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 July 3, 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 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
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 July 30, 1999
Common Stock, $.10 par value 11,908,573
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO POWER CORPORATION
Consolidated Balance Sheet
(Unaudited)
<S> <C> <C>
Assets
July 3, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Current Assets:
Cash and cash equivalents $ 10,265 $22,240
Advance to affiliate (Note 10) 657 -
Available-for-sale investments, at quoted market value (amortized cost - 4,018
of $4,017)
Accounts receivable, less allowances of $9,664 and $10,299 58,117 52,098
Unbilled contract costs and fees 6,526 10,718
Inventories:
Raw materials 17,635 21,549
Work in process 10,459 14,422
Finished goods 8,041 8,013
Prepaid income taxes 11,008 11,205
Net assets of discontinued operations (Note 4) - 8,525
Other current assets (Note 4) 3,869 2,421
Due from parent company and affiliated companies - 732
-------- --------
126,577 155,941
-------- --------
Rental Assets, at Cost 17,353 14,884
Less: Accumulated depreciation and amortization 5,310 4,766
-------- --------
12,043 10,118
-------- --------
Property, Plant, and Equipment, at Cost 32,775 34,433
Less: Accumulated depreciation and amortization 11,208 9,562
-------- --------
21,567 24,871
-------- --------
Other Assets 4,648 4,976
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 6) 147,370 155,729
-------- --------
$312,205 $351,635
======== ========
2
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THERMO POWER CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 3, October 3,
(In thousands except share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Notes payable and current maturities of long-term obligations $ 4,696 $ 396
(includes $1,458 advanced from affiliate in fiscal 1999; Note 10)
Accounts payable 27,186 30,899
Accrued payroll and employee benefits 7,340 7,885
Billings in excess of contract costs and fees 6,301 8,517
Accrued income taxes 7,226 10,048
Accrued warranty costs 6,491 6,293
Common stock of subsidiary subject to redemption ($1,380 and $18,450 1,380 18,372
redemption value; Note 9)
Accrued acquisition expenses (Note 5) 9,770 10,992
Other accrued expenses (Notes 4 and 6) 25,096 26,777
Due to parent company and affiliated companies 1,280 -
-------- --------
96,766 120,179
-------- --------
Deferred Income Taxes 852 1,093
-------- --------
Long-term Obligations (includes $160,000 due to parent company; Note 7) 160,439 160,499
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 30,000,000 shares authorized; 1,249 1,249
12,493,371 shares issued
Capital in excess of par value 55,505 55,401
Retained earnings 5,771 16,147
Treasury stock at cost, 601,619 and 663,208 shares (4,178) (4,600)
Accumulated other comprehensive items (Note 2) (4,199) 1,667
-------- --------
54,148 69,864
-------- --------
$312,205 $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 Operations
(Unaudited)
Three Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Revenues $68,292 $58,345
------- -------
Costs and Operating Expenses:
Cost of revenues (Note 6) 52,865 39,325
Selling, general, and administrative expenses (Note 6) 13,693 12,310
Research and development expenses 2,211 1,847
Restructuring costs (Note 6) 8,913 -
------- -------
77,682 53,482
------- -------
Operating Income (Loss) (9,390) 4,863
Interest Income 137 416
Interest Expense (includes $1,957 and $2,335 to related party) (2,029) (2,483)
------- -------
Income (Loss) from Continuing Operations Before Income Taxes and (11,282) 2,796
Minority Interest
Provision (Benefit) for Income Taxes (1,638) 1,368
Minority Interest Expense - 78
------- -------
Income (Loss) from Continuing Operations (9,644) 1,350
Income from Discontinued Operations (Note 4) - 41
------- -------
Net Income (Loss) $(9,644) $ 1,391
======= =======
Basic and Diluted Earnings (Loss) per Share from Continuing Operations (Note 3) $ (.81) $ .11
======= =======
Basic and Diluted Earnings (Loss) per Share (Note 3) $ (.81) $ .12
======= =======
Weighted Average Shares (Note 3):
Basic 11,885 11,823
======= =======
Diluted 11,885 11,951
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO POWER CORPORATION
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $205,734 $179,046
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 6) 153,234 125,882
Selling, general, and administrative expenses (Note 6) 42,649 37,853
Research and development expenses 5,622 6,031
Restructuring costs (Note 6) 9,614 -
-------- --------
211,119 169,766
-------- --------
Operating Income (Loss) (5,385) 9,280
Interest Income (includes $257 from related party in fiscal 1998) 504 1,673
Interest Expense (includes $6,162 and $5,824 to related party) (6,492) (6,544)
-------- --------
Income (Loss) from Continuing Operations Before Income Taxes and (11,373) 4,409
Minority Interest
Provision (Benefit) for Income Taxes (1,075) 2,568
Minority Interest Expense 78 345
-------- --------
Income (Loss) from Continuing Operations (10,376) 1,496
Loss from Discontinued Operations (Note 4) - (338)
-------- --------
Net Income (Loss) $(10,376) $ 1,158
======== ========
Basic and Diluted Earnings (Loss) per Share from Continuing Operations (Note 3) $ (.88) $ .13
======== ========
Basic and Diluted Earnings (Loss) per Share (Note 3) $ (.88) $ .10
======== ========
Weighted Average Shares (Note 3):
Basic 11,853 11,841
======== ========
Diluted 11,853 11,931
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMO POWER CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Operating Activities:
Net income (loss) $ (10,376) $ 1,158
Adjustment to reconcile net income (loss) to income (loss) from continuing
operations:
Loss from discontinued operations (Note 4) - 338
---------- ---------
Income (loss) from continuing operations (10,376) 1,496
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by operating activities of continuing operations:
Depreciation and amortization 8,004 8,001
Provision for losses on accounts receivable (Note 6) 885 167
Noncash restructuring costs (Note 6) 5,719 -
Minority interest expense 78 345
Change in deferred income taxes (149) (877)
Other noncash items (Note 6) 2,988 (53)
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable (9,644) (3,531)
Inventories 2,979 (830)
Unbilled contract costs and fees 4,019 (890)
Other current assets (517) (35)
Accounts payable (2,348) (3,617)
Other current liabilities (3,673) 393
---------- ---------
Net cash provided by (used in) continuing operations (2,035) 569
Net cash provided by discontinued operations 1,000 4,510
---------- ---------
Net cash provided by (used in) operating activities (1,035) 5,079
---------- ---------
Investing Activities:
Acquisitions, net of cash acquired (1,587) (148,854)
Proceeds from sale of a business (Note 4) 6,393 -
Proceeds from sale of a business to related party - 19,117
Proceeds from sale and maturities of available-for-sale investments 4,018 5,011
Advances to affiliate, net (Note 10) (657) -
Increase in rental assets (3,706) (2,374)
Proceeds from sale of rental assets 740 1,230
Purchases of property, plant, and equipment (2,939) (5,662)
Proceeds from sale of property, plant and equipment 189 2,066
Other 53 (783)
---------- ---------
Net cash provided by (used in) continuing operations 2,504 (130,249)
Net cash used in discontinued operations - (173)
---------- ---------
Net cash provided by (used in) investing activities $ 2,504 $(130,422)
---------- ---------
6
<PAGE>
THERMO POWER CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Financing Activities:
Redemption of subsidiary common stock (Note 9) $ (17,070) $ -
Issuance of long-term obligation to parent company - 160,000
Increase (decrease) in short-term obligations 4,389 (27,402)
Purchases of Company common stock - (1,390)
Net proceeds from issuance of Company common stock 526 537
Repayment of long-term obligations (275) -
---------- ---------
Net cash provided by (used in) financing activities of (12,430) 131,745
continuing operations
---------- ---------
Exchange Rate Effect on Cash (1,014) 171
---------- ---------
Increase (Decrease) in Cash and Cash Equivalents (11,975) 6,573
Cash and Cash Equivalents at Beginning of Period 22,240 19,347
---------- ---------
Cash and Cash Equivalents at End of Period $ 10,265 $ 25,920
========== =========
Noncash Activities:
Fair value of assets of acquired companies $ 1,767 $ 271,109
Cash paid for acquired companies (1,587) (164,435)
Cash paid in prior year for acquired company - (2,301)
---------- ---------
Liabilities assumed of acquired companies $ 180 $ 104,373
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
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 July 3, 1999, the results of
operations for the three- and nine-month periods ended July 3, 1999, and July 4,
1998, and the cash flows for the nine-month periods ended July 3, 1999, and July
4, 1998. The Company's results of operations for the nine-month periods ended
July 3, 1999, and July 4, 1998, include 39 weeks and 40 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.
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. During the third quarter of fiscal 1999 and
1998, the Company had a comprehensive loss of $11,607,000 and $104,000,
respectively. During the first nine months of fiscal 1999 and 1998, the Company
had a comprehensive loss of $16,242,000 and $618,000, respectively.
</TABLE>
3. Earnings (Loss) per Share
<TABLE>
<CAPTION>
Basic and diluted earnings (loss) per share were calculated as follows:
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
July 3, July 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Income (Loss) from Continuing Operations $(9,644) $ 1,350 $(10,376) $ 1,496
Income (Loss) from Discontinued Operations - 41 - (338)
------- -------- -------- --------
Net Income (Loss) $(9,644) $ 1,391 $(10,376) $ 1,158
======= ======== ======== ========
Basic
Weighted Average Shares 11,885 11,823 11,853 11,841
------- -------- -------- --------
Basic Earnings (Loss) per Share:
Continuing operations $ (.81) $ .11 $ (.88) $ .13
Discontinued operations - .01 - (.03)
------- -------- -------- --------
$ (.81) $ .12 $ (.88) $ .10
======= ======== ======== ========
8
<PAGE>
3. Earnings (Loss) per Share (continued)
Three Months Ended Nine Months Ended
July 3, July 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Diluted
Weighted Average Shares 11,885 11,823 11,853 11,841
Effect of Stock Options - 128 - 90
------- -------- -------- --------
Weighted Average Shares, as Adjusted 11,885 11,951 11,853 11,931
------- -------- -------- --------
Diluted Earnings (Loss) per Share:
Continuing operations $ (.81) $ .11 $ (.88) $ .13
Discontinued operations - .01 - (.03)
------- -------- -------- --------
$ (.81) $ .12 $ (.88) $ .10
======= ======== ======== ========
The computation of diluted loss per share for the fiscal 1999 periods
excludes the effect of assuming the exercise of outstanding stock options as the
effect would be antidilutive due to the Company's net loss. As of July 3, 1999,
there were 1,231,000 of such options outstanding, with exercise prices ranging
from $6.40 to $11.90 per share. The computation of diluted earnings per share
for the fiscal 1998 periods excluded the effect of certain outstanding stock
options as they were antidilutive.
4. Discontinued Operations
During fiscal 1998, the Company adopted a plan to divest its Engines
segment, which consisted 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 operations for fiscal 1998, and have been recorded as
a reduction of previously established reserves in fiscal 1999. The Engines
segment had revenues from external customers through the date of disposition and
a net loss for the first nine months of fiscal 1999 of $2,695,000 and $413,000,
respectively. The revenues from external customers and net loss from the Engines
segment for the first nine months of fiscal 1998 were $17,993,000 and $338,000,
respectively. The reserve for estimated losses on disposal of discontinued
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 nine months 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 $645,000. The remaining
reserve at July 3, 1999, was $896,000, primarily representing continuing
warranty obligations and a reserve for estimated losses from operations as the
Company winds down this business following its divestiture. 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 consisted 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 an increase in the reserve for estimated losses on disposal of
discontinued operations.
9
<PAGE>
5. Accrued Acquisition Expenses
The Company has undertaken restructuring activities at certain acquired
businesses, principally Peek plc, acquired in November 1997. The Company's
restructuring activities at acquired businesses, accounted for in accordance
with Emerging Issues Task Force Pronouncement (EITF) 95-3, have primarily
included the completion of acquired loss contracts at businesses being closed,
abandonment of excess facilities, and reductions in staffing levels. In
accordance with EITF 95-3, the Company recorded costs in connection with these
restructuring activities as part of the cost of acquisitions and finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. A summary of the changes in accrued acquisition expenses follows:
</TABLE>
<TABLE>
<CAPTION>
Acquired Abandonment
Loss of Excess
(In thousands) Contracts Facilities Severance Other Total
- ------------------------------- -------------- -------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 3, 1998 $ 8,906 $ 1,425 $ 639 $ 22 $10,992
Reserves established - - 99 - 99
Usage (330) (283) (592) - (1,205)
Decrease due to - - - (22) (22)
finalization of
restructuring plans,
recorded as a decrease in
cost in excess of net
assets of acquired
companies
Currency translation (89) - (5) - (94)
------- ------- ------- ------- -------
Balance at July 3, 1999 $ 8,487 $ 1,142 $ 141 $ - $ 9,770
======= ======= ======= ======= =======
6. Restructuring and Related Costs
During the third quarter of fiscal 1999, the Company undertook certain
restructuring actions, which included a decision by the Cooling and Cogeneration
Systems segment to divest its ThermoLyte Corporation subsidiary, as well as a
decision by the Traffic Control segment to outsource certain manufacturing and
warranty functions and reduce staffing levels, and a decision by the Industrial
Refrigeration Systems segment to reduce staffing levels. In addition, the
Traffic Control segment wrote down certain assets at Peek's sales and service
subsidiaries located in Malaysia and Croatia that have become impaired due to
business conditions in those regions. In connection with these actions, the
Company recorded restructuring and related costs of $12.6 million, including
$8.9 million of restructuring costs, inventory provisions of $3.0 million, costs
for outsourcing certain warranty repairs of $0.5 million, and a provision for
uncollectible accounts receivable of $0.2 million. Of the restructuring and
related costs of $12.6 million, $7.9 million, $4.6 million, and $0.1 million
were recorded by the Traffic Control, Cooling and Cogeneration Systems, and
Industrial Refrigeration Systems segments, respectively. Restructuring costs
include $4.1 million for the write-off of cost in excess of net assets of
acquired companies, of which $2.9 million was to reduce the carrying value of
ThermoLyte to the estimated proceeds from its sale and $1.2 million was to
reduce the carrying value of Peek's subsidiaries located in Malaysia and Croatia
due to projected undiscounted cash flows from their operations being
insufficient to recover the Company's investment. In addition, restructuring
costs include $2.0 million of severance costs for approximately 63 employees
across all functions; $1.6 million for the write-down of certain fixed assets,
principally at operations being exited; and $1.2 million for lease costs at
facilities being abandoned. Provisions for severance and leases were accounted
for in accordance with EITF 94-3. The inventory and warranty provisions are
included in cost of revenues and the charge for uncollectible accounts
receivable is included in selling, general, and administrative expenses in the
accompanying statement of operations. Inventory provisions represent a
write-down of inventories to estimated salvage value and consist of $1.9 million
for raw materials for product lines being outsourced, $1.0 million for a
discontinued product line, and $0.1 million for inventories at Malaysia and
Croatia. Unaudited revenues and operating
10
<PAGE>
6. Restructuring and Related Costs (continued)
losses for ThermoLyte, excluding restructuring and related costs, were $9.8
million and $0.1 million, respectively, for the first nine months of fiscal
1999, and $3.1 million and $1.4 million, respectively, for fiscal 1998. The
Company is actively seeking a buyer for ThermoLyte's principal operations and
expects to complete a transaction in the next twelve months, although there can
be no assurance that this will occur.
During the second quarter of fiscal 1999, the Company recorded
restructuring costs of $0.7 million at the Traffic Control segment related to
actions taken at its Peek subsidiary. The restructuring costs, which were
accounted for in accordance with EITF 94-3, consisted of $0.4 million of
severance costs for approximately 70 employees across all functions, $0.2
million for lease costs at facilities being abandoned in connection with the
consolidation of facilities, and an asset write-down of $0.1 million related to
the consolidation of such facilities.
The Company expects to incur additional restructuring costs totaling
approximately $2.5 million, principally at the Traffic Control segment, through
December 1999 for costs that will be recorded when incurred, such as additional
severance and fees associated with outsourcing certain product lines. Completion
of the Company's restructuring plans is expected to occur by December 1999. As
of July 3, 1999, the Company had terminated 49 employees of the 133 employees
for whom severance had been provided in the first nine months of fiscal 1999. A
summary of the changes in accrued restructuring costs, included in other accrued
expenses in the accompanying balance sheet, follows:
Abandonment
of Excess
(In thousands) Severance Facilities Total
- ------------------------------------------------ -------------- -------------- -------------- -------------
Balance at October 3, 1998 $ - $ - $ -
Provision charged to expense 2,430 1,465 3,895
Usage (246) (28) (274)
Currency translation (58) (38) (96)
------ ------- -------
Balance at July 3, 1999 $2,126 $ 1,399 $ 3,525
====== ======= =======
7. Promissory Note
The Company's $160.0 million promissory note to Thermo Electron
Corporation is due in November 1999. In February 1999, 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 proceeds from its October 1998 offering of 7.625% Notes due
2008, and other available cash. 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%. 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.
8. Proposed Merger
On May 5, 1999, the Company entered into a definitive agreement and plan
of merger with Thermo Electron, under which Thermo Electron would acquire all of
the outstanding shares of Company common stock held by minority shareholders.
The Board of Directors of the Company unanimously approved the merger agreement
based on a recommendation by a special committee of the Board of Directors,
consisting solely of outside directors of the Company. Under the terms of the
merger agreement, the Company would become a wholly owned subsidiary of Thermo
Electron. Each issued and outstanding share of Company common stock not already
owned by Thermo Electron would be converted into the right to receive $12.00 in
cash. Following the merger, the Company's common stock would cease to be
publicly traded. The completion of this merger is subject to shareholder
approval of the
11
<PAGE>
8. Proposed Merger (continued)
merger agreement and the completion of review by the Securities and Exchange
Commission of certain required filings. Thermo Electron intends to vote all of
its shares of common stock of the Company in favor of approval of the merger
agreement and, therefore, approval of the merger agreement is assured. This
merger is expected to be completed in the fourth quarter of calendar 1999.
9. Redemption of ThermoLyte Common Stock
In December 1998, holders of 1,707,000 shares of ThermoLyte Corporation
common stock redeemed their shares for $10.00 per share in cash, or an aggregate
of $17,070,000. Subsequent to such redemption, 138,000 redeemable shares of
ThermoLyte common stock remained outstanding and are redeemable in December 1999
at $10.00 per share. The Company's ownership of ThermoLyte increased to 98% as a
result of such redemption.
10. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points,
set at the beginning of each month. Thermo Electron is contractually required to
maintain cash, cash equivalents, and/or immediately available bank lines of
credit equal to at least 50% of all funds invested under this cash management
arrangement by all Thermo Electron subsidiaries other than wholly owned
subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice. Amounts
invested in this arrangement are included in "advance to affiliate" in the
accompanying balance sheet.
In addition, under the new domestic cash management arrangement, amounts
borrowed from Thermo Electron by the Company for domestic cash management
purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 150 basis
points, set at the beginning of each month. Amounts borrowed under this
arrangement are included in "notes payable and current maturities of long-term
obligations" in the accompanying balance sheet.
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 immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
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, 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.
12
<PAGE>
Overview (continued)
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. In addition,
a significant portion of the Traffic Control segment's revenues are generated by
sales to distributors whose customers are governmental entities. A decrease in
demand from 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 conversion to the
Euro currency, which began on 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, 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 sells
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. In
connection with restructuring actions commenced during the third quarter of
fiscal 1999, the Company has decided to divest its ThermoLyte subsidiary (Note
6). Unaudited revenues and operating losses for ThermoLyte, excluding
restructuring and related costs, were $9.8 million and $0.1 million,
respectively, for the first nine months of fiscal 1999, and $3.1 million and
$1.4 million, respectively, for fiscal 1998.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Overview (continued)
The Company's revenues by industry segment are:
Three Months Ended Nine Months Ended
July 3, July 4, July 3, July 4,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Traffic Control $ 36,912 $ 34,292 $119,637 $112,027
Industrial Refrigeration Systems 22,747 20,149 60,473 55,545
Cooling and Cogeneration Systems 8,656 4,193 25,830 11,948
Intersegment Sales Elimination (23) (289) (206) (474)
-------- --------- ------- --------
$ 68,292 $ 58,345 $205,734 $179,046
======== ========= ======== ========
Results of Operations
Third Quarter Fiscal 1999 Compared With Third Quarter Fiscal 1998
Total revenues increased to $68.3 million in the third quarter of fiscal
1999 from $58.3 million in the third quarter of fiscal 1998, due in part to an
increase at the Cooling and Cogeneration Systems segment of $4.5 million.
Revenues at the Cooling and Cogeneration Systems segment increased principally
due to the inclusion of $3.1 million in revenues from Optronics, acquired July
1998, and increased demand for gas-fueled cooling systems. Revenues at the
Traffic Control segment increased to $36.9 million in fiscal 1999 from $34.3
million in fiscal 1998, principally due to an increase in revenues in
Scandinavia, which includes Linne Trafik-System AB, acquired in December 1998,
offset in part by a decrease in orders from governmental entities as a result of
a reduction in funding allocated to traffic-control projects, primarily in the
United Kingdom. The unfavorable effects of currency translation, due to an
increase in the value of the U.S. dollar relative to currencies in foreign
countries in which the Company operates, decreased revenues at the Traffic
Control segment by $1.1 million in fiscal 1999. Industrial Refrigeration Systems
segment revenues increased to $22.7 million in fiscal 1999 from $20.1 million in
fiscal 1998, primarily due to increased demand for standard industrial
refrigeration packages at FES.
The gross profit margin decreased to 23% in the third quarter of fiscal
1999 from 33% in the third quarter of fiscal 1998. The gross profit margin at
the Traffic Control segment decreased to 27% in fiscal 1999 from 39% in fiscal
1998, primarily due to inventory provisions of $2.0 million and costs for
outsourcing certain warranty repairs of $0.5 million incurred in connection with
certain restructuring actions (Note 6). In addition, the effect of a change in
sales mix at its subsidiary located in the Netherlands further reduced the gross
profit margin at the Traffic Control segment. The gross profit margin at the
Cooling and Cogeneration Systems segment decreased to 11% in fiscal 1999 from
19% in fiscal 1998, principally due to inventory provisions of $1.0 million
incurred in connection with restructuring actions relating to the divestiture of
ThermoLyte (Note 6), offset in part by the inclusion of higher margin revenue
from Optronics.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 20% in the third quarter of fiscal 1999 from 21% in the third
quarter of fiscal 1998, principally due to increased revenues at each segment.
Selling, general, and administrative expenses in the third quarter of 1999
includes a provision for uncollectible accounts receivable of $0.2 million
incurred by the Traffic Control segment in connection with certain restructuring
actions (Note 6).
Research and development expenses increased to $2.2 million in the third
quarter of fiscal 1999 from $1.8 million in the third quarter of fiscal 1998.
Research and development expenses increased $0.6 million at the Traffic Control
segment primarily due to increased product development in the United States and
Sweden. This increase was offset in part by lower expenses at the Cooling and
Cogeneration Systems segment due to a reduction in spending on natural
gas-engine products and propane-powered lighting products as a result of the
completion of a phase of development efforts for these products.
14
<PAGE>
Third Quarter Fiscal 1999 Compared With Third Quarter Fiscal 1998 (continued)
During the third quarter of fiscal 1999, the Company undertook certain
restructuring actions, which included a decision by the Cooling and Cogeneration
Systems segment to divest its ThermoLyte subsidiary, a decision by the Traffic
Control segment to outsource certain manufacturing and warranty functions and
reduce staffing levels, and a decision by the Industrial Refrigeration Systems
segment to reduce staffing levels. In addition, the Traffic Control segment
wrote down certain assets at Peek's sales and service subsidiaries located in
Malaysia and Croatia that have become impaired due to business conditions in
those regions. In connection with these actions, the Company recorded
restructuring costs of $8.9 million, including $4.1 million for the write-off of
cost in excess of net assets of acquired companies; $2.0 of severance costs;
$1.6 million for the write-down of certain fixed assets, principally at
operations being exited; and $1.2 million for lease costs at facilities being
abandoned (Note 6). Of the total restructuring costs of $8.9 million recorded by
the Company, $5.2 million, $3.6 million, and $0.1 million were recorded by the
Traffic Control, Cooling and Cogeneration Systems, and Industrial Refrigeration
Systems segments, respectively. The Company expects to incur additional
restructuring costs totaling approximately $2.5 million, principally at the
Traffic Control segment, through December 1999.
Interest income decreased to $0.1 million in the third quarter of fiscal
1999 from $0.4 million in the third quarter of fiscal 1998. This decrease was
principally due to lower average invested balances resulting from the use of
cash to redeem ThermoLyte common stock in fiscal 1999 and to fund acquisitions
and repay short-term obligations assumed in connection with the Peek acquisition
in fiscal 1998. Interest expense decreased to $2.0 million in the third quarter
of fiscal 1999 from $2.5 million in the third quarter of fiscal 1998,
principally due to the effect of lower interest rates.
The Company recorded a tax benefit of $1.6 million in the third quarter of
1999 on pretax losses of $11.3 million, resulting in an effective tax rate of
15%. The effective tax rate was lower than the statutory federal income tax rate
principally due to nondeductible charges, including the write-off of cost in
excess of net assets of acquired companies of $4.1 million (Note 6) and the
amortization of $1.1 million of cost in excess of net assets of acquired
companies, and foreign tax rate differentials. The Company recorded a tax
provision of $1.4 million in the third quarter of fiscal 1998 on pretax income
of $2.8 million, resulting in an effective tax rate of 49%. The effective tax
rate was higher than the statutory federal income tax rate, principally due to
the effect of $1.1 million of nondeductible amortization of cost in excess of
net assets of acquired companies, offset in part by the effect of foreign tax
rate differentials.
Minority interest expense of $0.1 million in the third quarter of fiscal
1998 represents the accretion of ThermoLyte common stock subject to redemption,
which was accreted to its full redemption value in December 1998.
In accordance with the provisions of Accounting Principles Board Opinion
(APB) 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 operations for fiscal 1998, and
have been recorded as a reduction of previously established reserves in fiscal
1999 (Note 4). The Company had a loss from discontinued operations of $0.1
million in the third quarter of fiscal 1999 and income from discontinued
operations of $41,000 in the third quarter of fiscal 1998. The Company retained
liability for certain warranty obligations of this business. The Company does
not expect that this obligation, or other costs associated with winding down
this business, will materially affect its results of operations or cash flows.
First Nine Months Fiscal 1999 Compared With First Nine Months Fiscal 1998
Total revenues increased to $205.7 million in the first nine months of
fiscal 1999 from $179.0 million in the first nine months of fiscal 1998,
primarily due to an increase at the Cooling and Cogeneration segment of $13.9
million and an increase at the Traffic Control segment of $7.6 million. Cooling
and Cogeneration Systems segment revenues increased principally due to the
inclusion of $9.3 million of revenues from Optronics, acquired in July 1998, and
increased demand for gas-fueled cooling systems. Revenues increased at the
Traffic Control segment in fiscal 1999 due to the inclusion of revenues from
Peek, acquired in November 1997, for the full nine-month period, offset in part
by a decrease in Peek revenues from governmental entities as a result of a
reduction in funding allocated to traffic
15
<PAGE>
First Nine Months Fiscal 1999 Compared With First Nine Months Fiscal 1998 (continued)
control projects, primarily in the Netherlands and the United Kingdom. In
addition, the unfavorable effects of currency translation decreased revenues at
the Traffic Control segment by $0.8 million. Industrial Refrigeration Systems
segment revenues increased to $60.5 million in fiscal 1999 from $55.5 million in
fiscal 1998, primarily due to increased demand for standard industrial
refrigeration packages at FES.
The gross profit margin decreased to 26% in the first nine months of
fiscal 1999 from 30% in the first nine months of fiscal 1998, principally due to
a decrease at the Traffic Control segment. The gross profit margin at the
Traffic Control segment decreased to 30% in fiscal 1999 from 34% in fiscal 1998,
primarily due to the reasons discussed in the results of operations for the
third quarter. These decreases were offset in part by margin improvement at the
U.S. operations of the Traffic Control segment due to certain cost reduction
programs, including outsourcing and purchasing techniques. The fiscal 1998 gross
profit margin included a $0.9 million charge 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
were unchanged at 21% in the first nine months of fiscal 1999 and 1998. Selling,
general, and administrative expenses increased to $42.6 million in fiscal 1999
from $37.9 million in fiscal 1998, principally due to an increase in expenses at
the Cooling and Cogeneration segment, due to the inclusion of expenses from
Optronics, and an increase in expenses at the Traffic Control segment. The
increase in selling, general, and administrative expenses at the Traffic Control
segment was due to the inclusion of expenses from Peek for the full nine-month
period, and was offset in part by the effect of efforts to reduce expenses at
that business.
Research and development expenses decreased to $5.6 million in the first
nine months of fiscal 1999 from $6.0 million in the first nine months of fiscal
1998, primarily due to reduced spending at the Cooling and Cogeneration segment
on natural gas-engine products and propane-powered lighting products, due to the
completion of a phase of development efforts for these products. This decrease
was offset in part by higher research and development expenses at the Traffic
Control segment due to the inclusion of expenses from Peek for the full
nine-month period in fiscal 1999.
During the first nine months of fiscal 1999, the Company undertook certain
restructuring actions and recorded restructuring costs of $9.6 million (Note 6).
Of the total restructuring costs of $9.6 million recorded by the Company, $5.9
million, $3.6 million, and $0.1 million were recorded by the Traffic Control,
Cooling and Cogeneration Systems, and Industrial Refrigeration Systems segments,
respectively. Restructuring costs of $8.9 million were recorded in the third
quarter of fiscal 1999 for the reasons discussed in the results of operations
for the third quarter. In addition, during the second quarter of fiscal 1999,
the Traffic Control segment recorded restructuring costs of $0.7 million,
primarily for severance and abandoned-facility payments relating to the
consolidation of facilities at Peek.
Interest income decreased to $0.5 million in the first nine months of
fiscal 1999 from $1.7 million in the first nine months of fiscal 1998,
principally for the reasons discussed in the results of operations for the third
quarter. Interest expense was unchanged at $6.5 million in the first nine months
of fiscal 1999 and 1998. Interest expense increased in fiscal 1999 due to the
inclusion of interest expense on borrowings from Thermo Electron to finance the
November 1997 acquisition of Peek for the full nine-month period in fiscal 1999.
This increase was offset by a reduction in interest expense due to the repayment
in fiscal 1998 of short-term obligations assumed in connection with the Peek
acquisition and the effect of lower interest rates.
The Company recorded a tax benefit of $1.1 million in the first nine
months of fiscal 1999 on a pretax loss of $11.4 million, resulting in an
effective tax rate of 9%. The effective tax rate was lower than the statutory
federal income tax rate principally due to nondeductible charges, including the
write-off of cost in excess of net assets of acquired companies of $4.1 million
(Note 6) and the amortization of $3.3 million of cost in excess of net assets of
acquired companies, and foreign tax rate differentials. The Company recorded a
tax provision of $2.6 million in the first nine months of fiscal 1998 on pretax
income of $4.4 million, resulting in an effective tax rate of 58%. The
16
<PAGE>
First Nine Months Fiscal 1999 Compared With First Nine Months Fiscal 1998 (continued)
effective tax rate was higher than the statutory federal income tax rate
principally due to the effect of $2.7 million of nondeductible amortization of
cost in excess of net assets of acquired companies, and an increase in the
valuation allowance on net operating loss carryforwards and other tax assets at
the Company's ThermoLyte subsidiary.
Minority interest expense was $0.1 million in the first nine months of
1999, compared with $0.3 million in the first nine months of 1998. Minority
interest expense primarily represents accretion of ThermoLyte common stock
subject to redemption, which was accreted to its full redemption value in
December 1998. In addition, the fiscal 1998 period also includes minority
interest expense on Peek's earnings for the period from November 1997 to January
1998, prior to Peek becoming a wholly owned subsidiary of the Company.
In accordance with the provisions of APB 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 operations 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 $0.5 million in the first nine months of fiscal 1999
and $0.3 million in the first nine months of fiscal 1998.
Liquidity and Capital Resources
Consolidated working capital was $29.8 million at July 3, 1999, compared
with $35.8 million at October 3, 1998. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $10.3 million at July 3,
1999, compared with $26.3 million at October 3, 1998. In addition, the Company
had $0.7 million invested in an advance to affiliate at July 3, 1999. Prior to
the use of a new domestic cash management arrangement between the Company and
Thermo Electron (Note 10), which became effective June 1, 1999, amounts invested
with Thermo Electron were included in cash and cash equivalents. At July 3,
1999, $8.3 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 U.S. would be subject to a U.S. tax.
During the first nine months of fiscal 1999, $1.0 million of cash was used
by operating activities, which consisted of $2.0 million used by continuing
operations and $1.0 million provided by discontinued operations. The use of cash
by continuing operations was increased principally by a $9.6 million increase in
accounts receivable and a $3.7 million decrease in other current liabilities.
Accounts receivable increased primarily due to the timing of shipments at Peek,
FES, and Tecogen, and increased revenue in the third quarter of fiscal 1999 as
compared to the fourth quarter of fiscal 1998 at FES and Tecogen. Other current
liabilities decreased primarily due to a decrease in accrued income taxes, as a
result of a tax benefit recorded on the Company's operating losses in fiscal
1999 and the timing of payments, a decrease in billings in excess of contract
costs and fees, and utilization of acquisition reserves (Note 5). The decrease
in other current liabilities was offset in part by reserves established in
connection with certain restructuring activities (Note 6). Cash was generated by
a $4.0 million decrease in unbilled contract costs and fees and a $3.0 million
decrease in inventories. Inventories decreased primarily at Peek due to a
reduction in inventory levels in the Netherlands, in response to lower revenues,
and lower inventory levels in the United Kingdom, as a result of outsourcing
certain manufacturing functions in connection with restructuring activities
(Note 6). The change in billings in excess of contract costs and fees and
unbilled contract costs and fees was due to the timing of billings and
completion of contracts.
During the first nine months of fiscal 1999, the Company's investing
activities, excluding activity relating to available-for-sale investments and
net advances to affiliate (Note 10), 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 December 1998
acquisition of Linne Trafiksystem AB for $1.6 million in cash. In addition, the
Company expended $6.6 million for purchases of property, plant, and equipment
and rental assets, and received $0.9 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 $3 million.
17
<PAGE>
Liquidity and Capital Resources (continued)
The Company's financing activities used $12.4 million of cash during the
first nine months of fiscal 1999, principally to purchase $17.1 million of
ThermoLyte's common stock subject to redemption, which was redeemed in December
1998 (Note 9). The remaining liability for redeemable common stock of ThermoLyte
of $1.4 million is included in working capital at July 3, 1999. The remaining
ThermoLyte shares are redeemable at the option of the holder in December 1999.
The Company's ownership of ThermoLyte increased to 98% following the December
1998 redemption.
In connection with certain restructuring actions undertaken during fiscal
1999, the Company expects to incur cash expenditures of approximately $3.6
million during the remainder of fiscal 1999 and $3.1 million during fiscal 2000
(Note 6).
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
7). 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%. The Company's Board of Directors has authorized additional borrowings of
up to $10 million from Thermo Electron to fund working capital requirements and
Thermo Electron has expressed its willingness to lend such funds. 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 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, 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) assessing the year 2000 readiness of its 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 non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems 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 non-information technology systems, which efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunications
systems at its critical facilities. The Company is currently in phase two of its
program, during which any material noncompliant information technology systems
or non-information technology systems that were identified during phase one are
prioritized and remediated. Based on its evaluations, the Company does not
believe it is required to make any material upgrades to its critical
non-information technology systems. The Company is currently upgrading or
replacing its material noncompliant information technology systems, and this
process was approximately 80% complete as of July 3, 1999. The Company expects
that all of its material information technology systems and critical
non-information technology systems will be year 2000 compliant by October 1999.
18
<PAGE>
Year 2000 (continued)
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 distributed questionnaires relating to year 2000 compliance to its
significant suppliers and vendors. To date, no significant supplier or vendor
has indicated that it believes 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 completed the majority of its assessment of
third-party risk, and expects to be substantially completed by the end of 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. The Company expects to complete
its contingency plan by October 1999.
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 $1.4 million as of July 3, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $1.9 million. Of the external costs incurred as of July 3, 1999,
approximately $0.7 million had been spent on testing and upgrading information
technology systems, which represents approximately 25% of the Company's total
information technology budget. In addition, as of July 3, 1999, $0.6 million had
been spent on testing and upgrading products and $0.1 million had been 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.
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 certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and would be unable to provide materials and services to the Company on time.
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. If the
Company believes that any of its key suppliers or vendors may not be year 2000
compliant, it will seek to identify and secure other suppliers or vendors as
part of its contingency plan.
19
<PAGE>
Year 2000 (continued)
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. As discussed above, 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. If
any countries in which the Company operates experience significant year 2000
disruption, the Company could 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.
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in fiscal 1999 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.
Reliance on Sales to Governmental Entities. 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. In addition, a significant portion of the
Company's revenues in the Traffic Control segment are generated by sales to
distributors whose customers are governmental entities. The Company continues to
focus its marketing of the Traffic Control segment's products and services on
various governmental entities, including the U.S. Federal Highway Administration
and comparable overseas agencies, regional counties of governments, state and
city traffic engineers, public transit authorities, public toll operators, law
enforcement agencies, and tunnel and bridge authorities. Any decrease in
purchases by these government bodies, including, without limitation, decreases
as the result of a shift in priorities or overall budgeting limitations, could
have an adverse effect on the Company's business, financial condition, and
results of operations. Sales of the Company's Traffic Control segment's products
and services in the United States are largely dependent on federal funding of
transportation projects, such as appropriations and allocations to states under
the Transportation Equity Act for the 21st Century. Contracts with governmental
entities often permit the purchaser to cancel the agreement at any time.
Cancellation of a significant contract could also result in a material adverse
effect on the Company's business and future results of operations.
Customized Contracts. A significant portion of the Company's contracts for
traffic control systems require the development and integration of customized
products for a fixed fee. Due to the complexity of the Company's traffic control
systems, the Company may experience delays from time to time in developing,
manufacturing, and installing such systems. In addition, the Company may incur
substantial unanticipated costs that cannot be passed on to the customer. The
Company's inability to deliver customized systems in a timely manner and within
budget could result in a material adverse affect on the Company' business,
financial condition, and results of operations.
20
<PAGE>
Forward-looking Statements (continued)
Competition. The market for traffic products and services is extremely
competitive, and the Company expects that competition will continue to increase.
The Company believes that the principal competitive factors in the traffic
industry are price, functionality, reliability, service and support, and vendor
and product reputation. The Company believes that its ability to compete
successfully will depend on a number of factors both within and outside its
control, including the pricing policies of its competitors and suppliers, the
timing and quality of products introduced by the Company and others, the
Company's ability to maintain a strong reputation in the traffic industry, and
industry and general economic trends. In the traffic market, the Company
currently competes with companies with greater financial resources and name
recognition. The introduction by one of these competitors or a new competitor of
a technologically superior product would have a material adverse effect on the
Company's business, financial condition, and results of operations. There can be
no assurance that the Company will be able to compete successfully with existing
or new competitors.
The Company encounters and expects to continue to encounter intense
competition for the sale of its cooling and cogeneration products. The Company's
products are subject to competition from absorption air conditioning systems and
electric motor-driven vapor compressor systems, as well as other natural
gas-fueled engine-driven cooling systems. Although the Company has a proprietary
position with respect to certain features of its products, the core technologies
relating to its cooling and cogeneration products are mature and available to
other companies. A number of companies, including companies with greater
financial resources than those of the Company, offer products that compete with
those offered by the Company, and there can be no assurance that other companies
will not develop competitive products. In addition, electric utility pricing
programs provide competition for the Company's cooling and cogeneration
products.
The Company's sale of industrial refrigeration systems is subject to
intense competition. The industrial refrigeration market is mature, highly
fragmented, and extremely dependent on close customer contacts. There can be no
assurance that the Company will be able to continue to successfully compete in
the worldwide industrial refrigeration market, which is characterized by strong
local manufacturers.
Dependence on New Products. A substantial portion of the Company's
revenues are derived from the sale of electronics and associated hardware and
software for the traffic industry, as well as from providing integration
services for such electronics, hardware, and software, through the Company's
Peek subsidiary. A substantial portion of the Company's efforts, particularly
its product development and marketing efforts, is now focused on the traffic
market. Prior to the Peek acquisition, the Company had no prior experience in
the traffic industry, and there can be no assurance that the Company will be
able to successfully market and sell Peek's products and services. The Company's
future success will depend significantly on its ability to develop, introduce,
and integrate new products in the traffic market and to continue to improve the
performance, features, and reliability of Peek's current products. In order for
Peek to achieve the level of profitability desired by the Company, the Company
must successfully reduce Peek's expenses and improve market penetration. No
assurance can be given that the Company will be successful in this regard. Any
failure or inability of the Company's traffic products to perform substantially
as anticipated or to achieve market acceptance would have a material adverse
effect on the Company's business, financial condition, and results of
operations.
Risks Associated with International Operations. The Company intends to
continue to expand its presence in international markets. 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. International revenues are subject to a number of risks,
including the following: fluctuations in exchange rates may affect product
demand and adversely affect the profitability in U.S. dollars of products and
services provided by the Company in foreign markets where payment for the
Company's products and services is made in the local currency; agreements may be
difficult to enforce and receivables difficult to collect through a foreign
country's legal system; foreign customers may have longer payment cycles;
foreign countries may impose additional withholding taxes or otherwise tax the
Company's foreign income, impose tariffs, or adopt other restrictions on foreign
trade; U.S. export licenses, if
21
<PAGE>
Forward-looking Statements (continued)
required, may be difficult to obtain; the protection of intellectual property in
foreign countries may be more difficult to enforce; and the Company may incur
costs related to the conversion to the Euro currency, which began on January 1,
1999. There can be no assurance that any of these factors will not have a
material adverse impact on the Company's business, financial condition, and
results of operations.
The Company had planned to expand its traffic control business in Asia.
However, Asia is currently experiencing a severe economic crisis, which has been
characterized by sharply reduced economic activity and liquidity, highly
volatile foreign currency exchange and interests rates, and unstable stock
markets. In fiscal 1998, the Company discontinued certain operations located in
Asia. The economic crisis in Asia may adversely affect the Company's ability to
expand its Traffic Control business.
Ability to Manage Change. In November 1997, the Company acquired Peek, a
public company in the United Kingdom, which had, as of July 3, 1999,
approximately 1,000 employees located principally in Europe and the United
States, and had revenues in fiscal 1998, from the date of its acquisition, and
in the first nine months of fiscal 1999, of $152.4 million and $119.6 million,
respectively. This acquisition has resulted in new and increased
responsibilities for the Company's administrative, operational, development, and
financial personnel. In order to manage the Company's changing business, Peek's
management and other employees must be assimilated into the Company's existing
operations. There can be no assurance that the Company will be successful in
retaining Peek's key employees and integrating them into the Company. The
Company's success depends to a significant extent on the ability of its officers
and key employees to operate effectively, both independently and as a group, and
this ability may be impeded by the Company's rapid geographic expansion,
potential disruption of the Company's business, and diversion of management's
attention from other business concerns due to the Peek acquisition. In addition,
there can be no assurance that the Company's systems, procedures, and controls
will be adequate to support the significant expansion of the Company's
operations. Any failure of the Company's management to manage change effectively
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
Significant Quarterly Fluctuations in Operating Results. The quarterly
revenues and income of the Company's Traffic Control segment fluctuate
significantly based on funding patterns of governmental entities as well as
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. 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
addition, the demand for the Company's NuTemp subsidiary's equipment is
typically highest in the summer period and can be adversely affected by cool
summer weather.
Dependence of Markets on Government Regulation. The Public Utility
Regulatory Policies Act of 1978 (PURPA) and state laws and regulations
implementing PURPA prohibit discrimination by electric utilities against
cogeneration providers and require utilities to purchase co-generated
electricity under certain conditions. Under these regulations, certain classes
of facilities are exempt from the provisions of the Public Utility Holding
Company Act, as well as many state laws and regulations regarding the setting of
electricity rates and the financial and organizational regulation of electric
utilities, and certain provisions of the Federal Power Act. Because the
Company's current customers typically do not sell power to electric utilities,
the Company does not rely to a significant extent on the provisions of PURPA
that require utilities to purchase electricity from cogeneration providers.
However, recent bills in Congress have proposed amendments to, and in some
cases, the repeal of, certain of these laws or regulations. Any such amendment
or repeal could have a material adverse effect on the Company's cogeneration
business.
Importance of Energy Prices. The cost savings that result from use of the
Company's packaged cooling and cogeneration systems are directly related to the
retail price of electricity. Given prevailing rate structures, demand for the
Company's cooling and cogeneration systems has been less than anticipated.
Although the Company believes that increases in demand, as well as potential
increases in the cost of fuel, will lead to eventual increases in electricity
rates,
22
<PAGE>
Forward-looking Statements (continued)
there can be no assurance that electricity prices will increase in the future.
The economic benefits of the Company's natural gas engine products and packaged
cooling and cogeneration systems are also affected by the cost of natural gas. A
significant increase in the relative cost of natural gas could also have a
material adverse effect on the sale of certain of the Company's products.
Incentives for Cooling Systems. Purchasers of the Company's Tecochill(R)
cooling systems often receive investment incentives for the purchase of
Tecochill equipment from gas utilities or state or municipal governments.
Although the Company has no reason to believe these incentives will be
discontinued, elimination of these incentives could have a material adverse
effect on sales of the Company's Tecochill systems.
Risks Associated with Protection, Defense, and Use of Intellectual
Property and Ownership of Technology Rights. The Company holds several patents
relating to various aspects of its products. Proprietary rights relating to the
Company's products are protected from unauthorized use by third parties only to
the extent that they are covered by valid and enforceable patents or are
maintained in confidence as trade secrets. There can be no assurance that
patents will be issued from any pending or future patent applications owned by
or licensed to the Company or that the claims allowed under any issued patents
will be sufficiently broad to protect the Company's technology and, in the
absence of patent protection, the Company may be vulnerable to competitors who
attempt to copy the Company's products or gain access to its trade secrets and
know-how. Proceedings initiated by the Company to protect its proprietary rights
could result in substantial costs to the Company. There can be no assurance that
competitors of the Company will not initiate litigation to challenge the
validity of the Company's patents, or that they will not use their resources to
design comparable products that do not infringe the Company's patents. There may
also be pending or issued patents held by parties not affiliated with the
Company that relate to the Company's products or technologies. The Company may
need to acquire licenses to, or contest the validity of, any such patents. There
can be no assurance that any license required under any such patent would be
made available on acceptable terms or that the Company would prevail in any such
contest. The Company could incur substantial costs in defending itself in suits
brought against it or in suits in which the Company may assert its patent rights
against others. If the outcome of any such litigation is unfavorable to the
Company, the Company's business and results of operations could be materially
adversely affected. In addition, the Company relies on trade secrets and
proprietary know-how which it seeks to protect, in part, by confidentiality
agreements with its collaborators, employees, and consultants. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or be independently developed by competitors.
In addition, a significant percentage of the Company's research and
development is sponsored by third parties. Sponsors of these programs generally
own the rights to technology that is developed as a result of the Company's work
under the programs. These rights could limit the Company's ability to
commercialize any technological breakthroughs made in the course of such work.
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays.
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. As discussed above, 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. If
any countries in which the Company operates experience significant year 2000
disruption, the Company could 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
23
<PAGE>
Forward-looking Statements (continued)
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.
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.
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.
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 May 25, 1999, the Company filed a Current Report on Form 8-K dated as
of May 24, 1999, relating to certain pretax charges to be taken by the Company.
24
<PAGE>
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 August 1999.
THERMO POWER CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
25
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.1 Master Cash Management, Guarantee Reimbursement, and Loan
Agreement dated as of June 1, 1999, between the Registrant and
Thermo Electron Corporation.
10.2 Master Cash Management, Guarantee Reimbursement, and Loan Agreement
dated as of June 1, 1999, between ThermoLyte Corporation and
Thermo Electron Corporation.
10.3 Amended and Restated Deferred Compensation Plan for Directors of the Registrant.
27 Financial Data Schedule.
</TABLE>
MASTER CASH MANAGEMENT, GUARANTEE
REIMBURSEMENT AND LOAN AGREEMENT
This AGREEMENT is entered into as of the 1st day of June, 1999 by and
between Thermo Electron Corporation, a Delaware corporation ("Thermo Electron")
and Thermo Power Corporation, a Massachusetts corporation (the "Subsidiary").
WITNESSETH:
WHEREAS, Thermo Electron and the Subsidiary are party to a Master
Repurchase Agreement, 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
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;
<PAGE>
(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;
(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, 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.
(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.
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.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
THERMO ELECTRON CORPORATION
By: /s/ Kenneth J. Apicerno
Title: Treasurer
THERMO POWER CORPORATION
By: /s/ J. Timothy Corcoran
Title: President and
Chief Executive Officer
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 ThermoLyte Corporation, a Delaware corporation (the "Subsidiary").
WITNESSETH:
WHEREAS, Thermo Electron and the Subsidiary are party to a Master
Repurchase Agreement, as amended and restated, which contains terms governing a
cash management arrangement between them and a Master Guarantee Reimbursement
and Loan Agreement, as amended and restated, which contains terms relating to
intercompany credit support and a short term borrowing facility;
WHEREAS, Thermo Electron and the Subsidiary desire to establish a new
cash management arrangement and short term borrowing facility between them in
lieu of the arrangements set forth in the Master Repurchase Agreement and the
Master Guarantee Reimbursement and Loan Agreement and also to consolidate the
terms relating to intercompany credit support in one agreement;
WHEREAS, the Subsidiary and other majority owned subsidiaries of Thermo
Electron that join in this Agreement (collectively, the "Majority-Owned
Subsidiaries") and their wholly-owned subsidiaries wish to enter into various
financial transactions, such as convertible or nonconvertible debt, loans,
equity offerings, and other contractual arrangements with third parties (the
"Underlying Obligations") and may provide credit support to, on behalf of or for
the benefit of, other subsidiaries of Thermo Electron ("Credit Support
Obligations");
WHEREAS, the Majority Owned Subsidiaries and Thermo Electron acknowledge
that the Majority Owned Subsidiaries and their wholly-owned subsidiaries may be
unable to enter into many kinds of Underlying Obligations without a guarantee of
their performance thereunder from Thermo Electron (a "Parent Guarantee") or
without obtaining Credit Support Obligations from other Majority Owned
Subsidiaries;
WHEREAS, certain Majority Owned Subsidiaries ("Second Tier Majority
Owned Subsidiaries") may themselves be majority owned subsidiaries of other
Majority Owned Subsidiaries ("First Tier Majority Owned Subsidiaries");
WHEREAS, for various reasons, Parent Guarantees of a Second Tier
Majority Owned Subsidiary's Underlying Obligations may be demanded and given
without the respective First Tier Majority Owned Subsidiary also issuing a
guarantee of such Underlying Obligation;
WHEREAS, Thermo Electron may itself make a loan or provide other credit
to a Second Tier Majority Owned Subsidiary or its wholly-owned subsidiaries
under circumstances where the applicable First Tier Majority Owned Subsidiary
does not provide such credit; and
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
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;
(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, 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.
(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.
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.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
THERMO ELECTRON CORPORATION
By: /s/ Theo Melas-Kyriazi
Title: Vice President &
Chief Financial Officer
THERMOLYTE CORPORATION
By: /s/ J. Timothy Corcoran
Title: Chief Executive Officer
THERMO POWER CORPORATION
DEFERRED COMPENSATION PLAN FOR DIRECTORS
As amended and restated as of May 5, 1999
Section 1. Participation. Any director of Thermo Power Corporation (the
"Company") may elect to have such percentage as he or she may specify of the
fees otherwise payable to him or her deferred and paid to him or her as provided
in this Plan. A director who is also an employee of the Company or any
subsidiary or parent of the Company, shall not be eligible to participate in
this Plan. Each election shall be made by notice in writing delivered to the
Clerk of the Company, in such form as the Clerk shall designate, and each
election shall be applicable only with respect to fees earned subsequent to the
date of the election for the period designated in the form. The term
"participant" as used herein refers to any director who shall have made an
election. No participant may defer the receipt of any fees to be earned after
the later to occur of either (a) the date on which the participant shall retire
from or otherwise cease to engage in his or her principal occupation or
employment or (b) the date on which he or she shall cease to be a director of
the Company, or such earlier date as the Board of Directors of the Company, with
the participant's consent, may designate (the "deferral termination date"). In
the event that the participant's deferral termination date is the date on which
he or she ceases to engage in his or her principal occupation or employment, the
participant or a personal representative shall advise the Company of that date
by written notice delivered to the Clerk of the Company.
Section 2. Establishment of Deferred Compensation Accounts. There shall be
established for each participant an account to be designated as that
participant's deferred compensation account.
Section 3. Allocations to Deferred Compensation Accounts. There shall be
allocated to each participant's deferred compensation account, as of the end of
each quarter, an amount equal to his or her fees for that quarter which that
participant shall have elected to have deferred pursuant to Section 1.
Section 4. Stock Units and Stock Unit Accounts. All amounts allocated to a
participant's deferred compensation account pursuant to Section 3 and Section 5
shall be converted, at the end of each quarter, into stock units by dividing the
accumulated balance in the deferred compensation account as of the end of that
quarter by the average last sale price per share of the Company's common stock
as reported in The Wall Street Journal, for the five business days up to and
including the last business day of that quarter. The number of stock units, so
determined, rounded to the nearest one-hundredth of a share, shall be credited
to a separate stock unit account to be established for the participant, and the
aggregate value thereof as of the last business day of that quarter shall be
charged to the participant's deferred compensation account. No amounts credited
to the participant's deferred compensation account pursuant to Section 5
subsequent to the close of the fiscal year in which occurs the participant's
deferral termination date shall be converted into stock units. Any such amount
shall be distributed in cash as provided in Section 8. A maximum number of
50,000 shares of the Company's common stock may be represented by stock units
credited under this Plan, subject to proportionate adjustment in the event of
any stock dividend, stock split or other capital change affecting the Company's
common stock.
Section 5. Cash Dividend Credits. Additional credits shall be made to a
participant's deferred compensation account, until all distributions shall have
been made from the participant's stock unit account, in amounts equal to the
cash dividends (or the fair market value of dividends paid in property other
than dividends payable in common stock of the Company) which the participant
would have received from time to time had he or she been the owner on the record
dates for the payment of such dividends of the number of shares of the Company's
common stock equal to the number of units in his or her stock unit account on
those dates.
Section 6. Stock Dividend Credits. Additional credits shall be made to a
participant's stock unit account, until all distributions shall have been made
from the participant's stock unit account, of a number of units equal to the
number of shares of the Company's common stock, rounded to the nearest
one-hundredth share, which the participant would have received from time to time
as stock dividends had he or she been the owner on the record dates for the
payments of such stock dividends of the number of units of the Company's common
stock equal to the number of units credited to his or her stock unit account on
those dates.
Section 7. Adjustments in the Event of Certain Transactions. In the event of a
stock dividend, stock split or combination of shares, or other distribution with
respect to holders of Common Stock other than normal cash dividends, the number
of units then credited to a partipant's stock unit account shall be
appropriately adjusted on the same basis. In the event of any recapitalization,
merger or consolidation involving the Company, any transaction in which the
Company becomes a subsidiary of another entity, any sale or other disposition of
all or a substantial portion of the assets of the Company or any similar
transaction, as determined by the Board, the Board in its discretion may
terminate the Plan pursuant to Section 11.
Section 8. Distribution of Stock and Cash After Participant's Deferral
Termination Date. When a participant's deferral termination date shall occur,
the Company shall become obligated to make the distributions prescribed in the
following paragraphs (a) and (b).
(a) The Company shall distribute to the participant the number of shares
of the common stock of the Company which shall equal the total number of units
accumulated in his or her stock unit account as of the close of the fiscal year
in which the participant's deferral termination date occurs. Such distribution
of stock shall be made in ten annual installments, unless, at least six months
prior to his or her deferral termination date, the participant shall have
elected, by notice in writing filed with the Clerk of the Company, to have such
distribution made in five annual installments. In either such case, the
installments shall be of as nearly equal number of shares as practicable,
adjusted to reflect any changes pursuant to Sections 6 and 7 in the number of
units remaining in the participant's stock unit account. The first such
installment shall be distributed within 60 days after the close of the fiscal
year in which the participant's deferral termination date occurs. The remaining
installments shall be distributed at annual intervals thereafter. Anything
herein to the contrary notwithstanding, the Company shall have the option, if
its Board of Directors shall by resolution so determine, in lieu of making
distribution in ten or five annual installments as set forth above, with the
participant's consent, to distribute stock or any remaining installments thereof
in a single distribution at any time following the close of the fiscal year in
which the participant's deferral termination date occurs. Distribution of stock
made hereunder may be made from shares of common stock held in the treasury
and/or from shares of authorized but previously unissued shares of common stock.
(b) The Company shall distribute to the participant sums in cash equal
to the balance credited to his or her deferred compensation account as of the
close of the fiscal year in which his or her deferral termination date occurs
plus such additional amounts as shall be credited thereto from time to time
thereafter pursuant to Section 5. The cash distribution shall be made on the
same dates as the annual distributions made pursuant to paragraph (a) above, and
each cash distribution shall consist of the entire balance credited to the
participant's deferred compensation account at the time of the annual
distribution.
If a participant's deferral termination date shall occur by reason of
his or her death or if he or she shall die after his or her deferral termination
date but prior to receipt of all distributions of stock and cash provided for in
this Section 8, all stock and cash remaining distributable hereunder shall be
distributed to such beneficiary as the participant shall have designated in
writing and filed with the Clerk of the Company or, in the absence of
designation, to the participant's personal representative. Such distributions
shall be made in the same manner and at the same intervals as they would have
been made to the participant had he or she continued to live.
Section 9. Participant's Rights Unsecured. The right of any participant to
receive distributions under Section 8 shall be an unsecured claim against the
general assets of the Company. The Company may but shall not be obligated to
acquire shares of its outstanding common stock from time to time in anticipation
of its obligation to make such distributions, but no participant shall have any
rights in or against any shares of stock so acquired by the Company. All such
stock shall constitute general assets of the Company and may be disposed of by
the Company at such time and for such purposes as it may deem appropriate.
Section 10. Termination of the Plan. The Plan shall terminate and full
distribution shall be made from all participants' deferred compensation accounts
and stock unit accounts upon any change of control of the Company. Either of the
following shall be deemed to be a change of control: (a) the occurrence, without
the prior approval of the Board of Directors, of the acquisition, directly or
indirectly, by any person of 50% or more of the outstanding common stock of
either the Company or the beneficial owner of 25% or more of the outstanding
common stock of Thermo Electron Corporation ("Thermo Electron"), without the
prior approval of the prior directors of the Company or Thermo Electron, as the
case may be; (b) the failure of the prior directors to constitute a majority of
the Board of Directors of the Company or Thermo Electron, at any time within two
years following any electoral event. As used in this sentence and the preceding
sentence, person shall mean a natural person, an entity (together with an
affiliate thereof, as defined in Rule 405 under the Securities Act of 1933) or a
group, as defined in Rule 13d-5 under the Securities Exchange Act of 1934; prior
directors shall mean the persons serving on the Board of Directors immediately
prior to any electoral event; and electoral event shall mean any contested
election of directors or any tender or exchange offer for common stock of the
Company or Thermo Electron by any person other than the Company Thermo Electron
or a subsidiary of any of the foregoing companies. The Board of Directors at any
time, at its discretion, may terminate the Plan. If the Board of Directors
terminates the Plan after any person or group of persons shall have acquired or
proposed to acquire control of the Company through the Board of Directors or
Thermo Electron, full and prompt distribution shall be made from all
participants' deferred compensation accounts and stock unit accounts. Otherwise,
distributions in respect of credits to participants' deferred compensation
accounts and stock unit accounts as of the date of termination shall be made in
the manner and at the time prescribed in Section 8.
Section 11. Amendment and Termination of the Plan. The Board of Directors of the
Company may amend or terminate the Plan at any time and from time to time,
provided, however, that no amendment adversely affecting credits already made to
any participant's deferred compensation account or stock unit account may be
made without the consent of that participant or, if that participant has died,
that participant's beneficiary. Upon termination of the Plan, the Company shall
be obligated to distribute to the participant either of the following as the
Board of Directors of the Company, in its sole discretion, may determine: (i)
the number of shares of the common stock of the Company which shall equal the
total number of units accumulated in the participant's stock unit account as of
the effective date of termination of the Plan or (ii) a sum in cash equal to the
balance credited to the participant's deferred compensation account as of the
effective date of termination of the Plan.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 3, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-END> JUL-03-1999
<CASH> 10,265
<SECURITIES> 0
<RECEIVABLES> 67,781
<ALLOWANCES> 9,664
<INVENTORY> 36,135
<CURRENT-ASSETS> 126,577
<PP&E> 32,775
<DEPRECIATION> 11,208
<TOTAL-ASSETS> 312,205
<CURRENT-LIABILITIES> 96,766
<BONDS> 439
0
0
<COMMON> 1,249
<OTHER-SE> 52,899
<TOTAL-LIABILITY-AND-EQUITY> 312,205
<SALES> 205,734
<TOTAL-REVENUES> 205,734
<CGS> 153,234
<TOTAL-COSTS> 153,234
<OTHER-EXPENSES> 5,622
<LOSS-PROVISION> 885
<INTEREST-EXPENSE> 6,492
<INCOME-PRETAX> (11,373)
<INCOME-TAX> (1,075)
<INCOME-CONTINUING> (10,376)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,376)
<EPS-BASIC> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
