Work in Process and Finished Goods 1,762 1,229
------ ------
$2,001 $1,869
====== ======
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization primarily using the straight-line method over the
estimated useful lives of the property as follows: buildings and improvements, 5
to 40 years; machinery and equipment, 2 to 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 5% and 8% of the Company's machinery and equipment,
net, at fiscal year-end 2000 and 1999, respectively, are depreciated based on an
hourly rate that is computed by estimating total hours of operation for each
unit. Property, plant, and equipment consists of:
(In thousands) 2000 1999
----------------------------------------------------------------------------------- ----------- ---------
Land $ 6,272 $ 7,741
Buildings 37,709 42,161
Machinery, Equipment, and Leasehold Improvements 92,286 101,317
-------- -------
136,267 151,219
Less: Accumulated Depreciation and Amortization 66,311 59,705
-------- -------
$ 69,956 $91,514
======== =======
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Other Assets
Other assets in the accompanying balance sheet includes the costs of
acquired technology and other specifically identifiable intangible assets that
are being amortized using the straight-line method over their estimated useful
lives, which range from 5 to 20 years. These assets were $2,680,000 and
$3,291,000, net of accumulated amortization of $7,382,000 and $6,771,000, at
fiscal year-end 2000 and 1999, 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 $19,365,000 and $16,725,000 at fiscal
year-end 2000 and 1999, respectively. The Company assesses the future useful
life of this asset and other long-lived assets whenever events or changes in
circumstances indicate that the current useful life has diminished (Note 11).
Such events or circumstances generally would include the occurrence of operating
losses or a significant decline in earnings associated with the acquired
business or asset. The Company considers the future undiscounted cash flows of
the acquired companies in assessing the recoverability of this asset. The
Company assesses cash flows before interest charges and when impairment is
indicated, writes the asset down to fair value. If quoted market values are not
available, the Company estimates fair value by calculating the present value of
future cash flows. If impairment has occurred, any excess of carrying value over
fair value is recorded as a loss.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment.
In the accompanying fiscal 2000 statement of operations, a $1,905,000 write-off
of cumulative foreign currency translation loss is included in restructuring
costs (Note 11). Foreign currency transaction gains and losses are included in
the accompanying statement of operations and are not material for the three
years presented.
Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. At fiscal year-end 2000 and 1999, the balance of
accumulated other comprehensive items represents the Company's cumulative
translation adjustment.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in fiscal 1999 have been reclassified to conform to the
presentation in the fiscal 2000 financial statements.
12
<PAGE>
2. Acquisitions and Dispositions
Acquisitions
In August 1999, a subsidiary of the Company acquired the outstanding stock
of Dempsey Drums Limited for $2,286,000 in cash and 1,605 shares of the
subsidiary's common stock valued at $384,000. Dempsey Drums, an Ireland-based
service provider, specializes in the supply, disposal, and reconditioning of
steel and plastic drums and other specialized containers.
During fiscal 1999, the Company, through ThermoRetec, acquired one company
for $576,000 in cash and paid an additional $67,000 for a post-closing
adjustment relating to a fiscal 1998 acquisition.
In May 1997, the Company purchased a controlling interest in The Randers
Group Incorporated, a publicly traded provider of design, engineering, project
management, and construction services for industrial clients in the
manufacturing, pharmaceutical, and chemical-processing industries. The Company
purchased 1,420,000 shares of Randers' common stock from certain members of
Randers' management, and 84,000 shares from Thermo Power Corporation, an
affiliate of the Company, at a price of $3.125 per share, for an aggregate cost
of $4,700,000. Following these transactions, the Company owned approximately
53.3% of Randers' outstanding common stock. In addition, Thermo Electron owned
approximately 8.9% of Randers' outstanding common stock.
Subsequently, in September 1997, the Company entered into a definitive
agreement to transfer The Killam Group Inc., its wholly owned engineering and
consulting businesses, to Randers in exchange for newly issued shares of
Randers' common stock. Effective April 4, 1998, the agreement was amended to
provide that the price for these businesses would equal $70,644,407, the book
value of the transferred businesses as of April 4, 1998. The number of new
shares of Randers' common stock issued to the Company equaled such book value
divided by $3.125, or 22,606,210 shares. In January 1999, the Randers
shareholders approved the listing of these shares on the American Stock Exchange
and an amendment to Randers' certificate of incorporation changing Randers' name
to The Randers Killam Group Inc. Upon such issuance, the Company and Thermo
Electron owned approximately 94.8% and 1.0%, respectively, of Randers Killam's
outstanding common stock. The Company sold the Randers division in January 2000,
as discussed in "Dispositions" below.
In addition, during fiscal 1998, ThermoRetec made three acquisitions for
an aggregate purchase price of $5,665,000 in cash and 459,613 shares of
ThermoRetec's common stock, valued at $2,850,000. In fiscal 1998, Thermo
EuroTech made an acquisition of 70% of the outstanding shares of a business for
$4,400,000 in cash and a commitment to issue 69,200 shares of Thermo EuroTech's
common stock valued at $275,000. As of April 1, 2000, these shares had not been
issued. In lieu of issuing these shares, the Company plans to pay the fair value
of the shares, which was approximately $240,000 as of April 1, 2000.
These acquisitions have been accounted for using the purchase method of
accounting, and their results have been included in the accompanying financial
statements from their respective dates of acquisition. The aggregate cost of
these acquisitions, excluding the Randers division, exceeded the estimated fair
value of the acquired net assets by $12,660,000. Allocation of the purchase
price for these acquisitions was based on estimates of the fair value of the net
assets acquired and, for Dempsey Drums, is subject to adjustment upon
finalization of the purchase price allocation. The Company has gathered no
information that indicates the final allocation will differ materially from the
preliminary estimates. Pro forma data is not presented since the acquisitions
were not material to the Company's results of operations.
Dispositions
In March 2000, ThermoRetec sold the assets of a soil-recycling facility
for $400,000 in cash, of which $200,000 was placed in escrow. The release of the
escrowed funds to TPST is contingent upon the satisfaction of certain
post-closing conditions, primarily the achievement of fuel efficiency targets
for certain equipment. If certain of the post-closing conditions are not
satisfied, some or all of the escrowed funds will be returned to the buyer. The
purchase price of the assets was determined by the parties in arms-length
negotiations. The Company recognized a nominal loss on the sale.
13
<PAGE>
2. Acquisitions and Dispositions (continued)
In January 2000, the Company sold substantially all of the assets and
liabilities of the Randers division, exclusive of certain real estate, to a new
corporation formed by a former vice president and director of Randers Killam.
The aggregate sales price of $538,000 consists of a promissory note secured by
certain real estate. The promissory note is payable in monthly installments with
a final maturity in 2003 and bears interest at 8.0%. In addition, the acquirer
assumed $776,000 of mortgage debt. Due to the fact that the Company received no
cash consideration at the time of sale, the sale of the real estate is being
accounted for under the deposit method. Under the deposit method, the Company
did not record the note receivable and continues to report the property that was
sold as well as the existing mortgage debt in the accompanying balance sheet.
Future cash receipts from the acquirer will be reported as a deposit on the
contract. The Company incurred a $3,309,000 loss on the sale, which has been
included in restructuring costs in the accompanying fiscal 2000 statement of
operations (Note 11).
In October 1997, ThermoRetec sold its 50% limited-liability interest in
RETEC/TETRA L.C. to TETRA Thermal, Inc. for $8,825,000 in cash. The Company
realized a pretax gain of $3,012,000 on the sale, which is classified as "gain
on sale of unconsolidated subsidiary" in the accompanying statement of
operations.
In addition, in October 1997, the Company sold substantially all of the
assets of its Holcroft Division, its thermal-processing equipment business,
excluding certain accounts receivable, to Holcroft L.L.C., an affiliate of
Madison Capital Partners. The sale price for the transferred assets consisted of
$10,897,000 in cash, two promissory notes for principal amounts aggregating
$2,881,000, and the assumption by Holcroft L.L.C. of certain liabilities of the
Holcroft Division. After recording a post-closing purchase price adjustment, the
Company incurred a nominal loss on the sale. This business contributed
$17,330,000 and $893,000 to revenues and operating income, respectively, in
fiscal 1998.
3. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans permit the grant of nonqualified and
incentive stock options. A third plan permits the grant of a variety of stock
and stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under these plans are determined by
the Board Committee. Generally, options granted to date are exercisable
immediately, but are subject to certain transfer restrictions and the right of
the Company to repurchase shares issued upon exercise of the options at the
exercise price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over a one- to ten-year period, depending on the term of
the option, which may range from five to twelve years. Nonqualified stock
options may be granted at any price determined by the Board Committee, although
incentive stock options must be granted at not less than the fair market value
of the Company's stock on the date of grant. Generally, all options have been
granted at fair market value. The Company also has a directors' stock option
plan that provides for the grant of stock options to outside directors pursuant
to a formula approved by the Company's shareholders. Options awarded under this
plan are exercisable six months after the date of grant and expire three to
seven years after the date of grant. In addition to the Company's stock-based
compensation plans, certain officers and key employees may also participate in
the stock-based compensation plans of Thermo Electron.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 1,182,000 shares at a weighted average exercise price of $8.80 elected
14
<PAGE>
3. Employee Benefit Plans (continued)
to participate in this exchange and, as a result, received options to purchase
591,000 shares of Company common stock at $4.50 per share, which are included in
the fiscal 1999 grants in the table below. The other terms of the new options
are the same as the exchanged options except that the holders may not sell
shares purchased pursuant to such new options for six months from the exchange
date. The options exchanged were canceled by the Company.
In February and April 1999, the Company awarded 59,300 shares of
restricted Company common stock to certain key employees. The shares had an
aggregate value of $297,000 and vest three years from the date of award,
assuming continued employment, with certain exceptions. The Company has recorded
the fair value of the restricted stock as deferred compensation in the
accompanying balance sheet and is amortizing such amount over the vesting
period.
A summary of the Company's stock option activity is:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
2000 1999 1998
------------------ ------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Price Price Weighted
Number Number Number Average
of of of Exercise
(Shares in thousands) Shares Shares Shares Price
---------------------------------------------- -------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 1,757 $6.38 1,986 $8.87 2,558 $6.99
Granted - - 1,111 4.78 296 7.67
Exercised (92) 4.65 - - (696) 1.36
Forfeited (226) 7.05 (158) 8.28 (172) 9.35
Canceled due to exchange - - (1,182) 8.80 - -
----- ------ ------
Options Outstanding, End of Year 1,439 $6.39 1,757 $6.38 1,986 $8.87
===== ===== ====== ===== ====== =====
Options Exercisable 1,439 $6.39 1,757 $6.38 1,986 $8.87
===== ===== ====== ===== ====== =====
Options Available for Grant 484 351 327
===== ====== ======
A summary of the status of the Company's stock options at April 1, 2000,
is:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options Outstanding and Exercisable
---------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
--------------------------------------------- -------------------- ------------------- ------------------
$ 4.16 - $ 5.72 879 4.4 years $4.75
5.73 - 7.29 43 3.9 years 6.70
7.30 - 8.86 127 5.3 years 8.28
8.87 - 10.40 390 3.4 years 9.42
-----
$ 4.16 - $ 10.40 1,439 4.2 years $6.39
=====
15
<PAGE>
3. Employee Benefit Plans (continued)
Employee Stock Purchase Program
Substantially all of the Company's full-time employees are eligible to
participate in an employee stock purchase program sponsored by the Company and
Thermo Electron. Prior to November 1, 1998, the applicable shares of common
stock could be purchased at the end of a 12-month period at 95% of the fair
market value at the beginning of the period and the shares purchased were
subject to a six-month resale restriction. Effective November 1, 1998, the
applicable shares of common stock may be purchased at 85% of the lower of the
fair market value at the beginning or end of the plan year, and the shares
purchased are subject to a one-year resale restriction. Shares are purchased
through payroll deductions of up to 10% of each participating employee's gross
wages. During fiscal 2000 and 1998, the Company issued 8,289 and 13,976,
respectively, of its common stock under this program. No shares were issued
under this program during fiscal 1999.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after fiscal 1995 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net income (loss) and
earnings (loss) per share would have been:
(In thousands except per share amounts) 2000 1999 1998
----------------------------------------------------------------------- ----------- ----------- ---------
Net Income (Loss):
As reported $ (43,219) $ (1,421) $ 3,273
Pro forma (44,237) (3,172) 2,218
Basic Earnings (Loss) per Share:
As reported (2.27) (.07) .18
Pro forma (2.32) (.16) .12
Diluted Earnings (Loss) per Share:
As reported (2.27) (.07) .17
Pro forma (2.32) (.16) .12
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to April 2, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $1.45 and
$2.27 in fiscal 1999 and 1998, respectively. No options were granted in fiscal
2000. The fair value of each option grant was estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
----------------------------------------------------------------------- ----------- ----------- ---------
Volatility 28% 27%
Risk-free Interest Rate 4.9% 5.6%
Expected Life of Options 4.0 years 3.6 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock
16
<PAGE>
3. Employee Benefit Plans (continued)
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
401(k) Savings Plan
The majority of the Company's full-time U.S. employees are eligible to
participate in Thermo Electron's 401(k) savings plan. Contributions to this
401(k) savings plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. For this plan,
the Company contributed and charged to expense $651,000, $650,000, and $955,000
in fiscal 2000, 1999, and 1998, respectively.
Other Retirement Plans
Certain of the Company's subsidiaries offer other retirement plans in lieu
of participation in the Thermo Electron 401(k) savings plan. Company
contributions to these plans are based on formulas determined by the Company.
For these plans, the Company contributed and charged to expense $4,378,000,
$4,258,000, and $3,585,000 in fiscal 2000, 1999, and 1998, respectively.
4. Income Taxes
The components of income (loss) before provision for income taxes,
minority interest, and extraordinary item are:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 2000 1999 1998
--------------------------------------------------------------------- ----------- ------------ -----------
Domestic $(22,143) $ 179 $ 8,812
Foreign (21,715) (987) (298)
-------- -------- --------
$(43,858) $ (808) $ 8,514
======== ======== ========
The components of the provision for income taxes are:
(In thousands) 2000 1999 1998
--------------------------------------------------------------------- ------------ ----------- -----------
Currently Payable (Prepaid):
Federal $ 2,760 $2,232 $ 2,688
State 1,990 1,415 1,330
Foreign 1,209 (78) (110)
------- ------ -------
5,959 3,569 3,908
------- ------ -------
Net Deferred (Prepaid):
Federal (2,997) (1,365) 1,035
State (440) (201) 203
Foreign - (217) -
------- ------ -------
(3,437) (1,783) 1,238
------- ------ -------
$ 2,522 $1,786 $ 5,146
======= ====== =======
17
<PAGE>
4. Income Taxes (continued)
The Company and its majority-owned subsidiaries receive a tax deduction
upon exercise of nonqualified stock options by employees for the difference
between the exercise price and the market price of the underlying common stock
on the date of exercise. The provision for income taxes that is currently
payable does not reflect $207,000, $676,000, and $928,000 in fiscal 2000, 1999,
and 1998, respectively, of such benefits of the Company and its majority-owned
subsidiaries that have been allocated to capital in excess of par value,
directly or through the effect of majority-owned subsidiaries' equity
transactions.
The provision for income taxes in the accompanying statement of operations
differs from the provision calculated by applying the statutory federal income
tax rate of 34% to income (loss) before provision for income taxes, minority
interest, and extraordinary item due to:
(In thousands) 2000 1999 1998
--------------------------------------------------------------------- ------------ ----------- -----------
Provision (Benefit) for Income Taxes at Statutory Rate $(14,912) $ (275) $ 2,895
Differences Resulting From:
Amortization and write-off of cost in excess of net assets 7,561 898 739
of acquired companies
Unbenefited foreign loss 6,811 - -
State income taxes, net of federal tax 1,023 801 1,012
Nondeductible expenses 163 90 64
Dividend from less than 80%-owned subsidiary - 122 118
Other, net 1,876 150 318
-------- ------- --------
$ 2,522 $ 1,786 $ 5,146
======== ======= ========
Deferred tax asset and deferred income taxes in the accompanying balance
sheet consist of:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 2000 1999
--------------------------------------------------------------------- ------------ ----------- -----------
Deferred Tax Asset:
Net operating loss and tax credit carryforward $10,343 $ 6,597
Reserves and accruals 5,939 3,519
Accrued compensation 1,328 2,315
Allowance for doubtful accounts 42 212
Other 766 179
------- -------
18,418 12,822
Less: Valuation allowance 10,343 4,814
------- -------
$ 8,075 $ 8,008
======= =======
Deferred Income Taxes:
Depreciation $ 1,351 $ 3,637
Other deferred items 100 (99)
------- -------
$ 1,451 $ 3,538
======= =======
18
<PAGE>
4. Income Taxes (continued)
The valuation allowance relates to the uncertainty surrounding the
realization of the tax benefits attributable primarily to state and foreign
operating loss carryforwards. The valuation allowance increased in fiscal 2000
as a result of certain losses that arose during the year. Of the total fiscal
2000 valuation allowance, $168,000 will be used to reduce cost in excess of net
assets of acquired companies when any portion of the related deferred tax asset
is recognized.
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of its investment in the common stock of
its domestic subsidiaries (such difference relates primarily to unremitted
earnings and gains on issuance of stock by subsidiaries) because the Company
does not expect this basis difference to become subject to tax at the parent
level. The Company believes it can implement certain tax strategies to recover
its investment in its domestic subsidiaries tax-free.
The net operating loss carryforward primarily consists of $22,750,000 of
foreign carryforwards, which do not expire, and $27,110,000 of state
carryforwards, substantially all of which expire in 2003.
5. Short- and Long-term Obligations
Short-term Obligations
At fiscal year-end 2000, the Company had borrowings of $8,965,000 under an
arrangement with a wholly owned subsidiary of Thermo Electron (Note 1). The
interest rate for these borrowings was 4.20%. At fiscal year-end 1999,
$9,228,000 was outstanding under a similar arrangement, bearing interest at
4.00%.
At fiscal year-end 2000, the Company had borrowings of $1,158,000 under an
arrangement with Thermo Electron (Note 1). The interest rate on these borrowings
was 6.35% at fiscal year-end 2000.
Thermo EuroTech has access to approximately $8,000,000 under a line of
credit denominated in Irish punts. At fiscal year-end 2000 and 1999, borrowings
were $7,905,000 and $6,705,000, respectively, bearing interest at 3.60%.
In addition, Thermo EuroTech has short-term borrowings outstanding of
$1,710,000 at fiscal year-end 2000, bearing interest at 8.00%.
19
<PAGE>
5. Short- and Long-term Obligations (continued)
Long-term Obligations
(In thousands except per share amounts) 2000 1999
----------------------------------------------------------------------------------- ----------- ----------
4 5/8% Subordinated Convertible Debentures, Due 2003, Convertible at $111,850 $111,850
$15.90 per Share (includes $1,659 and $515 held by Thermo Electron)
4 7/8% Subordinated Convertible Debentures, Due May 2000, Convertible 37,950 37,950
into Shares of ThermoRetec at $17.92 per Share (includes $4,300 and
$4,180 held by Thermo Electron)
2 1/2% Subordinated Convertible Debentures, Due 2001, Convertible into 4,787 6,999
Shares of Thermo EuroTech (Delaware) Inc. at $5.25 per Share
6.25% Mortgage Loan, Payable in Monthly Installments of $9, With - 1,063
Balloon Payment in May 1999
Mortgage Loan, Payable in Monthly Installments of $5, With Final 769 856
Payment in 2003 (a)
Other 1,449 1,584
-------- --------
156,805 160,302
Less: Current Maturities 38,692 1,685
-------- --------
$118,113 $158,617
======== ========
(a) Bears interest at Prime Rate, which was 9.00% at April 1, 2000.
During fiscal 1999, the Company reorganized the capital structure of
Thermo EuroTech by offering shareholders the right to exchange their common
shares in Thermo EuroTech for 2 1/2% subordinated convertible debentures due
2001 (the Debentures) issued by a new wholly owned Delaware subsidiary of the
Company, known as Thermo EuroTech (Delaware) Inc. (TETD). As of October 31,
1998, when the exchange offer expired, 1,646,854 common shares had been
exchanged by Thermo EuroTech's shareholders for the Debentures having an
aggregate principal amount equal to $6,999,000. The reacquisition of these
shares was accounted for using the purchase method of accounting. Following the
transaction, TETD owned 78% of Thermo EuroTech's outstanding common shares. The
Debentures are guaranteed on a subordinated basis by Thermo Electron.
During fiscal 2000, the Company purchased $2,212,000 principal amount of
the 2 1/2% subordinated convertible debentures for $2,034,000 in cash, resulting
in an extraordinary gain of $107,000, net of taxes of $71,000.
The 4 5/8% and 4 7/8% subordinated convertible debentures are guaranteed
on a subordinated basis by Thermo Electron. The Company has agreed to reimburse
Thermo Electron in the event Thermo Electron is required to make a payment under
the guarantees. The 4 7/8% debentures were paid in cash in May 2000.
The annual requirements for long-term obligations as of April 1, 2000, are
$38,692,000 in fiscal 2001; $5,302,000 in fiscal 2002; $720,000 in fiscal 2003;
$111,961,000 in fiscal 2004; $90,000 in fiscal 2005; and $40,000 in fiscal 2006
and thereafter. Total requirements of long-term obligations are $156,805,000.
See Note 10 for information pertaining to the fair value of the Company's
long-term obligations.
20
<PAGE>
6. Commitments and Contingencies
Operating Leases
The Company leases land, office, operating facilities, and equipment under
operating leases expiring or cancelable at various dates through fiscal 2009.
The accompanying statement of operations includes expenses from operating leases
of $6,308,000, $6,273,000, and $5,822,000 in fiscal 2000, 1999, and 1998,
respectively. Future minimum payments due under noncancelable operating leases
at April 1, 2000, are $4,358,000 in fiscal 2001; $2,656,000 in fiscal 2002;
$1,508,000 in fiscal 2003; $952,000 in fiscal 2004; $514,000 in fiscal 2005;
$1,000,000 in fiscal 2006 and thereafter. Total future minimum lease payments
are $10,988,000. See Note 7 for an office and manufacturing facility leased from
Thermo Electron.
Contingencies
The Company is contingently liable with respect to lawsuits and other
matters that arose in the ordinary course of business. In the opinion of
management, these contingencies will not have a material adverse effect upon the
financial position of the Company or its results of operations.
7. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In calendar 1997, the Company paid an amount equal to
1.0% of the Company's revenues. For these services, the Company was charged
$2,459,000, $2,480,000, and $2,845,000 in fiscal 2000, 1999, and 1998,
respectively. The fee is reviewed and adjusted annually by mutual agreement of
the parties. The corporate services agreement is renewed annually but can be
terminated upon 30 days' prior notice by the Company or upon the Company's
withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron
Corporate Charter defines the relationship among Thermo Electron and its
majority-owned subsidiaries). Management believes that the service fee charged
by Thermo Electron is reasonable and that such fees are representative of the
expenses the Company would have incurred on a stand-alone basis. For additional
items such as employee benefit plans, insurance coverage, and other identifiable
costs, Thermo Electron charges the Company based upon costs attributable to the
Company. In fiscal 2000 and 1999, Thermo Electron billed the Company an
additional $7,000 and $157,000, respectively, for certain administrative
services required by the Company that were not covered by the corporate services
agreement.
Development Agreement
The Company and Thermo Electron entered into a development agreement under
which Thermo Electron agreed to fund up to $4,000,000 of the direct and indirect
costs of the Company's development of soil-remediation centers. As of October 2,
1993, all such funding under this agreement was completed. In exchange for this
funding, the Company granted Thermo Electron a royalty equal to approximately 3%
of net revenues from soil-remediation services performed at the centers
developed under the agreement. The royalty payments may cease if the amounts
paid by the Company yield a certain internal rate of return to Thermo Electron
on the funds advanced to the Company under the agreement. Two sites were
developed under this agreement. The Company paid royalties of $196,000,
$186,000, and $115,000 in fiscal 2000, 1999, and 1998, respectively, relating to
this agreement, which are included in selling, general, and administrative
expenses in the accompanying statement of operations.
21
<PAGE>
7. Related-party Transactions (continued)
Operating Lease
In addition to the operating leases discussed in Note 6, the Company
leases an office and operating facility from Thermo Electron. The accompanying
statement of operations includes expenses from this operating lease of $166,000
in fiscal 2000, 1999, and 1998. The future minimum payments due under the lease
as of April 1, 2000, are $166,000 in each of fiscal 2001 through 2006. Total
future minimum lease payments are $996,000. In June 2000, the Company sold the
business that was the lessee under this arrangement (Note 17). The buyer
purchased the building from Thermo Electron.
Other Related-party Transactions
The Company purchases and sells products and services in the ordinary
course of business with other companies affiliated with Thermo Electron. Sales
of services to such affiliated companies totaled $288,000, $379,000, and
$320,000 in fiscal 2000, 1999, and 1998, respectively. Purchases of products and
services from such affiliated companies total $641,000, $231,000, and $938,000
in fiscal 2000, 1999, and 1998, respectively.
Cash Management
The Company invests excess cash in arrangements with Thermo Electron as
discussed in Note 1.
Short- and Long-term Obligations
See Note 5 for a description of short- and long-term obligations of the
Company held by Thermo Electron.
8. Common Stock
At fiscal year-end 1998, 847,678 put rights were attached to certain
shares of Company common stock which were previously issued in connection with
an acquisition. The put rights obligated the Company, at the holders' option, to
purchase shares of the Company's common stock for $8.00 per share at any time
through January 2002. At the time a holder elected to tender shares, the Company
had the option to net cash settle the obligation in lieu of purchasing the
shares. During fiscal 2000 and 1999, the Company repurchased 423,854 and 423,824
shares of common stock, respectively, under such arrangements and settled the
put right obligation.
At April 1, 2000, the Company had 700,500 warrants outstanding to purchase
shares of its common stock, which are exercisable at prices ranging from $10.00
to $11.34 per share and expire in fiscal 2001. The warrants were issued in
fiscal 1992 and 1993 in connection with private placements completed by three of
ThermoRetec's soil-remediation subsidiaries.
At April 1, 2000, the Company had reserved 9,733,648 unissued shares of
its common stock for possible issuance under stock-based compensation plans,
conversion of the 4 5/8% subordinated convertible debentures, and exercise of
warrants.
9. Transactions in Stock of Subsidiaries
Dividends declared by ThermoRetec were $1,356,000, $2,610,000, and
$2,504,000 in fiscal 2000, 1999, and 1998, respectively. Dividends declared by
ThermoRetec include $947,000, $1,798,000, and $1,736,000 in fiscal 2000, 1999,
and 1998, respectively, that were allocated to the Company. Dividends declared
in fiscal 2000 were paid in cash and in fiscal 1999 and 1998 were reinvested in
611,957 shares and 254,833 shares, respectively, of ThermoRetec's common stock
pursuant to ThermoRetec's Dividend Reinvestment Plan.
</TABLE>
22
<PAGE>
9. Transactions in Stock of Subsidiaries (continued)
The Company's percentage ownership of its majority-owned subsidiaries at
year end was:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2000 1999 1998
------------------------------------------------------------------------- ---------- ---------- ----------
ThermoRetec 70% 70% 69%
Randers Killam (a) 95% 95% 53%
Thermo EuroTech 88% 78% 56%
(a) Upon issuance of 22,606,210 shares of Randers Killam common stock to the
Company, as described in Note 2, the Company owned approximately 95% of
Randers Killam's outstanding common stock.
10. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, advance to affiliate, accounts receivable, short-term obligations
and current maturities of long-term obligations, accounts payable, due to parent
company and affiliated companies, and long-term obligations. The carrying
amounts of these financial instruments, with the exception of long-term
obligations, approximate fair value due to their short-term nature.
The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the respective
year ends. The carrying amount and fair value of the Company's long-term
obligations are:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
2000 1999
-------------------- ---------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-------------------------------------------------------------- ---------- ---------- ---------- ----------
Subordinated Convertible Debentures $116,637 $102,097 $156,799 $ 139,587
Other 1,476 1,476 1,818 1,818
-------- -------- -------- ---------
$118,113 $103,573 $158,617 $ 141,405
======== ======== ======== =========
11. Restructuring Costs
Fiscal 2000 Plan
In May 1999, the Company announced that its majority-owned subsidiaries
planned to sell several businesses. At the time of the decision, the businesses
that were to be sold were considered outside the future focus of the Company and
its subsidiaries because of low growth prospects, marginal profitability, or the
need to invest significant capital to achieve desired returns. The businesses
proposed to be sold include the used-oil processing operation of Thermo
EuroTech, N.V.; three soil-recycling facilities of ThermoRetec, in addition to
the sites previously announced, discussed below; and the Randers division, BAC
Killam Inc., and E3-Killam Inc. businesses of Randers Killam. The Randers Killam
businesses provide engineering and construction services, including
transportation planning and design. In connection with these actions, the
Company recorded $58,694,000 of restructuring and related costs during fiscal
2000, including restructuring costs of $56,981,000, a tax asset write-off of
$1,055,000, and an inventory provision of $658,000. In the accompanying
statement of operations, the tax write-off is included in provision for income
taxes and the inventory provision is included in cost of revenues. Restructuring
costs include a $21,113,000 write-down of cost in excess of net assets of
acquired companies to reduce the carrying value of the businesses
23
<PAGE>
11. Restructuring Costs (continued)
proposed to be sold to the estimated proceeds from their sale; a $19,997,000
write-down of fixed assets to their estimated disposal value; $2,985,000 for
ongoing lease costs for facilities that will be exited in connection with the
sale of certain businesses; $2,494,000 for estimated land reclamation costs;
$5,517,000 for losses, primarily on the sale of the Randers division (Note 2)
and BAC Killam (Note 17); a $1,905,000 charge for the cumulative foreign
currency translation loss adjustment related to Thermo EuroTech's used-oil
processing business; a $1,788,000 write-off of intangible assets related to
license acquisition costs at the used-oil processing business; $645,000 for
severance costs for 44 employees across all functions, 14 of whom were
terminated in fiscal 2000; a $442,000 write-off of other current assets
associated with the businesses to be sold; and $95,000 for retention bonuses
paid. The tax write-off represents a deferred tax asset that will not be
realized as a result of selling Thermo EuroTech's used-oil processing business.
The inventory provision also relates to exiting this business. The write-down of
fixed assets principally relates to special-purpose equipment in the used-oil
processing and soil-recycling businesses. The effects of these charges reduced
depreciation and amortization expense, thereby reducing the Company's pretax
operating loss by approximately $3,013,000 during fiscal 2000.
Fiscal 1999 Plan
During fiscal 1999, the Company recorded $10,217,000 of restructuring
costs, which were accounted for in accordance with Emerging Issues Task Force
Pronouncement (EITF) 94-3. Of these restructuring costs, $9,176,000 was recorded
by ThermoRetec in connection with the closure of two soil-recycling facilities.
ThermoRetec took this action after a period of operating losses at the
facilities, which it believes arose from relaxed enforcement of state rules
concerning disposal of contaminated soils and the availability of alternative
disposal options to customers. The costs include a $6,238,000 write-down of
fixed assets to their estimated disposal value of $895,000 and a $1,884,000
write-off of intangible assets, including $715,000 of cost in excess of net
assets of acquired companies, as well as $1,054,000 for ongoing lease costs and
severance for 13 employees, 6 of whom were terminated in fiscal 1999 and none of
whom were terminated in fiscal 2000. ThermoRetec closed one soil-recycling
facility in March 1999 and sold the second soil-recycling facility in March
2000. The Company suspended depreciation on the assets written down following
the write-down. In addition, the Company recorded $1,041,000 of restructuring
costs for abandoned-facility payments relating to the consolidation of the
facilities of another business. The annual savings from the consolidation of
these facilities totals $0.2 million and such savings began in September 1998,
the date of abandonment.
All businesses announced for sale prior to the January 2000 decision by
Thermo Electron to sell all of the businesses of the Company reported aggregate
revenues and operating loss, prior to restructuring and related costs, of
$35,016,000 and $1,830,000, respectively, in fiscal 2000 and $54,369,000 and
$1,640,000, respectively, in fiscal 1999. The aggregate net assets to be sold of
$5,576,000 at April 1, 2000, include net assets of $2,284,000 in the Engineering
and Design segment and $3,292,000 in the Environmental-liability Management
segment. Although there can be no assurance concerning the timing of the
completion of the sale of any of these businesses, the Company expects that the
remaining sales will primarily occur in the first half of fiscal 2001.
24
<PAGE>
11. Restructuring Costs (continued)
</TABLE>
Substantially all of the restructuring and related costs to date have been
noncash charges except for amounts recorded as accrued restructuring costs. A
summary of the changes in accrued restructuring costs, which the Company expects
to pay primarily over the first six months of fiscal 2001, is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Severance Facility- Land Other Total
(In thousands) closing Reclamation
Costs
------------------------------------ ------------- ------------- -------------- ------------- ------------
Fiscal 1999 Plan
Balance at April 4, 1998 $ - $ - $ - $ - $ -
Provision charged to expense 213 1,882 - - 2,095
Usage (101) (275) - - (376)
------ ------ ------ ------ ------
Balance at April 3, 1999 112 1,607 - - 1,719
Usage (78) (69) - - (147)
Reserves reversed due to (34) (665) - - (699)
sale of businesses ------ ------ ------ ------ ------
Balance at April 1, 2000 $ - $ 873 $ - $ - $ 873
====== ====== ====== ====== ======
Fiscal 2000 Plan
Balance at April 3, 1999 $ - $ - $ - $ - $ -
Provision charged to expense 645 2,985 2,494 95 6,219
Usage (239) (222) (192) (95) (748)
Currency translation - (191) (246) - (437)
------ ------ ------ ------ ------
Balance at April 1, 2000 $ 406 $2,572 $2,056 $ - $5,034
====== ====== ====== ====== ======
The Company expects to incur additional restructuring costs of
approximately $2,100,000, primarily during the remainder of calendar 2000, for
severance, employee retention, and relocation expenses. Pursuant to the
requirements of EITF 94-3, these costs are not permitted as charges until they
are incurred.
In February 2000, ThermoRetec signed a letter of intent to sell its five
remaining soil-remediation facilities, including three facilities announced for
sale earlier in fiscal 2000. The transaction is expected to be completed before
the end of July 2000, although there can be no assurance that ThermoRetec will
complete this sale. Revenues and operating income before restructuring charges
of the five soil-remediation facilities that will be sold aggregated $23,376,000
and $3,432,000, respectively, in fiscal 2000, and $19,795,000 and $1,729,000,
respectively, in fiscal 1999.
25
<PAGE>
12. Supplemental Cash Flow Information
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 2000 1999 1998
------------------------------------------------------------------------- ----------- ---------- ---------
Cash Paid For:
Interest $ 7,942 $ 8,244 $ 10,363
Income taxes $ 4,440 $ 3,025 $ 4,041
Noncash Activities:
Fair value of assets of acquired companies $ 3,328 $ 643 $ 29,477
Cash paid for acquired companies (2,286) (643) (14,765)
Issuance of subsidiary common stock for acquired companies (384) - (3,125)
--------- -------- --------
Liabilities assumed of acquired companies $ 658 $ - $ 11,587
========= ======== ========
Issuance of subsidiary subordinated convertible debentures in $ - $ 6,999 $ -
exchange for subsidiary common stock (Note 5)
Conversions of subordinated convertible debentures $ - $ - $ 13,220
Company common stock received in settlement of a note receivable $ - $ 668 $ -
Notes receivable received upon sale of business (Note 2) $ - $ - $ 2,881
13. Business Segment Information
The Company organizes and manages its businesses by individual functional
operating entity. The Company has combined its operating entities into four
segments: Environmental-liability Management, Engineering and Design, Laboratory
Testing, and Metal Treating. In classifying entities into a particular segment,
the Company aggregates businesses with similar economic characteristics,
services, methods of providing services, customers, and regulatory environments.
The Environmental-liability Management segment is a national provider of
environmental-liability and resource-management services, offering these and
related consulting services in four areas: consulting and engineering, nuclear
remediation, soil remediation, and fluids recycling.
The Engineering and Design segment provides comprehensive engineering and
outsourcing services such as water and wastewater treatment; highway and bridge
engineering; infrastructure engineering; and, prior to the January 2000 sale of
the Randers division (Note 2), process engineering and construction. In
addition, this segment provides consulting services that address natural
resource management issues. In April 2000, the Company sold the assets of its
BAC Killam subsidiary, which performed the Company's highway and bridge
engineering services (Note 17).
The Laboratory Testing segment operates analytical laboratories that
provide environmental- and pharmaceutical-testing services.
The Metal Treating segment performs metallurgical processing services
using thermal-treatment equipment. Until the October 1997 sale of its equipment
division (Note 2), this segment also designed, manufactured, and installed
advanced custom-engineered, thermal-processing systems. In June 2000, the
Company sold the remaining businesses comprising this segment (Note 17).
26
<PAGE>
13. Business Segment Information (continued)
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------- ---------- --------- ---------
Revenues:
Environmental-liability Management (a) $ 166,157 $159,094 $141,115
Engineering and Design (b) 79,638 91,839 84,566
Laboratory Testing (c) 44,759 40,523 37,485
Metal Treating 17,246 19,274 36,618
Intersegment sales elimination (d) (471) (691) (998)
--------- -------- --------
$ 307,329 $310,039 $298,786
========= ======== ========
Income (Loss) Before Provision for Income Taxes, Minority Interest, and
Extraordinary Item:
Environmental-liability Management (e) $ (30,218) $ (3,644) $ (454)
Engineering and Design (f) (13,271) 4,406 6,303
Laboratory Testing 6,553 5,206 4,363
Metal Treating 1,685 2,339 4,278
Corporate (g) (2,674) (2,319) (2,756)
--------- -------- --------
Total operating income (loss) (37,925) 5,988 11,734
Interest and other expense, net (5,933) (6,796) (3,220)
--------- -------- --------
$ (43,858) $ (808) $ 8,514
========= ======== ========
Total Assets:
Environmental-liability Management $ 149,234 $168,723 $166,925
Engineering and Design 88,935 106,301 102,394
Laboratory Testing 51,465 48,434 43,557
Metal Treating 12,898 11,509 12,795
Corporate (h) 2,021 15,498 34,855
--------- -------- --------
$ 304,553 $350,465 $360,526
========= ======== ========
Depreciation and Amortization:
Environmental-liability Management $ 7,128 $ 9,245 $ 7,672
Engineering and Design 2,306 3,117 3,003
Laboratory Testing 3,901 3,527 2,865
Metal Treating 872 834 1,007
Corporate 8 100 237
--------- -------- --------
$ 14,215 $ 16,823 $ 14,784
========= ======== ========
27
<PAGE>
13. Business Segment Information (continued)
(In thousands) 2000 1999 1998
------------------------------------------------------------------------- ---------- ---------- ----------
Capital Expenditures:
Environmental-liability Management $ 5,161 $ 8,385 $ 8,916
Engineering and Design 1,355 1,632 1,759
Laboratory Testing 4,093 6,463 7,018
Metal Treating 2,656 1,053 764
Corporate - (118) 3
------- ------- -------
$13,265 $17,415 $18,460
======= ======= =======
(a) Includes intersegment sales of $7,000 and $82,000 in fiscal 1999 and 1998, respectively.
(b) Includes intersegment sales of $27,000, $60,000, and $73,000 in fiscal 2000, 1999, and 1998,
respectively.
(c) Includes intersegment sales of $444,000, $624,000, and $843,000 in fiscal
2000, 1999, and 1998, respectively.
(d) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(e) Includes restructuring and related costs of $38,368,000 and $9,176,000 in fiscal 2000 and 1999,
respectively (Note 11).
(f) Includes restructuring costs of $19,271,000 and $1,023,000 in fiscal 2000 and 1999 (Note 11).
(g) Primarily general and administrative expenses.
(h) Primarily cash, cash equivalents, and advance to affiliate.
14. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
(In thousands except per share amounts) 2000 1999 1998
------------------------------------------------------------------------- ----------- ----------- ---------
Basic
Net Income (Loss) $(43,219) $ (1,421) $ 3,273
-------- -------- -------
Weighted Average Shares 19,033 19,402 18,700
-------- -------- -------
Basic Earnings (Loss) per Share $ (2.27) $ (.07) $ .18
======== ======== =======
Diluted
Net Income (Loss) $(43,219) $ (1,421) $ 3,273
Effect of Majority-owned Subsidiaries' Dilutive Securities - (2) (13)
-------- -------- -------
Income (Loss) Available to Common Shareholders, as Adjusted $(43,219) $ (1,423) $ 3,260
-------- -------- -------
Weighted Average Shares 19,033 19,402 18,700
Effect of Stock Options - - 278
-------- -------- -------
Weighted Average Shares, as Adjusted 19,033 19,402 18,978
-------- -------- -------
Diluted Earnings (Loss) per Share $ (2.27) $ (.07) $ .17
======== ======== =======
Options to purchase 597,000, 1,980,000, and 1,156,000 shares of common
stock were not included in the computation of diluted earnings (loss) per share
for fiscal 2000, 1999, and 1998, respectively. Their effect would have been
antidilutive because the exercise price was greater than the average market
price for the common stock and, in fiscal 2000 and 1999, due to the Company's
net loss position. In addition, the computation of diluted earnings (loss)
28
<PAGE>
14. Earnings (Loss) per Share (continued)
per share for each period excludes the effect of assuming the conversion of
convertible obligations because the effect would be antidilutive. The
calculation for each period excluded $111,850,000 principal amount of 4 5/8%
subordinated convertible debentures, convertible at $15.90 per share.
An extraordinary gain recorded by the Company decreased basic and diluted
loss per share by $.01 in fiscal 2000 (Note 5).
15. Proposed Merger
On October 19, 1999, the Company entered into a definitive agreement and
plan of merger, as amended, with Thermo Electron, pursuant to which Thermo
Electron would acquire all of the outstanding shares of Company common stock
held by shareholders other than Thermo Electron in exchange for Thermo Electron
common stock worth between $7.50 and $9.25 per share of Company common stock.
The number of Thermo Electron shares to be issued to Thermo TerraTech minority
shareholders will be determined at the time of the merger transaction, according
to the following conditions: If during the 20 trading days immediately prior to
the effective date of the merger the average closing price of Thermo Electron
common stock is less than $18.75, Thermo TerraTech shareholders would receive
common stock worth the equivalent of $7.50 per share of Thermo TerraTech common
stock. However, Thermo Electron may elect to terminate the agreement if it would
be required to issue 1.8 million or more shares of Thermo Electron common stock.
If the average closing price of Thermo Electron common stock is between $18.75
and $23.125, each share of Thermo TerraTech common stock would be exchanged for
.4 shares of Thermo Electron common stock. If the average closing price of
Thermo Electron common stock is greater than $23.125, Thermo TerraTech
shareholders would receive Thermo Electron common stock worth the equivalent of
$9.25 per share of Thermo TerraTech common stock. At the same time, the
Company's two subsidiaries, ThermoRetec and Randers Killam, also entered into
merger agreements with Thermo Electron, pursuant to which all of the shares of
common stock of those companies held by stockholders other than the Company and
Thermo Electron would be acquired for $7.00 and $4.50 per share, respectively,
without interest, in cash. The mergers of ThermoRetec and Randers Killam were
completed effective June and May 2000, respectively. The Board of Directors of
the Company approved the merger agreement based on a recommendation by a special
committee of the Board of Directors, consisting of an independent director of
the Company. The completion of the Company's merger is subject to certain
conditions, including shareholder approval of the merger agreement and the
completion of review by the Securities and Exchange Commission of certain
required filings. Thermo Electron intends to vote all of its shares of common
stock of the Company in favor of approval of the merger agreement and,
therefore, approval of the merger agreement is assured. This merger is expected
to be completed in the third quarter of calendar 2000. Following the merger, the
Company's common stock would cease to be publicly traded.
29
<PAGE>
</TABLE>
16. Unaudited Quarterly Information
(In thousands except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
2000 First Second Third Fourth
---------------------------------------------------------- ----------- ----------- ----------- -----------
Revenues $ 75,908 $ 78,036 $ 80,846 $ 72,539
Gross Profit (a) 15,694 16,420 17,617 14,216
Income (Loss) Before Extraordinary Item (45,094) 1,207 86 475
Net Income (Loss) (b) (45,094) 1,207 182 486
Earnings (Loss) per Share:
Basic (2.37) .06 .01 .03
Diluted (2.37) .06 .01 .02
1999 First Second (c) Third Fourth
---------------------------------------------------------- ----------- ----------- ----------- -----------
Revenues $ 76,693 $ 77,177 $ 80,400 $ 75,769
Gross Profit 15,648 15,143 15,851 15,787
Net Income (Loss) 1,001 (3,696) 771 503
Basic and Diluted Earnings (Loss) per Share .05 (.19) .04 .03
(a) Reflects a pretax charge of $658,000 for restructuring in the first quarter.
(b) Reflects pretax charges of $55,910,000, $120,000, $2,207,000, and $457,000 for restructuring and
related costs in the first, second, third, and fourth quarters, respectively.
(c) Reflects a pretax charge of $10,217,000 for restructuring costs.
17. Subsequent Events
On April 14, 2000, BAC Killam sold all of its assets for $3,341,000, of
which approximately $1,374,000 was paid in cash at the closing. The balance
represents accounts receivable of BAC Killam that will be collected by the buyer
and be paid to the Company upon collection (less a five percent collection fee).
On June 1, 2000, the Company sold substantially all of the assets and
liabilities of its Metallurgical, Inc., Cal-Doran Metallurgical Services, Inc.,
and Metal Treating Inc. subsidiaries for $15,700,000 in cash, subject to
adjustment based on the difference between the net assets as of the closing date
of the sale and $8,323,000. The selling price includes $1,092,000 of real estate
leased by the businesses sold that was owned by Thermo Electron. The Company
agreed to indemnify the buyer for expenses incurred by the buyer in excess of
$1,000,000, but not to exceed $3,500,000, from certain potential environmental
liabilities. The Company has not recorded a liability in connection with this
indemnity because the amount that would likely be paid by the Company, if any,
cannot be reasonably estimated.
30
<PAGE>
Thermo TerraTech Inc. 2000 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo TerraTech Inc.:
We have audited the accompanying consolidated balance sheet of Thermo
TerraTech Inc. (a Delaware corporation and an 88%-owned subsidiary of Thermo
Electron Corporation) and subsidiaries as of April 1, 2000, and April 3, 1999,
and the related consolidated statements of operations, cash flows, and
comprehensive income and shareholders' investment for each of the three years in
the period ended April 1, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo
TerraTech Inc. and subsidiaries as of April 1, 2000, and April 3, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended April 1, 2000, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Boston, Massachusetts May 18, 2000
(except with respect to the matters discussed
in Note 17, as to which the date is June 1, 2000)
31
<PAGE>
Thermo TerraTech Inc. 2000 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 Operations under
the heading "Forward-looking Statements."
Overview
The Company provides industrial outsourcing services and manufacturing
support encompassing a broad range of specializations. The Company operates in
four segments: environmental-liability management, engineering and design,
laboratory testing, and metal treating.
Environmental-liability Management
The Company's ThermoRetec Corporation subsidiary, jointly owned with
Thermo Electron Corporation, is a national provider of environmental-liability
and resource-management services. ThermoRetec offers these and related
consulting services in four areas: consulting and engineering, nuclear
remediation, soil remediation, and fluids recycling. In February 2000,
ThermoRetec signed a letter of intent to sell its remaining soil-recycling
facilities. The transaction is expected to be completed before the end of July
2000, although there can be no assurance that ThermoRetec will complete this
sale (Note 11). The Company's majority-owned Thermo EuroTech N.V. subsidiary,
located in the Netherlands, specializes in converting "off-spec" and
contaminated petroleum fluids into useable oil products. The Company intends to
exit this business, as discussed in the results of operations. Thermo EuroTech
also provides in-plant waste management and recycling services through its
Ireland-based Green Sunrise Holdings Ltd. subsidiary. In August 1999, Green
Sunrise acquired the outstanding stock of Dempsey Drums Limited, an
Ireland-based service provider specializing in the supply, disposal, and
reconditioning of steel and plastic drums and other specialized containers (Note
2).
Engineering and Design
The Company's The Randers Killam Group Inc. subsidiary, jointly owned with
Thermo Electron Corporation, provides comprehensive engineering and outsourcing
services such as water and wastewater treatment, process engineering and
construction, highway and bridge engineering, and infrastructure engineering. In
January 2000, Randers Killam sold its Randers division, a process engineering
and construction business (Note 2). In April 2000, Randers Killam sold the
assets of its BAC Killam Inc. subsidiary, a highway and bridge engineering
business (Note 17). The Company's wholly owned Normandeau Associates Inc.
subsidiary provides consulting services that address natural resource management
issues.
Laboratory Testing
The Company's wholly owned Thermo Analytical Inc. subsidiary operates
analytical laboratories that provide environmental- and pharmaceutical-testing
services, primarily to commercial clients throughout the U.S.
Metal Treating
The Company performs metallurgical processing services using
thermal-treatment equipment at locations in California, Minnesota, and
Wisconsin. The Company sold the businesses comprising this segment in June 2000
(Note 17).
On January 31, 2000, Thermo Electron Corporation, the majority owner of
the Company, announced that it plans to sell all of the businesses of the
Company.
32
<PAGE>
Thermo TerraTech Inc. 2000 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Fiscal 2000 Compared With Fiscal 1999
Total revenues were $307.3 million in fiscal 2000, compared with $310.0
million in fiscal 1999. Revenues from the Environmental-liability Management
segment increased to $166.2 million in fiscal 2000 from $159.1 million in fiscal
1999. Excluding intrasegment sales, revenues at ThermoRetec increased to $152.8
million in fiscal 2000 from $141.6 million in fiscal 1999, primarily due to
higher revenues from a large remedial-construction contract that is expected to
continue through fiscal 2001. Revenues from Thermo EuroTech decreased $4.2
million to $13.3 million due to a decrease in sales of usable oil products and a
decrease in revenues relating to contracts to perform soil-remediation services
overseas and to process oil-based muds. These decreases were offset in part by
$1.6 million of revenues from Dempsey Drums, which was acquired in August 1999
(Note 2). Revenues from the Engineering and Design segment decreased to $79.6
million in fiscal 2000 from $91.8 million in fiscal 1999, primarily due to lower
contract revenue resulting in part from a recession in the chemical industry and
the sale of the Randers division in January 2000 (Note 2). Revenues from the
Laboratory Testing segment increased to $44.8 million in fiscal 2000 from $40.5
million in fiscal 1999, due to higher demand resulting from new industrial
customers. Revenues from the Metal Treating segment decreased to $17.2 million
in fiscal 2000 from $19.3 million in fiscal 1999, due to weakness in the
agricultural equipment and commercial aerospace industries. The Metal Treating
segment businesses were sold in June 2000 (Note 17).
The gross profit margin increased to 21% in fiscal 2000 from 20% in fiscal
1999. Excluding the effect of a $0.7 million write-off of inventory in the
Environmental-liability Management segment in fiscal 2000 (Note 11), the gross
profit margin increased primarily due to a $2.5 million reduction of
depreciation expense in fiscal 2000 as a result of certain write-offs in the
Environmental-liability Management and Engineering and Design segments (Note
11). The gross profit margin from the Engineering and Design segment increased
to 25% in fiscal 2000 from 23% in fiscal 1999, due to a decrease in low-margin
contract revenue.
Selling, general, and administrative expenses as a percentage of revenues
remained constant at 15% in fiscal 2000 and 1999.
In connection with the planned sale of businesses discussed in Note 11,
the Company recorded $57.0 million of restructuring costs in fiscal 2000. Of
these restructuring costs, $37.7 million was recorded by the
Environmental-liability Management segment and $19.3 million was recorded by the
Engineering and Design segment. These charges represent the excess of book value
of the businesses proposed to be sold over the estimated proceeds from their
sale, a write-down of fixed assets to their estimated disposal value, ongoing
lease obligations, land reclamation costs, losses on the sale of certain of
these businesses, a charge for a cumulative translation adjustment, write-offs
of intangible and other assets, and severance costs.
During fiscal 1999, the Company recorded $10.2 million of restructuring
costs (Note 11). Of these restructuring costs, $9.2 million was recorded by
ThermoRetec in the Environmental-liability Management segment in connection with
the closure of two soil-recycling facilities. ThermoRetec took this action after
a period of operating losses at the facilities, which it believes arose from
relaxed enforcement of state rules concerning disposal of contaminated soils and
the availability of alternative disposal options to customers. The costs include
a write-down of fixed assets to their estimated disposal value and a write-off
of intangible assets, including cost in excess of net assets of acquired
companies, as well as other closure costs. In addition, the Company recorded
$1.0 million of restructuring costs for abandoned-facility payments relating to
the consolidation of the facilities of another business.
Interest income increased to $2.8 million in fiscal 2000 from $2.2 million
in fiscal 1999, primarily as the result of higher average invested balances.
Interest expense decreased to $8.7 million in fiscal 2000 from $9.0 million in
fiscal 1999, primarily due to lower average debt balances as a result of
repurchases of subordinated convertible debentures and repayments of debt made
by the Company in fiscal 2000.
33
<PAGE>
Fiscal 2000 Compared With Fiscal 1999 (continued)
The Company recorded income tax provisions of $2.5 million and $1.8
million in fiscal 2000 and 1999, respectively, on pretax losses in both periods,
primarily due to the effect of nondeductible amortization and write-off of cost
in excess of net assets of acquired companies and foreign losses for which a tax
benefit was not recorded. In addition, the tax provision recorded in fiscal 2000
includes a $1.1 million write-off of deferred tax assets (Note 11).
The Company recorded minority interest income of $3.1 million and $1.2
million in fiscal 2000 and 1999, respectively, primarily due to losses incurred
by the Company's majority-owned subsidiaries.
During fiscal 2000, the Company purchased $2.2 million principal amount of
2 1/2% subordinated convertible debentures, convertible into shares of Thermo
EuroTech (Delaware) Inc., for $2.0 million in cash, resulting in an
extraordinary gain of $107,000, net of taxes of $71,000 (Note 5).
Fiscal 1999 Compared With Fiscal 1998
Total revenues were $310.0 million in fiscal 1999, compared with $298.8
million in fiscal 1998. Metal Treating segment revenues decreased to $19.3
million in fiscal 1999 from $36.6 million in fiscal 1998, due to the sale of the
Company's thermal-processing equipment business in October 1997, which
contributed revenues of $17.3 million in fiscal 1998 (Note 2). Revenues from the
Environmental-liability Management segment increased 13% to $159.1 million in
fiscal 1999 from $141.1 million in fiscal 1998. Excluding intrasegment sales,
revenues at ThermoRetec increased to $141.6 million in fiscal 1999 from $127.1
million in fiscal 1998, primarily due to $8.6 million of higher revenues from
consulting and engineering services at RETEC and, to a lesser extent, the
inclusion of $6.2 million of revenues from businesses acquired in fiscal 1998.
Revenues from ThermoRetec's soil-remediation services increased $6.4 million in
fiscal 1999, resulting from higher volumes of soil processed. These increases
were offset in part by a decrease in revenues resulting from a decline in the
number of contracts in process at ThermoRetec's eastern United States
construction operations (formerly IEM Sealand). Revenues from Thermo EuroTech
increased $3.5 million to $17.5 million due to the inclusion for the full fiscal
1999 period of revenues from Green Sunrise, which was acquired in February 1998
and added incremental revenues of $6.4 million, offset in part by a decrease in
sales of useable oil products. Revenues from the Engineering and Design segment
increased to $91.8 million in fiscal 1999 from $84.6 million in fiscal 1998,
primarily due to increased revenues from two construction and labor management
contracts, which are expected to be completed by the end of the first quarter of
fiscal 2000. Engineering and Design segment revenues also increased $3.5 million
due to the inclusion for the full fiscal 1999 period of revenues from Randers,
acquired May 1997. Revenues from the Laboratory Testing segment increased to
$40.5 million in fiscal 1999 from $37.5 million in fiscal 1998 due to higher
demand.
The gross profit margin increased to 20% in fiscal 1999 from 18% in fiscal
1998. The gross profit margin from the Environmental-liability Management
segment increased to 16% in fiscal 1999 from 11% in fiscal 1998, primarily due
to a $2.3 million reduction in losses on certain remedial-construction
contracts, higher utilization of billable personnel at RETEC, a $1.6 million
increase in gross profit at the Company's soil-recycling sites primarily due to
higher volumes of soil processed, and $0.4 million of lower depreciation expense
following suspension of depreciation at two soil-recycling sites. To a lesser
extent, the gross profit margin from the Environmental-liability Management
segment increased due to higher margins at Thermo EuroTech as a result of the
inclusion of higher-margin revenues at Green Sunrise. The gross profit margin
was 40% at Green Sunrise in fiscal 1999. The gross profit margin from the
Engineering and Design segment decreased to 23% in fiscal 1999 from 25% in
fiscal 1998, primarily due to a change in the mix of contracts.
Selling, general, and administrative expenses as a percentage of revenues
increased slightly to 15% in fiscal 1999 from 14% in fiscal 1998, primarily due
to the absence of lower relative expenses at the Company's Metal Treating
segment due to the sale of the thermal-processing equipment business in fiscal
1998 and higher relative expenses at Green Sunrise, which was acquired in
February 1998. During fiscal 1999, the Metal Treating segment and Green Sunrise
had selling, general and administrative expenses as a percent of revenues of 9%
and 30%, respectively. In addition, selling, general, and administrative
expenses at the Environmental-liability Management segment increased due to a
$0.8 million increase in provision for uncollectible accounts and a $0.4 million
increase in administrative costs associated with ThermoRetec's name change.
34
<PAGE>
Fiscal 1999 Compared With Fiscal 1998 (continued)
During fiscal 1999, the Company recorded $10.2 million of restructuring
costs. Of these restructuring costs, $9.2 million was recorded by ThermoRetec in
the Environmental-liability Management segment in connection with the closure of
two soil-recycling facilities. ThermoRetec took this action after a period of
operating losses at the facilities, which it believes arose from relaxed
enforcement of state rules concerning disposal of contaminated soils and the
availability of alternative disposal options to customers. The costs include a
write-down of fixed assets to their estimated disposal value and a write-off of
intangible assets, including cost in excess of net assets of acquired companies,
as well as other closure costs. These facilities reported aggregated revenues
and operating losses of $2.2 million and $0.8 million, respectively, in fiscal
1998, and aggregated revenues and operating losses prior to the decision to
close the facilities of $1.8 million and $0.1 million, respectively, in fiscal
1999. In addition, the Company recorded $1.0 million of restructuring costs for
abandoned-facility payments relating to the consolidation of the facilities of
another business (Note 11). The annual savings from consolidating these
facilities total $0.2 million and such savings began in September 1998, the date
of abandonment.
Interest income decreased to $2.2 million in fiscal 1999 from $4.2 million
in fiscal 1998, primarily as a result of lower average invested balances.
Interest expense decreased to $9.0 million in fiscal 1999 from $10.8 million in
fiscal 1998, primarily due to the repayment of a note payable in February and
May 1998, the repayment of a promissory note to Thermo Electron Corporation, and
the conversion of the Company's 6 1/2% subordinated convertible debentures
during fiscal 1998, offset in part by increased borrowings at Thermo EuroTech
during fiscal 1999 and the issuance of $7.0 million principal amount of 2 1/2%
convertible subordinated debentures due 2001 (Note 5).
Equity in earnings of unconsolidated subsidiary in fiscal 1998 represented
ThermoRetec's proportionate share of income from a joint venture. Gain on sale
of unconsolidated subsidiary in fiscal 1998 resulted from ThermoRetec's sale of
its interest in this joint venture (Note 2).
The Company recorded income tax expense of $1.8 million in fiscal 1999 on
a pretax loss primarily due to the effect of nondeductible amortization and
write off of cost in excess of net assets of acquired companies. The effective
tax rate in fiscal 1998 was 60%. This rate exceeded the statutory federal income
tax rate primarily due to the impact of state income taxes and the nondeductible
amortization of cost in excess of net assets of acquired companies.
The Company recorded minority interest income of $1.2 million in fiscal
1999, compared with minority interest expense of $0.1 million in fiscal 1998,
primarily due to the effect of a net loss at ThermoRetec in fiscal 1999.
Liquidity and Capital Resources
Consolidated working capital was $30.7 million at April 1, 2000, compared
with $67.0 million at April 3, 1999. Working capital decreased $38.0 million as
a result of the reclassification of subordinated convertible debentures due May
2000 to current liabilities. Cash and cash equivalents were $4.2 million at
April 1, 2000, compared with $43.0 million at April 3, 1999. In addition, as of
April 1, 2000, the Company had $47.7 million invested in an advance to
affiliate. Prior to the use of a new domestic cash management arrangement
between the Company and Thermo Electron Corporation, which became effective June
1999, amounts invested with Thermo Electron were included in cash and cash
equivalents. Of the total cash and cash equivalents at April 1, 2000, $3.9
million was held by the Company's majority-owned subsidiaries and the balance
was held by the Company and its wholly owned subsidiaries. The total $47.7
million advance to affiliate at April 1, 2000, was advanced by the Company's
majority-owned subsidiaries.
During fiscal 2000, $22.8 million of cash was provided by operating
activities. During this period, $4.8 million of cash was provided by an increase
in other current liabilities, primarily due to an increase in accrued
restructuring costs. The Company expects to pay the $5.9 million balance of
accrued restructuring costs primarily over the first six months of fiscal 2001.
A decrease in accounts receivable provided $6.0 million of cash, primarily at
ThermoRetec due to the timing of billings and, to a lesser extent, at the
Engineering and Design segment due to a decrease in revenues.
35
<PAGE>
Liquidity and Capital Resources (continued)
These decreases were offset in part by increased accounts receivable at the
Laboratory Testing segment, primarily as a result of increased laboratory
testing revenues. An increase in inventories and unbilled contract costs and
fees used $4.1 million of cash, primarily at ThermoRetec, due to the timing of
billings, offset in part by a decrease at the Engineering and Design segment due
to the effect of a decline in revenues.
Excluding advance to affiliate activity, the Company's investing
activities in fiscal 2000 primarily consisted of $3.8 million received from the
collection of long-term notes receivable, an acquisition, and capital additions.
In August 1999, a subsidiary of the Company acquired Dempsey Drums Limited for
$2.0 million in cash, net of cash acquired, and the issuance of shares of the
subsidiary's common stock valued at $0.4 million (Note 2). The Company expended
$13.3 million for purchases of property, plant, and equipment in fiscal 2000 and
expects to spend approximately $12 million for capital additions during fiscal
2001.
In January 2000, the Company sold substantially all of the assets and
liabilities of the Randers division in exchange for a $538,000 note receivable
due 2003 (Note 2). In March 2000, the Company sold the assets of a
soil-recycling facility for $400,000 in cash, of which $200,000 was placed in
escrow and has not yet been received (Note 2).
The Company's financing activities used cash of $4.3 million in fiscal
2000. During this period, the Company used cash of $3.8 million for the
repurchase of Company and subsidiary common stock, including Company stock
subject to certain put rights on shares issued in connection with an
acquisition. As of April 1, 2000, the Company has no further cash obligation
pursuant to put rights. In addition, the Company used $2.0 million for the
repurchase of subordinated convertible debentures and $1.6 million for the
repayment of debt (Note 5). These uses of cash were offset in part by $2.3
million borrowed to finance an acquisition (Note 2).
In April and June 2000, the Company sold two of its businesses for $16.0
million in cash, subject to a post-closing adjustment (Note 17). In May 2000,
ThermoRetec's $38.0 million principal amount 4 7/8% subordinated convertible
debentures matured. To finance a portion of the debt repayment, the Company
borrowed approximately $10 million under its domestic cash management
arrangement with Thermo Electron (Note 1).
The Company generally expects to have positive cash flow from its existing
operations. Thermo Electron has expressed its willingness to advance up to $15
million to the Company for short-term liquidity in the event that the need
arises. Accordingly, the Company believes that its existing resources and
potential borrowings from Thermo Electron are sufficient to meet the capital
requirements of its existing operations for at least the next 18 months.
Market Risk
The Company is exposed to market risk from changes in interest rates,
foreign currency exchange rates, and equity prices, which could affect its
future results of operations and financial condition. The Company manages its
exposure to these risks through its regular operating and financing activities.
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in Dutch guilders. The effect
of a change in foreign exchange rates on the Company's net investment in foreign
subsidiaries is reflected in the "Accumulated other comprehensive items"
component of shareholders' investment. A 10% appreciation in fiscal year-end
2000 functional currencies, relative to the U.S. dollar, would result in a $1.1
million reduction of shareholders' investment. A 10% depreciation in fiscal
year-end 1999 functional currencies, relative to the U.S. dollar, would result
in a $1.1 million reduction of shareholders' investment.
36
<PAGE>
Market Risk (continued)
Equity Prices
The Company's and its subsidiaries' subordinated convertible debentures
are sensitive to fluctuations in the price of Company or subsidiary common stock
into which the debentures are convertible. Changes in equity prices would result
in changes in the fair value of the Company's and its subsidiaries' subordinated
convertible debentures due to the difference between the current market price
and the market price at the date of issuance of the debentures. Upon the fiscal
2001 merger of the Company and Thermo Electron, the Company's subordinated
convertible debentures will be assumed by Thermo Electron. After the merger, the
Company's subordinated convertible debentures will be convertible into shares of
Thermo Electron common stock, rather than into the Company's common stock. A 10%
increase in fiscal year-end 1999 market equity prices would result in a negative
impact to the Company of $1.0 million on the fair value of its subordinated
convertible debentures.
Interest Rates
The Company's subordinated convertible debentures are sensitive to changes
in interest rates. Interest rate changes would result in a change in the fair
value of the Company's and its subsidiaries' subordinated convertible debentures
due to the difference between the market interest rate and the rate at the date
of issuance of the debentures. A 10% decrease in fiscal year-end 2000 and 1999
market interest rates would result in a negative impact to the Company of $2.2
million and $0.2 million, respectively, on the fair value of its subordinated
convertible debentures.
The Company's cash, cash equivalents, advance to affiliate, and
variable-rate short- and long-term obligations are sensitive to changes in
interest rates. Interest rate changes would result in a change in interest
income and expense due to the difference between the current interest rates on
cash, cash equivalents, advance to affiliate, and the variable-rate short- and
long-term obligations and the rate that these financial instruments may adjust
to in the future. A 10% decrease in fiscal year-end 2000 and 1999 interest rates
would result in a negative impact of $0.1 million and $0.1 million,
respectively, on the Company's net income.
Year 2000
As of the date of this report, the Company has completed its year 2000
initiatives which included: (i) testing and upgrading significant information
technology systems and facilities; (ii) assessing the year 2000 readiness of its
key suppliers, vendors, and customers; and (iii) developing contingency plans.
As a result of completing these initiatives, the Company believes that all
of its material information technology systems and critical non-information
technology systems are year 2000 compliant. In addition, the Company is not
aware of any significant supplier or vendor that has experienced material
disruption due to year 2000 issues. The Company has also developed a contingency
plan to allow its primary business operations to continue despite disruptions
due to year 2000 problems, if any, that might yet arise in the future. The costs
incurred to date by the Company in connection with the year 2000 issue have not
been material.
While the Company to date has been successful in minimizing negative
consequences arising from year 2000 issues, there can be no assurance that in
the future the Company's business operations or financial condition may not be
impacted by year 2000 problems, such as increased warranty claims, vendor and
supplier disruptions, or litigation relating to year 2000 issues.
37
<PAGE>
Thermo TerraTech Inc. 2000 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 2001 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.
Dependence on Environmental Regulation. Federal, state, and local
environmental laws govern each of the markets in which the Company conducts
business, as well as many of the Company's operations. The markets for many of
the Company's services, including industrial-remediation services,
nuclear-remediation services, hazardous waste-remedial construction services,
soil-remediation services, waste-fluids recycling services, engineering and
design services, and laboratory services, and the standards governing most
aspects of the construction and operation of the Company's facilities, were
directly or indirectly created by, and depend on, the existence and enforcement
of those laws. These laws and regulations may change in the future, requiring
new technologies or stricter standards with which the Company must comply. In
addition, these laws and regulations could be made more lenient in the future,
thereby reducing the size of the markets addressed by the Company. Any such
change in federal, state, and local environmental laws and regulations may have
a material adverse effect on the Company's business.
Responsibility for establishing and enforcing certain federal policies,
such as the federal underground storage tank policy, has been delegated to the
states, which are not only required to establish regulatory programs, but are
also permitted to impose more stringent requirements than are otherwise required
by federal law. Certain states have adopted a "risk-based" approach to
prioritizing site cleanups and setting cleanup standards, which attempts to
balance the costs of remediation against the potential harm to human health and
the environment from leaving sites unremediated. Additional states may adopt
these policies, which could 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. These laws and regulations also impose liability for
remediation and cleanup of environmental contamination, both on-site and
off-site, resulting from past and present operations. These requirements may
also be imposed as conditions to operating permits or licenses that are subject
to renewal, modification, or revocation. Laws and regulations may require the
Company to modify, supplement, replace, or curtail its operating methods,
facilities, or equipment at costs which may be substantial without any
corresponding increase in revenue. The Company is also potentially subject to
monetary fines, penalties, remediation, cleanup or stop orders, injunctions, or
orders to cease or suspend its practices. The outcome of any proceedings and
associated costs and expenses could have a material adverse impact on the
Company's business. In addition, the Company is subject to numerous laws and
regulations related to the protection of human health and safety. Such laws and
regulations may 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 attempts 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, such claims could be asserted in the future against the Company.
Uncertainty of Funding. Remediation compliance requirements and related
costs are often beyond the financial capabilities of individuals and small
companies. To address this problem, some states have established tax-supported
trust funds to assist in the financing of compliance and site remediation. As a
consequence, in many of the states in which the Company markets its soil
remediation services, the majority, and in some cases virtually all, of the soil
remediated by the Company is paid for by large companies and/or these state
trust funds. Any substantial decrease 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
38
<PAGE>
were originally estimated. As a result, several states have relaxed enforcement
activities and others have reduced compliance requirements in order to reduce
the costs of cleanup. These factors have already resulted in lower levels of
cleanup activity in some states and have had a material adverse effect on the
Company's business. Continued de-emphasis on enforcement activities and/or
further reductions in compliance requirements will have an even more severe
adverse effect on the Company's business.
The Company depends on funding from the federal and state governments, and
their agencies and instrumentalities, for compensation for its services. For
example, ThermoRetec's nuclear-remediation business provides a large portion of
its services directly or indirectly to the U.S. Department of Energy (DOE) and
the Company's engineering and design businesses perform significant amounts of
services for state and municipal governments.
Competition. The markets for many of the Company's services are regional
and are characterized by intense competition from numerous local competitors.
Some of the Company's competitors have greater technical and financial resources
than those of the Company. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the promotion and sale of their services than the
Company. Competition could increase if new companies enter the market or its
existing competitors expand their service lines. The Company's current
technology, technology under development, or ability to develop new technologies
may not be sufficient to enable it to compete effectively with its competitors.
Seasonal Influences. A majority of the Company's businesses experience
seasonal fluctuations. A majority of the Company's soil-remediation sites, as
well as the Company's fluids-recycling sites, experience declines in revenues if
severe weather conditions occur. Site remediation work and certain environmental
testing services, such as the services provided by Lancaster Laboratories,
RETEC, Randers, and Thermo NUtech, may decline in winter months as a result of
severe weather conditions. In Europe, Thermo EuroTech may experience a decline
in the feedstock delivered to and from its facilities during winter months due
to frozen waterways.
Possible Obsolescence Due to Technological Change. Technological
developments are expected to continue at a rapid pace in the environmental
services industry. The Company's technologies could be rendered obsolete or
uneconomical by technological advances by one or more companies that address the
Company's markets or by future entrants into the industry. The Company may not
have the resources to, or otherwise be successful in, developing responses to
technological advances by others.
Dependence of Thermo EuroTech on Availability of Waste Oil Supplies and
Ability to Export Refined Oil. Thermo EuroTech's North Refinery facility has
historically received a large percentage of its oil feedstock from the former
Soviet Union. North Refinery no longer receives any oil from that nation, due to
political and economic changes that have made the transportation of waste oil
difficult. To overcome this loss of supply, North Refinery has taken steps to
replace and diversify its feedstock suppliers. North Refinery may experience
future disruptions in deliveries. Any disruptions in supply could have a
material adverse effect on the Company's results of operations. In addition,
North Refinery has received a one-year exemption from the environmental
authorities in The Netherlands and the United Kingdom allowing it to export
refined oil, which would otherwise be regulated as "waste" under the
environmental regulations of those countries. If North Refinery is unable after
that time to qualify its exported oil as non-waste quality oil, or if North
Refinery is unable to extend the length of its exemption, the Company's results
of operations could be materially adversely affected.
Potential Professional Liability. The Company's business exposes it to
potential liability for the negligent performance of its services, and the
Company could face substantial liability to clients and third parties for
damages resulting from faulty designs or other professional services. The
Company currently maintains professional errors and omissions insurance, but
this insurance may not provide sufficient coverage in the event of a claim, and
the Company may not be able to maintain such coverage on acceptable terms, if at
all. A professional liability claim could result in a material adverse effect on
the Company's business, financial condition, and results of operations.
39
<PAGE>
Dependence on Sales to Government Entities. A significant portion of the
Company's revenues is derived from municipalities, state governments, and
government utility authorities. Any decreases in purchases by these entities,
including decreases resulting from shifts in priorities or overall budgeting
limitations, could have a material adverse effect on the Company's business,
financial condition, and results of operations. In addition, most of the
Company's contracts require the Company to perform specific services for a fixed
fee. Contracts with governmental entities often permit the purchaser to cancel
the agreement at any time. A significant overrun in the Company's expenses or
cancellation of a significant contract could also result in a material adverse
effect on the Company's business, financial condition, and results of
operations. The Company's contracts with governmental entities are also subject
to other risks, including contract suspensions; protests by disappointed bidders
of contract awards, which can result in the re-opening of the bidding process;
and changes in government policies or regulations.
Risks Associated with Cash Management Arrangement with Thermo Electron.
The Company participates in a cash management arrangement with its parent
company, Thermo Electron. Under this cash management arrangement, the Company
lends its excess cash to Thermo Electron on an unsecured basis. The Company has
the contractual right to withdraw its funds invested in the cash management
arrangement upon 30 days' prior notice. Thermo Electron is contractually
required to maintain cash, cash equivalents, and/or immediately available bank
lines of credit equal to at least 50% of all funds invested under the cash
management arrangement by all Thermo Electron subsidiaries other than wholly
owned subsidiaries. The funds are held on an unsecured basis and therefore are
subject to the credit risk of Thermo Electron. The Company's ability to receive
its cash upon notice of withdrawal could be adversely affected if participants
in the cash management arrangement demand withdrawal of their funds in an
aggregate amount in excess of the 50% reserve required to be maintained by
Thermo Electron. In the event of a bankruptcy of Thermo Electron, the Company
would be treated as an unsecured creditor and its right to receive funds from
the bankruptcy estate would be subordinated to secure creditors and would be
treated on a pari passu basis with all other unsecured creditors. Further, all
cash withdrawn by the Company from the cash management arrangement within one
year before the bankruptcy would be subject to rescission. The inability of
Thermo Electron to return the Company's cash on a timely basis or at all could
have a material adverse effect on the Company's results of operations and
financial position.
40
<PAGE>
Thermo TerraTech Inc. 2000 Financial Statements
Selected Financial Information
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts) 2000 (a) 1999 (b) 1998 (c) 1997 (d) 1996
-------------------------------------------------- ---------- ----------- ---------- ---------- ---------
Statement of Operations Data
Revenues $307,329 $ 310,039 $298,786 $278,503 $220,484
Income (Loss) Before Extraordinary Item (43,326) (1,421) 3,273 (162) 3,447
Net Income (Loss) (43,219) (1,421) 3,273 (162) 3,447
Earnings (Loss) per Share:
Basic (2.27) (.07) .18 (.01) .20
Diluted (2.27) (.07) .17 (.01) .18
Balance Sheet Data
Working Capital $ 30,733 $ 67,043 $ 69,319 $ 77,315 $ 66,008
Total Assets 304,553 350,465 360,526 393,784 333,656
Long-term Obligations 118,113 158,617 153,144 165,186 155,384
Shareholders' Investment 51,570 92,157 97,130 83,526 85,870
(a) Reflects a $58.7 million pretax charge for restructuring and related costs.
(b) Reflects a $10.2 million pretax charge for restructuring costs.
(c) Reflects a $3.0 million pretax gain from ThermoRetec's sale of its investment in a joint venture.
(d) Reflects $7.8 million of restructuring costs and a loss $1.5 million relating to the sale of the
Company's J. Amerika division. Also reflects the issuance of $115.0 million
principal amount of 4 7/8% subordinated convertible debentures, and a gain
on issuance of stock by subsidiary of $1.5 million.
41
<PAGE>
Thermo TerraTech Inc. 2000 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TTT. The following table sets forth the high and low sales prices of
the Company's common stock for fiscal 2000 and 1999, as reported in the
consolidated transaction reporting system.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fiscal 2000 Fiscal 1999
Quarter High Low High Low
-------------------------------------------------------------- ---------- ---------- ---------- ----------
First $5 13/16 $3 7/8 $6 3/4 $4 1/2
Second 5 15/16 4 1/2 5 3 3/4
Third 6 13/16 5 1/4 4 5/8 3 15/16
Fourth 8 1/2 6 3/4 5 3/4 4 3/8
As of April 28, 2000, the Company had 1,244 holders of record of its
common stock. This does not include holdings in street or nominee names. The
closing market price on the American Stock Exchange for the Company's common
stock on April 28, 2000, was $7 1/2 per share.
Common stock of the Company's ThermoRetec Corporation and The Randers
Killam Group Inc. subsidiaries were traded on the American Stock Exchange
(symbols THN and RGI, respectively) until June 6, 2000, and May 16, 2000,
respectively.
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Company's Board of Directors and will depend upon, among other
factors, the Company's earnings, capital requirements, and financial condition.
</TABLE>
