SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended April 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-12636
THERMORETEC CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 59-3203761
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Damonmill Square
9 Pond Lane, Suite 5A
Concord, Massachusetts 01742-2851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of April 30, 1999, was approximately $8,465,000.
As of April 30, 1999, the Registrant had 13,554,498 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Fiscal 1999 Annual Report to Shareholders for the
year ended April 3, 1999, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on September 16, 1999, are incorporated by reference
into Part III.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
ThermoRetec Corporation (the Company or the Registrant, formerly Thermo
Remediation Inc.) is a national provider of environmental-liability and
resource-management services. Through a nationwide network of offices, the
Company offers these and related consulting services in four segments:
Consulting and Engineering, Nuclear Remediation, Soil Remediation, and Fluids
Recycling.
The Company's Consulting and Engineering segment provides consultation,
engineering, and on-site services to help clients manage problems associated
with environmental compliance, resource management, and the remediation of
industrial sites contaminated with organic and inorganic wastes and residues.
The Company also performs the cleanup of hazardous waste sites for government
and industry as a prime construction contractor and completes predesigned
remedial action contracts at sites containing hazardous, toxic, and radioactive
wastes. The Company develops and implements management and computer-based
systems that aid in the collection and application of environmental data,
helping to establish or improve a customer's environmental-compliance programs
while controlling the related costs.
The Company's Nuclear Remediation segment provides services to remove
radioactive contaminants from sand, gravel, and soil, as well as health physics
services, radiochemistry laboratory services, radiation dosimetry services,
radiation-instrument calibration and repair services, and radiation-source
production.
Through the Company's Soil Remediation segment, the Company designs and
operates facilities for the remediation of nonhazardous soil, and operates such
facilities on the East and West Coasts. The Company also designs and operates
mobile equipment for the on-site remediation of such wastes. During fiscal
1999*, the Company announced plans to close two soil-recycling facilities, one
of which closed in March 1999. The Company is actively seeking a buyer for the
other soil-recycling facility. In May 1999, the Company announced plans to sell
three additional soil-recycling facilities. In connection with these actions,
the Company expects to record approximately $10 million of charges, primarily in
the first quarter of fiscal 2000. For the fiscal year ended April 3, 1999,
revenues and operating income from these businesses totaled $8.0 million and
$0.4 million, respectively.
The Company's Fluids Recycling segment collects, tests, processes, and
recycles used motor oil and other industrial fluids.
The Company was incorporated in November 1991 as an indirect, wholly owned
subsidiary of Thermo TerraTech Inc. On October 1, 1993, pursuant to a
reorganization, Thermo TerraTech contributed to the Company certain additional
assets and liabilities pertaining to its soil-remediation business. As of April
3, 1999, Thermo TerraTech owned 9,486,508 shares of the common stock of the
Company, representing 70% of such stock outstanding. An 87%-owned publicly
traded subsidiary of Thermo Electron Corporation, Thermo TerraTech provides
industrial outsourcing services and manufacturing support encompassing a broad
range of specializations, including environmental-liability management,
engineering and design, laboratory testing, and metal treating.
As of April 3, 1999, Thermo Electron owned 264,700 shares of the Company's
common stock, representing 2% of such stock outstanding. Thermo Electron is a
world leader in monitoring, analytical, and biomedical instrumentation;
biomedical products including heart-assist devices, respiratory-care equipment,
and mammography systems; and paper recycling and papermaking equipment. Thermo
Electron also develops alternative-energy systems and clean fuels, provides a
range of services including industrial outsourcing and environmental-liability
management, and conducts research and development in advanced imaging, laser,
and electronic information-management technologies. Thermo Electron and Thermo
TerraTech may purchase shares of the Company's common stock from time to time in
the open market or in negotiated transactions. During fiscal 1999, Thermo
Electron purchased 70,800 shares of the Company's common stock in the open
market for $0.2 million.
- -------------------
* References to fiscal 1999, 1998, and 1997 herein are for the fiscal years
ended April 3, 1999, April 4, 1998, and March 29, 1997, respectively.
2
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Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company and its sister subsidiary, The Randers Killam Group Inc., as well as
their parent company, Thermo TerraTech, would be merged into Thermo Electron. As
a result, all three companies would become wholly owned subsidiaries of Thermo
Electron. The public shareholders of the Company, The Randers Killam Group, and
Thermo TerraTech would receive common stock in Thermo Electron in exchange for
their shares. The completion of these transactions is subject to numerous
conditions, as outlined in Note 16 to Consolidated Financial Statements in the
Registrant's Fiscal 1999 Annual Report to Shareholders, which information is
incorporated herein by reference.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report on Form
10-K. 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 under the heading
"Forward-looking Statements" in the Registrant's Fiscal 1999 Annual Report to
Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Segments
Financial information concerning the company's segments is summarized in
Note 14 to Consolidated Financial Statements in the Registrant's Fiscal 1999
Annual Report to Shareholders, which information is incorporated herein by
reference.
(c) Description of Business
(i) Principal Products and Services
Consulting and Engineering
The Company provides environmental consulting and remediation construction
management to clients in the transportation, refining, chemical, wood-treating,
gas, and electric utility industries across the nation. Through its consulting,
engineering, and on-site services, the Company offers a broad array of remedial
solutions, all of which are applied from a risk-management perspective, to help
clients manage problems associated with environmental compliance, resource
management, and the remediation of industrial sites contaminated with various
wastes and residues. The Company provides particular expertise in bioremediation
and in managing wastes from manufactured-gas plants, refineries, and railroad
properties.
The Company also performs cleanups of hazardous waste sites for government
and industry as a prime construction contractor and completes predesigned
remedial action contracts at sites containing hazardous, toxic, and radioactive
wastes. Under contracts with federal and state governments, and other public and
private sector clients, the Company also provides project management and
construction services for the remediation of hazardous and nonhazardous wastes.
Most of this contract work is obtained through a bid process, with the job being
awarded to the best qualified bidder.
3
<PAGE>
In addition, the Company helps public utilities, government institutions,
and Fortune 500 companies develop and implement management and computer-based
systems that aid in the collection and application of environmental and
resource-management data. By helping to establish or improve a customer's
environmental-compliance program, the Company's customized services promote and
support the integration of environmental-management functions with everyday
business activities. The Company's services help multinational companies
accurately estimate and control the cost of their environmental-compliance and
health and safety efforts. The Company also develops measurement systems that
track clients' progress toward their stated environmental performance goals.
Nuclear Remediation
The Company provides services to remove radioactive contaminants from
sand, gravel, and soil, as well as health physics services, radiochemistry
laboratory services, radiation dosimetry services, radiation-instrument
calibration and repair services, and radiation-source production. As part of its
radiation and nuclear/health physics services business, the Company provides
site surveys for radioactive materials and on-site samples, as well as analysis
in support of decontamination programs and dosimetry services to measure
personnel exposure. In addition, using its proprietary segmented-gate system
technology, the Company removes radioactive contaminants from sand, gravel, and
soil. A substantial part of the Company's health physics services has been
performed under the U.S. Department of Energy's remedial action programs.
Soil Remediation
The Company designs and operates facilities for the remediation of
nonhazardous soil. The Company's soil-remediation centers are environmentally
secure facilities for receiving, storing, and processing petroleum-contaminated
soils. Each site consists principally of a soil-remediation unit and a
soil-storage area. The Company currently provides soil-remediation services at
facilities in California, Oregon, Washington, Maryland, and New York.
The market for remediation of petroleum-contaminated soils, as with many
other waste markets, was created by environmental regulations. The market for
soil-remediation services has been driven largely by state programs to enforce
the Environmental Protection Agency's underground storage tank (UST) regulations
and to fund cleanups. UST compliance requirements and attendant remediation
costs are often beyond the financial capabilities of individuals and smaller
companies. To address this problem, some states established tax-supported trust
funds to assist in the financing of UST compliance and remediation. Many states
have realized that the number of sites requiring remediation and the costs of
compliance are substantially higher than were originally estimated. As a result,
several states have significantly reduced compliance requirements and altered
regulatory approaches and standards in order to reduce the costs of cleanup.
More lenient regulatory standards, reduced enforcement, and uncertainty with
respect to such changes have resulted in lower levels of cleanup activity in
most states where the Company conducts business, which had a material adverse
effect on the Company's business in recent years. Although the Company expects
this market to remain viable for some time after April 3, 1999, there can be no
assurance that this business will not decline in future years. In May 1999, the
Company announced plans to sell three additional soil-recycling facilities. In
addition, underground and aboveground tank regulations, clean water legislation,
and real estate transfer and financing transactions also influence demand for
soil-remediation services.
Fluids Recycling
The Company offers a full spectrum of environmental services related to
managing and recycling non-hazardous, liquid, and solid materials generated by
business and industry. The Company's client base is largely public retail and
industrial businesses, but also includes municipalities, public utilities,
railroads, the mining industry, and government agencies. The materials managed
by the Company for its customers primarily are used oils and oil-contaminated
waters, which are continuously generated as part of the customers' operations.
As such, the Company provides services for its customers on a recurring basis.
The Company processes the materials it collects into products for resale and/or
recycling, such as fuel, glycol, steel, and clean water. The Company has
expanded its services to include a variety of field technical services,
including on-site waste sampling and testing, emergency response, and tank
cleaning.
4
<PAGE>
The Company currently operates from eight permitted facilities located in
Arizona, New Mexico, Nevada, Colorado, Utah, Idaho, and Oregon. Each facility
serves distinctive local markets, and utilizes its own fleet of mobile equipment
to facilitate liquid waste collection and the delivery of finished recycled
products.
(ii) New Products
The Company has made no commitments to new products that would require the
investment of a material amount of the Company's assets.
(iii)
Raw Materials
Supplies purchased by the Company are available either from a number of
different suppliers or from alternative sources that could be developed without
a material adverse effect on the Company's business. To date, the Company has
experienced no difficulties in obtaining these materials.
(iv) Patents, Licenses, and Trademarks
The Company currently owns or has rights under licenses to a number of
U.S. patents. Although the Company believes that patent protection provides it
with competitive advantages with respect to certain portions of its business and
will continue to seek patent protection when appropriate, the Company also
believes that its business depends primarily upon trade secrets and the
technical and marketing expertise of its personnel.
The Company has a perpetual, exclusive, and royalty-free license from
Thermo TerraTech to develop, own, and operate soil-remediation centers and to
employ mobile remediation equipment incorporating Thermo TerraTech's technology
throughout North America (other than in Massachusetts and New Hampshire).
(v) 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 may decline in winter months as a result of severe weather conditions.
(vi) Working Capital Requirements
In general, there are no special credit terms extended to customers that
would have a material adverse effect on the Company's working capital.
(vii)Dependency on a Single Customer
A substantial portion of the Company's nuclear-remediation services have
been provided to the U.S. government. Total revenues to U.S. government agencies
accounted for 13%, 10%, and 30% of the Company's total revenues in fiscal 1999,
1998, and 1997, respectively. Revenues from BP Amoco Corporation accounted for
12% of the Company's total revenues in fiscal 1999.
5
<PAGE>
(viii) Backlog
<TABLE>
<CAPTION>
The Company's backlog of firm orders at fiscal year-end 1999 and 1998 was:
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
Consulting and Engineering $26,750 $36,772
Nuclear Remediation 20,885 15,088
------- -------
$47,635 $51,860
======= =======
The Company believes that substantially all of the backlog at April 3,
1999, will be completed during fiscal 2000. Certain of these orders are subject
to cancellation by the customer upon payment of a cancellation charge and all
federal government contracts are subject to termination at any time by the
government without penalty. The Company does not believe that the level of, or
changes in the level of, its backlog is necessarily indicative of intermediate
or long-term trends in its business. Soil-remediation and fluids-recycling
services are provided on a current basis pursuant to purchase orders.
Accordingly, there is no backlog for these services.
(ix) Government Contracts
See Dependency on a Single Customer.
(x) Competition
Many of the Company's businesses are engaged in highly competitive,
regional markets, with competition coming from numerous small firms offering
limited services, as well as much larger firms that offer an array of services.
In the Consulting and Engineering segment, the Company competes with
numerous regional and local companies as well as a number of national
remediation contractors. The Company competes primarily based on value, with the
vast majority of the contracts it seeks awarded on the basis of scope,
effectiveness, and cost. Other competitive factors in this segment include:
reputation; experience; breadth and quality of services offered; and technical,
managerial, and business proficiency.
The type of nuclear-remediation services offered by the Company's Nuclear
Remediation segment are also offered by many large national companies. The
Company competes primarily on the basis of its proprietary technology and price.
Competition in the Soil Remediation segment is intense. The Company's
principal competitors are landfills, including major landfill companies. The
Company also currently competes with companies offering a wide range of disposal
options, including other fixed-site, thermal-treatment facilities, operators of
mobile thermal-treatment facilities, bioremediation and vapor-extraction
facilities, and, in certain states, with asphalt plants and brick kilns that use
the contaminated soil in their production processes. Competition in the
soil-remediation market has always been highly localized, consisting mostly of
single-site or single-unit operators. Competitive conditions limit the prices
charged by the Company in each local market for soil-remediation services.
Pricing is therefore a major competitive factor for the Company. The Company
believes competition and price pressure will remain intense for the foreseeable
future.
</TABLE>
6
<PAGE>
Competition in the Fluids Recycling segment is highly fragmented and
ranges in size from small, under-capitalized private enterprises to larger
national public companies. At both ends of this spectrum, the industry continues
to consolidate and restructure. The Company competes primarily on the basis of
quality and price.
(xi) Environmental Protection Regulations
The Company believes that compliance by the Company with federal, state,
and local environmental protection regulations will not have a material adverse
effect on its capital expenditures, earnings, or competitive position.
(xii) Number of Employees
As of April 3, 1999, the Company employed approximately 1,000 people.
(d) Financial Information About Geographic Areas
The Company's sales in foreign locations are currently insignificant.
(e) Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age Present Title (Fiscal Year First Became Executive Officer)
---------------------------- ------ ---------------------------------------------------------------
<S> <C> <C>
Dr. Robert W. Dunlap 62 President and Chief Executive Officer (1996)
Jeffrey L. Powell 40 Senior Vice President (1993)
Nels R. Johnson 48 Vice President (1995)
Theo Melas-Kyriazi 39 Chief Financial Officer (1998)
Paul F. Kelleher 56 Chief Accounting Officer (1993)
Each executive officer serves until his successor is chosen or appointed by
the Board of Directors and qualified or until his earlier resignation, death, or
removal. Mr. Kelleher has held comparable positions for at least five years,
with either the Company, Thermo TerraTech, or Thermo Electron. Dr. Dunlap has
been President and Chief Executive Officer of the Company since April 1998, was
a Vice President of the Company from 1996 through April 1998, and has served as
President of RETEC, a division of the Company, which he helped found, since
1985. Mr. Powell served as President of the Company since its inception in 1993,
and as its Chief Executive Officer from May 1997 until April 1998, when he was
named Senior Vice President. Mr. Johnson has been Vice President of the Company
since 1995. He has served as President of the Company's Thermo Nutech business
since 1988. Mr. Melas-Kyriazi was appointed Chief Financial Officer of the
Company and Thermo Electron on January 1, 1999. He joined Thermo Electron in
1986 as Assistant Treasurer, and became Treasurer in 1988. He was named
President and Chief Executive Office of Thermo Spectra Corporation, a public
subsidiary of Thermo Instrument Systems Inc. in 1994, a position he held until
becoming Vice President of Corporate Strategy for Thermo Electron in 1998. Mr.
Melas-Kyriazi remains a Vice President of Thermo Electron. Messrs. Dunlap,
Powell, and Johnson are full-time employees of the Company. Messrs.
Melas-Kyriazi and Kelleher are full-time employees of Thermo Electron, but
devote such time to the affairs of the Company as the Company's needs reasonably
require.
7
<PAGE>
Item 2. Properties
The location and general character of the Company's properties by segment
as of April 3, 1999, are:
Consulting and Engineering
The Company occupies approximately 112,000 square feet, pursuant to leases
expiring in fiscal 2000 through 2003, primarily in Colorado, Pennsylvania,
Massachusetts, Washington, Texas, Indiana, and North Carolina, from which it
provides environmental construction and remediation construction management
services.
Nuclear Remediation
The Company leases approximately 26,000 square feet, pursuant to leases
expiring in fiscal 2000 through 2001, in New Mexico and Tennessee, and owns
approximately 33,500 square feet in New Mexico and California, from which it
provides nuclear remediation services.
Soil Remediation
The Company owns approximately 72 acres in Maryland, California, and
Oregon, from which it provides soil-remediation services. The Company occupies
approximately 20 acres in New York, Washington, and South Carolina, pursuant to
leases expiring in fiscal 2000 through 2006, from which it provides
soil-remediation services. The Company also occupies approximately 12,000 square
feet of office and engineering space in Florida, pursuant to a lease expiring in
fiscal 2000.
Fluids Recycling
The Company owns approximately 50,000 square feet in Idaho and Arizona and
occupies an aggregate of approximately six acres on a site in Arizona and on a
site in Nevada pursuant to leases expiring in fiscal 2003, upon which it has
constructed fluids storage and processing equipment.
The Company believes that these facilities are adequate for its present
operations and that other suitable space is readily available if any of such
leases are not extended.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
8
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information concerning the market and market price for the Registrant's
Common Stock, $.01 par value, and dividend policy are included under the
sections labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's Fiscal 1999 Annual Report to Shareholders and is incorporated
herein by reference.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's Fiscal 1999 Annual Report to Shareholders and is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1999 Annual Report to Shareholders and is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1999 Annual Report to Shareholders and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements as of April 3, 1999,
and supplementary data are included in the Registrant's Fiscal 1999 Annual
Report to Shareholders and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Not applicable.
9
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference from the material contained under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" under the caption
"Stock Ownership" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated herein by
reference from the material contained under the caption "Executive Compensation"
in the Registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated herein by
reference from the material contained under the caption "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by
reference from the material contained under the caption "Relationship with
Affiliates" in the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the close of the fiscal year.
10
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a,d) Financial Statements and Schedules
(1)The consolidated financial statements set forth in the list below are
filed as part of this Report.
(2)The consolidated financial statement schedule set forth in the list
below is filed as part of this Report.
(3)Exhibits filed herewith or incorporated herein by reference are set
forth in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders' Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedule filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or the notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Date: June 9, 1999 THERMORETEC CORPORATION
By: /s/ Robert W. Dunlap
Robert W. Dunlap
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of June 9, 1999.
Signature Title
By: /s/ Robert W. Dunlap President, Chief Executive Officer, and
Robert W. Dunlap Director
By: /s/ Theo Melas-Kyriazi Chief Financial Officer and Director
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ John P. Appleton Chairman of the Board and Director
John P. Appleton
By: /s/ Elias P. Gyftopoulos Director
Elias P. Gyftopoulos
By: /s/ Brian D. Holt Director
Brian D. Holt
By: /s/ Fred Holubow Director
Fred Holubow
By: /s/ Frank E. Morris Director
Frank E. Morris
By: /s/ William A. Rainville Director
William A. Rainville
12
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Report of Independent Public Accountants
To the Shareholders and Board of Directors of ThermoRetec Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in ThermoRetec Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated May 11, 1999 (except with respect to the
matters discussed in Note 18, as to which the date is June 1, 1999). Our audits
were made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in Item 14 on page 11 is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
consolidated financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
May 11, 1999
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE II
THERMORETEC CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at
Beginning Provision Accounts Balance
of Charged to Accounts Written at End
Description Year Expense Recovered Off Other (a) of Year
- ----------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Allowance for Doubtful Accounts
Fiscal Year Ended April 3, 1999 $1,690 $1,026 $ - $ (360) $ (650) $1,706
Fiscal Year Ended April 4, 1998 $1,557 $ 193 $ - $ (144) $ 84 $1,690
Fiscal Year Ended March 29, 1997 $ 786 $ 162 $ 5 $ (191) $ 795 $1,557
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Description Balance at Provision Activity Balance
Beginning Charged to Charged to at End
of Year Expense (c) Reserve of Year
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
Accrued Restructuring Costs (b)
Fiscal Year Ended April 3, 1999 $ - $1,054 $(252) $ 802
(a) Includes allowances of businesses acquired during the year as described in
Note 3 to Consolidated Financial Statements in the Registrant's Fiscal 1999
Annual Report to Shareholders. Fiscal 1999 amount includes an acquired company's
reserves that were not required and were therefore reversed to cost in excess
of net assets of acquired companies.
(b) The nature of activity in this account is described in Note 12 to
Consolidated Financial Statements in the Registrant's Fiscal 1999 Annual
Report to Shareholders.
(c) Excludes provisions of $8.1 million and $7.8 million in fiscal 1999 and
1997, respectively, for asset writedowns.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1 Form of Agreement of Merger between Thermo Remediation Inc.
(California) and Thermo Remediation Inc. (Delaware) (filed as
Exhibit 2.1 to the Registrant's Registration Statement on Form
S-1 [Reg. No. 33-70544] and incorporated herein by reference).
2.2 Securities Purchase Agreement dated as of September 27, 1993,
between TPS Technologies Inc. and the Registrant (filed as
Exhibit 2.2 to the Registrant's Registration Statement on Form
S-1 [Reg. No. 33-70544] and incorporated herein by reference).
2.3 Asset Transfer Agreement dated as of October 1, 1993, among
Thermo TerraTech Inc. (formerly Thermo Process Systems Inc.),
TPS Technologies Inc., and the Registrant (filed as Exhibit 2.3
to the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-70544] and incorporated herein by reference).
2.4 Exclusive License Agreement dated as of October 1, 1993, among
Thermo TerraTech Inc. (formerly Thermo Process Systems Inc.),
TPS Technologies Inc., and the Registrant (filed as Exhibit 2.4
to the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-70544] and incorporated herein by reference).
2.5 Non-Competition and Non-Disclosure Agreement dated as of
October 1, 1993, among Thermo TerraTech Inc. (formerly Thermo
Process Systems Inc.), TPS Technologies Inc., and the
Registrant (filed as Exhibit 2.5 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-70544] and
incorporated herein by reference).
3.1 Certificate of Incorporation, as amended, of the Registrant (filed as
Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 3, 1998 [File No. 1-12636] and incorporated
herein by reference).
3.2 Bylaws of the Registrant (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-70544] and incorporated herein by reference).
3.3 Fiscal Agency Agreement dated as of May 5, 1995, among the Registrant,
Thermo Electron Corporation, and Chemical Bank, as Fiscal Agent, with
respect to the Registrant's 4 7/8% convertible subordinated
debentures due 2000 (filed as Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended April 4, 1998
[File No. 1-12636] and incorporated herein by reference).
10.1 Corporate Services Agreement dated June 1, 1992, between Thermo
Electron Corporation and the Registrant (filed as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 [Reg. No. 33-70544]
and incorporated herein by reference).
10.2 Thermo Electron Corporate Charter, as amended and restated, effective
January 3, 1993 (filed as Exhibit 10.1 to Thermo Electron's Annual
Report on Form 10-K for the fiscal year ended January 2, 1993 [File
No. 1-8002] and incorporated herein by reference).
10.3 Tax Allocation Agreement dated as of June 1, 1992, between
Thermo TerraTech Inc. (formerly Thermo Process Systems Inc.)
and the Registrant (filed as Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-70544] and
incorporated herein by reference).
15
<PAGE>
Exhibit
Number Description of Exhibit
10.4 Securities Purchase Agreement dated as of September 27, 1993, between
Fred Holubow and the Registrant (filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-70544] and incorporated herein by reference).
10.5 Master Repurchase Agreement dated January 1, 1994, between the Registrant
and Thermo Electron Corporation (filed as Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1 [Reg. No. 33-77818]
and incorporated herein by reference).
10.6 Equity Incentive Plan of the Registrant (filed as Exhibit 10.7
to the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-70544] and incorporated herein by reference).
10.7 Deferred Compensation Plan for Directors of the Registrant
(filed as Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-70544] and incorporated
herein by reference).
10.8 Amended and Restated Directors Stock Option Plan (filed as Exhibit
10.8 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended April 1, 1995 [File No. 1-12636] and incorporated herein
by reference).
In addition to the stock-based compensation plans of the Registrant,
the executive officers of the Registrant may be granted awards under
stock-based compensation plans of Thermo Electron and Thermo
TerraTech for services rendered to the Registrant or to such
affiliated corporations. The terms of such plans are substantially
the same as those of the Registrant's Equity Incentive Plan.
10.9 Form of Indemnification Agreement for Officers and Directors
(filed as Exhibit 10.10 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-70544] and incorporated
herein by reference).
10.10 Stock Purchase and Note Issuance Agreement dated as of November
22, 1993, between Thermo TerraTech Inc. (formerly Thermo
Process Systems Inc.) and the Registrant (filed as Exhibit
10.11 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-70544] and incorporated herein by reference).
10.11 $2,650,000 principal amount Subordinated Convertible Note dated
as of November 22, 1993, made by the Registrant, issued to
Thermo TerraTech Inc. (formerly Thermo Process Systems Inc.)
(filed as Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-70544] and incorporated
herein by reference).
10.12 Note dated December 24, 1994, from the Registrant to Thermo Electron
Corporation (filed as Exhibit 10.12 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended April 1, 1995 [File No.
1-12636] and incorporated herein by reference).
10.13 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of February 26, 1998, between the Registrant and
Thermo TerraTech Inc. (Filed as Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended April 4, 1998
[File No. 1-12636] and incorporated herein by reference).
10.14 Agreement and Plan of Merger dated as of December 1, 1995, by and
among the Registrant, TRI Acquisition Inc. and Remediation
Technologies, Inc. (filed as Exhibit 2(a) to Thermo TerraTech's
Current Report on Form 8-K relating to the events occurring on
December 8, 1995 [File No. 1-9549] and incorporated herein by
reference).
16
<PAGE>
Exhibit
Number Description of Exhibit
10.15 Agreement and Plan of Merger dated as of June 28, 1995, by and among
Thermo TerraTech Inc., Eberline Acquisition Inc., the Registrant, and
Eberline Holdings Inc. (filed as Appendix B to the Registrant's Proxy
Statement for the Annual Meeting held on December 13, 1995 [File No.
1-12636] and incorporated herein by
reference).
10.16 Restated Stock Holdings Assistance Plan and Form of Executive Loan
(filed as Exhibit 10.17 to the Registrant's Annual Report on Form
10-K for the fiscal year ended on April 4, 1998 [File No. 1-12636]
and incorporated herein by reference).
10.17 Master Cash Management, Guarantee Reimbursement, and Loan Agreement
dated as of June 1, 1999, between the Registrant and Thermo Electron
Corporation.
13 Annual Report to Shareholders for the fiscal year ended April 3, 1999
(only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
17
</TABLE>
MASTER CASH MANAGEMENT, GUARANTEE
REIMBURSEMENT AND LOAN AGREEMENT
This AGREEMENT is entered into as of the 1st day of June, 1999 by and
between Thermo Electron Corporation, a Delaware corporation ("Thermo Electron")
and ThermoRetec Corporation, a Delaware corporation (the "Subsidiary").
WITNESSETH:
WHEREAS, Thermo Electron and the Subsidiary are party to a Master
Repurchase Agreement, as amended and restated, which contains terms governing a
cash management arrangement between them and a Master Guarantee Reimbursement
and Loan Agreement, as amended and restated, which contains terms relating to
intercompany credit support and a short term borrowing facility;
WHEREAS, Thermo Electron and the Subsidiary desire to establish a new cash
management arrangement and short term borrowing facility between them in lieu of
the arrangements set forth in the Master Repurchase Agreement and the Master
Guarantee Reimbursement and Loan Agreement and also to consolidate the terms
relating to intercompany credit support in one agreement;
WHEREAS, the Subsidiary and other majority owned subsidiaries of Thermo
Electron that join in this Agreement (collectively, the "Majority-Owned
Subsidiaries") and their wholly-owned subsidiaries wish to enter into various
financial transactions, such as convertible or nonconvertible debt, loans,
equity offerings, and other contractual arrangements with third parties (the
"Underlying Obligations") and may provide credit support to, on behalf of or for
the benefit of, other subsidiaries of Thermo Electron ("Credit Support
Obligations");
WHEREAS, the Majority Owned Subsidiaries and Thermo Electron acknowledge
that the Majority Owned Subsidiaries and their wholly-owned subsidiaries may be
unable to enter into many kinds of Underlying Obligations without a guarantee of
their performance thereunder from Thermo Electron (a "Parent Guarantee") or
without obtaining Credit Support Obligations from other Majority Owned
Subsidiaries;
WHEREAS, certain Majority Owned Subsidiaries ("Second Tier Majority Owned
Subsidiaries") may themselves be majority owned subsidiaries of other Majority
Owned Subsidiaries ("First Tier Majority Owned Subsidiaries");
WHEREAS, for various reasons, Parent Guarantees of a Second Tier Majority
Owned Subsidiary's Underlying Obligations may be demanded and given without the
respective First Tier Majority Owned Subsidiary also issuing a guarantee of such
Underlying Obligation;
WHEREAS, Thermo Electron may itself make a loan or provide other credit to
a Second Tier Majority Owned Subsidiary or its wholly-owned subsidiaries under
circumstances where the applicable First Tier Majority Owned Subsidiary does not
provide such credit; and
<PAGE>
WHEREAS, Thermo Electron is willing to consider continuing to issue Parent
Guarantees and providing credit, and the Majority Owned Subsidiaries are willing
to consider continuing to provide Credit Support Obligations, on the terms and
conditions set forth below;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by each party hereto, the parties agree as follows:
1. Cash Management Arrangement. The Subsidiary directly, or through its
wholly-owned U.S. subsidiaries, may, from time to time, lend its excess cash to
Thermo Electron (a "Transaction"), on an unsecured basis, bearing interest at a
rate equal to the 30-day Dealer Commercial Paper Rate as reported in the Wall
Street Journal (the "DCP Rate") plus 50 basis points, which rate shall be
adjusted on the second business day of each fiscal month of the Subsidiary and
shall be in effect for the entirety of such fiscal month. The Subsidiary shall
institute a Transaction by depositing its excess cash in the Subsidiary's
concentration account at BankBoston Corporation ("BankBoston") or other bank
designated by Thermo Electron. At the end of each business day, the cash balance
deposited in the Subsidiary's concentration account shall be transferred to
Thermo Electron's intercompany account at BankBoston or other bank designated by
Thermo Electron. Thermo Electron shall indicate on its books the balance of the
Subsidiary's cash held by Thermo Electron under this arrangement. After each
fiscal month end, Thermo Electron shall provide the Subsidiary a report
indicating the Subsidiary's aggregate cash balance ("Excess Cash") held by
Thermo Electron hereunder. The Subsidiary shall have the right to withdraw all
or part of its Excess Cash upon 30 days' prior notice to Thermo Electron. Within
30 days of receipt of such withdrawal notice, Thermo Electron shall transfer the
portion of the Excess Cash requested for withdrawal to an account designated by
the Subsidiary. Thermo Electron shall maintain, at all times, cash, cash
equivalents and/or immediately available bank lines of credit equal to at least
50% of the cash balances of the Subsidiary and of all other participating
subsidiaries of Thermo Electron, other than wholly-owned subsidiaries of Thermo
Electron, held by Thermo Electron under this arrangement. Interest shall be
payable on the Excess Cash by Thermo Electron to the Subsidiary each fiscal
month in arrears. In addition, the Subsidiary's non-U.S. subsidiaries may, from
time to time, lend or advance their excess cash to Thermo Electron, on an
unsecured basis, bearing interest at rates set by Thermo Electron at the
beginning of each month, based to the extent practicable on comparable interest
rates generally available in the local jurisdiction of such participating
non-U.S. subsidiary. Further, Thermo Electron and such non-U.S. subsidiaries
participating in the cash management arrangement with Thermo Electron shall
establish mutually agreeable procedures governing such cash management
arrangement.
2. Loans and Advances. Upon request from the Subsidiary, Thermo Electron
may make loans and advances to the Subsidiary on a short-term, revolving credit
basis, from time to time, in such amounts as mutually determined by Thermo
Electron and the Subsidiary. The aggregate principal amount of such loans and
advances shall be reflected on the books and records of the Subsidiary and
Thermo Electron. All such loans and advances shall be on an unsecured basis
unless specifically provided otherwise in separate loan documents executed at
that time. The Subsidiary shall pay interest on the aggregate unpaid principal
amount of such loans from time to time outstanding at a rate equal to the DCP
2
<PAGE>
Rate plus one hundred fifty (150) basis points, which rate shall be adjusted on
the second business day of each fiscal month of the Subsidiary and shall be in
effect for the entirety of such fiscal month. If, however, one or more of the
Subsidiary's majority-owned U.S. subsidiaries (i.e., not wholly-owned) is also
participating in the cash management arrangement with Thermo Electron, then the
rate payable on the Subsidiary's outstanding principal balance shall be
calculated as follows: If the aggregate amount of the Subsidiary's
majority-owned U.S. subsidiaries' cash balances under the cash management
arrangement ("Majority-Owned Excess Cash") equals or exceeds the Subsidiary's
outstanding principal balance, then the Subsidiary shall pay interest on the
aggregate unpaid principal amount of such loans at a rate per annum equal to the
DCP Rate plus fifty (50) basis points. If the aggregate amount of the
Majority-Owned Excess Cash is less than the Subsidiary's outstanding principal
balance, then (A) the Subsidiary shall pay interest at a rate per annum equal to
the DCP Rate plus fifty (50) basis points on that portion of the unpaid
principal amount equal to the Majority-Owned Excess Cash, and (B) the Subsidiary
shall pay interest at a rate per annum equal to the DCP Rate plus one hundred
fifty (150) basis points on that portion of the unpaid principal amount equal to
(i) the Subsidiary's outstanding principal balance, minus (ii) the
Majority-Owned Excess Cash. The interest rates set forth in the prior two
sentences shall be adjusted on the second business day of each fiscal month of
the Subsidiary and shall be in effect for the entirety of such fiscal month.
Interest shall be computed on a 360-day basis. Interest is payable each fiscal
month in arrears. The aggregate principal amount outstanding shall be payable
within 30 days of demand by Thermo Electron. Overdue principal and interest
shall bear interest at a rate per annum equal to the rate of interest published
from time to time in the Wall Street Journal as the "prime rate" plus one
percent (1%). The principal and accrued interest may be paid by the Subsidiary
at any time or from time to time, in whole or in part, without premium or
penalty. All payments shall be applied first to accrued interest and then to
principal. At the end of each business day, Thermo Electron shall apply the
balance of the Subsidiary's Excess Cash held by Thermo Electron under the cash
management arrangement toward the payment of any loans or advances to the
Subsidiary. Principal and interest shall be payable in lawful money of the
United States of America, in immediately available funds, at the principal
office of Thermo Electron or at such other place as Thermo Electron may
designate from time to time in writing to the Subsidiary. The unpaid principal
amount of any such borrowings, and accrued interest thereon, shall become
immediately due and payable, without demand, upon occurrence of any of the
following events:
(a) the failure of the Subsidiary to pay any amount due hereunder within
fifteen (15) days of the date when due;
(b) the failure of the Subsidiary to pay its debts as they become due, the
filing by or against the Subsidiary of any petition under the U.S.
Bankruptcy Code (or the filing of any similar petition under the
insolvency law of any jurisdiction), or the making by the Subsidiary of an
assignment or trust mortgage for the benefit of creditors or the
appointment of a receiver, custodian or similar agent with respect to, or
the taking by any such person of possession of, any material property of
the Subsidiary;
(c) the sale by the Subsidiary of all or substantially all of its assets;
(d) the merger or consolidation of the Subsidiary with or into any other
3
<PAGE>
corporation in a transaction in which the Subsidiary is not the surviving
entity;
(e) the issuance of any writ of attachment, by trustee process or
otherwise, or any restraining order or injunction against or affecting the
person or property of the Subsidiary that is not removed, repealed or
dismissed within thirty (30) days of issuance and as a result has a
material adverse effect on the business, operations, assets or condition,
financial or otherwise, of the Subsidiary or its ability to discharge any
of its liabilities or obligations to Thermo Electron; and
(f) the suspension of the transaction of the usual business of the
Subsidiary.
3. Guarantee Arrangements.
(a) If Thermo Electron provides a Parent Guarantee of an Underlying
Obligation, and the beneficiary(ies) of the Parent Guarantee enforce the
Parent Guarantee, or Thermo Electron performs under the Parent Guarantee
for any other reason, then the Majority Owned Subsidiary that is
obligated, either directly or indirectly through a wholly-owned
subsidiary, under such Underlying Obligation shall indemnify and save
harmless Thermo Electron from any liability, cost, expense or damage
(including reasonable attorneys' fees) suffered by Thermo Electron as a
result of the Parent Guarantee. If the Underlying Obligation is issued by
a Second Tier Majority Owned Subsidiary or a wholly-owned subsidiary
thereof, and such Second Tier Majority Owned Subsidiary is unable to fully
indemnify Thermo Electron (because of the poor financial condition of such
Second Tier Majority Owned Subsidiary, or for any other reason), then the
First Tier Majority Owned Subsidiary that owns the majority of the stock
of such Second Tier Majority Owned Subsidiary shall indemnify and save
harmless Thermo Electron from any remaining liability, cost, expense or
damage (including reasonable attorneys' fees) suffered by Thermo Electron
as a result of the Parent Guarantee. If a Majority Owned Subsidiary or a
wholly-owned subsidiary thereof provides a Credit Support Obligation for
any subsidiary of Thermo Electron, other than a subsidiary of such
Majority Owned Subsidiary, and the beneficiary(ies) of the Credit Support
Obligation enforce the Credit Support Obligation, or the Majority Owned
Subsidiary or its wholly-owned subsidiary performs under the Credit
Support Obligation for any other reason, then Thermo Electron shall
indemnify and save harmless the Majority Owned Subsidiary or its
wholly-owned subsidiary, as applicable, from any liability, cost, expense
or damage (including reasonable attorneys' fees) suffered by the Majority
Owned Subsidiary or its wholly-owned subsidiary, as applicable, as a
result of the Credit Support Obligation. Without limiting the foregoing,
Credit Support Obligations include the deposit of funds by a Majority
Owned Subsidiary or a wholly-owned subsidiary thereof in a credit
arrangement with a banking facility whereby such funds are available to
the banking facility as collateral for overdraft obligations of other
Majority Owned Subsidiaries or their subsidiaries also participating in
the credit arrangement with such banking facility. Nothwithstanding the
foregoing, in order to obtain the benefits of the indemnification
obligations of the First Tier Majority Owned Subsidiary set forth above in
this Section 3(a), Thermo Electron must have notified the First Tier
Majority Owned Subsidiary prior to guaranteeing the obligations of the
4
<PAGE>
Second Tier Majority Owned Subsidiary. If after five (5) business days,
Thermo Electron has not received from the First Tier Majority Owned
Subsidiary a notice of objection stating that the First Tier Majority
Owned Subsidiary objects to Thermo Electron guaranteeing the obligations
of the Second Tier Majority Owned Subsidiary, then Thermo Electron may
proceed to issue its guarantee of the Underlying Obligation and such
guarantee shall be subject to the benefits of the indemnification
obligations of the First Tier Majority Owned Subsidiary set forth above in
this Section 3(a). If Thermo Electron does receive such notice of
objection, then Thermo Electron's guarantee shall not be subject to the
indemnification obligations of the First Tier Majority Owned Subsidiary
set forth above in this Section 3(a).
(b) For purposes of this Agreement, the term "guarantee" shall include not
only a formal guarantee of an obligation, but also any other arrangement
where Thermo Electron is liable for the obligations of a Majority Owned
Subsidiary or its wholly-owned subsidiaries. Such other arrangements
include (a) representations, warranties and/or covenants or other
obligations joined in by Thermo Electron, whether on a joint or joint and
several basis, for the benefit of the Majority Owned Subsidiary or its
wholly-owned subsidiaries and (b) responsibility of Thermo Electron by
operation of law for the acts and omissions of the Majority Owned
Subsidiary or its wholly-owned subsidiaries, including controlling person
liability under securities and other laws.
(c) Promptly after Thermo Electron receives notice that a beneficiary of a
Parent Guarantee is seeking to enforce such Parent Guarantee, Thermo
Electron shall notify the Majority Owned Subsidiary(s) obligated, either
directly or indirectly through a wholly-owned subsidiary, under the
relevant Underlying Obligation. Such Majority Owned Subsidiary(s) or
wholly-owned subsidiary thereof, as applicable, shall have the right, at
its own expense, to contest the claim of such beneficiary. If a Majority
Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, is
contesting the claim of such beneficiary, Thermo Electron will not perform
under the relevant Parent Guarantee unless and until, in Thermo Electron's
reasonable judgment, Thermo Electron is obligated under the terms of such
Parent Guarantee to perform. Subject to the foregoing, any dispute between
a Majority Owned Subsidiary or wholly-owned subsidiary thereof, as
applicable, and a beneficiary of a Parent Guarantee shall not affect such
Majority Owned Subsidiary's obligation to promptly indemnify Thermo
Electron hereunder. Promptly after a Majority Owned Subsidiary or
wholly-owned subsidiary thereof, as applicable, receives notice that a
beneficiary of a Credit Support Obligation is seeking to enforce such
5
<PAGE>
Credit Support Obligation, the Majority Owned Subsidiary shall notify
Thermo Electron. Thermo Electron shall have the right, at its own expense,
to contest the claim of such beneficiary. If Thermo Electron or the
subsidiary of Thermo Electron on whose behalf the Credit Support
Obligation is given is contesting the claim of such beneficiary, the
Majority Owned Subsidiary or wholly-owned subsidiary thereof, as
applicable, will not perform under the relevant Credit Support Obligation
unless and until, in the Majority Owned Subsidiary's reasonable judgment,
the Majority Owned Subsidiary or wholly-owned subsidiary thereof, as
applicable, is obligated under the terms of such Credit Support Obligation
to perform. Subject to the foregoing, any dispute between Thermo Electron
or the subsidiary of Thermo Electron on whose behalf the Credit Support
Obligation was given, on the one hand, and a beneficiary of a Credit
Support Obligation, on the other, shall not affect Thermo Electron's
obligation to promptly indemnify the Majority Owned Subsidiary or its
wholly-owned subsidiary, as applicable, hereunder.
(d) If Thermo Electron makes a loan or provides other credit ("Credit
Extension") to a Second Tier Majority Owned Subsidiary, the First Tier
Majority Owned Subsidiary that owns the majority of the stock of such
Second Tier Majority Owned Subsidiary hereby guarantees the Second Tier
Majority Owned Subsidiary's obligations to Thermo Electron thereunder.
Such guaranty shall be enforced only after Thermo Electron, in its
reasonable judgment, determines that the Second Tier Majority Owned
Subsidiary is unable to fully perform its obligations under the Credit
Extension. If Thermo Electron provides Credit Extension to a wholly-owned
subsidiary of a Second Tier Majority Owned Subsidiary, the Second Tier
Majority Owned Subsidiary hereby guarantees it wholly-owned subsidiary's
obligations to Thermo Electron thereunder and the First Tier Majority
Owned Subsidiary that owns the majority of the stock of such Second Tier
Majority Owned Subsidiary hereby guarantees the Second Tier Majority Owned
Subsidiary's obligations to Thermo Electron hereunder. Such guaranty by
the First Tier Majority Owned Subsidiary shall be enforced only after
Thermo Electron, in its reasonable judgment, determines that the Second
Tier Majority Owned Subsidiary is unable to fully perform its guaranty
obligation hereunder. Notwithstanding the foregoing, in order for a Credit
Extension to be deemed guaranteed by the First Tier Majority Owned
Subsidiary as set forth above in this Section 3(d), Thermo Electron must
have notified the First Tier Majority Owned Subsidiary prior to providing
the Credit Extension to the Second Tier Majority Owned Subsidiary. If
after five (5) business days, Thermo Electron has not received from the
First Tier Majority Owned Subsidiary a notice of objection stating that
the First Tier Majority Owned Subsidiary objects to Thermo Electron
providing a Credit Extension to the Second Tier Majority Owned Subsidiary,
then Thermo Electron may proceed to issue the Credit Extension to the
Second Tier Majority Owned Subsidiary and the First Tier Majority Owned
Subsidiary shall be deemed to have guaranteed such Credit Extension as set
forth above in this Section 3(d). If Thermo Electron does receive such
notice of objection, then Thermo Electron's Credit Extension shall not be
deemed guaranteed by the First Tier Majority Owned Subsidiary as set forth
in this Section 3(d).
(e) All payments required to be made under this Section 3 by a Majority
Owned Subsidiary or its wholly-owned subsidiaries, as applicable, shall be
made within two days after receipt of notice from Thermo Electron. All
payments required to be made under this Section 3 by Thermo Electron shall
be made within two days after receipt of notice from the Majority Owned
Subsidiary.
4. Waivers. No delay or omission on the part of either party in exercising
any right hereunder shall operate as a waiver of such right or of any other
right of the party, nor shall any delay, omission or waiver on any one occasion
be deemed a bar to or waiver of the same or any other right on any future
occasion. The Subsidiary hereby waives demand, notice of prepayment, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of the Subsidiary's obligations hereunder.
The Subsidiary hereby assents to any indulgence and any extension of time for
6
<PAGE>
payment of any indebtedness hereunder granted or permitted by the party.
5. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts applicable to
contracts made and performed therein without giving effect to any choice of law
provision or rule that would cause the application of laws of any jurisdiction
other than the Commonwealth of Massachusetts.
6. Severability. Each provision and agreement herein shall be treated as
separate and independent from any other provision or agreement herein and shall
be enforceable notwithstanding the unenforceability of any such other provision
or agreement.
7. Non-assignability. The rights and obligations of the parties under this
Agreement shall not be assigned by either party without the prior written
consent of the other party. Subject to the foregoing, this Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
successors and assigns.
8. Other Agreements. The parties agree that, effective as of the date
hereof, each of the Master Repurchase Agreement, as amended and restated,
between the Subsidiary and Thermo Electron and the Master Guarantee
Reimbursement and Loan Agreement, as amended and restated, between the
Subsidiary and Thermo Electron, is hereby terminated and is of no further force
and effect.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
THERMO ELECTRON CORPORATION
By: /s/ Theo Melas-Kyriazi
-------------------------------
Title: Chief Financial Officer
THERMORETEC CORPORATION
By: /s/ Kenneth J. Apicerno
-------------------------------
Title: Treasurer
8
<PAGE>
Exhibit 13
ThermoRetec Corporation
Consolidated Financial Statements
Fiscal 1999
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ThermoRetec Corporation 1999 Financial Statements
Consolidated Statement of Operations
Year Ended
April 3, April 4, March 29,
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ---------- ---------
Revenues (Notes 11 and 14) $141,946 $128,409 $114,849
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues 119,483 114,011 96,901
Selling, general, and administrative expenses (Note 8) 16,820 14,778 13,098
Restructuring costs (Notes 12 and 18) 9,176 - 7,800
-------- -------- --------
145,479 128,789 117,799
-------- -------- --------
Operating Loss (3,533) (380) (2,950)
Interest Income 795 970 1,896
Interest Expense (includes $264, $259, and $259 to related party; Note 6) (2,168) (2,209) (2,251)
Gain on Sale of Unconsolidated Subsidiary (Note 13) - 3,012 -
Other Income, Net (Note 2) - 209 136
Equity in Earnings of Unconsolidated Subsidiary (Note 13) - 174 865
-------- -------- --------
Income (Loss) Before Income Taxes (4,906) 1,776 (2,304)
Income Tax (Provision) Benefit (Note 5) 1,045 (1,536) (377)
-------- -------- --------
Net Income (Loss) $ (3,861) $ 240 $ (2,681)
======== ======= ========
Basic and Diluted Earnings (Loss) per Share (Note 15) $ (.29) $ .02 $ (.21)
======== ======= ========
Weighted Average Shares (Note 15)
Basic 13,089 12,609 12,821
======== ======= ========
Diluted 13,089 12,758 12,821
======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
ThermoRetec Corporation 1999 Financial Statements
Consolidated Balance Sheet
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Assets
Current Assets:
Cash and cash equivalents (includes $20,607 and $8,000 under repurchase $ 20,669 $ 8,912
agreement with affiliated company; Note 18)
Available-for-sale investments, at quoted market value (amortized cost - 2,003
of $2,008 in 1998; Note 2)
Accounts receivable, less allowances of $1,706 and $1,690 32,035 30,529
Unbilled contract costs and fees 8,675 8,154
Prepaid and refundable income taxes (Note 5) 3,923 2,256
Prepaid expenses 1,454 2,257
Due from parent company and affiliated companies - 667
-------- --------
66,756 54,778
-------- --------
Property, Plant, and Equipment, at Cost, Net 31,742 37,011
-------- --------
Other Assets 7,589 10,954
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Notes 3 and 12) 35,087 37,568
-------- --------
$141,174 $140,311
======== ========
3
<PAGE>
ThermoRetec Corporation 1999 Financial Statements
Consolidated Balance Sheet (continued)
April 3, April 4,
(In thousands except share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 10,048 $10,936
Accrued payroll and employee benefits 6,326 4,875
Deferred revenue 3,908 3,374
Billings in excess of revenues earned 3,323 1,277
Other accrued expenses 4,068 4,375
Due to parent company and affiliated companies 2,109 -
-------- --------
29,782 24,837
-------- --------
Deferred Income Taxes (Note 5) 511 407
-------- --------
Subordinated Convertible Obligations (includes $6,830 and 40,600 40,600
$5,650 of related-party debt; Note 6)
-------- --------
Commitments and Contingencies (Note 7)
Shareholders' Investment (Notes 4 and 9):
Common stock, $.01 par value, 50,000,000 shares authorized; 142 140
14,247,572 and 14,019,918 shares issued
Capital in excess of par value 88,045 89,103
Accumulated deficit (12,063) (5,592)
Treasury stock at cost, 693,074 and 1,089,085 shares (5,843) (9,181)
Accumulated other comprehensive items (Note 2) - (3)
-------- --------
70,281 74,467
-------- --------
$141,174 $140,311
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ThermoRetec Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows
Year Ended
April 3, April 4, March 29,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Operating Activities
Net income (loss) $(3,861) $ 240 $(2,681)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Noncash restructuring costs (Note 12) 8,122 - 7,800
Depreciation and amortization 7,889 7,066 6,603
Gain on sale of unconsolidated subsidiary (Note 13) - (3,012) -
Equity in earnings of unconsolidated subsidiary (Note 13) - (174) (865)
Deferred income tax expense (benefit) (1,857) (1,243) 602
Provision for losses on accounts receivable 1,026 193 162
Other noncash items 469 (51) 76
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable (1,541) (7,487) (6,008)
Unbilled contract costs and fees (521) (1,797) (3,420)
Other current assets 814 529 365
Accounts payable (488) 998 3,558
Billings in excess of revenues earned 2,046 398 249
Other current liabilities 2,338 (1,428) (1,934)
Due to (from) parent company and affiliated companies 1,830 (346) 243
------- ------- -------
Net cash provided by (used in) operating activities 16,266 (6,114) 4,750
------- ------- -------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (576) (5,163) (1,681)
Proceeds from sale and maturities of available-for-sale 2,006 2,088 20,908
investments
Purchases of available-for-sale investments - - (15,753)
Purchases of property, plant, and equipment (5,437) (6,318) (6,036)
Proceeds from sale of property, plant, and equipment 409 455 113
Proceeds from sale of unconsolidated subsidiary (Note 13) - 8,825 -
Increase in other assets (149) (1,119) (788)
Other 122 - -
------- ------- -------
Net cash used in investing activities (3,625) (1,232) (3,237)
------- ------- -------
Financing Activities
Purchases of Company common stock - (3,055) (8,317)
Net proceeds from issuance of Company common stock 29 179 313
Dividends paid (Note 9) (806) (751) (847)
Other (107) 182 794
------- ------- -------
Net cash used in financing activities $ (884) $(3,445) $(8,057)
------- ------- -------
5
<PAGE>
ThermoRetec Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
April 3, April 4, March 29,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Increase (Decrease) in Cash and Cash Equivalents $11,757 $(10,791) $(6,544)
Cash and Cash Equivalents at Beginning of Year 8,912 19,703 26,247
------- ------- -------
Cash and Cash Equivalents at End of Year $20,669 $ 8,912 $19,703
======= ======= =======
Cash Paid For
Interest $ 1,955 $ 1,996 $2,031
Income taxes $ 432 $ 2,113 $1,490
Noncash Activities
Fair value of assets of acquired companies $ 576 $13,772 $6,961
Cash paid for acquired companies (576) (5,665) (1,705)
Issuance of Company common stock for acquired companies - (2,850) (2,006)
------- ------- -------
Liabilities assumed of acquired companies $ - $ 5,257 $ 3,250
======= ======= =======
Dividends reinvested in Company common stock (Note 9) $ 1,804 $ 1,753 $ 1,710
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ThermoRetec Corporation 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
Year Ended
April 3, April 4, March 29,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ----------- ---------- ---------
Comprehensive Income
Net Income (Loss) $ (3,861) $ 240 $ (2,681)
-------- -------- --------
Other Comprehensive Items:
Unrealized gain (loss) on available-for-sale investments 3 (7) 12
-------- --------- --------
$ (3,858) $ 233 $ (2,669)
======== ======== ========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 140 $ 134 $ 128
Activity under dividend reinvestment plan (Note 9) 2 2 2
Issuance of stock under employees' and directors' stock plans - - 1
Issuance of Company common stock for acquired companies (Note - 4 3
-------- -------- --------
3)
Balance at end of year 142 140 134
-------- -------- --------
Capital in Excess of Par Value:
Balance at beginning of year 89,103 85,402 81,353
Activity under dividend reinvestment plan (Note 9) (1,457) 1,751 1,708
Activity under employees' and directors' stock plans (50) (359) (654)
Tax benefit related to employees' and directors' stock plans 449 181 198
(Note 5)
Issuance of Company common stock for acquired companies (Note 3) - 2,128 2,003
Capital contribution from parent company - - 794
-------- -------- --------
Balance at end of year 88,045 89,103 85,402
-------- -------- --------
Accumulated Deficit:
Balance at beginning of year (5,592) (3,328) 1,910
Net income (loss) (3,861) 240 (2,681)
Activity under dividend reinvestment plan (Note 9) (2,610) (2,504) (2,557)
-------- -------- --------
Balance at end of year (12,063) (5,592) (3,328)
-------- -------- --------
Treasury Stock:
Balance at beginning of year (9,181) (7,382) (31)
Activity under dividend reinvestment plan (Note 9) 3,259 - -
Activity under employees' and directors' stock plans 79 538 966
Purchases of Company common stock - (3,055) (8,317)
Issuance of Company common stock for acquired companies (Note 3) - 718 -
-------- -------- --------
Balance at end of year (5,843) (9,181) (7,382)
-------- -------- --------
Accumulated Other Comprehensive Items:
Balance at beginning of year (3) 4 (8)
Other comprehensive items 3 (7) 12
-------- -------- --------
Balance at end of year - (3) 4
-------- -------- --------
$ 70,281 $ 74,467 $ 74,830
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
ThermoRetec Corporation 1999 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
ThermoRetec Corporation (the Company) is a national provider of
environmental-liability and resource-management services and related consulting
services. The Company operates in four segments: Consulting and Engineering,
Nuclear Remediation, Soil Remediation, and Fluids Recycling. In September 1998,
the Company's name was changed from Thermo Remediation Inc. to ThermoRetec
Corporation.
Relationship with Thermo TerraTech Inc. and Thermo Electron Corporation
The Company was incorporated in November 1991 and commenced operation in
June 1992. As of April 3, 1999, Thermo TerraTech Inc. owned 9,486,508 shares of
the Company's common stock, representing 70% of such stock outstanding. Thermo
TerraTech is an 87%-owned subsidiary of Thermo Electron Corporation. As of April
3, 1999, Thermo Electron owned 264,700 shares of the Company's common stock,
representing 2% of such stock outstanding.
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. As part of this
reorganization the Company would be merged into Thermo Electron (Note 16).
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated. The Company accounted for its investment in a business in which
it owned 50% through October 1997 using the equity method (Note 13).
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest March
31. References to fiscal 1999, 1998, and 1997 are for the fiscal years ended
April 3, 1999, April 4, 1998, and March 29, 1997, respectively. Fiscal years
1999 and 1997 each included 52 weeks; fiscal 1998 included 53 weeks.
Revenue Recognition
Revenues from certain environmental-liability management and consulting
services are recognized upon completion of services rendered. The Company's
Consulting and Engineering and Nuclear Remediation segments also perform
services pursuant to long-term contracts. Revenues and profits on substantially
all long-term contracts are recognized using the percentage-of-completion
method. Revenues recorded under the percentage-of-completion method were
$73,557,000, $77,052,000, and $65,217,000 in fiscal 1999, 1998, and 1997,
respectively. The percentage of completion is determined by relating either the
actual costs or actual labor incurred to date to management's estimate of total
costs or total labor, respectively, to be incurred on each contract. If a loss
is projected on any contract in process, a provision is made currently for the
entire loss. The Company's contracts generally provide for billing of customers
upon the attainment of certain milestones specified in each contract. Revenues
earned on contracts-in-process in excess of billings are classified as unbilled
contract costs and fees in the accompanying balance sheet. There are no
significant amounts included in the accompanying balance sheet that are not
expected to be recovered from existing contracts at current contract values, or
that are not expected to be collected within one year. Amounts billed in excess
of revenues recognized are classified as billings in excess of revenues earned
in the accompanying balance sheet. Revenues from soil-remediation services are
recognized as soil is processed, and the Company bills customers upon receipt of
the contaminated soil at its remediation centers.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in 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 when antidilutive, diluted earnings (loss) per share have been computed
assuming the exercise of stock options, as well as their related income tax
effects. The computation of diluted earnings (loss) per share excludes the
effect of assuming the conversion of convertible bonds because the effect would
be antidilutive.
Cash and Cash Equivalents
At fiscal year-end 1999 and 1998, $20,607,000 and $8,000,000,
respectively, of the Company's cash equivalents were invested in a repurchase
agreement with Thermo Electron. Under this agreement, the Company in effect
lends excess cash to Thermo Electron, which Thermo Electron collateralizes with
investments principally consisting of corporate notes, U.S. government-agency
securities, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter (Note 18). Cash equivalents are carried at cost, which approximates
market value.
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization primarily using the straight-line method over the
estimated useful lives of the property, as follows: buildings, 5 to 40 years;
machinery and equipment, 2 to 15 years; and leasehold improvements, the shorter
of the term of the lease or the life of the asset. Soil-remediation units, which
accounted for 26% and 36% of the Company's machinery and equipment, net, at
fiscal year-end 1999 and 1998, respectively, are depreciated based on an hourly
rate that is computed by estimating total hours of operation for each unit.
Property, plant, and equipment consists of:
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Land $ 4,552 $ 4,554
Buildings 15,147 18,106
Machinery, Equipment, and Leasehold Improvements 35,581 34,380
------- -------
55,280 57,040
Less: Accumulated Depreciation and Amortization 23,538 20,029
------- -------
$31,742 $37,011
======= =======
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 10 years. These assets were $3,280,000 and
$5,200,000, net of accumulated amortization of $6,760,000 and $5,706,000, at
fiscal year-end 1999 and 1998, respectively. In fiscal 1999, the Company wrote
off $1,169,000 of other assets in connection with restructuring actions (Note
12).
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over periods ranging from 20 to 40
years. Accumulated amortization was $3,900,000 and $2,836,000 at fiscal year-end
1999 and 1998, respectively. The Company assesses the future useful life of this
asset whenever events or changes in circumstances indicate that the current
useful life has diminished (Note 12). The Company considers the future
undiscounted cash flows of the acquired companies in assessing the
recoverability of this asset. If impairment has occurred, any excess of carrying
value over fair value is recorded as a loss.
Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"other comprehensive items," which represents unrealized net of tax gains and
losses on available-for-sale investments, reported as a component of
shareholders' investment in the accompanying balance sheet.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in fiscal 1998 and 1997 have been restated to conform to
the presentation in the fiscal 1999 financial statements.
2. Available-for-sale Investments
The Company's debt securities are considered available-for-sale
investments in the accompanying balance sheet and are carried at market value,
with the difference between cost and market value, net of related tax effects,
recorded as a component of shareholders' investment titled "Accumulated other
comprehensive items."
Available-for-sale investments in the accompanying fiscal 1998 balance
sheet represents corporate bonds with contractual maturities of one year or
less. The difference between the market value and the cost basis of
available-for-sale investments was $5,000 of gross unrealized losses at fiscal
year-end 1998.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded in the
accompanying statement of operations. In fiscal 1997, the Company recorded gross
realized gains of $145,000 and gross unrealized losses of $9,000 related to the
sale of available-for-sale investments.
10
<PAGE>
3. Acquisitions
During fiscal 1999, the Company acquired a business for $576,000 in cash.
In November 1997, the Company acquired Benchmark Environmental Corporation
for 85,106 shares of the Company's common stock, valued at $450,000, and
$2,900,000 in cash. The shares of the Company's common stock issued in
connection with the acquisition are subject to certain restrictions on transfer.
The restrictions lapse with respect to one-third of the shares on each of the
second, third, and fourth anniversaries of the closing. Benchmark provides
nuclear-remediation and waste-management services to government agencies and
private industry.
In August 1997, the Company, through its Remediation Technologies, Inc.
(RETEC) subsidiary, acquired substantially all of the assets, subject to certain
liabilities, of RPM Systems, Inc. for 374,507 shares of the Company's common
stock, valued at $2,400,000, and $600,000 in cash. Certain shares of the
Company's common stock issued in connection with the acquisition are subject to
restrictions on transfer. Thirty percent of such shares have no transfer
restrictions; while the restrictions lapse with respect to one half of the
remaining shares on each of the second and third anniversaries of the closing.
RPM provides consulting services in the areas of environmental management,
planning, and information technology.
In May 1997, the Company, also through RETEC, acquired substantially all
of the assets, subject to certain liabilities, of TriTechnics Corporation for
$1,600,000 in cash. TriTechnics provides comprehensive consulting and remedial
services at refinery and chemical-plant sites.
During fiscal 1998, the Company also acquired an additional business
for $565,000 in cash. In September 1996, the Company acquired IEM Sealand
Corporation for 311,040 shares of the Company's common stock, valued at
$2,006,000, and $1,705,000 in cash. The shares of the Company's common
stock issued in connection with the acquisition are subject to certain
restrictions on transfer. The restrictions lapse with respect to one-third
of the shares on each of the third, fourth, and fifth anniversaries of the
closing. IEM Sealand performs cleanups of hazardous waste sites for
government and industry as a prime construction contractor and completes
predesigned remedial action contracts at sites containing hazardous, toxic,
and radioactive wastes.
These acquisitions have been accounted for using the purchase method of
accounting and their results of operations have been included in the
accompanying financial statements from their respective dates of acquisition.
The aggregate cost of the acquisitions exceeded the estimated fair value of the
acquired net assets by $15,026,000, which is being amortized over periods
ranging from 20 to 40 years. Allocation of the purchase price for these
acquisitions was based on estimates of the fair value of the net assets
acquired. Pro forma data is not included as the effect of these acquisitions was
not material to the Company's results of operations.
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has a stock-based compensation plan for its key employees,
directors, and others. The Company also adopted an employee stock-based
compensation plan, similar to its stock-based compensation plan, except that
neither executive officers nor directors are eligible to participate in the
plan. Both plans permit the grant of a variety of stock and stock-based awards
as determined by the human resources committee of the Company's Board of
Directors (the Board Committee), including restricted stock, stock options,
stock bonus shares, or performance-based shares. As of fiscal year-end 1999,
only nonqualified stock options have been awarded under these plans. The option
recipients and the terms of options granted under these plans are determined by
the Board Committee. Generally, options granted to date are exercisable
immediately, but are subject to certain transfer restrictions and the right of
the Company to repurchase shares issued upon exercise of the options at the
exercise price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over a five to ten year period, depending on the term of
the option, which may range from seven to twelve years. Nonqualified stock
options may be granted at any price determined by the Board Committee, although
incentive stock options must be granted at not less than the fair market value
of the stock on the date of grant. To date, all options have been granted at
fair market value.
</TABLE>
11
<PAGE>
4. Employee Benefit Plans (continued)
The Company also has a directors' stock option plan, which provides for
the grant of stock options to outside directors pursuant to a formula approved
by the Company's shareholders. Options awarded under this plan are exercisable
six months after the date of grant and expire three to seven years after the
date of grant. In addition to the Company's stock-based compensation plans,
certain officers and key employees may also be granted options under the
stock-based compensation plans of Thermo Electron or Thermo TerraTech.
In 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 1,119,000 shares at a weighted average exercise price of $7.46 per share
elected to participate in this exchange and, as a result, received options to
purchase 560,000 shares of the Company common stock at $2.66 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.
<TABLE>
<CAPTION>
A summary of the Company's stock option activity is:
1999 1998 1997
------------------- ------------------ ------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
- ---------------------------------------------- --------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding, Beginning of Year 2,051 $ 7.32 1,897 $ 7.92 1,559 $6.95
Granted 779 2.63 438 6.52 556 8.65
Exercised (9) 3.06 (61) 2.58 (168) 1.47
Forfeited (162) 8.61 (223) 12.18 (50) 7.43
Canceled due to exchange (1,119) 7.46 - - - -
------ ----- ------
Options Outstanding, End of Year 1,540 $ 4.74 2,051 $ 7.32 1,897 $7.92
====== ====== ===== ====== ====== =====
Options Exercisable 1,510 $ 4.61 2,045 $ 7.31 1,826 $7.79
====== ====== ===== ====== ====== =====
Options Available for Grant 609 196 415
====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
A summary of the status of the Company's stock options at April 3, 1999, is:
Options Outstanding
-----------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ------------------------------------------------ ------------------ ------------------- -------------------
<S> <C> <C> <C>
$ 1.98 - $ 5.22 936 5.5 years $ 2.75
5.23 - 8.46 469 2.2 years 6.81
8.47 - 11.69 114 5.6 years 10.51
11.70 - 14.93 21 4.6 years 14.82
-----
$ 1.98 - $ 14.93 1,540 5.3 years $ 4.74
=====
The information disclosed above for options outstanding at April 3, 1999,
does not differ materially for options exercisable.
</TABLE>
12
<PAGE>
4. Employee Benefit Plans (continued)
Employee Stock Purchase Program
Substantially all of the Company's full-time employees are eligible to
participate in an employee stock purchase program sponsored by the Company and
Thermo Electron. Prior to November 1, 1998, the applicable shares of common
stock could be purchased at the end of a 12-month period at 95% of the fair
market value at the beginning of the period and the shares purchased were
subject to a six-month resale restriction. Effective November 1, 1998, the
applicable shares of common stock may be purchased at 85% of the lower of the
fair market value at the beginning or end of the plan year, and shares purchased
are subject to a one-year resale restriction. Shares are purchased through
payroll deductions of up to 10% of each participating employee's gross wages. No
shares were issued under this program in fiscal 1999. During fiscal 1998 and
1997, the Company issued 3,367 shares and 5,792 shares, respectively, of its
common stock under this program. Employees of the Company's Thermo NUtech
subsidiary participated in an employee stock purchase program sponsored by
Thermo TerraTech through November 1996.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------- ------------ ----------- -----------
Net Income (Loss):
As reported $(3,861) $ 240 $(2,681)
Pro forma (4,721) (286) (2,946)
Basic and Diluted Earnings (Loss) per Share:
As reported (.29) .02 (.21)
Pro forma (.36) (.02) (.23)
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 $2.63,
$1.82, and $3.58 in fiscal 1999, 1998, and 1997, respectively. The fair value of
each option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1999 1998 1997
- ------------------------------------------------------------------- --------------- ----------- ----------
Volatility 36% 27% 29%
Risk-free Interest Rate 4.7% 5.5% 6.3%
Expected Life of Options 3.6 years 3.4 years 5.9 years
13
<PAGE>
4. Employee Benefit Plans (continued)
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plans
The majority of the Company's full-time employees are eligible to
participate in 401(k) savings plans sponsored by certain subsidiaries and Thermo
Electron. Contributions to the 401(k) savings plans are made by both the
employee and the Company. Company contributions are based upon the level of
employee contributions and for certain plans are based on subsidiary profits.
The Company contributed and charged to expense for these plans $2,764,000,
$2,016,000, and $1,572,000 in fiscal 1999, 1998, and 1997, respectively.
5. Income Taxes
The components of the income tax (provision) benefit are:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------- ------------ ----------- -----------
Currently Refundable (Payable):
Federal $ (139) $(1,947) $ 510
State (673) (832) (285)
------- ------ -------
(812) (2,779) 225
------- ------ -------
Net (Deferred) Prepaid:
Federal 1,619 1,074 (491)
State 238 169 (111)
------- ------ -------
1,857 1,243 (602)
------- ------ -------
$ 1,045 $(1,536) $ (377)
======= ======= =======
The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the Company's stock on the date of exercise. The income tax
provision that is currently payable does not reflect $449,000, $181,000, and
$198,000 of such benefits of the Company that have been allocated to capital in
excess of par value in fiscal 1999, 1998, and 1997, respectively.
14
<PAGE>
5. Income Taxes (continued)
The income tax (provision) benefit in the accompanying statement of
operations differs from the amounts calculated by applying the statutory federal
income tax rate of 34% to income (loss) before income taxes due to:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------- ------------ ------------ ----------
Income Tax (Provision) Benefit at Statutory Rate $ 1,668 $ (604) $ 783
Differences Resulting From:
State income taxes, net of federal tax (287) (438) (261)
Amortization and write-off of cost in excess of net assets of (341) (267) (979)
acquired companies
Nondeductible expenses (55) (27) (27)
Other 60 (200) 107
------- ------- ------
$ 1,045 $(1,536) $ (377)
======= ======= ======
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of:
(In thousands) 1999 1998
- ----------------------------------------------------------------------- ----------- ----------- ----------
Prepaid Income Taxes:
Reserves and accruals $2,137 $1,057
Accrued compensation 1,098 897
Net operating loss carryforwards 1,583 714
Allowance for doubtful accounts 77 9
Other 192 25
------ ------
5,087 2,702
Less: Valuation allowance 1,164 739
------ ------
$3,923 $1,963
====== ======
Deferred Income Taxes:
Depreciation 1,094 407
Intangible assets (760) -
Other 177 -
------ ------
$ 511 $ 407
====== ======
The valuation allowance relates to uncertainty surrounding the realization
of tax benefits attributable to federal and state operating losses and credit
carryforwards. The valuation allowance increased in fiscal 1999 as a result of
certain losses that arose during the year. Of the total fiscal 1999 valuation
allowance, $117,000 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.
15
<PAGE>
6. Subordinated Convertible Obligations
In May 1995, the Company issued and sold $37,950,000 principal amount of 4
7/8% subordinated convertible debentures due May 2000, including $3,000,000
principal amount of such debentures sold to Thermo Electron. During fiscal 1999,
Thermo Electron purchased an additional $1,180,000 principal amount of such
debentures. The debentures are convertible into shares of the Company's common
stock at a conversion price of $17.92 per share and are guaranteed on a
subordinated basis by Thermo Electron. Thermo TerraTech has agreed to reimburse
Thermo Electron in the event Thermo Electron is required to make a payment under
the guarantee.
In fiscal 1994, the Company issued to Thermo TerraTech $2,650,000
principal amount of a 3 7/8% subordinated convertible note due November 2000.
The note is convertible into shares of the Company's common stock at a
conversion price of $9.83 per share.
See Note 10 for fair value information pertaining to the Company's
subordinated convertible obligations.
7. Commitments and Contingencies
Operating Leases
The Company leases land, office facilities, and equipment under operating
leases expiring at various dates through fiscal 2006. The accompanying statement
of operations includes expenses from operating leases of $3,151,000, $2,707,000,
and $1,943,000 in fiscal 1999, 1998, and 1997, respectively. Future minimum
payments due under noncancelable operating leases at April 3, 1999, are
$2,579,000 in fiscal 2000, $2,218,000 in fiscal 2001; $1,511,000 in fiscal 2002;
$913,000 in fiscal 2003; $221,000 in fiscal 2004; and $155,000 in 2005 and
thereafter. Total future minimum lease payments are $7,597,000.
Contingencies
The Company is contingently liable with respect to lawsuits and other
matters that arose in the ordinary course of business. In the opinion of
management, these contingencies will not have a material adverse effect upon the
financial position of the Company or its results of operations.
8. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In calendar 1997 and 1996 the Company paid an amount
equal to 1.0% of the Company's revenues. For these services, the Company was
charged $1,136,000, $1,220,000, and $1,148,000 in fiscal 1999, 1998, and 1997,
respectively. The fee is reviewed and adjusted annually by mutual agreement of
the parties. The corporate services agreement is renewed annually but can be
terminated upon 30 days' prior notice by the Company or upon the Company's
withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron
Corporate Charter defines the relationship among Thermo Electron and its
majority-owned subsidiaries). Management believes that the service fee charged
by Thermo Electron is reasonable and that such fees are representative of the
expenses the Company would have incurred on a stand-alone basis. For additional
items such as employee benefit plans, insurance coverage, and other identifiable
costs, Thermo Electron charges the Company based upon costs attributable to the
Company. In fiscal 1999, Thermo Electron billed the Company an additional
$57,000 for certain administrative services required by the Company that were
not covered by the corporate services agreement.
16
<PAGE>
8. Related-party Transactions (continued)
Subordinated Convertible Obligations
See Note 6 for obligations of the Company held by Thermo Electron and
Thermo TerraTech.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Notes 1 and 18.
Other Related-party Transactions
The Company purchases and sells services in the ordinary course of
business to other companies affiliated with Thermo TerraTech. Purchases of
services from such affiliated companies totaled $432,000, $1,129,000, and
$979,000 in fiscal 1999, 1998, and 1997, respectively. Sales of services to such
affiliated companies totaled $730,000, $1,710,000, and $1,825,000 in fiscal
1999, 1998, and 1997, respectively.
In March 1999, as settlement of a note receivable, the Company received
118,707 shares of Thermo TerraTech common stock. The Company immediately sold
the shares to Thermo TerraTech at fair market value, and received proceeds of
$668,000.
9. Common Stock
Dividends to common shareholders of the Company of $2,610,000 were
declared in fiscal 1999, of which $1,804,000, including $1,798,000 paid to
Thermo TerraTech, was reinvested in 614,244 shares of the Company's common stock
pursuant to the Company's Dividend Reinvestment Plan. Dividends to common
shareholders of the Company of $2,504,000 were declared in fiscal 1998, of which
$1,753,000, including $1,736,000 paid to Thermo TerraTech, was reinvested in
257,338 shares of the Company's common stock. Dividends to common shareholders
of the Company of $2,557,000 were declared in fiscal 1997, of which $1,710,000,
including $1,694,000 paid to Thermo TerraTech, was reinvested in 196,806 shares
of the Company's common stock.
At April 3, 1999, the Company had reserved 4,709,734 unissued shares of
its common stock for possible issuance under stock-based compensation plans and
possible issuance upon conversion of the Company's subordinated convertible
obligations.
10. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable, due from
parent company and affiliated companies, accounts payable, due to parent company
and affiliated companies, and subordinated convertible obligations. The carrying
amounts of these financial instruments, with the exception of available-for-sale
investments and subordinated convertible obligations, approximates fair value
due to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying fiscal 1998 balance sheet. The fair value was determined based upon
quoted market prices. See Note 2 for fair value information pertaining to these
financial statements.
Based on quoted market prices and on borrowing rates available to the
Company, the fair value of the Company's subordinated convertible obligations
was $38,728,000 and $39,395,000 at fiscal year-end 1999 and 1998, respectively.
17
<PAGE>
11. Significant Customer and Concentration of Credit Risk
A substantial portion of the Company's Nuclear Remediation segment's
services has been provided to the U.S. government. Total revenues to U.S.
government agencies accounted for 13%, 10%, and 30% of the Company's total
revenues in fiscal 1999, 1998, and 1997, respectively. In fiscal 1999, the
Company's Consulting and Engineering segment provided services to one customer
which accounted for 12% of the Company's total revenues. Management does not
believe that these concentrations of credit risk have or will have a significant
negative impact on the Company.
12. Restructuring Costs
During fiscal 1999, the Company recorded $9,176,000 of restructuring
costs, which were accounted for in accordance with Emerging Issues Task Force
Pronouncement 94-3, in connection with the closure of two soil-recycling
facilities in response to a continued downturn in the Company's Soil Remediation
segment. 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 primarily for ongoing lease costs and severance
for 13 employees, 6 of whom were terminated in fiscal 1999. The Company closed
one of the soil-recycling facilities in March 1999 and is actively seeking a
buyer for the second soil-recycling facility. If no buyer is found, the
Company will close the facility.
A summary of the changes in accrued restructuring costs, which are
included in other accrued expenses in the accompanying balance sheet, is as
follows:
Facility
(In thousands) Severance Costs Total
- --------------------------------------------------------------- -------------- ------------- -------------
Balance at April 4, 1998 $ - $ - $ -
Provision charged to expense 213 841 1,054
Usage (101) (151) (252)
------- ------ -------
Balance at April 3, 1999 $ 112 $ 690 $ 802
======= ====== =======
During fiscal 1997, the Company recorded $7,800,000 of restructuring costs
to write down certain capital equipment and intangible assets, including
$2,206,000 of cost in excess of net assets of acquired companies, in response to
a severe downturn in the Company's Soil Remediation segment, which resulted in
the closure of two soil-recycling facilities. In addition, the Company's
analysis indicated that the future undiscounted cash flows from certain other
soil-recycling facilities that remained open would be insufficient to recover
the Company's investment in those business units, thus requiring a write-down of
certain assets, included in the $7,800,000 charge. Of the total charge,
$2,206,000 was nondeductible for tax purposes.
In May 1999, the Company announced certain other restructuring actions
(Note 18).
13. Equity in Earnings of Unconsolidated Subsidiary
The Company's equity in earnings of unconsolidated subsidiary in the
accompanying statement of operations represented the Company's proportionate
share of income from a 50% investment in RETEC/TETRA L.C., acquired in December
1995 through an acquisition. In October 1997, the Company sold its 50%
limited-liability interest in RETEC/TETRA to TETRA Thermal, Inc., for $8,825,000
in cash. The Company realized a pretax gain of $3,012,000 on the sale.
For the year ended December 31, 1996, RETEC/TETRA reported revenues of
$12,066,000, cost of revenues of $9,040,000, gross profit of $3,026,000, and net
income of $981,000.
</TABLE>
18
<PAGE>
14. Business Segment Information
The Company organizes and manages its business by individual functional
operating entity. The Company operates in four segments: Consulting and
Engineering, Nuclear Remediation, Soil Remediation, and Fluids Recycling. In
classifying operational entities into a particular segment the Company
aggregates businesses with similar economic characteristics, services, and
customers.
The Consulting and Engineering segment provides consultation, engineering,
and on-site services to help clients manage problems associated with
environmental compliance, resource management, and the remediation of industrial
sites contaminated with organic and inorganic wastes and residues.
The Nuclear Remediation segment provides services to remove radioactive
contaminants from sand, gravel, and soil, as well as health physics services,
radiochemistry laboratory services, radiation dosimetry services,
radiation-instrument calibration and repair services, and radiation-source
production.
The Soil Remediation segment designs and operates facilities for the
on-site remediation of nonhazardous soil and mobile equipment.
The Company's Fluids Recycling segment collects, tests, processes, and
recycles used motor oil and other industrial fluids.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- --------- ---------
Revenues:
Consulting and Engineering $ 73,439 $ 76,892 $ 64,913
Nuclear Remediation 34,863 26,934 23,472
Soil Remediation 24,183 17,773 21,233
Fluids Recycling 9,461 6,810 5,231
--------- -------- ---------
$ 141,946 $128,409 $ 114,849
========= ======== =========
Income (Loss) Before Income Taxes:
Consulting and Engineering $ 3,042 $ (1,854) $ 5,588
Nuclear Remediation 1,479 1,659 1,735
Soil Remediation (a) (7,259) 236 (9,404)
Fluids Recycling 1,103 939 912
Corporate (b) (1,898) (1,360) (1,781)
--------- -------- ---------
Total operating loss (3,533) (380) (2,950)
Interest and other income (expense), net (1,373) 2,156 646
--------- -------- ---------
$ (4,906) $ 1,776 $ (2,304)
========= ======== =========
Total Assets:
Consulting and Engineering $ 55,068 $ 59,773 $ 49,229
Nuclear Remediation 18,774 16,585 10,886
Soil Remediation 27,710 36,409 36,977
Fluids Recycling 12,851 13,225 10,573
Corporate (c) 26,771 14,319 28,449
--------- -------- ---------
$ 141,174 $140,311 $ 136,114
========= ======== =========
19
<PAGE>
14. Business Segment Information (continued)
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- ---------- --------
Depreciation and Amortization:
Consulting and Engineering $ 1,618 $ 1,453 $ 1,118
Nuclear Remediation 1,841 1,274 856
Soil Remediation 3,305 3,239 3,668
Fluids Recycling 1,120 768 501
Corporate 5 332 460
--------- -------- -------
$ 7,889 $ 7,066 $ 6,603
========= ======== =======
Capital Expenditures:
Consulting and Engineering $ 1,131 $ 1,048 $ 588
Nuclear Remediation 2,222 2,336 288
Soil Remediation 1,581 1,183 1,663
Fluids Recycling 503 1,727 3,497
Corporate - 24 -
--------- -------- -------
$ 5,437 $ 6,318 $ 6,036
========= ======== =======
(a) Includes restructuring costs of $9,176,000 and $7,800,000 in fiscal 1999 and
1997, respectively.
(b) Primarily general and administrative expenses.
(c) Primarily cash and cash equivalents.
15. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------- ----------- ---------- ---------
Basic
Net Income (Loss) $(3,861) $ 240 $(2,681)
------- -------- -------
Weighted Average Shares 13,089 12,609 12,821
------- ------- -------
Basic Earnings (Loss) per Share $ (.29) $ .02 $ (.21)
======== ======= =======
Diluted
Net Income (Loss) $(3,861) $ 240 $(2,681)
------- ------- -------
Weighted Average Shares 13,089 12,609 12,821
Effect of Stock Options - 149 -
------- ------- -------
Weighted Average Shares, as Adjusted 13,089 12,758 12,821
------- ------- -------
Diluted Earnings (Loss) per Share $ (.29) $ .02 $ (.21)
======= ======= =======
The computation of diluted earnings (loss) per share excludes the effect
of assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of April 3, 1999, there were 1,547,000 of such options
outstanding, with exercise prices ranging from $1.98 to $14.93 per share.
</TABLE>
20
<PAGE>
15. Earnings (Loss) per Share (continued)
In addition, the computation of diluted earnings (loss) per share excludes
the effect of assuming the conversion of convertible obligations because the
effect would be antidilutive. As of April 3, 1999, the Company had $37,950,000
principal amount of 4 7/8% subordinated convertible debentures, convertible at
$17.92 per share, and $2,650,000 principal amount of a 3 7/8% subordinated
convertible note, convertible at $9.83 per share, that were excluded from the
calculation of diluted earnings (loss) per share.
16. Proposed Reorganization
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company and its sister subsidiary, The Randers Killam Group Inc., as well as
their parent company, Thermo TerraTech, would be merged into Thermo Electron. As
a result, all three companies would become wholly owned subsidiaries of Thermo
Electron. The public shareholders of the Company, The Randers Killam Group, and
Thermo TerraTech would receive common stock in Thermo Electron in exchange for
their shares. The completion of this transaction is subject to numerous
conditions, including the establishment of prices and exchange ratios;
confirmation of anticipated tax consequences; the approval of the Board of
Directors of Thermo TerraTech and The Randers Killam Group; the negotiation and
execution of a definitive merger agreement; the receipt of a fairness opinion
from an investment banking firm that the transaction is fair to the Company's
shareholders (other than Thermo TerraTech and Thermo Electron) from a financial
point of view; the approval of the Company's Board of Directors, including its
independent directors; and completion of review by the Securities and Exchange
Commission of any necessary documents regarding the proposed transaction.
<TABLE>
<CAPTION>
17. Unaudited Quarterly Information
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts)
1999 First Second (a) Third Fourth
- ---------------------------------------------------------------- --------- ---------- ---------- ---------
Revenues $34,416 $35,140 $36,907 $35,483
Gross Profit 5,544 5,633 5,543 5,743
Net Income (Loss) 488 (5,323) 506 468
Basic and Diluted Earnings (Loss) per Share .04 (.41) .04 .04
1998 First Second (b) Third (c) Fourth
- ---------------------------------------------------------------- --------- ---------- ---------- ---------
Revenues $28,204 $33,639 $34,620 $31,946
Gross Profit 4,371 5,274 3,947 806
Net Income (Loss) 576 696 1,701 (2,733)
Basic and Diluted Earnings (Loss) per Share .05 .06 .13 (.21)
(a) Reflects a pretax charge of $9,176,000 for restructuring costs.
(b) Reflects the August 1997 acquisition of RPM.
(c) Reflects the November 1997 acquisition of Benchmark and includes a pre-tax
gain of $3,012,000 from the sale of an investment in a joint venture.
21
<PAGE>
18. Subsequent Events
Restructuring Actions
On May 24, 1999, the Company announced that it plans to sell three
soil-recycling facilities in addition to those discussed in Note 12. As a
result, the Company expects to incur pretax charges totaling approximately $10
million, primarily in the first quarter of fiscal 2000. These charges primarily
represent the excess of the book value of the three facilities that will be sold
over the estimated proceeds from the sale. For the fiscal year ended April 3,
1999, revenues and operating income from these businesses totaled $8,001,000 and
$371,000, respectively.
Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement (Note 1). Under the new arrangement,
amounts advanced to Thermo Electron by the Company for domestic cash management
purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis
points, set at the beginning of each month. Thermo Electron is contractually
required to maintain cash, cash equivalents, and/or immediately available bank
lines of credit equal to at least 50% of all funds invested under this cash
management arrangement by all Thermo Electron subsidiaries other than wholly
owned subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice. The
Company will report amounts invested in this arrangement as "advance to
affiliate" in its balance sheet, beginning in the first quarter of fiscal 2000.
22
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ThermoRetec Corporation:
We have audited the accompanying consolidated balance sheet of ThermoRetec
Corporation (formerly Thermo Remediation, Inc.; a Delaware corporation and
70%-owned subsidiary of Thermo TerraTech Inc.) and subsidiaries as of April 3,
1999, and April 4, 1998, and the related consolidated statements of operations,
cash flows, and comprehensive income and shareholders' investment for each of
the three years in the period ended April 3, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 ThermoRetec
Corporation and subsidiaries as of April 3, 1999, and April 4, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended April 3, 1999, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts May 11, 1999 (except with respect to the matters discussed
in Note 18, as to which the date is June 1, 1999)
23
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operation under
the heading "Forward-looking Statements."
Overview
The Company is a national provider of environmental-liability and
resource-management services. Through a nationwide network of offices, the
Company offers these and related consulting services in four segments:
Consulting and Engineering, Nuclear Remediation, Soil Remediation, and Fluids
Recycling.
The Company's Consulting and Engineering segment provides consultation,
engineering, and on-site services to help clients manage problems associated
with environmental compliance, resource management, and the remediation of
industrial sites contaminated with organic and inorganic wastes and residues. In
May 1997, the Company's RETEC subsidiary acquired TriTechnics Corporation, an
environmental engineering and consulting firm. The Company's eastern
construction operations, acquired in September 1996, perform the cleanup of
hazardous waste sites for government and industry as a prime construction
contractor and completes predesigned remedial action contracts at sites
containing hazardous, toxic, and radioactive wastes.
The Company's Nuclear Remediation segment provides services to remove
radioactive contaminants from sand, gravel, and soil, as well as health physics
services, radiochemistry laboratory services, radiation dosimetry services,
radiation-instrument calibration and repair services, and radiation-source
production. In November 1997, the Company acquired Benchmark Environmental
Corporation, a provider of nuclear-remediation and waste-management services to
government and private sector clients.
Through its Soil Remediation segment, the Company designs and operates
facilities for the on-site remediation of nonhazardous soil and mobile
equipment. The Company's soil-remediation centers are environmentally secure
facilities for receiving, storing, and processing petroleum-contaminated soils.
Although the Company expects this market to remain viable for some time after
April 3, 1999, there can be no assurance that this business will not decline in
future years. In May 1999, the Company announced plans to sell three additional
soil-recycling facilities (Note 18). In connection with this action, the Company
expects to incur pretax charges totaling approximately $10 million, primarily in
the first quarter of fiscal 2000. These charges primarily represent the excess
of the book value of the three facilities that will be sold over the estimated
proceeds from the sale. For the fiscal year ended April 3, 1999, revenues and
operating income from these businesses totaled $8,001,000 and $371,000,
respectively.
The Company's Fluids Recycling segment collects, tests, processes, and
recycles used motor oil and other industrial fluids in certain western states
(Oregon, Idaho, Nevada, Utah, Colorado, New Mexico, and Arizona).
The Company's businesses are affected by several factors, particularly
regulation and enforcement of remediation activities, extreme weather
variations, economic cycles, the availability of federal and state funding for
environmental cleanup, and local competition.
The Company has acquired a number of businesses in the last three years.
The Company does not presently intend to actively seek to make additional
acquisitions in the near future, and expects instead to concentrate its
resources on strengthening its core businesses.
24
<PAGE>
Results of Operations
Fiscal 1999 Compared With Fiscal 1998
Revenues increased 11% to $141.9 million in fiscal 1999 from $128.4
million in fiscal 1998. Nuclear Remediation segment revenues increased $7.9
million to $34.9 million due to the inclusion of $5.2 million in revenues from
an acquired business, as well as internal growth. Soil Remediation segment
revenues increased $6.4 million to $24.2 million, resulting from higher volumes
of soil processed. The Company believes that the recent strength in the
soil-remediation market is due in part to compliance with a December 1998 U.S.
Environmental Protection Agency deadline for modifying underground storage
tanks. Although the Company expects this market to remain viable for some time
after April 3, 1999, there can be no assurance that this business will not
decline in future years. In May 1999, the Company announced plans to sell three
additional soil-recycling facilities (Note 18). For fiscal 1999, revenues and
operating income from these businesses totaled $8.0 million and $0.4 million,
respectively. Fluids Recycling segment revenues increased $2.7 million to $9.5
million, primarily due to increased capacity as a result of geographical
expansion. These increases in revenues were offset in part by a decrease in
revenues of $3.5 million to $73.4 million at the Consulting and Engineering
segment due to a decrease in revenues at the Company's eastern construction
operations resulting from a decline in the number of contracts in process,
offset in part by higher revenues from consulting and engineering services at
RETEC and the inclusion of $1.0 million in revenues from businesses acquired in
fiscal 1998.
The gross profit margin increased to 16% in fiscal 1999 from 11% in fiscal
1998. The gross profit margin increased in fiscal 1999 primarily due to a
reduction of losses at the Company's eastern construction operations on certain
remedial-construction contracts and higher utilization of billable personnel at
RETEC at the Consulting and Engineering segment, as well as higher volumes of
soil processed at the Soil Remediation segment. These increases were offset in
part by a reduction in gross profit margin at the Nuclear Remediation segment
due to development costs associated with a contract for the U.S. Department of
Energy.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 12% in fiscal 1999 and 1998. Selling, general, and
administrative expenses increased primarily due to higher provisions for
uncollectible accounts, increased administrative costs associated with the
Company's name change, the inclusion of expenses for the full year from acquired
businesses, and higher insurance costs.
During fiscal 1999, the Company recorded $9.2 million of restructuring
costs in connection with the closure of two soil-recycling facilities. The costs
include a write-down of fixed assets to their estimated disposal value and a
write-off of intangible assets, including cost in excess of net assets of
acquired companies, as well as other closure costs (Note 12). The closure was in
response to changes in market conditions, which have resulted in lower-priced
disposal alternatives. These facilities reported aggregate revenues and
operating losses of $2.2 million and $0.8 million, respectively, in fiscal 1998
and aggregate 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
May 1999, the Company announced that it would record additional pretax
restructuring charges of approximately $10 million, primarily in the first
quarter of fiscal 2000, as a result of the Company's decision to sell three
additional soil-recycling facilities (Note 18).
Interest income decreased to $0.8 million in fiscal 1999 from $1.0 million
in fiscal 1998 as a result of lower average invested cash balances.
Equity in earnings of unconsolidated subsidiary in fiscal 1998 represents
the Company's proportionate share of income from a joint venture that was sold
in fiscal 1998. "Gain on sale of unconsolidated subsidiary" resulted from the
Company's sale of its interest in this joint venture (Note 13).
The Company recorded a tax benefit in fiscal 1999 at an effective rate
below the statutory federal income tax rate, primarily due to the impact of the
write-off of nondeductible cost in excess of net assets of acquired companies.
The effective tax rate in fiscal 1998 exceeded the statutory federal income tax
rate primarily due to the impact of state income taxes and nondeductible
amortization of cost in excess of net assets of acquired companies.
In July 1998, the Company filed suit against a customer, seeking payment
of $2.6 million that has been billed under a contract to provide remediation
services. The customer has disputed its obligation to pay the Company. While the
Company generally maintains reserves for these types of matters, failure to
collect this receivable would have a material adverse impact on the Company's
future results of operations.
25
<PAGE>
Fiscal 1998 Compared With Fiscal 1997
Revenues in fiscal 1998 increased 12% to $128.4 million from $114.8
million in fiscal 1997. Consulting and Engineering segment revenues increased
$12.0 million to $76.9 million due to the inclusion of $16.7 million in revenues
from acquired businesses and, to a lesser extent, higher revenues from
consulting and engineering services at RETEC. This increase was offset in part
by an $11.1 million decrease in revenues resulting from a decline in the number
of contracts in process at the Company's eastern construction operations.
Revenues from the Nuclear Remediation segment increased $3.5 million to $26.9
million, primarily due to the inclusion of revenues from an acquired business.
Revenues at the Fluids Recycling segment increased $1.6 million in fiscal 1998,
primarily due to increased capacity as a result of geographic expansion.
Revenues from the Soil Remediation segment decreased $3.5 million, resulting
from the closure of two sites, as well as heavy rains, which unfavorably
affected operations at certain West Coast sites, and, to a lesser extent,
competitive pricing pressures.
The gross profit margin decreased to 11% in fiscal 1998 from 16% in fiscal
1997, primarily due to losses on certain remedial-construction contracts at the
Company's eastern construction operations, resulting from poorly bid and
executed projects, and an increase in lower-margin revenues at RETEC at the
Consulting and Engineering segment. These decreases were offset in part by a
greater percentage of soil-remediation revenues earned at certain higher-margin
soil-remediation facilities at the Soil Remediation segment.
Selling, general, and administrative expenses as a percentage of revenues
remained relatively unchanged at 11.5% and 11.4% in fiscal 1998 and 1997,
respectively. Selling, general, and administrative expenses increased due to the
inclusion of expenses from acquired businesses.
During fiscal 1997, the Company recorded $7.8 million of restructuring
costs in connection with the write-down of certain capital equipment and
intangible assets, including cost in excess of net assets of acquired companies
(Note 12). The write-down was in response to a severe downturn in the Company's
soil-recycling business, which resulted in the closure of two soil-remediation
sites. In addition, the Company's analysis indicated that the future
undiscounted cash flows from certain other soil-remediation sites that remained
open would be insufficient to recover the Company's investment in these business
units, thus requiring a write-down of certain assets, included in the $7.8
million charge.
Interest income decreased to $1.0 million in fiscal 1998 from $1.9 million
in fiscal 1997 as a result of lower average invested balances due to the use of
$11.4 million to repurchase Company common stock in fiscal 1998 and 1997 and the
Company's funding of an increase in accounts receivable.
Equity in earnings of unconsolidated subsidiary represents the Company's
proportionate share of income from a joint venture. "Gain on sale of
unconsolidated subsidiary" resulted from the Company's sale of its interest in
this joint venture in October 1997 (Note 13).
The effective tax rate for fiscal 1998 exceeded the statutory federal
income tax rate primarily due to the impact of state income taxes and
nondeductible amortization of cost in excess of net assets of acquired
companies. The Company recorded an income tax provision on a pretax loss in
fiscal 1997, primarily due to the amortization and write-off of nondeductible
costs in excess of net assets of acquired companies and, to a lesser extent, the
impact of state income taxes.
26
<PAGE>
Liquidity and Capital Resources
Consolidated working capital, including cash, cash equivalents, and
short-term available-for-sale investments, was $37.0 million at April 3, 1999,
compared with $29.9 million at April 4, 1998. Cash, cash equivalents, and
available-for-sale investments were $20.7 million at April 3, 1999, compared
with $10.9 million at April 4, 1998. During fiscal 1999, $16.3 million of cash
was provided by operating activities. Cash of $3.7 million was provided by an
increase in accounts payable and other current liabilities, including due to
parent company and affiliated companies, primarily due to the timing of
payments. An increase in billings in excess of revenues earned provided cash of
$2.0 million, primarily as a result of the receipt of an advance payment related
to an environmental-liability management contract at the Consulting and
Engineering segment.
Excluding available-for-sale investment activity, the Company's primary
investing activity in fiscal 1999 consisted of capital expenditures. The Company
expended $5.4 million for purchases of property, plant, and equipment during
fiscal 1999. The Company plans to make capital expenditures of approximately
$4.5 million during fiscal 2000.
In fiscal 1999, the Company's financing activities used $0.9 million of
cash. The Company paid $0.8 million in cash dividends in fiscal 1999. The amount
of cash dividends ultimately paid by the Company is dependent on the number of
shareholders participating in the Company's Dividend Reinvestment Plan.
The Company generally expects to have positive cash flow from its existing
operations. Although the Company does not presently intend to actively seek to
acquire additional businesses in the near future, it may acquire one or more
complementary businesses if they are presented to the Company on terms the
Company believes to be attractive. Such acquisitions may require significant
amounts of cash. In addition, the Company's $38.0 million principal amount 4
7/8% convertible debentures mature on May 1, 2000. The maturity of this debt
could adversely affect the Company's liquidity in the first quarter of fiscal
2001. The Company expects that it will finance any such acquisitions and the
redemption of such debentures through a combination of internal funds and/or
short-term borrowings from Thermo TerraTech Inc. or Thermo Electron Corporation,
although it has no agreement with these companies to ensure that funds will be
available on acceptable terms, or at all.
Market Risk
The Company is exposed to market risk from changes in interest 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.
Interest Rates
The Company's subordinated convertible obligations are sensitive to
changes in interest rates. Interest rate changes would result in a change in the
fair value of these subordinated convertible obligations due to the difference
between the market interest rate and the rate at the date of issuance of the
subordinated convertible obligations. A 10% decrease in fiscal year-end 1999
market interest rates would result in a negative impact to the Company of $0.1
million on the fair value of its long-term obligations.
Equity Prices
The Company's subordinated convertible obligations are sensitive to
fluctuations in the price of Company common stock into which the obligations are
convertible. Changes in the price of the underlying common stock would result in
changes in the fair value of the Company's subordinated convertible obligations
due to the difference between the current market price and the market price at
the date of issuance of the obligations. A 10% increase in the fiscal year-end
1999 market equity prices would result in a negative impact to the Company of
$0.3 million on the fair value of its price-sensitive equity financial
instruments.
27
<PAGE>
Year 2000
The following constitutes a "Year 2000 Readiness Disclosure" under the
Year 2000 Informational and Readiness Disclosure Act. The Company continues to
assess the potential impact of the year 2000 date recognition issue on the
Company's internal business systems, services, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) assessing the year 2000 readiness of its
key suppliers and vendors; and (iii) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company's efforts included testing the
year 2000 readiness of its utility and telecommunications systems at its
critical facilities. The Company is currently in phase two of its program,
during which any noncompliant systems or facilities that were identified during
phase one are prioritized and remediated. Based on its evaluations of its
critical facilities, the Company does not believe that any material upgrades or
modifications are required. The Company is currently upgrading or replacing its
material noncompliant information technology systems, and this process was
approximately 80% complete as of April 3, 1999. In many cases, such upgrades or
replacements are being made in the ordinary course of business, without
accelerating previously scheduled upgrades or replacements. The Company expects
that all of its material information technology systems and critical facilities
will be year 2000 compliant by October 1999.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. To date, no significant supplier or
vendor has indicated that its business operations will be materially disrupted
by the year 2000 issue. The Company has started to follow-up with significant
suppliers and vendors that have not responded to the Company's questionnaires.
The Company has not completed the majority of its assessment of third-party
risk, but expects to be substantially completed by October 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying manual backup systems in the event of a
failure of the Company's material information technology systems. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, and significant suppliers and vendors, it will modify and adjust its
contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred third-party expenses (external costs) related to
year 2000 issues of approximately $0.2 million as of April 3, 1999, and the
total external costs of year 2000 remediation are expected to be approximately
$0.5 million. All of the external costs incurred as of April 3, 1999, were spent
on testing and upgrading information technology systems. In fiscal year 1999,
approximately 5% of the Company's total information technology budget was spent
on year 2000 issues. All internal costs and related external costs, other than
capital additions, related to year 2000 remediation have been and will continue
to be expensed as incurred.
The Company does not track the internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
28
<PAGE>
Year 2000 (continued)
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that the Company experiences year 2000
issues in its material information technology systems that cause the Company to
be unable to access data, to process transactions, and to maintain accurate
books and records. In such an event, the Company's operations could be delayed
or temporarily shut down, and it could be unable to meet its obligations to
customers in a timely fashion. The Company's business, operations and financial
condition could be adversely affected in amounts that cannot be reasonably
estimated at this time.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Some services provided by the Company involve the delivery to clients of
third-party software and hardware. In addition, certain older third-party
products, which the Company no longer uses in providing its services to clients,
may not be year 2000 compliant, which may expose the Company to claims. As
discussed above, if any of the Company's key suppliers or vendors experience
business disruptions due to year 2000 issues, the Company might also be
materially adversely affected. There is expected to be a significant amount of
litigation relating to the year 2000 issue and there can be no assurance that
the Company will not incur material costs in defending or bringing lawsuits. In
addition, if any year 2000 issues are identified, there can be no assurance that
the Company will be able to retain qualified personnel to remedy such issues.
Any unexpected costs or delays arising from the year 2000 issue could have a
material adverse impact on the Company's business, operations, and financial
condition in amounts that cannot be reasonably estimated at this time.
29
<PAGE>
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in fiscal 2000 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.
Dependence on Environmental Regulation. Federal, state, and local
environmental laws govern each of the markets in which the Company conducts
business, as well as many of the Company's operations. The markets for each of
the Company's services, including industrial remediation services, nuclear
remediation services, hazardous waste remedial construction services,
soil-remediation services, and waste-fluids recycling services, and the
standards governing most aspects of the construction and operation of the
Company's facilities were directly or indirectly created by, and are dependent
on, the existence and enforcement of those laws. There can be no assurance that
these laws and regulations will not change in the future, requiring new
technologies or stricter standards with which the Company must comply. In
addition, there can be no assurance that these laws and regulations will not be
made more lenient in the future, thereby reducing the size of the markets
addressed by the Company. Any such change in such federal, state, and local
environmental laws and regulations may have a material adverse effect on the
Company's business.
Responsibility for establishing and enforcing certain federal policies,
such as the federal underground storage tank policy, has been delegated to the
states, which are not only required to establish regulatory programs, but also
are permitted to mandate more stringent requirements than are otherwise required
by federal law. Recently, certain states have adopted a "risk-based" approach to
prioritizing site cleanups and setting cleanup standards, which attempt to
balance the costs of remediation against the potential harm to human health and
the environment from leaving sites unremediated. There can be no assurance that
additional states will not adopt similar policies, or that these policies will
not reduce the size of the potential market addressed by the Company.
Potential Environmental and Regulatory Liability. The Company's operations
are subject to comprehensive laws and regulations related to the protection of
the environment. Among other things, these laws and regulations impose
requirements to control air, soil, and water pollution, and regulate health,
safety, zoning, land use, and the handling and transportation of hazardous and
nonhazardous materials. Such laws and regulations also impose liability for
remediation and cleanup of environmental contamination, both on-site and
off-site, resulting from past and present operations. These requirements may
also be imposed as conditions of operating permits or licenses that are subject
to renewal, modification, or revocation. Existing laws and regulations, and new
laws and regulations, may require the Company to modify, supplement, replace, or
curtail its operating methods, facilities, or equipment at costs which may be
substantial, without any corresponding increase in revenue. The Company is also
potentially subject to monetary fines, penalties, remediation, cleanup, or stop
orders, injunctions, or orders to cease or suspend certain of its practices. The
outcome of any proceedings and associated costs and expenses could have a
material adverse impact on the Company's business. In addition, the Company's
divisions are subject to numerous laws and regulations related to the protection
of human health and safety. Such laws and regulations may impose liability on
the Company for exposure of its employees to radiation or other hazardous
contamination or failure to isolate and remove radioactive or other hazardous
contaminants from soil.
The Company endeavors to operate its business to minimize its exposure to
environmental and other regulatory liabilities. Although no claims giving rise
to such liabilities have been asserted by the Company's customers or employees
to date, there can be no assurance that such claims cannot or will not be
asserted against the Company.
30
<PAGE>
Uncertainty of Funding. Remediation compliance requirements and attendant
costs are often beyond the financial capabilities of many individuals and small
companies. To address this problem, some states have established tax-supported
trust funds to assist in the financing of compliance and site remediation. As a
consequence, in many of the states in which the Company markets its
soil-remediation services, the majority, and in some cases virtually all, of the
soil remediated by the Company is paid for by large companies and/or state trust
funds. Any substantial decrease in this funding could have a material adverse
effect on the Company's business and financial performance. Many states have
realized that the number of sites requiring remediation and the costs of
compliance are substantially higher than were originally estimated. As a result,
several states have relaxed enforcement activities and others have reduced
compliance requirements in order to reduce the costs of cleanup. These factors
have already resulted in lower levels of cleanup activity in some states and
have had a material adverse effect on the Company's business. Continued
de-emphasis on enforcement activities and/or further reductions in compliance
requirements will have an even more severe adverse effect on the Company's
business.
The Company depends on funding from the federal and state governments, and
their agencies and instrumentalities, for compensation for its services. For
example, Thermo NUtech provides a large portion of its services directly or
indirectly to the U.S. Department of Energy (DOE). Declines in spending by the
DOE and other governmental agencies could have a material adverse effect on the
Company's business.
Competition. The markets for many of the Company's services are regional
and are characterized by intense competition from numerous local competitors.
Some of the Company's competitors have greater technical and financial resources
than those of the Company. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the promotion and sale of their services than the
Company. Competition could increase if new companies enter the market or if
existing competitors expand their service lines. There can be no assurance that
the Company's current technology, technology under development, or ability to
develop new technologies will be sufficient to enable it to compete effectively
with its competitors.
Seasonal Influences. A majority of the Company's businesses experience
seasonal fluctuations. A majority of the Company's soil-remediation sites, as
well as the company's fluids-recycling sites, experience declines in severe
weather conditions. Site remediation work and certain environmental testing
services, such as the services provided by RETEC, IEM Sealand, and Thermo
NUtech, may decline in winter months as a result of severe weather conditions.
Possible Obsolescence Due to Technological Change. Technological
developments are expected to continue at a rapid pace in the environmental
services industry. The Company's technologies could be rendered obsolete or
uneconomical by technological advances by one or more companies that address the
Company's markets or by future entrants into the industry. There can be no
assurance that the Company would have the resources to, or otherwise would be
successful in, developing responses to technological advances by others.
Risks Associated with Acquisition Strategy. The Company's strategy has
included the acquisition of businesses that complement or augment the Company's
existing services. The Company does not presently intend to actively seek to
make additional acquisitions in the near future, and expects instead to
concentrate its resources on strengthening its core businesses. The Company may,
however, acquire one or more additional businesses if they are presented to the
Company on terms the Company believes to be attractive.
Promising acquisitions are difficult to identify and complete for a number
of reasons, including competition among prospective buyers and the need for
regulatory approvals. Any acquisitions completed by the Company may be made at
substantial premiums over the fair value of the net assets of the acquired
companies. There can be no assurance that the Company will be able to complete
future acquisitions or that the Company will be able to successfully integrate
any acquired businesses. In order to finance such acquisitions, it may be
necessary for the Company to raise additional funds through public or private
financings. Any equity or debt financing, if available at all, may be on terms
which are not favorable to the Company and, in the case of equity financing, may
result in dilution to the Company's stockholders.
31
<PAGE>
No Assurance of Development and Commercialization of Technology Under
Development. The Company is currently engaged in the development of several
technologies which may ultimately be commercialized to provide services to
customers. There are a number of technological challenges that the Company must
successfully address to complete any of its development efforts. Technology
development involves a high degree of risk, and returns to investors are
dependent upon successful development and commercialization of such technology.
There can be no assurance that any of the technologies currently being developed
by the Company, or those to be developed in the future, will be technologically
feasible or accepted by the marketplace, or that any such development will be
completed in any particular timeframe.
Risks Associated with Cash Management Arrangement with the Parent Company.
The Company participates in a cash management arrangement with its parent
company, Thermo Electron. Under this cash management arrangement, the Company
lends its excess cash to Thermo Electron on an unsecured basis. The Company has
the contractual right to withdraw its funds invested in the cash management
arrangement upon 30 days' prior notice. Thermo Electron is contractually
required to maintain cash, cash equivalents, and/or immediately available bank
lines of credit equal to at least 50% of all funds invested under the cash
management arrangement by all Thermo Electron subsidiaries other than wholly
owned subsidiaries. The funds are held on an unsecured basis and therefore are
subject to the credit risk of Thermo Electron. The Company's ability to receive
its cash upon notice of withdrawal could be adversely affected if participants
in the cash management arrangement demand withdrawal of their funds in an
aggregate amount in excess of the 50% reserve required to be maintained by
Thermo Electron. In the event of a bankruptcy of Thermo Electron, the Company
would be treated as an unsecured creditor and its right to receive funds from
the bankruptcy estate would be subordinated to secure creditors and would be
treated on a pari passu basis with all other unsecured creditors. Further, all
cash withdrawn by the Company from the cash management arrangement within one
year before the bankruptcy would be subject to rescission. The inability of
Thermo Electron to return the Company's cash on a timely basis or at all could
have a material adverse effect on the Company's results of operations and
financial position.
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays. Some
services provided by the Company involve the delivery to clients of third-party
software and hardware. In addition, certain older third-party products, which
the Company no longer uses in providing its services to clients, may not be year
2000 compliant, which may expose the Company to claims. As discussed above, if
any of the Company's key suppliers or vendors experience business disruptions
due to year 2000 issues, the Company might also be materially adversely
affected. There is expected to be a significant amount of litigation relating to
the year 2000 issue and there can be no assurance that the Company will not
incur material costs in defending or bringing lawsuits. In addition, if any year
2000 issues are identified, there can be no assurance that the Company will be
able to retain qualified personnel to remedy such issues. Any unexpected costs
or delays arising from the year 2000 issue could have a material adverse impact
on the Company's business, operations, and financial condition in amounts that
cannot be reasonably estimated at this time.
32
<PAGE>
Selected Financial Information
(In thousands except per share amounts) 1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995
- -------------------------------------------------- ---------- ----------- ---------- ---------- ---------
Statement of Operations Data
Revenues $141,946 $ 128,409 $114,849 $ 66,957 $ 51,504
Net Income (Loss) (3,861) 240 (2,681) 5,444 3,643
Earnings (Loss) per Share:
Basic (.29) .02 (.21) .44 .36
Diluted (.29) .02 (.21) .42 .35
Balance Sheet Data
Working Capital $ 36,974 $ 29,941 $ 38,960 $ 46,343 $ 3,384
Total Assets 141,174 140,311 136,114 135,802 79,156
Subordinated Convertible Obligations 40,600 40,600 40,600 40,600 2,650
Shareholders' Investment 70,281 74,467 74,830 83,352 60,320
Other Data
Cash Dividends Declared $ 2,610 $ 2,504 $ 2,557 $ 2,491 $ 2,012
(a) Reflects a $9.2 million pretax charge for restructuring costs.
(b) Reflects the November 1997 acquisition of Benchmark, the August 1997
acquisition of RPM, and the May 1997 acquisition of TriTechnics and includes
a pretax gain of $3.0 million from the sale of an investment in a joint
venture.
(c) Reflects the September 1996 acquisition of IEM Sealand and $7.8 million of
pretax restructuring costs.
(d) Reflects the May 1995 issuance of $38 million principal amount of 4 7/8%
subordinated convertible debentures and a private placement of 500,000
shares of the Company's common stock for net proceeds of $6.6 million. Also
reflects the December 1995 acquisition of RETEC.
33
<PAGE>
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol THN. The following table sets forth the high and low sale prices of
the Company's common stock for fiscal 1999 and 1998, as reported in the
consolidated transaction reporting system.
Fiscal 1999 Fiscal 1998
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- ---------
First $6 3/4 $4 3/8 $7 9/16 $6 1/2
Second 5 1/8 2 3/8 8 1/8 6 7/8
Third 3 1/8 1 3/4 7 11/16 5 1/2
Fourth 3 5/8 1 7/8 7 3/8 5 5/8
As of April 30, 1999, the Company had 166 holders of record of its common
stock. This does not include holdings in street or nominee names. The closing
market price on the American Stock Exchange for the Company's common stock on
April 30, 1999, was $2 5/16 per share.
Dividend Policy
The Company intends to pay cash dividends from time to time to the holders
of the Company's common stock out of funds legally available therefor. The
Company currently expects that such dividends will be paid semiannually. No
assurance can be given, however, as to whether the Company will continue to pay
dividends in the future. On August 4, 1998, and February 23, 1999, the Board of
Directors declared semiannual dividends of $.10 per share, which were paid on
September 1, 1998, and March 25, 1999, to shareholders of record as of August
18, 1998, and March 11, 1999, respectively.
Dividend Reinvestment Plan
The ThermoRetec Corporation Dividend Reinvestment Plan permits
shareholders to have their dividends reinvested automatically in additional
shares of the Company's common stock without paying service charges or brokerage
fees. For more details about this service, please write to:
BankBoston N.A.
c/o Boston EquiServe Limited Partnership
Investor Relations Department
P.O. Box 8040
Boston, Massachusetts 02266-8040
34
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit 21
THERMORETEC CORPORATION
Subsidiaries of the Registrant
As of May 29, 1999, ThermoRetec Corporation owned the following companies:
NAME STATE OR PERCENT OF
JURISDICTION OF OWNERSHIP
INCORPORATION
- -----------------------------------------------------------------------------------------------------------
Benchmark Environmental Corporation New Mexico 100
Eberline Holdings Inc. Delaware 100
Eberline Analytical Corporation New Mexico 100
Thermo Hanford Inc. Delaware 100
TMA/NORCAL Inc. California 100
ThermoRetec Construction Corporation (formerly IEM Sealand Virginia 100
Corporation)
ThermoRetec Resource Planning & Management Systems Corporation Connecticut 100
(formerly RPM Systems, Inc.)
ThermoRetec Consulting Corporation (formerly Remediation Delaware 100
Technologies Inc.)
GeoWest Golden Inc. Colorado 100
GeoWest TriTechnics of Ohio, LLC Colorado 100
Retec North Carolina, Inc. North Carolina 100
RETEC Thermal, Inc. Delaware 100
Thermo Fluids Inc. Delaware 100
TPS Technologies Inc. Florida 100
TPST Soil Recyclers of California Inc. California 100
California Hydrocarbon, Inc. Nevada 100
TPST Soil Recyclers of Maryland Inc. Maryland 100
Todds Lane Limited Partnership (1% of which is owned directly Maryland 100*
by TPS Technologies Inc.)
TPST Soil Recyclers of New York Inc. New York 100
TPST Soil Recyclers of Oregon Inc. Oregon 100
TPST Soil Recyclers of South Carolina Inc. Delaware 100
TPST Soil Recyclers of Virginia Inc. Delaware 100
TPST Soil Recyclers of Washington Inc. Washington 100
TRI Oak Ridge Inc. Delaware 100
TRI Oak Ridge L.L.C. (additionally, 50% of the shares are owned Delaware 50
directly by Coleman Services Incorporated)
TRUtech L.L.C. Delaware 47.5*
*Represents an interest in a joint venture.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated May 11, 1999 (except with respect to the matters
discussed in Note 18, as to which the date is June 1, 1999), included in or
incorporated by reference into ThermoRetec Corporation's Annual Report on Form
10-K for the fiscal year ended April 3, 1999, and into the Company's previously
filed Registration Statements as follows: Registration Statement No. 33-92058 on
Form S-8, Registration Statement No. 33-85368 on Form S-8, Registration
Statement No. 33-85370 on Form S-8, Registration Statement No. 33-85374 on Form
S-8, Registration Statement No. 33-85372 on Form S-8, Registration Statement No.
333-00062 on Form S-3, Registration Statement No. 33-80747 on Form S-8,
Registration Statement No. 33-80515 on Form S-8, Registration Statement No.
33-81226 on Form S-3D, Registration Statement No. 333-35373 on Form S-3,
Registration Statement No. 333-33341 on Form S-3D, and Registration Statement
No. 333-75051 on Form S-3D.
Arthur Andersen LLP
Boston, Massachusetts
June 7, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMORETEC
CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED APRIL 3, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-03-1999
<PERIOD-END> APR-03-1999
<CASH> 20,669
<SECURITIES> 0
<RECEIVABLES> 33,741
<ALLOWANCES> 1,706
<INVENTORY> 0
<CURRENT-ASSETS> 66,756
<PP&E> 55,280
<DEPRECIATION> 23,538
<TOTAL-ASSETS> 141,174
<CURRENT-LIABILITIES> 29,782
<BONDS> 40,600
0
0
<COMMON> 142
<OTHER-SE> 70,139
<TOTAL-LIABILITY-AND-EQUITY> 141,174
<SALES> 0
<TOTAL-REVENUES> 141,946
<CGS> 0
<TOTAL-COSTS> 119,483
<OTHER-EXPENSES> 9,176
<LOSS-PROVISION> 1,026
<INTEREST-EXPENSE> 2,168
<INCOME-PRETAX> (4,906)
<INCOME-TAX> (1,045)
<INCOME-CONTINUING> (3,861)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,861)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
