SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended January 2, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-10573
THERMO POWER CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2891371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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 (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Class Outstanding at January 29, 1999
---------------------------- -------------------------------
Common Stock, $.10 par value 11,830,163
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO POWER CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
January 2, October 3,
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 30,029 $ 22,240
Available-for-sale investments, at quoted
market value (amortized cost of $4,017) - 4,018
Accounts receivable, less allowances of
$9,595 and $10,299 67,884 52,098
Unbilled contract costs and fees 9,622 10,718
Inventories:
Raw materials 20,384 21,549
Work in process 9,550 14,422
Finished goods 7,271 8,013
Prepaid income taxes 10,983 11,205
Net assets of discontinued operations (Note 4) 935 8,525
Other current assets (Note 4) 3,628 2,421
Due from parent company and affiliated
companies - 732
-------- --------
160,286 155,941
-------- --------
Rental Assets, at Cost 14,812 14,884
Less: Accumulated depreciation and
amortization 4,891 4,766
-------- --------
9,921 10,118
-------- --------
Property, Plant, and Equipment, at Cost 35,775 34,433
Less: Accumulated depreciation and
amortization 10,609 9,562
-------- --------
25,166 24,871
-------- --------
Other Assets 260 282
-------- --------
Cost in Excess of Net Assets of Acquired
Companies 160,079 160,423
-------- --------
$355,712 $351,635
======== ========
2
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THERMO POWER CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
January 2, October 3,
(In thousands except share amounts) 1999 1998
- --------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations $ 360 $ 396
Accounts payable 33,765 30,899
Accrued payroll and employee benefits 9,218 7,885
Billings in excess of contract costs and fees 7,846 8,517
Accrued income taxes 9,456 10,048
Accrued warranty costs 6,301 6,293
Common stock of subsidiary subject to
redemption ($1,380 and $18,450 redemption
value) 1,380 18,372
Payable for redeemed common stock of
subsidiary 17,070 -
Accrued acquisition expenses (Note 5) 10,427 11,083
Other accrued expenses (Note 4) 28,039 26,686
Due to parent company and affiliated
companies 677 -
-------- --------
124,539 120,179
-------- --------
Deferred Income Taxes 923 1,093
-------- --------
Long-term Obligations (includes $160,000 due to
parent company; Note 6) 160,439 160,499
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 30,000,000
shares authorized; 12,493,371 shares issued 1,249 1,249
Capital in excess of par value 55,401 55,401
Retained earnings 17,119 16,147
Treasury stock at cost, 663,208 shares (4,600) (4,600)
Accumulated other comprehensive items (Note 3) 642 1,667
-------- --------
69,811 69,864
-------- --------
$355,712 $351,635
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMO POWER CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
------------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Revenues $76,261 $58,696
------- -------
Costs and Operating Expenses:
Cost of revenues 55,071 40,783
Selling, general, and administrative expenses 15,406 12,783
Research and development expenses 1,781 1,630
------- -------
72,258 55,196
------- -------
Operating Income 4,003 3,500
Interest Income (includes $180 from related
party in fiscal 1998) 329 589
Interest Expense (includes $2,168 and $1,175 to
related party) (2,303) (1,425)
------- -------
Income from Continuing Operations Before
Income Taxes and Minority Interest 2,029 2,664
Provision for Income Taxes 979 1,195
Minority Interest Expense 78 189
------- -------
Income from Continuing Operations 972 1,280
Loss from Discontinued Operations (Note 4) - (225)
------- -------
Net Income $ 972 $ 1,055
======= =======
Basic and Diluted Earnings per Share from
Continuing Operations $ .08 $ .11
======= =======
Basic and Diluted Earnings per Share (Note 2) $ .08 $ .09
======= =======
Weighted Average Shares (Note 2):
Basic 11,830 11,898
======= =======
Diluted 11,835 11,912
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO POWER CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
----------------------
January 2, January 3,
(In thousands) 1999 1998
- -------------------------------------------------------------------------
Operating Activities:
Net income $ 972 $ 1,055
Adjustments to reconcile net income to income
from continuing operations:
Loss from discontinued operations - 225
--------- ---------
Income from continuing operations 972 1,280
Adjustments to reconcile income from
continuing operations to net cash provided
by operating activities of continuing
operations:
Depreciation and amortization 2,759 2,446
Provision for losses on accounts receivable 152 30
Minority interest expense 78 189
Change in deferred income taxes 72 (671)
Other noncash items - (47)
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable (15,923) (5,488)
Inventories 7,224 7,034
Unbilled contract costs and fees 1,105 (1,587)
Other current assets 584 (38)
Accounts payable 2,418 1,943
Other current liabilities 1,098 1,297
--------- ---------
Net cash provided by continuing operations 539 6,388
Net cash provided by discontinued operations 308 1,690
--------- ---------
Net cash provided by operating activities 847 8,078
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (1,587) (143,743)
Proceeds from sale of a business (Note 4) 6,393 -
Proceeds from sale and maturities of
available-for-sale investments 4,018 -
Purchases of property, plant, and equipment (1,868) (1,459)
Proceeds from sale of property, plant, and
equipment 176 1,210
Increase in rental assets (312) (389)
Proceeds from sale of rental assets 239 314
Other - (9)
--------- ---------
Net cash provided by (used in) continuing
operations 7,059 (144,076)
Net cash used in discontinued operations - (38)
--------- ---------
Net cash provided by (used in) investing
activities $ 7,059 $(144,114)
--------- ---------
5
<PAGE>
THERMO POWER CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
------------------------
January 2, January 3,
(In thousands) 1999 1998
- -------------------------------------------------------------------------
Financing Activities:
Issuance of long-term obligation to parent
company $ - $ 160,000
Decrease in short-term obligations - (2,924)
Purchases of Company common stock - (1,129)
Net proceeds from issuance of Company common
stock - 183
Repayment of long-term obligations (96) (44)
--------- ---------
Net cash provided by (used in) financing
activities of continuing operations (96) 156,086
--------- ---------
Exchange Rate Effect on Cash (21) 270
--------- ---------
Increase in Cash and Cash Equivalents 7,789 20,320
Cash and Cash Equivalents at Beginning of
Period 22,240 19,347
--------- ---------
Cash and Cash Equivalents at End of Period $ 30,029 $ 39,667
========= =========
Noncash Activities:
Fair value of assets of acquired companies $ 1,767 $ 271,109
Cash paid for acquired companies (1,587) (159,324)
Cash paid in prior year for acquired company - (2,301)
Payable for remaining outstanding shares of
tender offer - (5,111)
--------- ---------
Liabilities assumed of acquired companies $ 180 $ 104,373
========= =========
Sale of acquired business to related party $ - $ 19,117
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
THERMO POWER CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Power Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at January 2, 1999, and the results of
operations and cash flows for the three-month periods ended January 2, 1999, and
January 3, 1998. The Company's results of operations for the three-month periods
ended January 2, 1999, and January 3, 1998, include 13 weeks and 14 weeks,
respectively. In addition, prior period amounts have been reclassified to
conform to the presentation in the current financial statements and to classify
the results of the Company's Engines segment as discontinued operations (Note
4). Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of October 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
October 3, 1998, filed with the Securities and Exchange Commission.
2. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
----------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Income from Continuing Operations $ 972 $ 1,280
Loss from Discontinued Operations - (225)
------- -------
Net Income $ 972 $ 1,055
======= =======
Basic
Weighted Average Shares 11,830 11,898
------- -------
Basic Earnings per Share:
Continuing operations $ .08 $ .11
Discontinued operations - (.02)
------- -------
$ .08 $ .09
======= =======
7
<PAGE>
2. Earnings per Share (continued)
Three Months Ended
----------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Diluted
Weighted Average Shares 11,830 11,898
Effect of Stock Options 5 14
------- -------
Weighted Average Shares, as Adjusted 11,835 11,912
------- -------
Diluted Earnings per Share:
Continuing operations $ .08 $ .11
Discontinued operations - (.02)
------- -------
$ .08 $ .09
======= =======
The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of January 2, 1999, there were 1,157,000 of
such options outstanding, with exercise prices ranging from $8.25 to $12.83 per
share.
3. Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards 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. The Company had a comprehensive loss of $53,000
in the first quarter of fiscal 1999 and comprehensive income of $1,169,000 in
the first quarter of fiscal 1998.
4. Discontinued Operations
During fiscal 1998, the Company adopted a plan to divest its Engines
segment, which consists of its Crusader Engines division. In accordance with the
provisions of Accounting Principles Board Opinion No. 30 concerning reporting
the effect of disposal of a segment of a business, the results of operations of
the Engines segment have been classified as discontinued in the accompanying
statement of income for fiscal 1998, and have been recorded as a reduction of
previously established reserves in fiscal 1999. Revenues and net loss for the
Engines segment were $2,695,000 and $305,000, respectively, in the first quarter
of fiscal 1999, and $4,866,000 and $225,000, respectively, in the first quarter
of fiscal 1998. The reserve for estimated losses on disposal of discontinued
8
<PAGE>
4. Discontinued Operations (continued)
operations at October 3, 1998, totaled $993,000, including $700,000 for
estimated losses from operations of the Engines segment through the expected
date of disposition. During the first quarter of fiscal 1999, the reserve was
increased by a pretax gain on the sale of the net assets of the industrial and
marine engine product lines of $508,000, discussed below, and was reduced by
pretax operating losses of discontinued operations of $478,000. The remaining
reserve at January 2, 1999, was $1,139,000, primarily representing continuing
warranty obligations and a reserve for estimated losses from operations. The tax
effect on these items was recorded as an adjustment to accrued income taxes. The
reserve for estimated losses on disposal of discontinued operations is included
in other accrued expenses in the accompanying balance sheet.
In December 1998, the Company completed the sale of the industrial and
marine engine product lines of its Crusader Engines division to two unrelated
third parties. Such sale represents a complete divestiture of the Engines
segment. The aggregate sales price for the two product lines consists of
$6,393,000 in cash, the assumption of certain liabilities of the Crusader
Engines division, and a receivable of $1,035,000. The receivable, which is
included in other current assets in the accompanying balance sheet, is due in
December 1999 and is secured by an irrevocable letter of credit. The sale of the
net assets of the two product lines resulted in a pretax gain of $508,000, which
was recorded as a reduction in the reserve for estimated losses on disposal of
discontinued operations. The net assets of discontinued operations in the
accompanying January 2, 1999, balance sheet primarily represents accounts
receivable.
5. Accrued Acquisition Expenses
During fiscal 1998, in connection with its November 1997 acquisition of Peek
plc, the Company undertook a restructuring of the acquired business. At October
3, 1998, the Company had finalized its plan for restructuring the acquired
business and the remaining reserve for these restructuring activities totaled
$10,970,000. During the first quarter of fiscal 1999, the Company expended
$738,000 for restructuring costs relating to this acquisition, primarily for
ongoing severance and abandoned facility payments. At January 2, 1999, the
remaining reserve for restructuring the Peek business was $10,214,000, including
the impact of currency translation, and is comprised of $6,980,000 for estimated
costs for the completion of acquired loss contracts at two business locations
which the Company intends to close, $1,834,000 for estimated losses on an
acquired loss contract at a business location the Company has closed, and
$1,400,000 for ongoing payments for abandoned facilities and severance.
6. Promissory Note
The Company's $160.0 million promissory note to Thermo Electron Corporation
is due in November 1999. Subsequent to the end of the quarter, Thermo Electron
issued a commitment letter to the Company pursuant to which Thermo Electron has
agreed to refinance the promissory note at the option of the Company, on its
maturity date, with the net
9
<PAGE>
6. Promissory Note (continued)
proceeds from its October 1998 offering of 7.625% Notes due 2008, and other
available cash. In accordance with the agreement, the new promissory note from
the Company to Thermo Electron would be due in 2008 and bear interest at a rate
of 7.625%. The promissory note has been classified as long-term in the
accompanying fiscal 1999 balance sheet as a result of the Company's ability and
intent to refinance the $160.0 million promissory note at maturity.
7. Proposed Reorganization Plan
In August 1998, Thermo Electron announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company. As
part of this reorganization, Thermo Electron announced that the Company may be
taken private and become a wholly owned subsidiary of Thermo Electron. It is
currently contemplated that the Company's shareholders would receive cash in
exchange for their shares of common stock of the Company. The completion of this
transaction is subject to numerous conditions, including the establishment of
the price; the approval of the Board of Directors of Thermo Electron; the
negotiation and execution of a definitive purchase and sale or merger agreement;
the receipt of a fairness opinion from an investment banking firm that the
transaction is fair to the Company's shareholders (other than Thermo Electron)
from a financial point of view; the approval of the Company's Board of
Directors, including its directors who are serving on a special committee for
the purpose of evaluating and negotiating the proposed transaction; and
clearance by the Securities and Exchange Commission of any necessary documents
regarding the proposed transaction.
Item 2 - 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 under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K, as
amended, for the fiscal year ended October 3, 1998, filed with the Securities
and Exchange Commission.
Overview
The Company's continuing operations are divided into three segments: Traffic
Control, Industrial Refrigeration Systems, and Cooling and Cogeneration Systems.
Through the Company's Peek subsidiary, acquired November 1997, the Traffic
Control segment develops, manufactures,
10
<PAGE>
Overview (continued)
markets, installs, and services equipment to monitor and regulate traffic flow
in cities and towns around the world. Peek offers a wide range of products,
including hardware, such as vehicle detectors, counters, classifiers, traffic
signals and controllers, video cameras, and variable message signs, as well as
traffic management systems that integrate these products to ease roadway
congestion, improve safety, and collect data. Traffic management systems include
variable message systems to advise drivers of accidents and other roadway
hazards, traffic signal-timing systems that adapt continuously to changing
conditions to minimize delays, parking guidance systems, and public
transportation-management systems that give buses priority at intersections. The
Company also offers high-resolution video equipment to aid police officers in
capturing the information necessary to charge individuals with motor vehicle
violations such as speeding and red light violations.
Sales to governmental entities accounted for 26% of the Company's total
revenues in fiscal 1998, of which 92% related to sales to foreign governmental
entities. Sales to governmental entities related principally to the Traffic
Control segment and represented 39% of its revenues in fiscal 1998. A decrease
in sales to governmental entities could have an adverse effect on the Company's
business and future results of operations.
The quarterly revenues and income of the Traffic Control segment fluctuate
significantly based on funding patterns of governmental entities and
seasonality. As a result of these factors, Peek has historically experienced
higher sales and income in the first and third fiscal quarters and lower sales
and income in the second and fourth fiscal quarters. Additionally, a portion of
the Traffic Control segment's revenues result from the sale of large systems,
the timing of which can lead to variability in the Company's quarterly revenues
and income.
In fiscal 1998, approximately 44% of the Company's revenues originated
outside the U.S., principally in Europe, and approximately 8% of the Company's
revenues were exports from the U.S. Foreign divisions and subsidiaries
principally sell in their local currencies and generally seek to charge their
customers in the same currency as their operating costs. However, the Company's
financial performance and competitive position can be affected by currency
exchange rate fluctuations affecting the relationship between the U.S. dollar
and foreign currencies. The Company seeks to reduce its exposure to currency
fluctuations through the use of forward contracts. Since the operations of the
Traffic Control segment are conducted principally in Europe, the Company's
operating results could be adversely affected by capital spending levels and
economic conditions in Europe. In addition, the Company's results of operations
could be adversely affected by possible costs related to the Euro currency's
introduction beginning January 1, 1999.
Through the Company's FES division, the Industrial Refrigeration Systems
segment supplies standard and custom-designed industrial refrigeration systems
used primarily by the food-processing, chemical,
11
<PAGE>
Overview (continued)
petrochemical, and pharmaceutical industries. NuTemp, Inc. is a supplier of
rental cooling and industrial refrigeration equipment. The Company also offers
custom-made and remanufactured equipment for sale. NuTemp's industrial
refrigeration equipment is used primarily in the food-processing, chemical,
petrochemical, and pharmaceutical industries, and its commercial cooling
equipment is used primarily in institutions and commercial buildings, as well as
by service contractors. The demand for NuTemp's equipment is highest in the
summer months and can be adversely affected by cool summer weather.
The Cooling and Cogeneration Systems segment consists of the Company's
Tecogen division and the Company's ThermoLyte Corporation subsidiary. Tecogen
develops, markets, and services preassembled cooling and cogeneration systems
fueled principally by natural gas for sale to a wide range of commercial,
institutional, industrial, and multi-unit residential users. Certain
large-capacity cooling systems are manufactured for Tecogen by FES. Tecogen also
conducts research and development on natural gas-engine technology, applications
of thermal energy, and pollution-control technologies. ThermoLyte is developing
and commercializing various propane-powered lighting products. In July 1998,
ThermoLyte acquired the outstanding stock of Optronics, Inc. Optronics makes
over 400 lighting and associated products, including tail-lights and turn-signal
lights for trailers, portable lights for fishing and hunting, and docking
lights, and serves the automotive, sporting goods, and marine markets.
The Company's revenues by industry segment are:
Three Months Ended
----------------------
January 2, January 3,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------
Traffic Control $ 52,104 $ 38,752
Industrial Refrigeration Systems 16,829 17,009
Cooling and Cogeneration Systems 7,350 2,958
Intersegment Sales Elimination (22) (23)
-------- --------
$ 76,261 $ 58,696
======== ========
Results of Operations
First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
Total revenues increased to $76.3 million in the first quarter of fiscal
1999 from $58.7 million in the first quarter of fiscal 1998, primarily due to an
increase in revenues from the Traffic Control segment of $13.4 million. Traffic
Control segment revenues increased due to the inclusion of revenues from Peek
plc, acquired in November 1997, for the full three-month period in fiscal 1999.
This revenue increase was offset in part by a decrease in Peek's revenues at
subsidiaries located in the United Kingdom and the Netherlands, primarily due to
a decrease in orders from governmental entities as a result of a reduction in
funding
12
<PAGE>
First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
(continued)
allocated by those entities to traffic control projects. Industrial
Refrigeration Systems segment revenues were relatively unchanged at $16.8
million in the first quarter of fiscal 1999 and $17.0 million in the first
quarter of fiscal 1998. Cooling and Cogeneration Systems segment revenues
increased to $7.4 million in the first quarter of fiscal 1999 from $3.0 million
in the first quarter of fiscal 1998, principally due to the inclusion of $2.5
million in revenues from Optronics, acquired in July 1998, and increased demand
for gas-fueled cooling systems.
The gross profit margin decreased to 28% in the first quarter of fiscal 1999
from 31% in the first quarter of fiscal 1998, principally due to a decrease in
margins at Peek. Peek's gross profit margin decreased to 31% in the first
quarter of fiscal 1999 from 35% in the first quarter of fiscal 1998, primarily
due to a change in sales mix at its subsidiary located in the Netherlands. The
fiscal 1998 period included a charge of $0.9 million relating to the sale of
inventories revalued at the date of the acquisition of Peek. Changes in gross
profit margin from fiscal 1998 to fiscal 1999 at the Industrial Refrigeration
Systems segment and the Cooling and Cogeneration Systems segment did not
materially impact the Company's consolidated gross profit margin.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 20% in the first quarter of fiscal 1999 from 22% in the first
quarter of fiscal 1998, principally due to a reduction in expenses at Peek as a
result of certain restructuring activities in connection with its acquisition.
Research and development expenses were $1.8 million in the first quarter of
fiscal 1999, compared with $1.6 million in the first quarter of fiscal 1998. An
increase in research and development expenses of $0.6 million at Peek due to the
inclusion of expenses for the full three-month period in fiscal 1999, was offset
in part by a reduction in spending on natural gas-engine products and
propane-powered lighting products due to the completion of a phase of
development efforts for these products.
Interest income decreased to $0.3 million in the first quarter of fiscal
1999 from $0.6 million in the first quarter of fiscal 1998, principally due to
lower average invested balances resulting from the use of cash during fiscal
1998 to fund acquisitions and repay short-term obligations assumed in connection
with the Peek acquisition. Interest expense increased to $2.3 million in the
first quarter of fiscal 1999 from $1.4 million in the first quarter of fiscal
1998, principally due to borrowings from Thermo Electron to finance the November
1997 acquisition of Peek.
The effective tax rate increased to 48% in the first quarter of fiscal 1999
from 45% in the first quarter of fiscal 1998. The effective tax rates exceeded
the statutory federal income tax rate primarily due to the impact of
nondeductible amortization of cost in excess of net assets of acquired
companies. The effective tax rate increased in fiscal 1999 from fiscal 1998,
principally due to the larger relative impact of nondeductible amortization of
cost in excess of net assets of acquired companies, as well as the inclusion of
nondeductible amortization relating to Peek for the full three-month period in
fiscal 1999.
13
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First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
(continued)
In accordance with the provisions of Accounting Principles Board Opinion No.
30 concerning reporting the effect of disposal of a segment of a business, the
results of operations of the Engines segment have been classified as
discontinued in the accompanying statement of income for fiscal 1998, and have
been recorded as a reduction of previously established reserves in fiscal 1999
(Note 4). The loss from discontinued operations was $0.3 million in the first
quarter of fiscal 1999 and $0.2 million in the first quarter of fiscal 1998.
Liquidity and Capital Resources
Consolidated working capital was $35.7 million at January 2, 1999, compared
with $35.8 million at October 3, 1998. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $30.0 million at January
2, 1999, compared with $26.3 million at October 3, 1998. Of the $30.0 million
balance at January 2, 1999, $6.0 million was held by ThermoLyte, and the
remainder was held by the Company and its wholly owned subsidiaries. At January
2, 1999, $10.0 million of the Company's cash and cash equivalents was held by
its foreign subsidiaries. While this cash can be used outside of the United
States, repatriation of this cash into the United States would be subject to a
United States tax. Additionally, working capital at January 2, 1999, includes a
liability for common stock of subsidiary subject to redemption of $1.4 million,
which represents ThermoLyte's common stock, redeemable at the option of the
holder in December 1999, and a payable for redeemed common stock of subsidiary
of $17.1 million, which represents the redemption value of ThermoLyte common
stock redeemed in December 1998. The Company's ownership of ThermoLyte increased
to 98% following the December 1998 redemption.
During the first quarter of fiscal 1999, $0.8 million of cash was provided
by operating activities, which consisted of $0.5 million provided by continuing
operations and $0.3 million provided by discontinued operations. Cash provided
by continuing operations was reduced by an increase in accounts receivable of
$15.9 million and was improved by a reduction in inventories of $7.2 million.
These changes were principally due to an increased level of sales activity in
the first quarter of fiscal 1999 as compared with the fourth quarter of fiscal
1998. Accounts receivable also increased due to slower payment patterns at
certain Peek subsidiaries. In addition, $2.4 million of cash was provided by an
increase in accounts payable, principally due to the timing of payments.
Discontinued operations provided $0.3 million of cash, principally as a result
of efforts to reduce working capital at that business.
During the first quarter of fiscal 1999, the Company's primary investing
activities, excluding available-for-sale investments activity, included the sale
of the industrial and marine engine product lines of its Crusader Engines
division for $6.4 million in cash and a receivable of $1.0 million (Note 4), and
the acquisition of Linne Trafiksystem AB,
14
<PAGE>
Liquidity and Capital Resources (continued)
acquired in December 1998, for $1.6 million in cash. In addition, the Company
expended $2.2 million for purchases of property, plant, and equipment and rental
assets, and received $0.4 million in proceeds from the sale of property, plant,
and equipment and rental assets. During the remainder of fiscal 1999, the
Company expects to make capital expenditures for the purchase of property,
plant, and equipment and rental assets of approximately $7 million.
The Company's financing activities used $0.1 million of cash during the
first quarter of fiscal 1999.
The Company's $160.0 million promissory note to Thermo Electron is due in
November 1999. Thermo Electron has issued a commitment letter to the Company
pursuant to which Thermo Electron has agreed to refinance the promissory note at
the option of the Company, on its maturity date, with the net proceeds from its
October 1998 offering of 7.625% Notes due 2008, and other available cash (Note
6). In accordance with the commitment letter, the new promissory note from the
Company to Thermo Electron would be due in 2008 and bear interest at a rate of
7.625%. In addition, shareholders of ThermoLyte common stock redeemed $17.1
million of redeemable common stock in December 1998. The remaining $1.4 million
of ThermoLyte's common stock is subject to redemption at the option of the
holder in December 1999. The Company's Board of Directors has authorized
additional borrowings of up to $10 million from Thermo Electron to fund working
capital requirements. The Company believes its existing resources, together with
the funding expected from Thermo Electron as described above, are sufficient to
meet the capital requirements of its existing operations for the foreseeable
future.
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) testing and developing upgrades, if
necessary, for the Company's current products and certain discontinued products;
(iii) contacting key suppliers and vendors to determine their year 2000
compliance status; and (iv) 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 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, the Company
15
<PAGE>
Year 2000 (continued)
does not believe it is required to make any material upgrades to its facilities.
The Company is currently upgrading or replacing its material noncompliant
information technology systems, and this process was approximately 60% complete
as of January 2, 1999. The Company expects that all of its material information
technology systems and critical facilities will be year 2000 compliant by
December 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, may not be year 2000 compliant. The Company is continuing to test and
evaluate such products. The Company is focusing its efforts on products that are
still under warranty, early in their expected life, and/or may pose a safety
risk. The Company is offering upgrades and/or identifying potential solutions
where reasonably practicable.
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. The Company has started to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has completed the majority of its
assessment of third party risk, and expects to be substantially completed by
August 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 and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses to third parties (External Costs) related
to year 2000 issues of approximately $1.2 million as of January 2, 1999, and the
total External Costs of year 2000 remediation are expected to be approximately
$2.3 million. Of the External Costs incurred
16
<PAGE>
Year 2000 (continued)
as of January 2, 1999, approximately $0.5 million was spent on testing and
upgrading information technology systems, which was expended in fiscal 1998 and
represented 25% of the Company's total information technology budget for that
period. In addition, $0.6 million was spent on testing and upgrading products
and $0.1 million was spent to test and upgrade facilities. Year 2000 costs were
funded from working capital. 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.
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.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material 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 significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates and interest rates has not changed materially from its exposure
at fiscal year-end 1998.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding the exhibits.
(b) Reports on Form 8-K
On December 10, 1998, the Company filed a Current Report on Form 8-K with
respect to a proposed corporate reorganization by the Company's parent
corporation, Thermo Electron Corporation, involving certain of Thermo Electron's
subsidiaries, including the Company.
18
<PAGE>
THERMO POWER CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 10th day of February 1999.
THERMO POWER CORPORATION
/s/ Paul F. Kelleher
------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
------------------------
Theo Melas-Kyriazi
Chief Financial Officer
19
<PAGE>
THERMO POWER CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------------------------------------------------------------------------------
10.1 Commitment Letter dated February 4, 1999, issued by Thermo Electron
to the Company to refinance $160,000,000 Promissory Note dated
November 17, 1997, issued by the Company to Thermo Electron.
27 Financial Data Schedule.
Exhibit 10.1
February 4, 1999
Thermo Power Corporation
45 First Avenue
Waltham, MA 02454
RE: $160,000,000 Promissory Note due November 1999
Thermo Electron hereby confirms its commitment to refinance the above referenced
note upon its maturity on November 16, 1999, under the following terms and
conditions:
Amount: Up to but not exceeding $160,000,000.00 USD
Maturity: October 30, 2008
Interest Rate: 7.625% per annum payable semi-annually in arrears each April
30th and October 30th, assuming a 360-day year consisting of
twelve 30-day months.
Prepayment: Note can be prepaid in full or in part at any time
without penalty
You must notify Thermo Electron Corporation (attn: Treasurer) no later than
October 15, 1999 if you intend to accept this refinancing option, and the amount
required. This refinancing will only be available once all amounts due and owing
to Thermo Electron Corporation under the existing promissory note have been
satisfied.
Thermo Electron Corporation
/s/ Kenneth J. Apicerno
By: Kenneth J. Apicerno
Title: Treasurer
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