-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Al6fdeRs+FJRoqZDpovv5UYrmpvSxNXT6Y3fVpMs0Ky+3+tBeAcbnfsJagsRaHF0 apBQfzDDtHqlLRKLcNtF5Q== 0000796038-99-000010.txt : 19990615 0000796038-99-000010.hdr.sgml : 19990615 ACCESSION NUMBER: 0000796038-99-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990403 FILED AS OF DATE: 19990610 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMO TERRATECH INC CENTRAL INDEX KEY: 0000796038 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] IRS NUMBER: 042925807 STATE OF INCORPORATION: DE FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09549 FILM NUMBER: 99644295 BUSINESS ADDRESS: STREET 1: 45 FIRST AVENUE STREET 2: P O BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02454-9046 BUSINESS PHONE: 6176221000 MAIL ADDRESS: STREET 1: 81 WYMAN STREET STREET 2: P O BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02454-9046 FORMER COMPANY: FORMER CONFORMED NAME: THERMO PROCESS SYSTEMS INC DATE OF NAME CHANGE: 19920703 10-K 1 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 1-9549 THERMO TERRATECH INC. (Exact name of Registrant as specified in its charter) Delaware 04-2925807 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 81 Wyman Street, P.O. Box 9046 Waltham, Massachusetts 02454-9046 (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, $.10 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 $9,493,000. As of April 30, 1999, the Registrant had 19,049,354 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. PART I Item 1. Business (a) General Development of Business Thermo TerraTech Inc. (the Company or the Registrant) provides industrial outsourcing services and manufacturing support encompassing a broad range of specializations. The Company operates in four segments: environmental-liability management, engineering and design, laboratory testing, and metal treating. The Environmental-liability Management segment includes the Company's majority-owned, publicly held ThermoRetec Corporation (formerly Thermo Remediation Inc.) subsidiary, which is a national provider of environmental-liability and resource-management services. Through a nationwide network of offices, ThermoRetec offers these and related consulting services in four areas: consulting and engineering, nuclear remediation, soil remediation, and fluids recycling. As of April 3, 1999, the Company owns 70% of ThermoRetec's outstanding common stock and holds a $2.7 million principal amount 3 7/8% subordinated convertible note due 2000 issued by ThermoRetec, convertible into shares of ThermoRetec common stock at a conversion price of $9.83 per share. The Company's majority-owned Thermo EuroTech N.V. subsidiary, located in the Netherlands, specializes in converting "off-spec" and contaminated petroleum fluids into useable oil products. Thermo EuroTech also provides in-plant waste management and recycling services through its Ireland-based Green Sunrise Holdings Ltd. subsidiary. As of April 3, 1999, the Company owns 78% of Thermo EuroTech's outstanding common stock. The Engineering and Design segment includes the Company's majority-owned, publicly held The Randers Killam Group Inc. (formerly The Randers Group Incorporated) subsidiary, which provides comprehensive engineering and outsourcing services in four areas: water and wastewater treatment, process engineering and construction, highway and bridge engineering, and infrastructure engineering. As of April 3, 1999, the Company owns approximately 95% of Randers Killam's outstanding common stock. This segment also includes the Company's wholly owned Normandeau Associates Inc. subsidiary, which provides consulting services that address natural resource management issues. The Company's wholly owned Thermo Analytical Inc. subsidiary, which represents the Laboratory Testing segment, operates analytical laboratories that provide environmental- and pharmaceutical-testing services, primarily to commercial clients throughout the U.S. The Metal Treating segment performs metallurgical processing services using thermal-treatment equipment at locations in California, Minnesota, and Wisconsin. In May 1999, the Company announced the planned sale of several businesses by its majority-owned subsidiaries. In connection with these proposed sales, the Company expects to incur pretax charges totaling approximately $65 million, primarily in the first quarter of fiscal 2000. Thermo EuroTech intends to sell its used-oil processing operations, Randers Killam plans to sell three operating units, and ThermoRetec plans to sell three soil-recycling facilities. For the fiscal year ended April 3, 1999, revenues and operating loss from these businesses totaled approximately $50 million and $0.1 million, respectively. The Company was incorporated on May 30, 1986, as an indirect, wholly owned subsidiary of Thermo Electron Corporation. As of April 3, 1999, Thermo Electron owned 16,605,831 shares of the Company's common stock, representing 87% of such stock outstanding. Thermo Electron 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. 2 Thermo Electron has from time to time repurchased shares of the Company's, ThermoRetec's, Randers Killam's, and Thermo EuroTech's common stock in the open market or in negotiated transactions. During fiscal 1999*, Thermo Electron purchased 670,521 shares, 70,800 shares, and 474,000 shares of the Company's, ThermoRetec's, and Thermo EuroTech's common stock, respectively, in the open market and negotiated transactions for a total price of $3.4 million, $0.2 million, and $1.5 million, respectively. Thermo Electron has announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. Under this plan, the Company, ThermoRetec, and Randers Killam would be merged into Thermo Electron. As a result, all three companies would become wholly owned subsidiaries of Thermo Electron. The public shareholders of the Company, ThermoRetec, and Randers Killam 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 17 to Consolidated Financial Statements in the Registrant's Fiscal 1999 Annual Report to Shareholders, which statements are 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 15 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 Services and Products Environmental-liability Management 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. The Company offers a broad array of remedial solutions 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. - -------------------- * 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. 3 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. 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. 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. During fiscal 1999, the Company announced plans to close two soil-recycling facilities, one of which was closed in March 1999. The Company is actively seeking a buyer for the second facility. In May 1999, ThermoRetec announced plans to sell three additional soil-recycling facilities. 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 (EPA'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 already 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. The Company offers a full spectrum of environmental services related to managing and recycling nonhazardous, 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 Thermo EuroTech specializes in processing "off-spec" mixtures of oil that contain water, ash, and sediment into commercially tradable end products used in blending. The end products of this process are commercial grade oils that can be blended to make diesel fuels and marine fuels or be used as a feed material. In recent years, the global drop in oil prices has affected sales of the off-spec oil produced at Thermo EuroTech's North Refinery division. Because of the price decline and instability in the worldwide oil market, Thermo EuroTech has applied to Dutch authorities for licenses to broaden the variety of waste streams that could be treated at North Refinery. In addition, Thermo EuroTech has taken steps to replace and diversify its feedstock suppliers. However, no assurance can be given that it will not experience future disruptions in deliveries. In May 1999, the Company announced plans to exit this business. Thermo EuroTech also provides in-plant waste management and recycling services through its Ireland-based Green Sunrise subsidiary. During fiscal 1999, 1998, and 1997, the Company derived revenues of $159.1 million, $141.1 million, and $126.8 million, respectively, from environmental-liability management services. Engineering and Design The Company provides comprehensive engineering and outsourcing services in such areas as water and wastewater treatment, process engineering and construction, highway and bridge engineering, and infrastructure engineering. A substantial portion of the Company's engineering and design services sales are made to existing customers on a repeat basis. Engineering and design services are often performed as multiyear studies. In addition to federal, state, and local governments, customers include public utilities, waste management companies, oil refineries, mining companies, chemical manufacturers, architectural and engineering firms, and a variety of service companies involved with real estate transactions. The Company specializes in the design, planning, and construction observation of municipal and privately owned water treatment plants, wastewater treatment plants, and hazardous wastewater facilities. The Company provides full-service contract operations to plant owners in the public and private sectors. These services facilitate regulatory compliance; optimize day-to-day plant operations; reduce costs; provide competent, experienced personnel; and promote good community relations. In addition, the Company provides design engineering, project management, and construction services for industrial clients in the manufacturing, pharmaceutical, and chemical-processing industries, principally in the Mid-West, Massachusetts, and West Virginia; a broad range of consulting services that address transportation planning and design; and transportation and environmental consulting, professional engineering, and architectural services. In May 1999, Randers Killam announced plans to sell three businesses: the Randers division, which provides the Company's process engineering and construction services; BAC Killam Inc., which provides the Company's highway and bridge engineering services; and E3-Killam Inc., which provides a small portion of the Company's water and wastewater treatment services. During fiscal 1999, 1998, and 1997, the Company derived revenues of $91.8 million, $84.6 million, and $74.8 million, respectively, from engineering and design services. Laboratory Testing The Company provides comprehensive laboratory-based services for the environmental and pharmaceutical industries. Analytical laboratory services consist of a comprehensive range of analytical tests to detect and measure organic contaminants and inorganic contaminants in samples of soil, water, air, industrial wastes, and biological materials. The Company also provides testing services for major pharmaceutical companies in support of their new healthcare drug development. During fiscal 1999, 1998, and 1997, the Company derived revenues of $40.5 million, $37.5 million, and $35.4 million, respectively, from laboratory testing services. 5 Metal Treating The Company performs metallurgical processing services using thermal-treatment equipment at locations in California, Minnesota, and Wisconsin. Through its Holcroft Division, which was sold in October 1997, the Company designed, manufactured, and installed computer-controlled, custom-engineered, thermal-processing systems used to treat primary metals and metal parts. During fiscal 1999, 1998, and 1997, the Company derived revenues of $19.3 million, $36.6 million, and $44.3 million, respectively, from metal treating services and process systems. (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 Prior to fiscal 1996, a large percentage of oil feedstock at Thermo EuroTech's North Refinery division came from the former Soviet Union. Thermo EuroTech no longer receives any oil from that nation as a result of political and economic changes that make transportation of waste oil difficult. To overcome this loss of supply, Thermo EuroTech has taken steps to replace and diversify its feedstock suppliers. However, no assurance can be given that it will not experience future disruptions in deliveries. In May 1999, the Company announced plans to sell the North Refinery division. Since the Company's business is primarily service oriented, it does not involve the processing of raw materials and is not dependent on fluctuations in the supply or price of raw materials, except as described above. To date, the Company has not experienced any difficulty in obtaining any of the materials or components used in its operations and does not foresee any such difficulty in the future. The Company has multiple sources for all of its significant raw material needs. (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. (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. In Europe, Thermo EuroTech may experience a decline in the feedstock delivered to and from its facilities during winter months due to frozen waterways. (vi) Working Capital Requirements In general, there are no special inventory requirements or credit terms extended to customers that would have a material adverse effect on the Company's working capital. 6 (vii) Dependency on a Single Customer See Government Contracts. (viii) Backlog
The Company's backlog of firm orders at fiscal year-end 1999 and 1998 was: (In thousands) 1999 1998 - -------------------------------------------------------------------------------------- --------- --------- Environmental-liability Management $ 47,635 $ 51,860 Engineering and Design 62,136 59,633 Laboratory Testing 2,517 2,362 Metal Treating 300 300 -------- -------- $112,588 $114,155 ======== ======== These amounts include the backlog of all of the Company's subsidiaries, with the exception of soil-recycling, fluids-recycling, and in-plant waste management and recycling services, which are provided on a current basis pursuant to purchase orders. Included in the Company's backlog at fiscal year-end 1999 and 1998 is the incomplete portion of contracts that are accounted for using the percentage-of-completion method. 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 government contracts are subject to termination at any time by the government without penalty. (ix) Government Contracts Approximately 6%, 4%, and 13%, of the Company's revenues in fiscal 1999, 1998, and 1997, respectively, were derived from contracts or subcontracts with the federal government that are subject to renegotiation of profits or termination. The Company does not have any knowledge of threatened or pending renegotiation or termination of any material contract or subcontract. (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. Environmental-liability Management In the market for consulting and engineering services, the Company competes with numerous regional and local companies as well as a number of national remediation contractors. The Company competes primarily on the basis of value, with the vast majority of the contracts it seeks awarded on the basis of scope, effectiveness, and cost. Other competitive factors for the Company's consulting and engineering businesses include: reputation; experience; breadth and quality of services offered; and technical, managerial, and business proficiency. The type of radiation and nuclear/health physics services offered by the Company 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 business 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 7 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. Competition in the fluids recycling market 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. Thermo EuroTech faces competition for oil from other oil processors and blenders and from a company with a similar distillation technology in Italy. The market for blending oils is very large and oils such as Thermo EuroTech's end products represent a very small percentage of the total market. Green Sunrise is the leading integrated service provider in an emerging, still fragmented market. No one competitor offers Green Sunrise's complete line of services and no single firm is dominant in any of Green Sunrise's primary service areas. Thermo EuroTech competes primarily on the basis of price. Engineering and Design The Company's engineering and design businesses are engaged in highly competitive markets in all of its service areas. These markets tend to be regional. In its geographic service area, competition consists of small, one- to three-person firms offering a limited scope of services, as well as much larger firms that may be regional, national, or international in the scope of services they offer. The principal competitive factors for the Company are: reputation; experience; price; breadth and quality of services offered; and technical, managerial, and business proficiency. Laboratory Testing Hundreds of independent analytical testing laboratories and consulting firms compete for business nationwide. Many of these firms use equipment and processes similar to those of the Company. Competition is based not only on price, but also on reputation for accuracy, quality, and the ability to respond rapidly to customer requirements. In addition, many industrial companies have their own in-house analytical testing capabilities. The Company believes that its competitive strength lies in the quality of its services. Metal Treating The market for metal-treating services is typically regional and competitive. All regions in which the Company has facilities contain numerous competitors. In addition, in-house heat-treating facilities provide a major source of competition. The Company competes in this segment on the basis of services provided, turnaround time, 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 2,900 persons. (d) Financial Information About Geographic Areas The Company's sales in foreign locations are currently insignificant.
8 (e) Executive Officers of the Registrant
Name Age Present Title (Fiscal Year First Became Executive Officer) ---------------------------- ------ ----------------------------------------------------- Dr. John P. Appleton 64 President and Chief Executive Officer (1993) Emil C. Herkert 61 Vice President (1996) Jeffrey L. Powell 40 Vice President (1994) Theo Melas-Kyriazi 39 Chief Financial Officer (1999) Paul F. Kelleher 56 Chief Accounting Officer (1986) Each executive officer serves until his successor is chosen or appointed by the Board of Directors and qualified or until earlier resignation, death, or removal. All executive officers, except Mr. Herkert and Mr. Powell, have held comparable positions for at least five years, either with the Company or with its parent company, Thermo Electron. Mr. Herkert has served as President of Killam Associates, a subsidiary of Randers Killam, since 1977 and was appointed Chief Executive Officer of Randers Killam in May 1997. Mr. Powell served as President of ThermoRetec 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. 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 Officer of ThermoSpectra 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. 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. Item 2. Properties The location and general character of the Company's principal properties by segment as of April 3, 1999, are: Environmental-liability Management The Company owns approximately 115,000 square feet of office, engineering, laboratory, and production space, principally in Ireland, the Netherlands, and California, and leases approximately 200,000 square feet of office, engineering, laboratory, and production space pursuant to leases expiring in fiscal 2000 through 2023, principally in Ireland, Colorado, Pennsylvania, Massachusetts, and New Mexico. The Company also owns approximately 72 acres in Maryland, California, Oregon, and Idaho, from which it provides soil-remediation services. The Company occupies approximately 20 acres principally 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 leases approximately six acres on one site in Arizona and one site in Nevada pursuant to leases expiring in fiscal 2001 and 2003, respectively, upon which it has constructed fluids storage and processing equipment. The Company occupies approximately 15 acres in Delfzijl, the Netherlands, pursuant to a lease expiring in 2059, consisting of office space, distillation facilities, and oil storage tanks. Engineering and Design The Company owns approximately 75,000 square feet of office, engineering, and laboratory space in New Jersey, Massachusetts, and Michigan, and leases approximately 180,000 square feet of office, engineering, and laboratory space pursuant to leases expiring in fiscal 2000 through 2008, principally in Pennsylvania, New Jersey, New York, Florida, New Hampshire, and Michigan. 9 Laboratory Testing The Company owns approximately 180,000 square feet of office and laboratory space in Pennsylvania, and leases approximately 12,000 square feet of office and laboratory space pursuant to leases expiring in fiscal 2001 and 2009 in Michigan and South Carolina, respectively. Metal Treating The Company owns approximately 140,000 square feet of office, laboratory, and production space in Minnesota and Wisconsin, and leases approximately 330,000 square feet of office, laboratory, and production space pursuant to leases expiring in fiscal 2003 in California. The Company believes that these facilities are in good condition and are adequate for its present operations and that other suitable space is readily available if any of such leases are not extended. With respect to leases expiring in the near future, in the event the Company does not renew such leases, the Company believes suitable alternate space is available for lease on acceptable terms. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information concerning the market and market price for the Registrant's Common Stock, $.10 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, 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 Disclosure Not applicable. 11 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. 12 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.
13 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 10, 1999 THERMO TERRATECH INC. By: /s/ John P. Appleton John P. Appleton 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 10, 1999. Signature Title By: /s/ John P. Appleton President, Chief Executive Officer, and John P. Appleton Director By: /s/ Theo Melas-Kyriazi Chief Financial Officer Theo Melas-Kyriazi By: /s/ Paul F. Kelleher Chief Accounting Officer Paul F. Kelleher By: /s/ John N. Hatsopoulos Director John N. Hatsopoulos By: /s/ Brian D. Holt Director Brian D. Holt By: /s/ Donald E. Noble Director Donald E. Noble By: /s/ William A. Rainville Director William A. Rainville By: /s/ Polyvios C. Vintiadis Chairman of the Board and Director Polyvios C. Vintiadis 14 Report of Independent Public Accountants To the Shareholders and Board of Directors of Thermo TerraTech Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Thermo TerraTech Inc.'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 19, 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 13 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 15
SCHEDULE II THERMO TERRATECH INC. Valuation and Qualifying Accounts (In thousands) 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 Year Ended April 3, 1999 $ 4,450 $ 2,085 $ (45) $(2,479) $ (434) $ 3,577 Year Ended April 4, 1998 $ 3,838 $ 1,141 $ - $ (773) $ 244 $ 4,450 Year Ended March 29, 1997 $ 2,861 $ 625 $ 49 $ (516) $ 819 $ 3,838 Description Balance at Provision Cash Balance Beginning Charged to Payments at End of Year Expense (c) of Year - --------------------------------------------------- ------------- ------------- ------------- ------------- Accrued Restructuring Costs (b) Year Ended April 3, 1999 $ - $ 2,095 $ (376) $ 1,719 (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 13 to Consolidated Financial Statements in the Registrant's Fiscal 1999 Annual Report to Shareholders. (c) Excludes provision of $8.1 million for fixed asset and intangible asset write-downs. 16 EXHIBIT INDEX Exhibit Number Description of Exhibit 2.1 Purchase and Sale Agreement executed October 6, 1997, by and among Remediation Technologies, Inc., RETEC Thermal, Inc., TETRA Thermal, Inc., and TETRA Technologies, Inc. (filed as Exhibit 2.1 to Thermo Remediation Inc.'s Current Report on Form 8-K dated October 6, 1997 [File No. 1-12636] and incorporated herein by reference). 2.2 Assignment and Assumption Agreement executed October 6, 1997, by and among Remediation Technologies, Inc., RETEC Thermal, Inc., TETRA Thermal, Inc., and TETRA Technologies, Inc. (filed as Exhibit 2.2 to Thermo Remediation Inc.'s Current Report on Form 8-K dated October 6, 1997 [File No. 1-12636] and incorporated herein by reference). 2.3 Asset Purchase Agreement dated as of October 10, 1997, between the Registrant and Holcroft L.L.C. (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated October 10, 1997 [File No. 1-9549] and incorporated herein by reference). 2.4 $2,218,000.00 Principal Promissory Note issued by Holcroft L.L.C. to the Registrant (filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated October 10, 1997 [File No. 1-9549] and incorporated herein by reference). 2.5 $663,117.82 Principal Promissory Note issued by Holcroft L.L.C. to the Registrant (filed as Exhibit 2.3 to the Registrant's Current Report on Form 8-K dated October 10, 1997 [File No. 1-9549] and incorporated herein by reference). 2.6 Subordination Agreement dated as of October 10, 1997, between the Registrant and Comerica Bank (filed as Exhibit 2.4 to the Registrant's Current Report on Form 8-K dated October 10, 1997 [File No. 1-9549] and incorporated herein by reference). 2.7 Stock Purchase and Sale Agreement dated May 12, 1997, by and between the Registrant and Thomas R. Eurich, Michael J. Krivitzky, Thomas J. McEnhill, and Bruce M. Bourdon (filed as Exhibit (iv) to Amendment No. 3 to Schedule 13D filed by Thermo Electron Corporation, Thermo Power Corporation, and the Registrant on May 13, 1997, and incorporated herein by reference). 2.8 Amendment No. 1 dated September 19, 1997, to Stock Purchase and Sale Agreement dated May 12, 1997, by and between the Registrant and Thomas R. Eurich, Michael J. Krivitzky, Thomas J. McEnhill, and Bruce M. Bourdon (filed as Exhibit 2.5 to The Randers Group Incorporated's Annual Report on Form 10-K for the fiscal year ended April 4, 1998 [File No. 0-18095] and incorporated herein by reference). 2.9 Letter of Intent dated May 12, 1997, by and between the Registrant and The Randers Group Incorporated (filed as Exhibit (v) to Amendment No. 3 to Schedule 13D filed by Thermo Electron Corporation and the Registrant on May 13, 1997, and incorporated herein by reference). 2.10 Stock Purchase Agreement entered on September 19, 1997, by and between the Registrant and The Randers Group Incorporated (filed as Exhibit (vii) to Amendment No. 4 to Schedule 13D filed by Thermo Electron Corporation and the Registrant on October 3, 1997, and incorporated herein by reference). 17 Exhibit Number Description of Exhibit 2.11 Amendment No. 1 dated as of April 4, 1998, to Stock Purchase Agreement entered on September 19, 1997, by and between the Registrant and The Randers Group Incorporated (filed as Exhibit 2.8 to The Randers Killam Group Incorporated's Annual Report on Form 10-K for the fiscal year ended April 4, 1998 [File No. 0-18095] and incorporated herein by reference). 2.12 Agreement by and among the Registrant, The Randers Group Incorporated, Thomas R. Eurich, Michael J. Krivitzky, Thomas J. McEnhill, Bruce M. Bourdon, and David A. Wiegerink (filed as Exhibit 10 to The Randers Group Incorporated's Current Report on Form 8-K dated October 3, 1997 [File No. 0-18095] and incorporated herein by reference). 3.1 Restated Certificate of Incorporation, as amended (filed as Exhibit 99 to the Registrant's Registration Statement on Form S-2 [Reg. No. 333-02269] and incorporated herein by reference). 3.2 Bylaws of the Registrant (filed as Exhibit 3(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 2, 1988 [File No. 1-9549] and incorporated herein by reference). 4.1 Fiscal Agency Agreement dated as of May 2, 1996, among the Registrant, Thermo Electron Corporation, and Chemical Bank, as Fiscal Agent (filed as Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 30, 1996 [File No. 1-9549] and incorporated herein by reference). 4.2 Fiscal Agency Agreement dated as of May 5, 1995, among Thermo Remediation Inc., Thermo Electron Corporation, and Chemical Bank, as fiscal agent (filed as Exhibit 4.1 to Thermo Remediation Inc.'s Annual Report on Form 10-K for the fiscal year ended April 4, 1998 [File No. 1-12636] and incorporated herein by reference). The Registrant hereby agrees, pursuant to Item 601(b)(4)(iii) (A) of Regulation S-K, to furnish to the Commission, upon request, a copy of each other instrument with respect to other long-term debt of the Company or its subsidiaries. 10.1 Thermo Electron Corporate Charter as amended and restated effective January 3, 1993 (filed as Exhibit 10(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 3, 1993 [File No. 1-9549] and incorporated herein by reference). 10.2 Amended and Restated Corporate Services Agreement dated January 3, 1993, between Thermo Electron Corporation and the Registrant (filed as Exhibit 10(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 3, 1993 [File No. 1-9549] and incorporated herein by reference). 10.3 Agreement of Lease dated December 31, 1985, between Claridge Properties Ltd. and Thermo Electron Corporation (filed as Exhibit 10(c) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6763] and incorporated herein by reference). 10.4 Assignment of Lease dated December 31, 1985, between Thermo Electron Corporation and TMO, Inc. (filed as Exhibit 10(d) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6763] and incorporated herein by reference). 18 Exhibit Number Description of Exhibit 10.5 Sublease dated March 30, 1986, between TMO, Inc. and Holcroft/Loftus, Inc. (filed as Exhibit 10(e) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6763] and incorporated herein by reference). 10.6 Lease Amending Agreement dated January 1, 1995, between Claridge Properties Ltd., Thermo Electron Corporation, and TMO, Inc. (filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 1, 1995 [File No. 1-9549] and incorporated by reference). 10.7 Second Amendment to Sublease dated as of October 10, 1997, between the Registrant and TMO, Inc. (filed as Exhibit 2.5 to the Registrant's Current Report on Form 8-K dated October 10, 1997 [File No. 1-9549] and incorporated herein by reference). 10.8 Sublease dated as of October 10, 1997, between the Registrant and Holcroft L.L.C. (filed as Exhibit 2.6 to the Registrant's Current Report on Form 8-K dated October 10, 1997 [File No. 1-9549] and incorporated herein by reference). 10.9 Exclusive License and Marketing Agreement dated March 22, 1990, among TPS Technologies Inc., Holcroft Inc., and Thermo Soil Recyclers Inc. (filed as Exhibit 10(q) to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1990 [File No. 1-9549] and incorporated herein by reference). 10.10 Form of Indemnification Agreement with Directors and Officers (filed as Exhibit 10(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 30, 1991 [File No. 1-9549] and incorporated herein by reference). 10.11 Development Agreement dated September 15, 1991, between Thermo Electron Corporation and the Registrant (filed as Exhibit 10(l) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 28, 1991 [File No. 1-9549] and incorporated herein by reference). 10.12 Amended and Restated Development Agreement dated January 2, 1992, between Thermo Electron Corporation and the Registrant (filed as Exhibit 10(m) to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 28, 1992 [File No. 1-9549] and incorporated herein by reference). 10.13 Asset Transfer Agreement dated as of October 1, 1993, among the Registrant, TPS Technologies Inc., and Thermo Remediation Inc. (filed as Exhibit 2.3 to Thermo Remediation Inc.'s Registration Statement on Form S-1 [Reg. No. 33-70544] and incorporated herein by reference). 10.14 Exclusive License Agreement dated as of October 1, 1993, among the Registrant, TPS Technologies Inc., and Thermo Remediation Inc. (filed as Exhibit 2.4 to Thermo Remediation Inc.'s Registration Statement on Form S-1 [Reg. No. 33-70544] and incorporated herein by reference). 10.15 Non-Competition and Non-Disclosure Agreement dated as of October 1, 1993, among the Registrant, TPS Technologies Inc.'s, and Thermo Remediation Inc. (filed as Exhibit 2.5 to Thermo Remediation Inc.'s Registration Statement on Form S-1 [Reg. No. 33-70544] and incorporated herein by reference). 10.16 Tax Allocation Agreement dated as of June 1, 1992, between the Registrant and Thermo Remediation Inc. (filed as Exhibit 10.3 to Thermo Remediation Inc.'s Registration Statement on Form S-1 [Reg. No. 33-70544] and incorporated herein by reference). 19 Exhibit Number Description of Exhibit 10.17 Agreement of Partnership dated May 16, 1994, among Terra Tech Labs Inc. (a wholly owned subsidiary of the Registrant) and Eberline Analytical Corporation, Skinner & Sherman, Inc., TMA/NORCAL Inc., Normandeau Associates Inc., Bettigole Andrews & Clark Inc., Fellows, Read & Associates Inc., and Thermo Consulting Engineers Inc. (each a wholly owned subsidiary of Thermo Instrument Systems Inc.; filed as Exhibit 1 to the Registrant's Current Report on Form 8-K relating to the events occurring on May 16, 1994 [File No. 1-9549] and incorporated herein by reference). 10.18 Promissory Note dated May 16, 1994, issued by the Registrant to Thermo Electron Corporation (filed as Exhibit 2 to the Registrant's Current Report on Form 8-K relating to the events occurring on May 16, 1994 [File No. 1-9549] and incorporated herein by reference). 10.19 Agreement of Dissolution of Partnership dated May 9, 1995, among Thermo Terra Tech (the Partnership), Terra Tech Labs, Inc. (a wholly owned subsidiary of the Registrant) and Eberline Analytical Corporation, Skinner & Sherman, Inc., TMA/NORCAL Inc., Normandeau Associates Inc., Bettigole Andrews & Clark Inc., Fellows, Read & Associates Inc., and Thermo Consulting Engineers Inc. (each a wholly owned subsidiary of Thermo Instrument Systems Inc.; filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K relating to the events occurring on May 9, 1995 [File No. 1-9549] and incorporated herein by reference). 10.20 Stock Purchase Agreement dated May 9, 1995, between the Registrant and Thermo Instrument Systems Inc. (filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K relating to the events occurring on May 9, 1995 [File No. 1-9549] and incorporated herein by reference). 10.21 Note dated May 17, 1995, from the Registrant to Thermo Electron Corporation (filed as Exhibit 2.3 to the Registrant's Current Report on Form 8-K relating to the events occurring on May 9, 1995 [File No. 1-9549] and incorporated herein by reference). 10.22 Stock Purchase and Note Issuance Agreement dated as of November 22, 1993, between the Registrant and Thermo Remediation Inc. (filed as Exhibit 10.11 to Thermo Remediation Inc.'s Registration Statement on Form S-1 [Reg. No. 33-70544] and incorporated herein by reference). 10.23 $2,650,000 principal amount Subordinated Convertible Note dated as of November 22, 1993, made by Thermo Remediation Inc., issued to the Registrant (filed as Exhibit 10.12 to Thermo Remediation Inc.'s Registration Statement on Form S-1 [Reg. No. 33-70544] and incorporated herein by reference). 10.24 Stock Purchase and Sale Agreement made and entered into on February 6, 1995, to be effective as of January 29, 1995, by and between Nord Est S.A., the Registrant, and Emil C. Herkert, Kenneth L. Zippler, Franklin O. Williamson, Jr., Fletcher N. Platt, Jr., Eugene J. Destefano, Meint Olthof, and Stanley P. Kaltnecker, Jr. (filed as Exhibit 1 to the Registrant's Current Report on Form 8-K relating to the events occurring on February 6, 1995 [File No. 1-9549] and incorporated herein by reference). 10.25 Agreement and Plan of Merger dated as of June 28, 1995, by and among the Registrant, Eberline Acquisition Inc., Thermo Remediation Inc., and Eberline Holdings Inc. (filed as Appendix B to Thermo Remediation Inc.'s Proxy Statement for the Annual Meeting held on December 13, 1995 [File No. 1-12636] and incorporated herein by reference). 20 Exhibit Number Description of Exhibit 10.26 $28,000,000 Secured Promissory Note dated as of January 29, 1995, issued by the Registrant to Nord Est S.A. (filed as Exhibit 2 to the Registrant's Current Report on Form 8-K relating to the events occurring on February 6, 1995 [File No. 1-9549] and incorporated herein by reference). 10.27 $38,000,000 Promissory Note dated as of February 21, 1995, issued by the Registrant to Thermo Electron Corporation (filed as Exhibit 3 to the Registrant's Current Report on Form 8-K relating to the events occurring on February 6, 1995 [File No. 1-9549] and incorporated herein by reference). 10.28 Asset Purchase Agreement by and among Thermo Analytical Inc. (as Buyer); Lancaster Laboratories, Inc. and Clewmark Holdings (as Sellers); and Earl H. Hess, Anita F. Hess, Kenneth E. Hess, J. Wilson Hershey, and Carol D. Hess (as the principal owners of Sellers) (filed as Exhibit 1 to the Registrant's Current Report on Form 8-K relating to the events occurring on May 10, 1995 [File No. 1-9549] and incorporated herein by reference). 10.29 Agreement and Plan of Merger dated as of the first day of December 1995, by and among Thermo Remediation Inc., TRI Acquisition Inc., and Remediation Technologies, Inc. (filed as Exhibit 2(a) to the Registrant'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). 10.30 Purchase and Sale Agreement dated as of December 20, 1994, by and among TPS Technologies Inc., TPST Soil Recyclers of Maryland Inc., Rafich Corporation, Harry Ratrie, John C. Cyphers, and J. Thomas Hood (filed as Exhibit 1 to Thermo Remediation Inc.'s Current Report on Form 8-K for the events occurring on December 21, 1994 [File No. 1-12636] and incorporated herein by reference). 10.31 Stock Purchase Agreement entered into on March 29, 1995, by and among Stalt Holding, B.V., Beheersmaatschappij J. Amerika N.V., A.J. Van Es, J.B. Van Es and D.A. Slager, and the Registrant (filed as Exhibit 1 to the Registrant's Current Report on Form 8-K relating to the events occurring on March 29, 1995 [File No. 1-9549] and incorporated herein by reference). 10.32 Thermo TerraTech Inc. - The Randers Group Incorporated Nonqualified Stock Option Plan (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 3, 1998 [File No. 1-9549] and incorporated herein by reference). 10.33 Incentive Stock Option Plan of the Registrant (filed as Exhibit 10(h) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6763] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Registrant's Nonqualified Stock Option Plan is 1,850,000 shares, after adjustment to reflect share increases approved in 1987, 1989, and 1992, 6-for-5 stock splits effected in July 1988 and March 1989, and 3-for-2 stock split effected in September 1989.) 10.34 Nonqualified Stock Option Plan of the Registrant (filed as Exhibit 10(i) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6763] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Registrant's Incentive Stock Option Plan is 1,850,000 shares, after adjustment to reflect share increases approved in 1987, 1989, and 1992, 6-for-5 stock splits effected in July 1988 and March 1989, and 3-for-2 stock split effected in September 1989.) 10.35 Deferred Compensation Plan for Directors of the Registrant (filed as Exhibit 10(k) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6763] and incorporated herein by reference). 21 Exhibit Number Description of Exhibit 10.36 Equity Incentive Plan (filed as Exhibit 10.63 to Thermedics Inc.'s Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-9567] and incorporated herein by reference; maximum number of shares issuable is 1,750,000 shares, after adjustment to reflect share increase approved in 1994). 10.37 Directors Stock Option Plan, as amended and restated effective January 1, 1995 (filed as Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 1, 1995 [File No. 1-9549] and incorporated herein by reference). 10.38 Thermo TerraTech Inc. (formerly Thermo Process Systems Inc.) - Thermo Remediation Inc. Nonqualified Stock Option Plan (filed as Exhibit 10(l) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 1994 [File No. 1-9549] 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 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. 10.39 Restated Stock Holdings Assistance Plan and Form of Executive Loan (filed as Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 29, 1997 [File No. 1-9549] and incorporated herein by reference). 10.40 Deferred Compensation Agreement dated September 16, 1996, between Elson T. Killam Associates Inc. and Emil C. Herkert (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 1998 [File No. 1-9549] and incorporated herein by reference). 10.41 Addendum dated 1990, to Deferred Compensation Agreement dated September 16, 1986, between Elson T. Killam Associates Inc. and Emil C. Herkert (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 1998 [File No. 1-9549] and incorporated herein by reference). 10.42 Amendment No. 1, dated April 27, 1990, to Deferred Compensation Agreement dated September 16, 1986, between Elson T. Killam Associates Inc. and Emil C. Herkert (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 1998 [File No. 1-9549] and incorporated herein by reference). 10.43 Master Cash Management, Guarantee Reimbursement, and Loan Agreement dated as of June 1, 1999, between the Registrant and Thermo Electron Corporation. 10.44 Master Cash Management, Guarantee Reimbursement, and Loan Agreement dated as of June 1, 1999, between ThermoRetec Corporation and Thermo Electron Corporation (filed as Exhibit 10.17 to ThermoRetec Corporation's Annual Report on Form 10-K for the fiscal year ended April 3, 1999 [File No. 1-12636] and incorporated herein by reference). 10.45 Master Cash Management, Guarantee Reimbursement, and Loan Agreement dated as of June 1, 1999, between The Randers Killam Group Inc. and Thermo Electron Corporation (filed as Exhibit 10.18 to The Randers Killam Group Inc.'s Annual Report on Form 10-K for the fiscal year ended April 3, 1999 [File No. 0-18095] and incorporated herein by reference). 22 Exhibit Number Description of Exhibit 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.
EX-10.43 2 Exhibit 10.43 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 Thermo TerraTech Inc., 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 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 Rate plus one hundred fifty (150) basis points, which rate shall be adjusted on 2 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 corporation in a transaction in which the Subsidiary is not the surviving entity; 3 (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 Second Tier Majority Owned Subsidiary. If after five (5) business days, 4 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 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. 5 (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 payment of any indebtedness hereunder granted or permitted by the party. 6 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 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 THERMO TERRATECH INC. By: /s/ Kenneth J. Apicerno ---------------------------- Title: Treasurer TTT 10854 EX-13 3 Thermo TerraTech Inc. Consolidated Financial Statements Fiscal 1999
Thermo TerraTech Inc. 1999 Financial Statements Consolidated Statement of Operations Year Ended April 3, April 4, March 29, (In thousands except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ---------- ---------- Revenues (Note 12): Service revenues $310,039 $281,456 $251,384 Product revenues - 17,330 27,119 -------- -------- ------- 310,039 298,786 278,503 -------- -------- ------- Costs and Operating Expenses: Cost of service revenues 247,610 230,376 204,724 Cost of product revenues - 14,735 22,677 Selling, general, and administrative expenses (Note 8) 46,224 41,941 39,191 Restructuring and nonrecurring items (Notes 3 and 13) 10,217 - 9,282 -------- -------- ------- 304,051 287,052 275,874 -------- -------- ------- Operating Income 5,988 11,734 2,629 Interest Income 2,185 4,163 7,253 Interest Expense (includes $162, $593, and $2,638 to parent (8,981) (10,778) (12,914) company) Gain on Issuance of Stock by Subsidiary (Note 10) - - 1,475 Gain on Sale of Unconsolidated Subsidiary (Note 3) - 3,012 - Equity in Earnings of Unconsolidated Subsidiary - 174 865 Other Income, Net - 209 401 -------- -------- ------- Income (Loss) Before Provision for Income Taxes and Minority (808) 8,514 (291) Interest Provision for Income Taxes (Note 5) 1,786 5,146 1,705 Minority Interest (Income) Expense (1,173) 95 (1,834) -------- -------- ------- Net Income (Loss) $ (1,421) $ 3,273 $ (162) ======== ======== ======= Earnings (Loss) per Share (Note 16) Basic $ (.07) $ .18 $ (.01) ======= ======== ======= Diluted $ (.07) $ .17 $ (.01) ======= ======== ======= Weighted Average Shares (Note 16) Basic 19,402 18,700 18,090 ======== ======== ======= Diluted 19,402 18,978 18,090 ======== ======== ======= The accompanying notes are an integral part of these consolidated financial statements. 3 Thermo TerraTech Inc. 1999 Financial Statements Consolidated Balance Sheet April 3, April 4, (In thousands) 1999 1998 - ----------------------------------------------------------------------------------- ----------- --------- Assets Current Assets: Cash and cash equivalents (includes $41,667 and $29,583 under $ 43,013 $34,711 repurchase agreements with parent company; Note 19) Available-for-sale investments, at quoted market value (amortized cost - 2,003 of $2,008; Note 2) Short-term held-to-maturity investments, at amortized cost (quoted - 13,939 market value of $13,979; Note 2) Accounts receivable, less allowances of $3,577 and $4,450 59,377 60,050 Unbilled contract costs and fees 21,207 20,547 Inventories 1,869 1,498 Prepaid and refundable income taxes (Note 5) 6,946 6,224 Prepaid expenses 3,196 3,810 -------- -------- 135,608 142,782 -------- -------- Property, Plant, and Equipment, at Cost, Net 91,514 91,709 -------- -------- Other Assets 15,949 18,227 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Notes 3 and 13) 108,627 107,808 -------- -------- $351,698 $360,526 ======== ======== 4 Thermo TerraTech Inc. 1999 Financial Statements Consolidated Balance Sheet (continued) April 3, April 4, (In thousands except share amounts) 1999 1998 - ----------------------------------------------------------------------------------- ----------- --------- Liabilities and Shareholders' Investment Current Liabilities: Notes payable and current maturities of long-term obligations $ 17,618 $27,165 (includes $9,228 under overdraft facility with related party; Note 6) Accounts payable 17,404 17,728 Accrued payroll and employee benefits 12,771 11,359 Deferred revenue 3,908 3,394 Other accrued expenses (Note 13) 14,342 11,476 Due to parent company and affiliated companies 2,522 2,341 -------- -------- 68,565 73,463 -------- -------- Deferred Income Taxes (Note 5) 3,538 2,901 -------- -------- Other Deferred Items 1,076 1,049 -------- -------- Long-term Obligations (Notes 6 and 11): Subordinated convertible debentures (includes $4,695 and $3,000 of 156,799 149,800 related-party debt) Other 1,818 3,344 -------- -------- 158,617 153,144 -------- -------- Minority Interest 27,745 32,839 -------- -------- Commitments and Contingencies (Note 7) Shareholders' Investment (Notes 4 and 9): Common stock, $.10 par value, 75,000,000 shares authorized; 19,583,773 1,958 1,958 shares issued Capital in excess of par value 70,633 70,437 Retained earnings 25,898 27,319 Treasury stock at cost, 543,319 and 51,188 shares (4,130) (484) Deferred compensation (Note 4) (252) - Accumulated other comprehensive items (1,950) (2,100) -------- -------- 92,157 97,130 -------- -------- $351,698 $360,526 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5 Thermo TerraTech Inc. 1999 Financial Statements Consolidated Statement of Cash Flows Year Ended April 3, April 4, March 29, (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Operating Activities Net income (loss) $ (1,421) $ 3,273 $ (162) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 16,823 14,784 12,900 Noncash restructuring and nonrecurring items (Note 13) 8,122 - 9,282 Gain on sale of unconsolidated subsidiary (Note 3) - (3,012) - Equity in earnings of unconsolidated subsidiary - (174) (865) Minority interest (income) expense (1,173) 95 (1,834) Provision for losses on accounts receivable 2,085 1,141 625 Other noncash items 199 327 430 Increase (decrease) in deferred income taxes 443 (1,583) (43) Gain on issuance of stock by subsidiary (Note 10) - - (1,475) Changes in current accounts, excluding the effects of acquisitions and dispositions: Accounts receivable (643) (11,154) (6,818) Inventories and unbilled contract costs and fees (2,026) (3,353) (7,784) Other current assets (176) 1,715 403 Accounts payable 55 5,507 895 Other current liabilities 7,653 (1,038) 3,399 -------- -------- -------- Net cash provided by operating activities 29,941 6,528 8,953 -------- -------- -------- Investing Activities Acquisitions, net of cash acquired (Note 3) (643) (12,746) (5,156) Purchases of available-for-sale investments - - (38,913) Proceeds from sale and maturities of available-for-sale 2,006 16,372 29,822 investments (Note 2) Proceeds from maturity of held-to-maturity investments (Note 2) 14,065 13,935 - Purchases of property, plant, and equipment (17,415) (18,460) (15,426) Proceeds from sale of businesses (Note 3) - 19,722 347 Issuances of notes receivable - (569) - Purchases of other assets (1,570) (1,993) (450) Other, net 474 2,464 1,356 -------- -------- -------- Net cash provided by (used in) investing activities $ (3,083) $ 18,725 $(28,420) -------- -------- -------- 6 Thermo TerraTech Inc. 1999 Financial Statements Consolidated Statement of Cash Flows (continued) Year Ended April 3, April 4, March 29, (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Financing Activities Net proceeds from issuance of subordinated convertible debentures $ - $ - $112,398 Repayment of notes payable to parent company - (38,000) (50,000) Proceeds from issuance of Company and subsidiaries' common 58 1,148 5,346 stock (Note 10) Repurchase of Company and subsidiaries' common stock and (3,390) (7,355) (14,984) subordinated convertible debentures Issuance of short-term obligations - 6,171 803 Repayment of notes payable (Note 2) (14,748) (14,878) (736) Dividends paid by subsidiary to minority shareholders (805) (751) (847) Other, net 425 - (266) -------- -------- -------- Net cash provided by (used in) financing activities (18,460) (53,665) 51,714 -------- -------- -------- Exchange Rate Effect on Cash (96) (49) (257) -------- -------- -------- Increase (Decrease) in Cash and Cash Equivalents 8,302 (28,461) 31,990 Cash and Cash Equivalents at Beginning of Year 34,711 63,172 31,182 -------- -------- -------- Cash and Cash Equivalents at End of Year $ 43,013 $ 34,711 $ 63,172 ======== ======== ======== See Note 14 for supplemental cash flow information. The accompanying notes are an integral part of these consolidated financial statements. 7 Thermo TerraTech Inc. 1999 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment Year Ended April 3, April 4, March 29, (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ----------- ---------- --------- Comprehensive Income Net Income (Loss) $(1,421) $ 3,273 $ (162) ------- ------- ------- Other Comprehensive Items: Foreign currency translation adjustment 147 (1,071) (1,661) Unrealized gains (losses) on available-for-sale investments 3 (10) 15 ------- ------- ------- 150 (1,081) (1,646) ------- ------- ------- Minority Interest Income (Expense) (284) 461 724 ------- ------- ------- $(1,555) $ 2,653 $(1,084) ======= ======= ======= Shareholders' Investment Common Stock, $.10 Par Value: Balance at beginning of year $ 1,958 $ 1,830 $ 1,760 Issuance of stock under employees' and directors' stock plans - - 24 Conversions of subordinated convertible debentures - 128 46 ------- ------- ------- Balance at end of year 1,958 1,958 1,830 ------- ------- ------- Capital in Excess of Par Value: Balance at beginning of year 70,437 62,610 59,419 Activity under employees' and directors' stock plans (130) (5,490) 264 Tax benefit related to employees' and directors' stock plans 181 655 461 Effect of outstanding put rights (1,271) - - Conversions of subordinated convertible debentures (Note 6) - 13,092 4,766 Effect of majority-owned subsidiaries' equity transactions 1,416 (430) (2,300) ------- ------- ------- Balance at end of year 70,633 70,437 62,610 ------- ------- ------- Retained Earnings: Balance at beginning of year 27,319 24,046 24,474 Net income (loss) (1,421) 3,273 (162) Metal Treating, Inc. transfer of cash to parent company (Note 3) - - (266) ------- ------- ------- Balance at end of year 25,898 27,319 24,046 ------- ------- ------- Treasury Stock: Balance at beginning of year (484) (3,941) (410) Activity under employees' and directors' stock plans 411 6,637 260 Purchases of Company common stock (4,057) (3,180) (3,791) ------- ------- ------- Balance at end of year $(4,130) $ (484) $(3,941) ------- ------- ------- 8 Thermo TerraTech Inc. 1999 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued) Year Ended April 3, April 4, March 29, (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ----------- ---------- --------- Deferred Compensation (Note 4): Balance at beginning of year $ - $ - $ - Activity under employees' stock plans (252) - - ------- ------- ------- Balance at end of year (252) - - ------- ------- ------- Accumulated Other Comprehensive Items: Balance at beginning of year (2,100) (1,019) 627 Other comprehensive items 150 (1,081) (1,646) ------- ------- ------- Balance at end of year (1,950) (2,100) (1,019) ------- ------- ------- $92,157 $97,130 $83,526 ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 9 Thermo TerraTech Inc. 1999 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Thermo TerraTech Inc. (the Company) provides industrial outsourcing services and manufacturing support encompassing a broad range of specializations. The Company operates in four segments: environmental-liability management, engineering and design, laboratory testing, and metal treating. Relationship with Thermo Electron Corporation The Company was incorporated on May 30, 1986, as an indirect, wholly owned subsidiary of Thermo Electron Corporation. As of April 3, 1999, Thermo Electron owned 16,605,831 shares of the Company's common stock, representing 87% of such stock outstanding. Thermo Electron has announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. Under this plan, the Company and its majority-owned subsidiaries, ThermoRetec Corporation (formerly Thermo Remediation Inc.) and The Randers Killam Group Inc. (formerly The Randers Group Incorporated), would be merged into Thermo Electron (Note 17). Principles of Consolidation The accompanying financial statements include the accounts of the Company; its wholly owned subsidiaries; its majority-owned public subsidiaries, ThermoRetec and Randers Killam; and its majority-owned, privately held Thermo EuroTech N.V. subsidiary. All material intercompany accounts and transactions have been eliminated. The Company accounted for its investment in a business in which it owned 50% using the equity method. In October 1997, the Company sold this investment (Note 3). Fiscal Year The Company has adopted a fiscal year ending the Saturday nearest March 31. References to fiscal 1999, 1998, and 1997 are for the fiscal years ended April 3, 1999, April 4, 1998, and March 29, 1997, respectively. Fiscal years 1999 and 1997 each included 52 weeks; fiscal 1998 included 53 weeks. Revenue Recognition For the majority of its operations, the Company recognizes revenues upon completion of the services it renders. Revenues and profits on substantially all contracts are recognized using the percentage-of-completion method. Revenues recorded under the percentage-of-completion method were $109,798,000 in fiscal 1999, $117,464,000 in fiscal 1998, and $113,481,000 in fiscal 1997. The percentage of completion is determined by relating either the actual costs or actual labor incurred to date to management's estimate of total costs or total labor, respectively, to be incurred on each contract. If a loss is indicated on any contract in process, a provision is made currently for the entire loss. The Company's contracts generally provide for billing of customers upon the attainment of certain milestones specified in each contract. Revenues earned on contracts in process in excess of billings are classified as unbilled contract costs and fees in the accompanying balance sheet. There are no significant amounts included in the accompanying balance sheet that are not expected to be recovered from existing contracts at current contract values, or that are not expected to be collected within one year, including amounts that are billed but not paid under retainage provisions. Amounts billed in excess of revenues recognized are included in other accrued expenses in the accompanying balance sheet. Revenues from soil-remediation services are recognized as soil is processed and the Company bills customers upon receipt of contaminated soil at its remediation centers. 10 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Gain on Issuance of Stock by Subsidiary At the time a subsidiary sells its stock to unrelated parties at a price in excess of its book value, the Company's net investment in that subsidiary increases. If at that time the subsidiary is an operating entity and not engaged principally in research and development, the Company records the increase as a gain (Note 10). If gains have been recognized on issuances of a subsidiary's stock and shares of the subsidiary are subsequently repurchased either by the subsidiary, the Company, or Thermo Electron, gain recognition does not occur on issuances subsequent to the date of a repurchase until such time as shares have been issued in an amount equivalent to the number of repurchased shares. Such transactions are reflected as equity transactions and the net effect of these transactions is reflected in the accompanying statement of comprehensive income and shareholders' investment as effect of majority-owned subsidiaries' equity transactions. Equity in Earnings of Unconsolidated Subsidiary Equity in earnings of unconsolidated subsidiary in the accompanying statement of operations represents the Company's proportionate share of income from a 50% investment in RETEC/TETRA L.C., acquired in December 1995 through ThermoRetec's acquisition of RETEC. In October 1997, ThermoRetec sold its 50% limited-liability interest in RETEC/TETRA to TETRA Thermal, Inc. (Note 3). For the year ended December 31, 1996, RETEC/TETRA reported revenues of $12,066,000, cost of revenues of $9,040,000, gross profit of $3,026,000, and net income of $981,000. Stock-based Compensation Plans The Company applies Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation plans (Note 4). Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, net proceeds, including tax benefits realized, are credited to shareholders' investment. Income Taxes The Company and Thermo Electron have a tax allocation agreement under which the Company and certain of its subsidiaries, exclusive of foreign operations, are included in Thermo Electron's consolidated federal and certain state income tax returns. The agreement provides that in years in which the Company has taxable income, it will pay to Thermo Electron amounts comparable to the taxes the Company would have paid if it had filed separate tax returns. If Thermo Electron's equity ownership of the Company were to drop below 80%, the Company would be required to file its own federal income tax return. In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. Earnings (Loss) per Share Basic earnings (loss) per share have been computed by dividing net income (loss) by the weighted average number of shares outstanding during the year. Except where the result would be antidilutive, diluted earnings (loss) per share have been computed assuming the exercise of stock options and warrants, as well as their related income tax effects. Diluted earnings (loss) per share for all periods exclude the effect of assuming the conversion of convertible obligations and the elimination of the related interest expense and the exercise of put rights, because the result would be antidilutive. 11 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Cash and Cash Equivalents At fiscal year-end 1999 and 1998, $40,625,000 and $29,583,000, respectively, of the Company's cash equivalents were invested in a repurchase agreement with Thermo Electron. Under this agreement, the Company in effect lends excess cash to Thermo Electron, which Thermo Electron collateralizes with investments principally consisting of corporate notes, U.S. government-agency securities, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement are readily convertible into cash by the Company. The repurchase agreement earns a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter (Note 19). At fiscal year-end 1999, $1,042,000 of the Company's cash equivalents, denominated in Dutch guilders, were invested in a repurchase agreement with a wholly owned subsidiary of Thermo Electron. Under this agreement, the Company in effect lends excess cash to the subsidiary, which Thermo Electron collateralizes with investments principally consisting of corporate notes, U.S. government-agency securities, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement are readily convertible into cash by the Company. The repurchase agreement earns a rate based on the Netherlands market rates, set at the beginning of each month. At fiscal year-end 1999 and 1998, the Company's cash equivalents also included investments in a money market fund, which has an original maturity of three months or less. Cash equivalents are carried at cost, which approximates market value. Inventories Inventories are stated at the lower of cost (on an average-cost basis) or market value and include materials, labor, and overhead. The components of inventories are: (In thousands) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Raw Materials and Supplies $ 640 $ 618 Work in Process and Finished Goods 1,229 880 -------- ------- $ 1,869 $ 1,498 ======== ======= Property, Plant, and Equipment The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization primarily using the straight-line method over the estimated useful lives of the property as follows: buildings and improvements, 5 to 40 years; machinery and equipment, 2 to 15 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset. Soil-remediation units, which accounted for 8% and 12% of the Company's machinery and equipment, net, at fiscal year-end 1999 and 1998, respectively, are depreciated based on an hourly rate that is computed by estimating total hours of operation for each unit. Property, plant, and equipment consists of: (In thousands) 1999 1998 - ----------------------------------------------------------------------------------- ----------- --------- Land $ 7,741 $ 7,743 Buildings 42,161 38,785 Machinery, Equipment, and Leasehold Improvements 101,317 95,840 -------- ------- 151,219 142,368 Less: Accumulated Depreciation and Amortization 59,705 50,659 -------- ------- $ 91,514 $91,709 ======== ======= 12 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Other Assets Other assets in the accompanying balance sheet includes the costs of acquired technology and other specifically identifiable intangible assets that are being amortized using the straight-line method over their estimated useful lives, which range from 5 to 20 years. These assets were $3,291,000 and $5,212,000, net of accumulated amortization of $6,771,000 and $5,716,000, at fiscal year-end 1999 and 1998, respectively. In fiscal 1999, the Company wrote off $1,169,000 of other assets in connection with restructuring actions (Note 13). Cost in Excess of Net Assets of Acquired Companies The excess of cost over the fair value of net assets of acquired companies is amortized using the straight-line method over periods ranging from 20 to 40 years. Accumulated amortization was $16,725,000 and $13,651,000 at fiscal year-end 1999 and 1998, respectively. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished (Note 13). The Company considers the future undiscounted cash flows of the acquired companies in assessing the recoverability of this asset. If impairment has occurred, any excess of carrying value over fair value is recorded as a loss. Foreign Currency All assets and liabilities of the Company's foreign subsidiaries are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates for the year in accordance with SFAS No. 52, "Foreign Currency Translation." Resulting translation adjustments are reflected in the "Accumulated other comprehensive items" component of shareholders' investment. Foreign currency transaction gains and losses are included in the accompanying statement of operations and are not material for the three years presented. Comprehensive Income During the first quarter of fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This pronouncement sets forth requirements for disclosure of the Company's comprehensive income and accumulated other comprehensive items. In general, comprehensive income combines net income and "other comprehensive items," which represents certain amounts that are reported as components of shareholders' investment in the accompanying balance sheet, including foreign currency translation adjustments and unrealized net of tax gains and losses on available-for-sale investments. At fiscal year-end 1999, the balance of accumulated other comprehensive items represents the Company's cumulative translation adjustment. At fiscal year-end 1998, the balance also includes net unrealized losses on available-for-sale investments of $3,000. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Presentation Certain amounts in fiscal 1998 and 1997 have been reclassified to conform to the presentation in the fiscal 1999 financial statements. 13 2. Available-for-sale and Held-to-maturity Investments The Company's debt securities are considered available-for-sale investments in the accompanying balance sheet and are carried at market value, with the difference between cost and market value, net of related tax effects, recorded in the "Accumulated other comprehensive items" component of shareholders' investment. The aggregate market value and cost basis of available-for-sale investments in the accompanying fiscal 1998 balance sheet, which represents investments in corporate bonds, were $2,003,000 and $2,008,000, respectively. The gross unrealized loss on these investments was $5,000. The cost of available-for-sale investments that were sold was based on specific identification in determining realized gains and losses recorded in the accompanying statement of operations. In fiscal 1997, the Company recorded gross realized gains of $204,000 and gross realized losses of $9,000 relating to the sale of available-for-sale investments. In order to secure the Company's obligation to the former owner of a business acquired in fiscal 1995, the Company purchased U.S. treasury bonds. In May 1998 and February 1998, $13,939,000 and $13,935,000 principal amounts, respectively, of the U.S. treasury bonds matured and the proceeds were used to repay the Company's zero coupon promissory note to the seller. The unmatured portion of these securities was classified as short-term held-to-maturity investments in the accompanying fiscal 1998 balance sheet and was carried at amortized cost. 3. Acquisitions and Dispositions Acquisitions During fiscal 1999, the Company, through ThermoRetec, acquired one company for $576,000 in cash and paid an additional $67,000 for a post-closing adjustment relating to a fiscal 1998 acquisition. In May 1997, the Company purchased a controlling interest in The Randers Group Incorporated, a publicly traded provider of design, engineering, project management, and construction services for industrial clients in the manufacturing, pharmaceutical, and chemical-processing industries. The Company purchased 1,420,000 shares of Randers' common stock from certain members of Randers' management, and 84,000 shares from Thermo Power Corporation, an affiliate of the Company, at a price of $3.125 per share, for an aggregate cost of $4,700,000. Following these transactions, the Company owned approximately 53.3% of Randers' outstanding common stock. In addition, Thermo Electron owned approximately 8.9% of Randers' outstanding common stock. Subsequently, in September 1997, the Company entered into a definitive agreement to transfer The Killam Group Inc., its wholly owned engineering and consulting businesses, to Randers in exchange for newly issued shares of Randers' common stock. Effective April 4, 1998, the agreement was amended to provide that the price for these businesses would equal $70,644,407, the book value of the transferred businesses as of April 4, 1998. The number of new shares of Randers' common stock issued to the Company equaled such book value divided by $3.125, or 22,606,210 shares. In January 1999, the Randers shareholders approved the listing of these shares on the American Stock Exchange and an amendment to Randers' certificate of incorporation changing Randers' name to The Randers Killam Group Inc. Upon such issuance, the Company and Thermo Electron owned approximately 94.8% and 1.0%, respectively, of Randers Killam's outstanding common stock. In addition, during fiscal 1998, ThermoRetec made three acquisitions for an aggregate purchase price of $5,665,000 in cash and 459,613 shares of ThermoRetec's common stock, valued at $2,850,000. In fiscal 1998, Thermo EuroTech made an acquisition of 70% of the outstanding shares of a business for $4,400,000 in cash and a commitment to issue 69,200 shares of Thermo EuroTech's common stock valued at $275,000. As of April 3, 1999, these shares had not been issued. In October 1996, the Company acquired Metal Treating, Inc. from Thermo Electron in exchange for $1,600,000 in cash. Metal Treating provides heat treating services, including carburizing, vacuum hardening, silver and copper brazing, and aluminum heat treating, primarily in the Milwaukee and southeastern Wisconsin areas. Because the Company and Metal Treating were deemed for accounting purposes to be under control of their common majority owner, Thermo Electron, the transaction has been accounted for at historical cost in a manner similar to a pooling-of-interests and the results of Metal Treating are included in the accompanying statement of operations from the beginning of fiscal 1997. 14 3. Acquisitions and Dispositions (continued) In addition, during fiscal 1997, the Company, directly and through ThermoRetec, acquired two companies for an aggregate of $3,865,000 in cash, 311,040 shares of ThermoRetec's common stock valued at $2,006,000, and the issuance of $1,300,000 of short- and long-term obligations. These acquisitions, except for Metal Treating, have been accounted for using the purchase method of accounting, and their results have been included in the accompanying financial statements from their respective dates of acquisition. The aggregate cost of these acquisitions exceeded the estimated fair value of the acquired net assets by $27,181,000, which is being amortized over periods ranging from 20 to 40 years. Allocation of the purchase price for these acquisitions was based on estimates of the fair value of the net assets acquired. Pro forma data is not presented since the acquisitions were not material to the Company's results of operations. Dispositions In October 1997, ThermoRetec sold its 50% limited-liability interest in RETEC/TETRA L.C. to TETRA Thermal, Inc. for $8,825,000 in cash. The Company realized a pretax gain of $3,012,000 on the sale, which is classified as "gain on sale of unconsolidated subsidiary" in the accompanying statement of operations. In addition, in October 1997, the Company sold substantially all of the assets of its Holcroft Division, its thermal-processing equipment business, excluding certain accounts receivable, to Holcroft L.L.C., an affiliate of Madison Capital Partners. The sale price for the transferred assets consisted of $10,897,000 in cash, two promissory notes for principal amounts aggregating $2,881,000, which is generally payable in annual installments through fiscal 2003, and the assumption by Holcroft L.L.C. of certain liabilities of the Holcroft Division. After recording a post-closing purchase price adjustment, the Company incurred a nominal loss on the sale. This business represented the Company's product revenues in the accompanying statement of operations and contributed $893,000 and $1,765,000 of operating income in fiscal 1998 and 1997, respectively. In fiscal 1997, the Company sold its J. Amerika division, resulting in a loss of $1,482,000, which is included in restructuring and other nonrecurring items in the accompanying statement of operations. J. Amerika's revenues and operating loss were $3,970,000 and $552,000, respectively, in fiscal 1997. 4. Employee Benefit Plans Stock-based Compensation Plans Stock Option Plans The Company has stock-based compensation plans for its key employees, directors, and others. Two of these plans permit the grant of nonqualified and incentive stock options. A third plan permits the grant of a variety of stock and stock-based awards as determined by the human resources committee of the Company's Board of Directors (the Board Committee), including restricted stock, stock options, stock bonus shares, or performance-based shares. The option recipients and the terms of options granted under these plans are determined by the Board Committee. Generally, options granted to date are exercisable immediately, but are subject to certain transfer restrictions and the right of the Company to repurchase shares issued upon exercise of the options at the exercise price, upon certain events. The restrictions and repurchase rights generally lapse ratably over a one- to ten-year period, depending on the term of the option, which may range from five to twelve years. Nonqualified stock options may be granted at any price determined by the Board Committee, although incentive stock options must be granted at not less than the fair market value of the Company's stock on the date of grant. Generally, all options have been granted at fair market value. The Company also has a directors' stock option plan that provides for the grant of stock options to outside directors pursuant to a formula approved by the Company's shareholders. Options awarded under this plan are exercisable six months after the date of grant and expire three to seven years after the date of grant. In addition to the Company's stock-based compensation plans, certain officers and key employees may also participate in the stock-based compensation plans of Thermo Electron. 15 4. Employee Benefit Plans (continued) In November 1998, the Company's employees, excluding its officers and directors, were offered the opportunity to exchange previously granted options to purchase shares of Company common stock for an amount of options equal to half of the number of options previously held, exercisable at a price equal to the fair market value at the time of the exchange offer. Holders of options to acquire 1,182,000 shares at a weighted average exercise price of $8.80 elected to participate in this exchange and, as a result, received options to purchase 591,000 shares of Company common stock at $4.50 per share, which are included in the fiscal 1999 grants in the table below. The other terms of the new options are the same as the exchanged options except that the holders may not sell shares purchased pursuant to such new options for six months from the exchange date. The options exchanged were canceled by the Company. In February 1999, the Company awarded 50,400 shares of restricted Company common stock to certain key employees. The shares had an aggregate value of $252,000 and vest three years from the date of award, assuming continued employment, with certain exceptions. The Company has recorded the fair value of the restricted stock as deferred compensation in the accompanying balance sheet and is amortizing such amount over the vesting period. A summary of the Company's stock option activity is:
1999 1998 1997 ------------------ ------------------ ------------------ Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise (Shares in thousands) Shares Price Shares Price Shares Price - --------------------------------------------- -------- ---------- -------- ---------- --------- --------- Options Outstanding, Beginning of Year 1,986 $ 8.87 2,558 $ 6.99 2,561 $ 6.13 Granted 1,111 4.78 296 7.67 288 10.10 Exercised - - (696) 1.36 (242) 1.16 Forfeited (158) 8.28 (172) 9.35 (49) 8.79 Canceled due to exchange (1,182) 8.80 - - - - ----- ----- ------ Options Outstanding, End of Year 1,757 $ 6.38 1,986 $ 8.87 2,558 $ 6.99 ===== ====== ===== ====== ====== ====== Options Exercisable 1,757 $ 6.38 1,986 $ 8.87 2,558 $ 6.99 ===== ====== ===== ====== ====== ====== Options Available for Grant 351 327 483 ===== ===== ====== A summary of the status of the Company's stock options at April 3, 1999, is: Options Outstanding and Exercisable --------------------------------------------------- Range of Exercise Prices Number Weighted Weighted of Average Average Shares Remaining Exercise (In thousands) Contractual Life Price - --------------------------------------------- -------------------- ------------------- ------------------ $ 4.16 - $ 5.85 1,065 6.9 years $4.74 5.86 - 7.55 55 4.5 years 6.62 7.56 - 9.24 230 3.6 years 8.40 9.25 - 10.93 407 4.6 years 9.49 ------ $ 4.16 - $ 10.93 1,757 5.9 years $6.38 ====== 16 4. Employee Benefit Plans (continued) Employee Stock Purchase Program Substantially all of the Company's full-time employees are eligible to participate in an employee stock purchase program sponsored by the Company and Thermo Electron. Prior to November 1, 1998, the applicable shares of common stock could be purchased at the end of a 12-month period at 95% of the fair market value at the beginning of the period and the shares purchased were subject to a six-month resale restriction. Effective November 1, 1998, the applicable shares of common stock may be purchased at 85% of the lower of the fair market value at the beginning or end of the plan year, and the shares purchased are subject to a one-year resale restriction. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages. No shares were issued under this program during fiscal 1999. During fiscal 1998 and 1997, the Company issued 13,976 shares and 25,053 shares, respectively, of its common stock under this program. Pro Forma Stock-based Compensation Expense In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-based Compensation," which sets forth a fair-value based method of recognizing stock-based compensation expense. As permitted by SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account for its stock-based compensation plans. Had compensation cost for awards granted after fiscal 1995 under the Company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on the Company's net income (loss) and earnings (loss) per share would have been: (In thousands except per share amounts) 1999 1998 1997 - ----------------------------------------------------------------------- ----------- ----------- ---------- Net Income (Loss): As reported $(1,421) $ 3,273 $ (162) Pro forma (3,172) 2,218 (866) Basic Earnings (Loss) per Share: As reported (.07) .18 (.01) Pro forma (.16) .12 (.05) Diluted Earnings (Loss) per Share: As reported (.07) .17 (.01) Pro forma (.16) .12 (.05) Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to April 2, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expected in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. The weighted average fair value per share of options granted was $1.45, $2.27, and $4.15 in fiscal 1999, 1998, and 1997, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1999 1998 1997 - ----------------------------------------------------------------------- ----------- ----------- --------- Volatility 28% 27% 29% Risk-free Interest Rate 4.9% 5.6% 6.2% Expected Life of Options 4.0 years 3.6 years 6.1 years 17 4. Employee Benefit Plans (continued) The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 401(k) Savings Plan The majority of the Company's full-time U.S. employees are eligible to participate in Thermo Electron's 401(k) savings plan. Contributions to this 401(k) savings plan are made by both the employee and the Company. Company contributions are based upon the level of employee contributions. For this plan, the Company contributed and charged to expense $650,000, $955,000, and $975,000 in fiscal 1999, 1998, and 1997, respectively. Other Retirement Plans Certain of the Company's subsidiaries offer other retirement plans in lieu of participation in the Thermo Electron 401(k) savings plan. Company contributions to these plans are based on formulas determined by the Company. For these plans, the Company contributed and charged to expense $4,258,000, $3,585,000, and $2,872,000 in fiscal 1999, 1998, and 1997, respectively. 5. Income Taxes The components of income (loss) before provision for income taxes and minority interest are: (In thousands) 1999 1998 1997 - --------------------------------------------------------------------- ----------- ------------ ----------- Domestic $ 179 $ 8,812 $ 3,149 Foreign (987) (298) (3,440) ------- ------- ------- $ (808) $ 8,514 $ (291) ======= ======= ======= The Company's foreign results of operations prior to fiscal 1998 include losses associated with its J. Amerika division, which was sold during the fourth quarter of fiscal 1997 (Note 3). 18 5. Income Taxes (continued) The components of the provision for income taxes are: (In thousands) 1999 1998 1997 - --------------------------------------------------------------------- ------------ ----------- ----------- Currently Payable (Prepaid): Federal $ 2,232 $2,688 $ 1,271 State 1,415 1,330 1,122 Foreign (78) (110) (234) ------- ------ ------- 3,569 3,908 2,159 ------- ------ ------- Net Deferred (Prepaid): Federal (1,365) 1,035 389 State (201) 203 88 Foreign (217) - (931) ------- ------ ------- (1,783) 1,238 (454) ------- ------ ------- $ 1,786 $5,146 $ 1,705 ======= ====== ======= The Company and its majority-owned subsidiaries receive a tax deduction upon exercise of nonqualified stock options by employees for the difference between the exercise price and the market price of the underlying common stock on the date of exercise. The provision for income taxes that is currently payable does not reflect $676,000, $928,000, and $659,000 in fiscal 1999, 1998, and 1997, respectively, of such benefits of the Company and its majority-owned subsidiaries that have been allocated to capital in excess of par value, directly or through the effect of majority-owned subsidiaries' equity transactions. The provision for income taxes in the accompanying statement of operations differs from the provision calculated by applying the statutory federal income tax rate of 34% to income (loss) before provision for income taxes and minority interest due to: (In thousands) 1999 1998 1997 - --------------------------------------------------------------------- ------------ ----------- ----------- Provision (Benefit) for Income Taxes at Statutory Rate $ (275) $2,895 $ (99) Differences Resulting From: State income taxes, net of federal tax 801 1,012 764 Amortization and write-off of cost in excess of net assets 898 739 1,344 of acquired companies Gain on issuance of stock by subsidiary - - (501) Nondeductible expenses 90 64 62 Dividend from less than 80%-owned subsidiary 122 118 115 Other, net 150 318 20 ------- ------ ------- $ 1,786 $5,146 $ 1,705 ======= ====== ======= 19 5. Income Taxes (continued) Prepaid income taxes and deferred income taxes in the accompanying balance sheet consist of: (In thousands) 1999 1998 - --------------------------------------------------------------------- ------------ ----------- ----------- Prepaid Income Taxes: Accrued compensation $2,315 $ 2,220 Reserves and accruals 3,519 3,640 Net operating loss and tax credit carryforward 3,111 1,934 Allowance for doubtful accounts 212 (137) Other 179 - ------ ------- 9,336 7,657 Less: Valuation allowance 1,328 739 ------ ------- $8,008 $ 6,918 ====== ======= Deferred Income Taxes: Depreciation $3,637 $ 2,785 Other deferred items (99) 116 ------ ------- $3,538 $ 2,901 ====== ======= The valuation allowance relates to the uncertainty surrounding the realization of the tax benefits attributable primarily to state operating loss carryforwards. The valuation allowance increased in fiscal 1999 as a result of certain losses that arose during the year. Of the total fiscal 1999 valuation allowance, $168,000 will be used to reduce cost in excess of net assets of acquired companies when any portion of the related deferred tax asset is recognized. The Company has not recognized a deferred tax liability for the difference between the book basis and tax basis of its investment in the common stock of its domestic subsidiaries (such difference relates primarily to unremitted earnings and gains on issuance of stock by subsidiaries) because the Company does not expect this basis difference to become subject to tax at the parent level. The Company believes it can implement certain tax strategies to recover its investment in its domestic subsidiaries tax-free. The net operating loss carryforward primarily consists of $10,600,000 of foreign carryforwards, which do not expire, and $11,050,000 of state carryforwards, substantially all of which expire in 2003. 6. Short- and Long-term Obligations Short-term Obligations Effective in fiscal 1999, Thermo EuroTech has an agreement with a wholly owned subsidiary of Thermo Electron under which Thermo EuroTech can borrow funds that bear interest at a rate based on the Netherlands market rates, set at the beginning of each month. At fiscal year-end 1999, $9,228,000 was outstanding under this arrangement, bearing interest at 4.00%. Borrowings under this overdraft facility are guaranteed by Thermo Electron. Available borrowings at fiscal year-end 1999 were $632,000. Prior to fiscal 1999, Thermo EuroTech had a line of credit, denominated in Dutch guilders, under which approximately $6,700,000 could be borrowed at the Dutch discount rate plus 125 basis points. At fiscal year-end 1998, $6,346,000 was outstanding under this arrangement, bearing interest at 4.02%. 20 6. Short- and Long-term Obligations (continued) In addition, in fiscal 1998, Thermo EuroTech entered into a line of credit, denominated in Irish punts. Borrowings, which are due in February 2000, were $6,705,000 and $6,052,000 at fiscal year-end 1999 and 1998, respectively, bearing interest at 3.60% and 5.75%, respectively. There are no additional amounts available under this line of credit. Long-term Obligations (In thousands except per share amounts) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- 4 5/8% Subordinated Convertible Debentures, Due 2003, Convertible at $111,850 $111,850 $15.90 per Share (includes $515 held by Thermo Electron in fiscal 1999) 4 7/8% Subordinated Convertible Debentures, Due May 2000, Convertible 37,950 37,950 into Shares of ThermoRetec at $17.92 per Share (includes $4,180 and $3,000 held by Thermo Electron) 2 1/2% Subordinated Convertible Debentures, Due 2001, Convertible into 6,999 - Shares of Thermo EuroTech (Delaware) Inc. at $5.25 per Share Zero Coupon Promissory Note (Note 2) - 13,939 6.25% Mortgage Loan, Payable in Monthly Installments of $9, With 1,063 1,173 Balloon Payment in May 1999 Mortgage Loan, Payable in Monthly Installments of $5, With Final 856 949 Payment in 2003 (a) Other 1,584 2,050 -------- -------- 160,302 167,911 Less: Current Maturities 1,685 14,767 -------- -------- $158,617 $153,144 ======== ======== (a) Bears interest at Prime Rate, which was 7.75% at April 3, 1999. During fiscal 1999, the Company reorganized the capital structure of Thermo EuroTech by offering shareholders the right to exchange their common shares in Thermo EuroTech for 2 1/2% subordinated convertible debentures due 2001 (the Debentures) issued by a new wholly owned Delaware subsidiary of the Company, known as Thermo EuroTech (Delaware) Inc. (TETD). As of October 31, 1998, when the exchange offer expired, 1,646,854 common shares had been exchanged by Thermo EuroTech's shareholders, subject to certain conditions, for Debentures having an aggregate principal amount equal to $6,999,000. The reacquisition of these shares was accounted for using the purchase method of accounting. The Debentures are not redeemable prior to maturity, and are convertible into common stock of TETD at an initial conversion price of $5.25 per share. The Debentures are guaranteed on a subordinated basis by Thermo Electron. Following the transaction, the Company owned 78% of Thermo EuroTech's outstanding common shares. The 4 5/8% and 4 7/8% subordinated convertible debentures are guaranteed on a subordinated basis by Thermo Electron. The Company has agreed to reimburse Thermo Electron in the event Thermo Electron is required to make a payment under the guarantees. During fiscal 1999, none of the 4 5/8% debentures were converted into shares of the Company's common stock. The annual requirements for long-term obligations as of April 3, 1999, are $1,685,000 in fiscal 2000; $38,490,000 in fiscal 2001; $7,492,000 in fiscal 2002; $652,000 in fiscal 2003; $111,912,000 in fiscal 2004; and $71,000 in fiscal 2005 and thereafter. Total requirements of long-term obligations are $160,302,000. See Note 11 for information pertaining to the fair value of the Company's long-term obligations. 21 7. Commitments and Contingencies Operating Leases The Company leases land, office, operating facilities, and equipment under operating leases expiring at various dates through fiscal 2008. The accompanying statement of operations includes expenses from operating leases of $6,273,000, $5,822,000, and $5,424,000 in fiscal 1999, 1998, and 1997, respectively. Future minimum payments due under noncancelable operating leases at April 3, 1999, are $5,217,000 in fiscal 2000; $4,228,000 in fiscal 2001; $3,030,000 in fiscal 2002; $1,625,000 in fiscal 2003; $427,000 in fiscal 2004; and $311,000 in 2005 and thereafter. Total future minimum lease payments are $14,838,000. See Note 8 for an office and manufacturing facility leased from Thermo Electron. Contingencies The Company is contingently liable with respect to lawsuits and other matters that arose in the ordinary course of business. In the opinion of management, these contingencies will not have a material adverse effect upon the financial position of the Company or its results of operations. 8. Related-party Transactions Corporate Services Agreement The Company and Thermo Electron have a corporate services agreement under which Thermo Electron's corporate staff provides certain administrative services, including certain legal advice and services, risk management, certain employee benefit administration, tax advice and preparation of tax returns, centralized cash management, and certain financial and other services, for which the Company currently pays Thermo Electron annually an amount equal to 0.8% of the Company's revenues. In calendar 1997 and 1996, the Company paid an amount equal to 1.0% of the Company's revenues. For these services, the Company was charged $2,480,000, $2,845,000, and $2,785,000 in fiscal 1999, 1998, and 1997, respectively. The fee is reviewed and adjusted annually by mutual agreement of the parties. The corporate services agreement is renewed annually but can be terminated upon 30 days' prior notice by the Company or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines the relationship among Thermo Electron and its majority-owned subsidiaries). Management believes that the service fee charged by Thermo Electron is reasonable and that such fees are representative of the expenses the Company would have incurred on a stand-alone basis. For additional items such as employee benefit plans, insurance coverage, and other identifiable costs, Thermo Electron charges the Company based upon costs attributable to the Company. In fiscal 1999, Thermo Electron billed the Company an additional $157,000 for certain administrative services required by the Company that were not covered by the corporate services agreement. Development Agreement The Company and Thermo Electron entered into a development agreement under which Thermo Electron agreed to fund up to $4,000,000 of the direct and indirect costs of the Company's development of soil-remediation centers. As of October 2, 1993, all such funding under this agreement was completed. In exchange for this funding, the Company granted Thermo Electron a royalty equal to approximately 3% of net revenues from soil-remediation services performed at the centers developed under the agreement. The royalty payments may cease if the amounts paid by the Company yield a certain internal rate of return to Thermo Electron on the funds advanced to the Company under the agreement. Two sites were developed under this agreement. The Company paid royalties of $186,000, $115,000, and $186,000 in fiscal 1999, 1998, and 1997, respectively, relating to this agreement, which are included in selling, general, and administrative expenses in the accompanying statement of operations. Operating Lease In addition to the operating leases discussed in Note 7, the Company leases an office and operating facility from Thermo Electron. The accompanying statement of operations includes expenses from this operating lease of $166,000 in fiscal 1999 and 1998 and $106,000 in fiscal 1997. The future minimum payments due under the lease as of April 3, 1999, are $166,000 in fiscal 2000 through 2005 and thereafter. Total future minimum lease payments are $996,000. 22 8. Related-party Transactions (continued) Other Related-party Transactions The Company purchases and sells products and services in the ordinary course of business with other companies affiliated with Thermo Electron. Sales of services to such affiliated companies totaled $379,000, $320,000, and $49,000 in fiscal 1999, 1998, and 1997, respectively. Purchases of products and services from such affiliated companies total $231,000, $938,000, and $455,000 in fiscal 1999, 1998, and 1997, respectively. Repurchase Agreements The Company invests excess cash in repurchase agreements with Thermo Electron as discussed in Notes 1 and 19. Short- and Long-term Obligations See Note 6 for a description of short- and long-term obligations of the Company held by Thermo Electron. 9. Common Stock Put rights are attached to certain shares of Company common stock which were previously issued in connection with an acquisition. The put rights obligate the Company, at the holders' option, to purchase shares of the Company's common stock for $8.00 per share at any time through January 2002. At the time a holder elects to tender shares, the Company has the option to net cash settle the obligation in lieu of purchasing the shares. At April 3, 1999, put rights with respect to 423,854 shares were outstanding. During fiscal 1999, the Company repurchased 423,824 shares of common stock under such arrangements. At April 3, 1999, the Company had 700,500 warrants outstanding to purchase shares of its common stock, which are exercisable at prices ranging from $10.00 to $11.34 per share and expire in fiscal 2001. The warrants were issued in fiscal 1992 and 1993 in connection with private placements completed by three of ThermoRetec's soil-remediation subsidiaries. At April 3, 1999, the Company had reserved 9,926,347 unissued shares of its common stock for possible issuance under stock-based compensation plans, conversion of the 4 5/8% subordinated convertible debentures, and exercise of warrants. 10. Transactions in Stock of Subsidiaries During fiscal 1997, Thermo EuroTech sold 1,105,000 shares of its common stock in a private placement at $4.25 per share for net proceeds of $4,314,000, resulting in a gain of $1,475,000. Dividends declared by ThermoRetec were $2,610,000, $2,504,000, and $2,557,000 in fiscal 1999, 1998, and 1997, respectively. Dividends declared by ThermoRetec include $1,798,000, $1,736,000, and $1,694,000 in fiscal 1999, 1998, and 1997, respectively, that were allocated to the Company and reinvested in 611,957 shares, 254,833 shares, and 194,961 shares, respectively, of ThermoRetec's common stock pursuant to ThermoRetec's Dividend Reinvestment Plan. The Company's percentage ownership of its majority-owned subsidiaries at year end was: 1999 1998 1997 - -------------------------------------------------------------------------- --------- --------- ---------- ThermoRetec 70% 69% 69% Randers Killam (a) 95% 53% 100% Thermo EuroTech 78% 56% 53% (a) Upon issuance of 22,606,210 shares of Randers Killam common stock to the Company, as described in Note 3, the Company owned approximately 95% of Randers Killam outstanding common stock. Fiscal 1997 represents the Company's ownership of The Killam Group prior to its transfer to Randers in fiscal 1998. 23 11. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, available-for-sale and held-to-maturity investments, accounts receivable, notes payable and current maturities of long-term obligations, accounts payable, due to parent company and affiliated companies, and long-term obligations. The carrying amounts of these financial instruments, with the exception of available-for-sale and held-to-maturity investments and long-term obligations, approximate fair value due to their short-term nature. Available-for-sale investments are carried at fair value in the accompanying fiscal 1998 balance sheet. The fair values were determined based on quoted market prices. See Note 2 for fair value information pertaining to these financial instruments. Held-to-maturity investments are carried at amortized cost in the accompanying fiscal 1998 balance sheet. The fair values are disclosed on the accompanying balance sheet and were determined based on quoted market prices. The fair value of long-term obligations was determined based on quoted market prices and on borrowing rates available to the Company at the respective year ends. The carrying amount and fair value of the Company's long-term obligations are:
1999 1998 -------------------- -------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - --------------------------------------------------------------- ---------- ---------- ---------- ---------- Subordinated Convertible Debentures $156,799 $139,587 $149,800 $ 143,416 Other 1,818 1,818 3,344 3,344 -------- -------- -------- --------- $158,617 $141,405 $153,144 $ 146,760 ======== ======== ======== ========= 12. Significant Customers During fiscal 1999, 1998, and 1997, revenues derived from U.S. government agencies accounted for 6%, 4%, and 13%, respectively, of the Company's total revenues. 13. Restructuring Costs During fiscal 1999, the Company recorded $10,217,000 of restructuring costs, which were accounted for in accordance with Emerging Issues Task Force Pronouncement 94-3. Of these restructuring costs, $9,176,000 was recorded by ThermoRetec in connection with the closure of two soil-recycling facilities. The costs include a $6,238,000 write-down of fixed assets to their estimated disposal value of $895,000 and a $1,884,000 write-off of intangible assets, including $715,000 of cost in excess of net assets of acquired companies, as well as $1,054,000 for ongoing lease costs and severance for 13 employees, 6 of whom were terminated in fiscal 1999. ThermoRetec closed one soil-recycling facility in March 1999 and is actively seeking a buyer for the second soil-recycling facility. If no buyer is found, ThermoRetec will close the facility. In addition, the Company recorded $1,041,000 of restructuring costs for abandoned-facility payments relating to the consolidation of the facilities of another business. 24 13. Restructuring Costs (continued) A summary of the changes in accrued restructuring costs, which are included in other accrued expenses in the accompanying balance sheet, is: Facility (In thousands) Severance Costs Total - ------------------------------------------------------------------------- ----------- ---------- --------- Balance at April 4, 1998 $ - $ - $ - Provision charged to expense 213 1,882 2,095 Usage (101) (275) (376) -------- -------- -------- Balance at April 3, 1999 $ 112 $ 1,607 $ 1,719 ======== ======== ======== During fiscal 1997, ThermoRetec recorded $7,800,000 of restructuring costs to write-down certain capital equipment and intangible assets in response to a severe downturn in its soil-recycling business, which resulted in the closure of two soil-remediation sites. The charge included a $2,206,000 write-down of cost in excess of net assets of acquired companies, which was nondeductible for tax purposes. In addition, the Company's analysis indicated that the future undiscounted cash flows from certain other soil-remediation sites that remained open would be insufficient to recover ThermoRetec's investment in these business units, thus requiring a write-down of certain assets, which is also included in the $7,800,000 charge. In May 1999, the Company announced certain other restructuring actions (Note 19). 14. Supplemental Cash Flow Information (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ----------- ---------- --------- Cash Paid For: Interest $ 8,244 $ 10,363 $ 10,255 Income taxes $ 3,025 $ 4,041 $ 1,958 Noncash Activities: Fair value of assets of acquired companies $ 643 $ 29,477 $ 12,996 Cash paid for acquired companies (643) (14,765) (5,465) Issuance of notes payable for acquired company - - (1,300) Issuance of subsidiary common stock for acquired companies - (3,125) (2,006) --------- -------- -------- Liabilities assumed of acquired companies $ - $ 11,587 $ 4,225 ========= ======== ======== Issuance of subsidiary subordinated convertible debentures in $ 6,999 $ - $ - exchange for subsidiary common stock (Note 6) Conversions of subordinated convertible debentures $ - $ 13,220 $ 4,812 Company common stock received in settlement of a note $ 668 $ - $ - receivable Notes receivable received upon sale of business (Note 3) $ - $ 2,881 $ - 25 15. Business Segment Information The Company organizes and manages its businesses by individual functional operating entity. The Company has combined its operating entities into four segments: Environmental-liability Management, Engineering and Design, Laboratory Testing, and Metal Treating. In classifying entities into a particular segment, the Company aggregates businesses with similar economic characteristics, services, methods of providing services, customers, and regulatory environments. The Environmental-liability Management segment is a national provider of environmental-liability and resource-management services, offering these and related consulting services in four areas: consulting and engineering, nuclear remediation, soil remediation, and fluids recycling. The Engineering and Design segment provides comprehensive engineering and outsourcing services such as water and wastewater treatment, process engineering and construction, highway and bridge engineering, and infrastructure engineering. In addition, this segment provides consulting services that address natural resource management issues. The Laboratory Testing segment operates analytical laboratories that provide environmental- and pharmaceutical-testing services. The Metal Treating segment performs metallurgical processing services using thermal-treatment equipment. Until the October 1997 sale of its equipment division (Note 3), this segment also designed, manufactured, and installed advanced custom-engineered, thermal-processing systems. (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------- ---------- --------- --------- Revenues: Environmental-liability Management (a) $ 159,094 $141,115 $ 126,811 Engineering and Design (b) 91,839 84,566 74,832 Laboratory Testing (c) 40,523 37,485 35,431 Metal Treating 19,274 36,618 44,342 Intersegment sales elimination (d) (691) (998) (2,913) --------- -------- --------- $ 310,039 $298,786 $ 278,503 ========= ======== ========= Income (Loss) Before Provision for Income Taxes and Minority Interest: Environmental-liability Management (e) $ (3,644) $ (454) $ (6,254) Engineering and Design (f) 4,406 6,303 6,689 Laboratory Testing 5,206 4,363 1,494 Metal Treating 2,493 4,278 4,326 Corporate (g) (2,473) (2,756) (3,626) --------- ------- --------- Total operating income 5,988 11,734 2,629 Interest and other expense, net (6,796) (3,220) (2,920) --------- ------- --------- $ (808) $ 8,514 $ (291) ========= ======= ========= Total Assets: Environmental-liability Management $ 169,956 $166,925 $ 150,362 Engineering and Design 106,301 102,394 85,679 Laboratory Testing 48,434 43,557 39,795 Metal Treating 11,509 12,795 34,338 Corporate (h) 15,498 34,855 83,610 --------- ------- --------- $ 351,698 $360,526 $ 393,784 ========= ======== ========= 26 15. Business Segment Information (continued) (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ---------- ---------- Depreciation and Amortization: Environmental-liability Management $ 9,245 $7,672 $ 7,049 Engineering and Design 3,117 3,003 2,245 Laboratory Testing 3,527 2,865 2,484 Metal Treating 834 1,007 1,089 Corporate 100 237 33 ------- ------ ------- $16,823 $14,784 $12,900 ======= ======= ======= Capital Expenditures: Environmental-liability Management $ 8,385 $8,916 $ 9,008 Engineering and Design 1,632 1,759 1,157 Laboratory Testing 6,463 7,018 3,321 Metal Treating 1,053 764 1,839 Corporate (118) 3 101 ------- ------ ------- $17,415 $18,460 $15,426 ======= ======= ======= (a) Includes intersegment sales of $7,000, $82,000, and $1,799,000 in fiscal 1999, 1998, and 1997, respectively. (b) Includes intersegment sales of $60,000, $73,000, and $4,000 in fiscal 1999, 1998, and 1997, respectively. (c) Includes intersegment sales of $624,000, $843,000, and $1,110,000 in fiscal 1999, 1998, and 1997, respectively. (d) Intersegment sales are accounted for at prices that are representative of transactions with unaffiliated parties. (e) Includes restructuring costs of $9,176,000 and $7,800,000 in fiscal 1999 and 1997, respectively (Note 13). In addition, fiscal 1997 includes loss on sale of business of $1,482,000 (Note 3). (f) Includes restructuring costs of $1,023,000 in fiscal 1999 (Note 13). (g) Primarily general and administrative expenses. (h) Primarily cash, cash equivalents, and available-for-sale investments. 16. Earnings (Loss) per Share Basic and diluted earnings (loss) per share were calculated as follows: (In thousands except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ---------- ---------- Basic Net Income (Loss) $(1,421) $ 3,273 $ (162) ------- ------- ------- Weighted Average Shares 19,402 18,700 18,090 ------- ------- ------- Basic Earnings (Loss) per Share $ (.07) $ .18 $ (.01) ======= ======= ======= 27 16. Earnings (Loss) per Share (continued) (In thousands except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------- ----------- ---------- --------- Diluted Net Income (Loss) $(1,421) $ 3,273 $ (162) Effect of Majority-owned Subsidiaries' Dilutive Securities (2) (13) - ------- ------- ------- Income (Loss) Available to Common Shareholders, as Adjusted $(1,423) $ 3,260 $ (162) ------- ------- ------- Weighted Average Shares 19,402 18,700 18,090 Effect of Stock Options - 278 - ------- ------- ------- Weighted Average Shares, as Adjusted 19,402 18,978 18,090 ------- ------- ------- Diluted Earnings (Loss) per Share $ (.07) $ .17 $ (.01) ======= ======= ======= The computation of diluted earnings (loss) per share for each period excludes the effect of assuming the exercise of certain outstanding stock options, warrants, and put rights because the effect would be antidilutive. As of April 3, 1999, there were 2,464,925 of such options and warrants outstanding, with exercise prices ranging from $4.16 to $11.34 per share. As of April 3, 1999, put rights with respect to an aggregate 423,854 shares were outstanding. The put rights obligate the Company, at the holder's option, to purchase shares of the Company's common stock for $8.00 per share. In addition, the computation of diluted earnings (loss) per share for each period excludes the effect of assuming the conversion of convertible obligations because the effect would be antidilutive. As of April 3, 1999, the calculation excluded $111,850,000 principal amount of 4 5/8% subordinated convertible debentures, convertible at $15.90 per share. 17. Proposed Reorganization Thermo Electron has announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. Under this plan, the Company, ThermoRetec, and Randers Killam would be merged into Thermo Electron. As a result, all three companies would become wholly owned subsidiaries of Thermo Electron. The public shareholders of all three companies would receive common stock in Thermo Electron in exchange for their shares. The completion of these transactions is subject to numerous conditions, including the establishment of prices and exchange ratios; confirmation of anticipated tax consequences; the approval of the Board of Directors of ThermoRetec and Randers Killam; the negotiation and execution of definitive merger agreements; the receipt of fairness opinions from investment banking firms that the transactions are fair to the Company's and subsidiaries' shareholders (other than the Company and Thermo Electron) from a financial point of view; the approval of the Company's Board of Directors, including its independent directors; and completion of review by the Securities and Exchange Commission of any necessary documents regarding the proposed transactions. 28 18. Unaudited Quarterly Information (In thousands except per share amounts) 1999 First Second (a) Third Fourth - ---------------------------------------------------------------- ---------- ---------- ---------- --------- Revenues $76,693 $77,177 $80,400 $75,769 Gross Profit 15,648 15,143 15,851 15,787 Net Income (Loss) 1,001 (3,696) 771 503 Basic and Diluted Earnings (Loss) per Share .05 (.19) .04 .03 1998 First Second Third (b) Fourth - ---------------------------------------------------------------- ---------- ---------- ---------- --------- Revenues $72,519 $81,161 $73,875 $71,231 Gross Profit 14,568 15,485 14,001 9,621 Net Income (Loss) 1,332 1,567 1,656 (1,282) Earnings (Loss) per Share: Basic .08 .09 .09 (.07) Diluted .07 .08 .09 (.07) (a) Reflects a pretax charge of $10,217,000 for restructuring costs. (b) Reflects a pretax gain of $3,012,000 from ThermoRetec's sale of its investment in a joint venture. 19. Subsequent Events Restructuring Actions In May 1999, the Company announced the planned sale of several businesses by its majority-owned subsidiaries. These include the following: -- The used-oil processing business by Thermo EuroTech. -- Three soil-recycling facilities by ThermoRetec. -- The businesses of BAC Killam Inc., the Randers division, and E3-Killam Inc. by Randers Killam. In connection with these actions, the Company expects to incur approximately $65 million in pretax charges, primarily during the first quarter of fiscal 2000. These charges primarily represent the excess of book value of the businesses to be sold over the estimated proceeds from the sale. As a result of the sale of the businesses, the Company also expects to incur costs for ongoing lease obligations, severance, and other exit costs, which have been provided for in the estimate of $65 million. Revenues and operating loss from these businesses aggregated $49,627,000 and $112,000, respectively, in fiscal 1999. Cash Management Arrangement Effective June 1, 1999, the Company and Thermo Electron commenced use of a new domestic cash management arrangement (Note 1). Under the new arrangement, amounts advanced to Thermo Electron by the Company for domestic cash management purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points, set at the beginning of each month. Thermo Electron is contractually required to maintain cash, cash equivalents, and/or immediately available bank lines of credit equal to at least 50% of all funds invested under this cash management arrangement by all Thermo Electron subsidiaries other than wholly owned subsidiaries. The Company has the contractual right to withdraw its funds invested in the cash management arrangement upon 30 days' prior notice. The Company will report amounts invested in this arrangement as "advance to affiliate" in its balance sheet, beginning in the first quarter of fiscal 2000. 29 Report of Independent Public Accountants To the Shareholders and Board of Directors of Thermo TerraTech Inc.: We have audited the accompanying consolidated balance sheet of Thermo TerraTech Inc. (a Delaware corporation and an 87%-owned subsidiary of Thermo Electron Corporation) and subsidiaries as of April 3, 1999, and April 4, 1998, and the related consolidated statements of operations, cash flows, and comprehensive income and shareholders' investment for each of the three years in the period ended April 3, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thermo TerraTech Inc. and subsidiaries as of April 3, 1999, and April 4, 1998, and the results of their operations and their cash flows for each of the three years in the period ended April 3, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts May 11, 1999 (except with respect to the matters discussed in Note 19, as to which the date is June 1, 1999) 30 Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed immediately after this Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "Forward-looking Statements." Overview The Company provides industrial outsourcing services and manufacturing support encompassing a broad range of specializations. The Company operates in four segments: environmental-liability management, engineering and design, laboratory testing, and metal treating. Environmental-liability Management The Company's majority-owned ThermoRetec Corporation subsidiary is a national provider of environmental-liability and resource-management services. ThermoRetec offers these and related consulting services in four areas: consulting and engineering, nuclear remediation, soil remediation, and fluids recycling. The Company's majority-owned Thermo EuroTech N.V. subsidiary, located in the Netherlands, specializes in converting "off-spec" and contaminated petroleum fluids into useable oil products. Thermo EuroTech also provides in-plant waste management and recycling services through its Ireland-based Green Sunrise Holdings Ltd. subsidiary, acquired in February 1998. Through December 1996, this segment also included the results of the Company's J. Amerika division, an underground tank and groundwater treatment services company. Engineering and Design The Company's majority-owned The Randers Killam Group Inc. subsidiary provides comprehensive engineering and outsourcing services such as water and wastewater treatment, process engineering and construction, highway and bridge engineering, and infrastructure engineering. The Company's wholly owned Normandeau Associates Inc. subsidiary provides consulting services that address natural resource management issues. Laboratory Testing The Company's wholly owned Thermo Analytical Inc. subsidiary operates analytical laboratories that provide environmental- and pharmaceutical-testing services, primarily to commercial clients throughout the U.S. Metal Treating The Company performs metallurgical processing services using thermal-treatment equipment at locations in California, Minnesota, and Wisconsin. Until the October 1997 sale of its equipment division located in Michigan (Note 3), the Company also designed, manufactured, and installed advanced custom-engineered, thermal-processing systems. In May 1999, the Company announced the planned sale of several businesses by its majority-owned subsidiaries. These include the used-oil processing business by Thermo EuroTech; three soil-recycling facilities by ThermoRetec; and the businesses of BAC Killam Inc., the Randers division, and E3-Killam Inc. by Randers Killam. In connection with these actions, the Company expects to incur approximately $65 million in pretax charges, primarily during the first quarter of fiscal 2000. These charges primarily represent the excess of book value of the businesses to be sold over the estimated proceeds from the sale. As a result of the sale of the businesses, the Company also expects to incur costs for ongoing lease obligations, severance, and other exit costs, which have been provided for in the estimate of $65 million. Revenues and operating loss from these businesses aggregated $49.6 million and $0.1 million, respectively, in fiscal 1999. 31 Results of Operations Fiscal 1999 Compared With Fiscal 1998 Total revenues were $310.0 million in fiscal 1999, compared with $298.8 million in fiscal 1998. Metal Treating segment revenues decreased to $19.3 million in fiscal 1999 from $36.6 million in fiscal 1998, due to the sale of the Company's thermal-processing equipment business in October 1997, which contributed revenues of $17.3 million in fiscal 1998 (Note 3). Revenues from the Environmental-liability Management segment increased 13% to $159.1 million in fiscal 1999 from $141.1 million in fiscal 1998. Excluding intrasegment sales, revenues at ThermoRetec increased to $141.6 million in fiscal 1999 from $127.1 million in fiscal 1998, primarily due to $8.6 million of higher revenues from consulting and engineering services at RETEC and, to a lesser extent, the inclusion of $6.2 million of revenues from businesses acquired in fiscal 1998. Revenues from ThermoRetec's soil-remediation services increased $6.4 million in fiscal 1999, resulting from higher volumes of soil processed. These increases were offset in part by a decrease in revenues resulting from a decline in the number of contracts in process at ThermoRetec's eastern construction operations. Revenues from Thermo EuroTech increased $3.5 million to $17.5 million due to the inclusion for the full fiscal 1999 period of revenues from Green Sunrise, which was acquired in February 1998 and added incremental revenues of $6.4 million, offset in part by a decrease in sales of useable oil products. Revenues from the Engineering and Design segment increased to $91.8 million in fiscal 1999 from $84.6 million in fiscal 1998, primarily due to increased revenues from two construction and labor management contracts, which are expected to be completed by the end of the first quarter of fiscal 2000. Engineering and Design segment revenues also increased $3.5 million due to the inclusion for the full fiscal 1999 period of revenues from Randers, acquired May 1997. Revenues from the Laboratory Testing segment increased to $40.5 million in fiscal 1999 from $37.5 million in fiscal 1998 due to higher demand. The gross profit margin increased to 20% in fiscal 1999 from 18% in fiscal 1998. The gross profit margin from the Environmental-liability Management segment increased in fiscal 1999 primarily due to a reduction of losses on certain remedial-construction contracts, higher utilization of billable personnel, and higher volumes of soil processed at RETEC and, to a lesser extent, higher gross profit margin at Thermo EuroTech due to the inclusion of higher-margin revenue at Green Sunrise. The gross profit margin from the Engineering and Design segment decreased in fiscal 1999, primarily due to a change in the mix of contracts. Selling, general, and administrative expenses as a percentage of revenues increased slightly to 15% in fiscal 1999 from 14% in fiscal 1998, primarily due to the absence in fiscal 1999 of lower relative expenses at the Company's Metal Treating segment due to the fiscal 1998 sale of the thermal-processing equipment business and higher relative expenses at Green Sunrise, which was acquired in February 1998. In addition, selling, general, and administrative expenses at the Environmental-liability Management segment increased due to higher provisions for uncollectible accounts, increased administrative costs associated with ThermoRetec's name change, higher insurance costs, and inclusion for the full period of expenses from acquired businesses. During fiscal 1999, the Company recorded $10.2 million of restructuring costs. Of these restructuring costs, $9.2 million was recorded by ThermoRetec in connection with the closure of two soil-recycling facilities. The costs include a write-down of fixed assets to their estimated disposal value and a write-off of intangible assets, including cost in excess of net assets of acquired companies, as well as other closure costs. The closure was in response to changes in market conditions, which resulted in lower-priced disposal alternatives. These facilities reported aggregated revenues and operating losses of $2.2 million and $0.8 million, respectively, in fiscal 1998, and aggregated revenues and operating losses prior to the decision to close the facilities of $1.8 million and $0.1 million, respectively, in fiscal 1999. In addition, the Company recorded $1.0 million of restructuring costs for abandoned-facility payments relating to the consolidation of the facilities of another business (Note 13). Interest income decreased to $2.2 million in fiscal 1999 from $4.2 million in fiscal 1998, primarily as a result of lower average invested cash balances. Interest expense decreased to $9.0 million in fiscal 1999 from $10.8 million in fiscal 1998, primarily due to the repayment of a note payable in February and May 1998, the repayment of a 32 Fiscal 1999 Compared With Fiscal 1998 (continued) promissory note to Thermo Electron Corporation, and the conversion of the Company's 6 1/2% subordinated convertible debentures during fiscal 1998, offset in part by increased borrowings at Thermo EuroTech during fiscal 1999 and the issuance of $7.0 million principal amount of 2 1/2% convertible subordinated debentures due 2001 (Note 6). Equity in earnings of unconsolidated subsidiary in fiscal 1998 represented ThermoRetec's proportionate share of income from a joint venture. Gain on sale of unconsolidated subsidiary in fiscal 1998 resulted from ThermoRetec's sale of its interest in this joint venture (Note 3). The Company recorded income tax expense of $1.8 million in fiscal 1999 on a pretax loss primarily due to the effect of nondeductible amortization and write off of cost in excess of net assets of acquired companies. The effective tax rate in fiscal 1998 was 60%. This rate exceeded the statutory federal income tax rate primarily due to the impact of state income taxes and the nondeductible amortization of cost in excess of net assets of acquired companies. The Company recorded minority interest income of $1.2 million in fiscal 1999, compared with minority interest expense of $0.1 million in fiscal 1998, primarily due to the effect of a net loss at ThermoRetec in fiscal 1999. Fiscal 1998 Compared With Fiscal 1997 Total revenues increased 7% to $298.8 million in fiscal 1998 from $278.5 million in fiscal 1997. Revenues from the Environmental-liability Management segment increased 11% to $141.1 million in fiscal 1998 from $126.8 million in fiscal 1997. Excluding intrasegment sales, revenues at ThermoRetec increased to $127.1 million in fiscal 1998 from $114.8 million in fiscal 1997, primarily due to the inclusion of $20.1 million of revenues from acquired businesses and, to a lesser extent, increased revenues from construction, consulting, and engineering services at RETEC. These increases were offset in part by an $11.1 million decrease in revenues resulting from a decline in the number of contracts in process at ThermoRetec's eastern construction operations. Revenues from soil-remediation services decreased $3.5 million, resulting from the closure of two sites, as well as heavy rains, which unfavorably affected operations at certain west coast sites, and, to a lesser extent, competitive pricing pressures. Revenues from Thermo EuroTech increased 17% to $14.0 million, primarily due to increased revenues relating to contracts to process oil-based muds and perform soil-remediation services overseas and the inclusion of $1.2 million of revenues from Green Sunrise, acquired in February 1998, offset in part by a decrease in revenues as a result of the sale of the Company's J. Amerika division in the fourth quarter of fiscal 1997 (Note 3). Revenues from the Engineering and Design segment increased to $84.6 million in fiscal 1998 from $74.8 million in fiscal 1997. The inclusion of an aggregate of $15.0 million of revenues from CarlanKillam Consulting Group, Inc. and Randers, acquired in November 1996 and May 1997, respectively, was offset in part by a decrease in revenues due to the completion of two major contracts in fiscal 1997. Revenues from the Laboratory Testing segment increased to $37.5 million in fiscal 1998 from $35.4 million in fiscal 1997 due to higher demand. Metal Treating segment revenues decreased to $36.6 million in fiscal 1998 from $44.3 million in fiscal 1997, primarily due to the sale of the Company's thermal-processing equipment business in October 1997 (Note 3), offset in part by an increase in demand for the Company's metallurgical-processing services in fiscal 1998. The gross profit margin remained constant at 18% in fiscal 1998 and 1997. The gross profit margin for the Laboratory Testing segment increased in fiscal 1998 due to lower margins in fiscal 1997 as a result of costs incurred related to efforts to eliminate redundant capabilities at regional laboratories. The gross profit margin from the Environmental-liability Management segment decreased in fiscal 1998 primarily due to losses on certain remedial-construction contracts at ThermoRetec's eastern construction operations as a result of poorly bid and executed contracts, and an increase in lower-margin revenues at RETEC, offset in part by increased margins at Thermo EuroTech due to a shift to higher-margin contracts in fiscal 1998. Selling, general, and administrative expenses as a percentage of revenues remained constant at 14% in fiscal 1998 and 1997. Selling, general, and administrative expenses increased primarily due to the inclusion of costs from acquired companies. 33 Fiscal 1998 Compared With Fiscal 1997 (continued) Restructuring and nonrecurring items of $9.3 million in fiscal 1997 includes a charge at ThermoRetec of $7.8 million to write down certain capital equipment and intangible assets in response to a severe downturn in its soil-recycling business, which resulted in the closure of two soil-remediation sites. The charge included a $2.2 million write-down of cost in excess of net assets of acquired companies, which was nondeductible for tax purposes. In addition, the Company's analysis indicated that the future undiscounted cash flows from certain other soil-remediation sites that remained open would be insufficient to recover ThermoRetec's investment in these business units, thus requiring a write-down of certain assets, which is included in the $7.8 million charge. In addition, restructuring and nonrecurring items in fiscal 1997 includes a $1.5 million loss on the sale of the Company's J. Amerika division (Note 3). Interest income decreased to $4.2 million in fiscal 1998 from $7.3 million in fiscal 1997 as a result of lower average investment balances following the repayment of a $38.0 million promissory note to Thermo Electron, the repurchase of Company and subsidiary common stock, as well as cash expended for acquisitions. These decreases were offset in part by cash received from the sale of the Company's thermal-processing equipment business and ThermoRetec's interest in a joint venture (Note 3). Interest expense decreased to $10.8 million in fiscal 1998 from $12.9 million in fiscal 1997, primarily due to the repayment of a promissory note to Thermo Electron and the conversion of the Company's 6 1/2% subordinated convertible debentures during fiscal 1998. The Company adopted a strategy of spinning out certain of its businesses into separate subsidiaries and having these subsidiaries sell a minority interest to outside investors. The Company believes that this strategy provides additional motivation and incentives for the management of the subsidiaries through the establishment of subsidiary-level stock option incentive programs, as well as capital to support the subsidiaries' growth. As a result of the issuance of common stock by Thermo EuroTech in fiscal 1997, the Company recorded a gain of $1.5 million. This gain represents an increase in the Company's net investment in the subsidiary and is classified as gain on issuance of stock by subsidiary in the accompanying statement of operations. The Company does not expect to have transactions that will result in such gains in the future. Equity in earnings of unconsolidated subsidiary represents ThermoRetec's proportionate share of income from a joint venture. Gain on sale of unconsolidated subsidiary in fiscal 1998 resulted from ThermoRetec's sale of its interest in this joint venture (Note 3). The effective tax rates in fiscal 1998 and 1997 exceeded the statutory federal income tax rate primarily due to the nondeductible amortization of cost in excess of net assets of acquired companies and the impact of state income taxes. The effective tax rate in fiscal 1997 was reduced by the effect of a nontaxable gain on issuance of stock by subsidiary. The Company recorded minority interest expense of $0.1 million in fiscal 1998, compared with minority interest income of $1.8 million in fiscal 1997, primarily due to higher earnings from the Company's majority-owned subsidiaries and the inclusion of minority interest expense associated with Randers (Note 3). Liquidity and Capital Resources Consolidated working capital was $67.0 million at April 3, 1999, compared with $69.3 million at April 4, 1998. Cash, cash equivalents, and available-for-sale investments were $43.0 million at April 3, 1999, compared with $36.7 million at April 4, 1998. Of the $43.0 million balance at April 3, 1999, $37.6 million was held by the Company's majority-owned subsidiaries and the remainder was held by the Company and its wholly owned subsidiaries. During fiscal 1999, $29.9 million of cash was provided by operating activities. During this period, $7.7 million of cash was provided by an increase in other current liabilities due to increased subcontract work at Randers Killam, as well as the timing of payments, including restructuring costs (Note 13). This effect was offset in part by an increase in unbilled contract costs and fees of $1.5 million, primarily due to the timing of billings on certain contracts. Excluding available-for-sale and held-to-maturity investment activity, the Company's investing activities in fiscal 1999 primarily consisted of capital additions. The Company expended $17.4 million for purchases of property, plant, and equipment in fiscal 1999 and expects to spend approximately $13.0 million for capital additions during fiscal 2000. 34 Liquidity and Capital Resources (continued) The Company's financing activities used cash of $18.5 million in fiscal 1999. During fiscal 1999, the Company repaid notes payable totaling $14.7 million. In October 1998, the Company, through Thermo EuroTech (Delaware) Inc., issued $7.0 million principal amount of 2 1/2% subordinated convertible debentures due 2001 in exchange for 1,646,854 common shares of the Company's Thermo EuroTech N.V. subsidiary (Note 6). During fiscal 1999, the Company used cash of $3.4 million to repurchase Company common stock pursuant to certain put rights on shares issued in connection with an acquisition. The Company has cash obligations to purchase additional shares under such arrangement aggregating $3.4 million through fiscal 2002 (Note 9). The Company generally expects to have positive cash flow from its existing operations. Although the Company does not presently intend to actively seek to acquire additional businesses in the near future, it may acquire one or more complimentary businesses if they are presented to the Company on terms the Company believes to be attractive. Such acquisitions may require significant amounts of cash. In addition, ThermoRetec's $38.0 million principal amount 4 7/8% subordinated convertible debentures mature on May 1, 2000. The maturity of ThermoRetec's debentures could adversely affect the Company's liquidity in the first quarter of fiscal 2001. The Company expects that it will finance any such acquisitions and the redemption of such debentures through a combination of internal funds and/or short-term borrowings from Thermo Electron, although it has no agreement with Thermo Electron to ensure that funds will be available on acceptable terms or at all. Except as described in this paragraph with respect to ThermoRetec's debentures, the Company believes that its existing resources are sufficient to meet the capital requirements of its existing businesses for the foreseeable future. Market Risk The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates, and equity prices, which could affect its future results of operations and financial condition. The Company manages its exposure to these risks through its regular operating and financing activities. Foreign Currency Exchange Rates The Company generally views its investment in foreign subsidiaries with a functional currency other than the Company's reporting currency as long-term. The Company's investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates. The functional currencies of the Company's foreign subsidiaries are principally denominated in Dutch guilders. The effect of a change in foreign exchange rates on the Company's net investment in foreign subsidiaries is reflected in the "Accumulated other comprehensive items" component of shareholders' investment. A 10% depreciation in fiscal year-end 1999 functional currencies, relative to the U.S. dollar, would result in a $1.1 million reduction of shareholders' investment. Equity Prices The Company's and its subsidiaries' subordinated convertible debentures are sensitive to fluctuations in the price of Company or subsidiary common stock into which the debentures are convertible. Changes in equity prices would result in changes in the fair value of the Company's and its subsidiaries' subordinated convertible debentures due to the difference between the current market price and the market price at the date of issuance of the debentures. A 10% increase in fiscal year-end 1999 market equity prices would result in a negative impact to the Company of $1.0 million on the fair value of its subordinated convertible debentures. Interest Rates The Company's subordinated convertible debentures are sensitive to changes in interest rates. Interest rate changes would result in a change in the fair value of the Company's and its subsidiaries' subordinated convertible debentures due to the difference between the market interest rate and the rate at the date of issuance of the debentures. A 10% decrease in fiscal year-end 1999 market interest rates would result in a negative impact to the Company of $0.2 million on the fair value of its subordinated convertible debentures. 35 Market Risk (continued) The Company's cash, cash equivalents, and variable-rate short- and long-term obligations are sensitive to changes in interest rates. Interest rate changes would result in a change in interest income and expense due to the difference between the current interest rates on cash, cash equivalents, and the variable-rate short- and long-term obligations and the rate that these financial instruments may adjust to in the future. A 10% decrease in fiscal year-end 1999 interest rates would result in a negative impact of $0.1 million on the Company's net income. Year 2000 The following constitutes a "Year 2000 Readiness Disclosure" under the Year 2000 Information and Readiness Disclosure Act. The Company continues to assess the potential impact of the year 2000 date recognition issue on the Company's internal business systems, services, and operations. The Company's year 2000 initiatives include (i) testing and upgrading significant information technology systems and facilities; (ii) assessing the year 2000 readiness of its key suppliers and vendors; and (iii) developing a contingency plan. The Company's State of Readiness The Company has implemented a compliance program to ensure that its critical information technology systems and facilities will be ready for the year 2000. The first phase of the program, testing and evaluating the Company's critical information technology systems and facilities for year 2000 compliance, has largely been completed. During phase one, the Company tested and evaluated its significant computer systems, software applications, and related equipment for year 2000 compliance. The Company also evaluated the potential year 2000 impact on its critical facilities. The Company's efforts included testing the year 2000 readiness of the utility and telecommunications systems at its critical facilities. The Company is currently in phase two of its program, during which any noncompliant systems or facilities that were identified during phase one are prioritized and remediated. Based on its evaluations of its critical facilities, the Company does not believe that any material upgrades or modifications are required. The Company is currently upgrading or replacing its material noncompliant information technology systems, and this process was approximately 80% complete as of April 3, 1999. In many cases, such upgrades or replacements are being made in the ordinary course of business, without accelerating previously scheduled upgrades or replacements. The Company expects that all of its material information technology systems and critical facilities will be year 2000 compliant by October 1999. The Company is in the process of identifying and assessing the year 2000 readiness of key suppliers and vendors that are believed to be significant to the Company's business operations. As part of this effort, the Company has developed and is distributing questionnaires relating to year 2000 compliance to its significant suppliers and vendors. To date, no significant supplier or vendor has indicated that its business operations will be materially disrupted by the year 2000 issue. The Company has started to follow up with significant suppliers and vendors that have not responded to the Company's questionnaires. The Company has not completed the majority of its assessment of third-party risk, but expects to be substantially completed by October 1999. Contingency Plan The Company is developing a contingency plan that will allow its primary business operations to continue despite disruptions due to year 2000 problems. This plan may include identifying manual or backup systems in the event of a failure of the Company's material information technology systems. As the Company continues to evaluate the year 2000 readiness of its business systems and facilities and significant suppliers and vendors, it will modify and adjust its contingency plan as may be required. 36 Year 2000 (continued) Estimated Costs to Address the Company's Year 2000 Issues The Company had incurred third-party expenses (external costs) related to year 2000 issues of approximately $325,000 as of April 3, 1999, and the total external costs of year 2000 remediation are expected to be approximately $620,000. All of the external costs incurred as of April 3, 1999, were spent on testing and upgrading information technology systems. In fiscal year 1999, an immaterial amount of the Company's total information technology budget was spent on year 2000 issues. All internal costs and related external costs, other than capital additions, related to year 2000 remediation have been and will continue to be expensed as incurred. The Company does not track the internal costs incurred for its year 2000 compliance project. Such costs are principally the related payroll costs for its information systems group. Reasonably Likely Worst Case Scenario At this point in time, the Company is not able to determine the most reasonably likely worst case scenario to result from the year 2000 issue. One possible worst case scenario would be that the Company experiences year 2000 problems in its material information technology systems that cause the Company to be unable to access data, to process transactions, and to maintain accurate books and records. In such an event, the Company's operations could be delayed or temporarily shut down, and it could be unable to meet its obligations to customers in a timely fashion. The Company's business, operations, and financial condition could be adversely affected in amounts that cannot be reasonably estimated at this time. Risks of the Company's Year 2000 Issues While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 problems will not have a material adverse impact on the Company's business, operations, or financial condition. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. Some services provided by the Company involve the delivery to clients of third-party software and hardware. In addition, certain older third-party products, which the Company no longer uses in providing its services to clients, may not be year 2000 compliant, which may expose the Company to claims. As discussed above, if any of the Company's key suppliers or vendors experience business disruptions due to year 2000 issues, the Company might also be materially adversely affected. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. In addition, if any year 2000 issues are identified, there can be no assurance that the Company will be able to retain qualified personnel to remedy such issues. Any unexpected costs or delays arising from the year 2000 issue could have a material adverse impact on the Company's business, operations, and financial condition in amounts that cannot be reasonably estimated at this time. 37 Forward-looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in fiscal 2000 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Dependence on Environmental Regulation. Federal, state, and local environmental laws govern each of the markets in which the Company conducts business, as well as many of the Company's operations. The markets for many of the Company's services, including industrial-remediation services, nuclear-remediation services, hazardous waste-remedial construction services, soil-remediation services, waste-fluids recycling services, engineering and design services, and laboratory services, and the standards governing most aspects of the construction and operation of the Company's facilities, were directly or indirectly created by, and are dependent on, the existence and enforcement of those laws. There can be no assurance that these laws and regulations will not change in the future, requiring new technologies or stricter standards with which the Company must comply. In addition, there can be no assurance that these laws and regulations will not be made more lenient in the future, thereby reducing the size of the markets addressed by the Company. Any such change in such federal, state, and local environmental laws and regulations may have a material adverse effect on the Company's business. Responsibility for establishing and enforcing certain federal policies, such as the federal underground storage tank policy, has been delegated to the states, which are not only required to establish regulatory programs, but are also permitted to mandate more stringent requirements than are otherwise required by federal law. Recently, certain states have adopted a "risk-based" approach to prioritizing site cleanups and setting cleanup standards, which attempts to balance the costs of remediation against the potential harm to human health and the environment from leaving sites unremediated. There can be no assurance that additional states will not adopt these policies or that these policies will not reduce the size of the potential market addressed by the Company. Potential Environmental and Regulatory Liability. The Company's operations are subject to comprehensive laws and regulations related to the protection of the environment. Among other things, these laws and regulations impose requirements to control air, soil, and water pollution, and regulate health, safety, zoning, land use, and the handling and transportation of hazardous and nonhazardous materials. Such laws and regulations also impose liability for remediation and cleanup of environmental contamination, both on-site and off-site, resulting from past and present operations. These requirements may also be imposed as conditions to operating permits or licenses that are subject to renewal, modification, or revocation. Existing laws and regulations, and new laws and regulations, may require the Company to modify, supplement, replace, or curtail its operating methods, facilities, or equipment at costs which may be substantial without any corresponding increase in revenue. The Company is also potentially subject to monetary fines, penalties, remediation, cleanup or stop orders, injunctions, or orders to cease or suspend certain of its practices. The outcome of any proceedings and associated costs and expenses could have a material adverse impact on the Company's business. In addition, the Company is subject to numerous laws and regulations related to the protection of human health and safety. Such laws and regulations may pose liability on the Company for exposure of its employees to radiation or other hazardous contamination or failure to isolate and remove radioactive or other hazardous contaminants from soil. The Company endeavors to operate its business to minimize its exposure to environmental and other regulatory liabilities. Although no claims giving rise to such liabilities have been asserted by the Company's customers or employees to date, there can be no assurance that such claims cannot or will not be asserted against the Company. Uncertainty of Funding. Remediation compliance requirements and attendant costs are often beyond the financial capabilities of individuals and small companies. To address this problem, some states have established tax-supported trust funds to assist in the financing of compliance and site remediation. As a consequence, in many of the states in which the Company markets its soil remediation services, the majority, and in some cases virtually all, of the soil remediated by the Company is paid for by large companies and/or these state trust funds. Any substantial decrease 38 in this funding could have a material adverse effect on the Company's business and financial performance. Many states have realized that the number of sites requiring remediation and the costs of compliance are substantially higher than were originally estimated. As a result, several states have relaxed enforcement activities and others have reduced compliance requirements in order to reduce the costs of cleanup. These factors have already resulted in lower levels of cleanup activity in some states and have had a material adverse effect on the Company's business. Continued de-emphasis on enforcement activities and/or further reductions in compliance requirements will have an even more severe adverse effect on the Company's business. The Company depends on funding from the federal and state governments, and their agencies and instrumentalities, for compensation for its services. For example, ThermoRetec's nuclear-remediation business provides a large portion of its services directly or indirectly to the U.S. Department of Energy (DOE) and the Company's engineering and design businesses perform significant amounts of services for state and municipal governments. Thermo NUtech has experienced a decrease in its radiochemistry laboratory work as a result of ongoing reductions in spending at the DOE as well as a shift in DOE spending from investigative work to cleanup work. Continued declines in spending by DOE and other governmental agencies could have a material adverse effect on the Company's business. Competition. The markets for many of the Company's services are regional and are characterized by intense competition from numerous local competitors. Some of the Company's competitors have greater technical and financial resources than those of the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their services than the Company. Competition could increase if new companies enter the market or its existing competitors expand their service lines. There can be no assurance that the Company's current technology, technology under development, or ability to develop new technologies will be sufficient to enable it to compete effectively with its competitors. Seasonal Influences. A majority of the Company's businesses experience seasonal fluctuations. A majority of the Company's soil-remediation sites, as well as the Company's fluids-recycling sites, experience declines in revenues if severe weather conditions occur. Site remediation work and certain environmental testing services, such as the services provided by Lancaster Laboratories, RETEC, Randers, IEM Sealand, and Thermo NUtech, may decline in winter months as a result of severe weather conditions. In Europe, Thermo EuroTech may experience a decline in the feedstock delivered to and from its facilities during winter months due to frozen waterways. Possible Obsolescence Due to Technological Change. Technological developments are expected to continue at a rapid pace in the environmental services industry. The Company's technologies could be rendered obsolete or uneconomical by technological advances by one or more companies that address the Company's markets or by future entrants into the industry. There can be no assurance that the Company would have the resources to, or otherwise would be successful in, developing responses to technological advances by others. Dependence of Thermo EuroTech on Availability of Waste Oil Supplies. Thermo EuroTech's North Refinery facility has historically received a large percentage of its oil feedstock from the former Soviet Union. North Refinery no longer receives any oil from that nation, due to political and economic changes that have made the transportation of waste oil difficult. To overcome this loss of supply, North Refinery has taken steps to replace and diversify its feedstock suppliers. No assurance can be given, however, that North Refinery will not experience future disruptions in deliveries. Any such disruptions could have a material adverse effect on the Company's results of operations. 39 Potential Professional Liability. The Company's business exposes it to potential liability for the negligent performance of its services, and the Company could face substantial liability to clients and third parties for damages resulting from faulty designs or other professional services. The Company currently maintains professional errors and omissions insurance, but there can be no assurance that this insurance will provide sufficient coverage in the event of a claim, that the Company will be able to maintain such coverage on acceptable terms, if at all, or that a professional liability claim would not result in a material adverse effect on the Company's business, financial condition, and results of operations. Dependence on Sales to Government Entities. A significant portion of the Company's revenues is derived from municipalities, state governments, and government utility authorities. Any decreases in purchases by these entities, including, without limitation, decreases resulting from shifts in priorities or overall budgeting limitations, could have a material adverse effect on the Company's business, financial condition, and results of operations. In addition, most of the Company's contracts require the Company to perform specific services for a fixed fee. Contracts with governmental entities often permit the purchaser to cancel the agreement at any time. A significant overrun in the Company's expenses or cancellation of a significant contract could also result in a material adverse effect on the Company's business, financial condition, and results of operations. The Company's contracts with governmental entities are also subject to other risks, including contract suspensions; protests by disappointed bidders of contract awards, which can result in the re-opening of the bidding process; and changes in government policies or regulations. Risks Associated with Acquisition Strategy. The Company's strategy includes the acquisition of businesses that complement or augment the Company's existing services. The Company does not presently intend to actively seek to make additional acquisitions in the near future, and expects instead to concentrate its resources on strengthening its core businesses. The Company may, however, acquire one or more additional businesses if they are presented to the Company on terms the Company believes to be attractive. Promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the need for regulatory approvals. Any acquisitions completed by the Company may be made at substantial premiums over the fair value of the net assets of the acquired companies. There can be no assurance that the Company will be able to complete future acquisitions or that the Company will be able to successfully integrate any acquired businesses. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds through public or private financings. Any equity or debt financing, if available at all, may be on terms that are not favorable to the Company and, in the case of equity financing, may result in dilution to the Company's shareholders. Risks Associated with Spin-out of Subsidiaries. The Company adopted a strategy of spinning out certain of its businesses into separate subsidiaries and having these subsidiaries sell a minority interest to outside investors. As a result of the sale of stock by subsidiaries, the issuance of stock by subsidiaries upon conversion of convertible debentures, and similar transactions, the Company records gains that represent the increase in the Company's net investment in the subsidiaries. These gains have represented a substantial portion of the net income reported by the Company in certain periods. The Company does not expect to have transactions that will result in such gains in the future. 40 No Assurance of Development and Commercialization of Technology Under Development. The Company is currently engaged in the development of several technologies that may ultimately be commercialized to provide services to customers. There are a number of technological challenges that the Company must successfully address to complete any of its development efforts. Technology development involves a high degree of risk, and returns to investors are dependent upon successful development and commercialization of such technology. There can be no assurance that any of the technologies currently being developed by the Company, or those to be developed in the future by the Company, will be technologically feasible or accepted by the marketplace, or that any such development will be completed in any particular timeframe. Risks Associated with Cash Management Arrangement with the Parent Company. The Company participates in a cash management arrangement with its parent company, Thermo Electron. Under this cash management arrangement, the Company lends its excess cash to Thermo Electron on an unsecured basis. The Company has the contractual right to withdraw its funds invested in the cash management arrangement upon 30 days' prior notice. Thermo Electron is contractually required to maintain cash, cash equivalents, and/or immediately available bank lines of credit equal to at least 50% of all funds invested under the cash management arrangement by all Thermo Electron subsidiaries other than wholly owned subsidiaries. The funds are held on an unsecured basis and therefore are subject to the credit risk of Thermo Electron. The Company's ability to receive its cash upon notice of withdrawal could be adversely affected if participants in the cash management arrangement demand withdrawal of their funds in an aggregate amount in excess of the 50% reserve required to be maintained by Thermo Electron. In the event of a bankruptcy of Thermo Electron, the Company would be treated as an unsecured creditor and its right to receive funds from the bankruptcy estate would be subordinated to secure creditors and would be treated on a pari passu basis with all other unsecured creditors. Further, all cash withdrawn by the Company from the cash management arrangement within one year before the bankruptcy would be subject to rescission. The inability of Thermo Electron to return the Company's cash on a timely basis or at all could have a material adverse effect on the Company's results of operations and financial position. Potential Impact of Year 2000 on Processing Date-sensitive Information. While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 problems will not have a material adverse impact on the Company's business, operations, or financial condition. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. Some services provided by the Company involve the delivery to clients of third-party software and hardware. In addition, certain older third-party products, which the Company no longer uses in providing its services to clients, may not be year 2000 compliant, which may expose the Company to claims. As discussed above, if any of the Company's key suppliers or vendors experience business disruptions due to year 2000 issues, the Company might also be materially adversely affected. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. In addition, if any year 2000 issues are identified, there can be no assurance that the Company will be able to retain qualified personnel to remedy such issues. Any unexpected costs or delays arising from the year 2000 issue could have a material adverse impact on the Company's business, operations, and financial condition in amounts that cannot be reasonably estimated at this time. 41 Selected Financial Information (In thousands except per share amounts) 1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995 - -------------------------------------------------- ---------- ----------- ---------- ---------- --------- Statement of Operations Data Revenues $310,039 $ 298,786 $278,503 $220,484 $136,985 Net Income (Loss) (1,421) 3,273 (162) 3,447 4,476 Earnings (Loss) per Share: Basic (.07) .18 (.01) .20 .26 Diluted (.07) .17 (.01) .18 .26 Balance Sheet Data Working Capital $ 67,043 $ 69,319 $ 77,315 $ 66,008 $ 63,459 Total Assets 351,698 360,526 393,784 333,656 273,298 Long-term Obligations 158,617 153,144 165,186 155,384 96,851 Shareholders' Investment 92,157 97,130 83,526 85,870 77,217 (a) Reflects a $10.2 million pretax charge for restructuring costs. (b) Reflects a pretax gain of $3.0 million from ThermoRetec's sale of its investment in a joint venture. (c) Reflects $7.8 million of nonrecurring costs and a loss $1.5 million relating to the sale of the Company's J. Amerika division. Also reflects the issuance of $115.0 million principal amount of 4 7/8% subordinated convertible debentures, and a gain on issuance of stock by subsidiary of $1.5 million. (d) Reflects the acquisition of Lancaster Laboratories in May 1995, the purchase of the businesses formerly operated by the environmental services joint venture from Thermo Instrument Systems Inc., and the issuance of a $35.0 million promissory note to Thermo Electron to fund the purchase. Reflects ThermoRetec's acquisition of RETEC in December 1995, the issuance of $38.0 million principal amount of 4 7/8% subordinated convertible debentures by ThermoRetec, and a gain on issuance of stock by subsidiaries of $4.1 million. Also reflects the write-off of goodwill of $5.0 million and a loss on the sale of assets of $0.6 million. 42 Common Stock Market Information The Company's common stock is traded on the American Stock Exchange under the symbol TTT. The following table sets forth the high and low sales prices of the Company's common stock for fiscal 1999 and 1998, as reported in the consolidated transaction reporting system. Fiscal 1999 Fiscal 1998 Quarter High Low High Low - --------------------------------------------------------------- ---------- ---------- ---------- ---------- First $6 3/4 $4 1/2 $11 1/8 $8 1/8 Second 5 3 3/4 12 1/16 9 7/8 Third 4 5/8 3 15/16 9 15/16 8 Fourth 5 3/4 4 3/8 8 3/16 6 5/8 As of April 30, 1999, the Company had 923 holders of record of its common stock. This does not include holdings in street or nominee names. The closing market price on the American Stock Exchange for the Company's common stock on April 30, 1999, was $4 3/16 per share. Common stock of ThermoRetec Corporation and The Randers Killam Group Inc., the Company's majority-owned public subsidiaries, are traded on the American Stock Exchange (symbols THN and RGI, respectively). Dividend Policy The Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future because its policy has been to use earnings to finance expansion and growth. Payment of dividends will rest within the discretion of the Company's Board of Directors and will depend upon, among other factors, the Company's earnings, capital requirements, and financial condition. 43
EX-21 4
Exhibit 21 THERMO TERRATECH INC. Subsidiaries of the Registrant As of May 29, 1999, Thermo TerraTech Inc. owned the following companies: STATE OR JURISDICTION OF PERCENT OF NAME INCORPORATION OWNERSHIP - ----------------------------------------------------------------------------------------------------------- Holcroft (Canada) Limited Canada 100 Holcroft Corporation Delaware 100 Holcroft GmbH Germany 100 Metallurgical, Inc. Minnesota 100 Cal-Doran Metallurgical Services, Inc. California 100 Metal Treating Inc. Wisconsin 100 Normandeau Associates, Inc. New Hampshire 100 TMA/Hanford, Inc. Washington 100 The Randers Killam Group Inc. (additionally, .99% of the shares are Delaware 94.81 owned directly by Thermo Electron Corporation) Randers Engineering, Inc. Michigan 100 Randers Engineering of Massachusetts, Inc. Michigan 100 Randers Group Property Corporation Michigan 100 Redeco Incorporated Michigan 100 Viridian Technology Incorporated Michigan 100 The Killam Group, Inc. Delaware 100 CarlanKillam Consulting Group, Inc. Florida 100 CarlanKillam Consulting Group of Alabama, Inc. Alabama 100 Thermo Consulting & Design Inc. Delaware 100 Engineering Technology and Knowledge Corporation Delaware 100 Elson T. Killam Associates, Inc. New Jersey 100 BAC Killam Inc. New York 100 N.H. Bettigole Co., Inc. Delaware 100 N.H. Bettigole P.A. New Jersey 100 N.H. Bettigole P.C. New York 100 CarlanKillam Construction Services, Inc. Florida 100 Duncan, Lagnese and Associates, Incorporated Pennsylvania 100 E3-Killam, Inc. New York 100 Killam Associates, Inc. Ohio 100 Killam Management and Operational Services, Inc. New Jersey 100 Fellows, Read & Associates, Inc. New Jersey 100 Killam Associates, New England Inc. Delaware 100 George A. Schock & Associates, Inc. New Jersey 100 Jennison Engineering, Inc. Vermont 100 Thermo Analytical Inc. Delaware 100 Skinner & Sherman, Inc. Massachusetts 100 STATE OR JURISDICTION OF PERCENT OF NAME INCORPORATION OWNERSHIP - ----------------------------------------------------------------------------------------------------------- Thermo EuroTech (Delaware) Inc. (additionally, 12.17% of the shares Delaware 87.83 are owned directly by Thermo Electron Corporation) Thermo EuroTech N.V. Netherlands 87.10 Thermo EuroTech Ireland Ltd. Ireland 100 Green Sunrise Holdings Ltd. Ireland 70 AutoRod Ltd. Ireland 100 Green Sunrise Industries Ltd. Ireland 100 GreenStar Recycling Ltd. Ireland 100 Pipe & Drain Services Ltd. Ireland 100 GreenStar Products Ltd. Ireland 70 Grond- & Watersaneringstechniek Nederland B.V. Netherlands 100 Refining & Trading Holland B.V. Netherlands 100 ThermoRetec Corporation (additionally, 1.89% of the shares are Delaware 69.12 owned directly by The Thermo Electron Companies Inc.) 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.
EX-23 5 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 19, as to which the date is June 1, 1999), included in or incorporated by reference into Thermo TerraTech Inc.'s Annual Report on Form 10-K for the year ended April 3, 1999, and into the Company's previously filed Registration Statements as follows: Registration Statement No. 333-02269 on Form S-2, Registration Statement No. 33-16462 on Form S-8, Registration Statement No. 33-16464 on Form S-8, Registration Statement No. 33-16465 on Form S-8, Registration Statement No. 33-16466 on Form S-8, Registration Statement No. 333-2055 on Form S-3, Registration Statement No. 33-52824 on Form S-8, Registration Statement No. 033-65307 on Form S-8, Registration Statement No. 033-65283 on Form S-8, Registration Statement No. 033-65281 on Form S-8, Registration Statement No. 33-86194 on Form S-8, and Registration Statement No. 333-05263 on Form S-3. Arthur Andersen LLP Boston, Massachusetts June 8, 1999 EX-27 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO TERRATECH INC.'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. 1,000 YEAR APR-03-1999 APR-03-1999 43,013 0 62,954 3,577 1,869 135,608 151,219 59,705 351,698 68,565 158,617 0 0 1,958 90,199 351,698 0 310,039 0 247,610 10,217 2,085 8,981 (808) 1,786 (1,421) 0 0 0 (1,421) (0.07) (0.07)
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