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 December 28, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Commission File Number 1-13572
THERMO ECOTEK CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-3072335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 Winter Street, Suite 300
Waltham, Massachusetts 02154
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 622-1000
Indicate by check mark whether the Registrant (1)
has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was
required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each
of the issuer's classes of Common Stock, as of the
latest practicable date.
Class Outstanding at January 24, 1997
---------------------------- --------------------------------
Common Stock, $.10 par value 25,007,980
PAGE
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO ECOTEK CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
December 28, September 28,
(In thousands) 1996 1996
------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 63,320 $ 63,238
Restricted funds 33,188 18,936
Accounts receivable and unbilled revenues 21,828 28,061
Inventories 12,983 11,299
Prepaid income taxes and other current
assets 4,456 4,953
-------- --------
135,775 126,487
-------- --------
Property, Plant and Equipment, at Cost 315,856 309,384
Less: Accumulated depreciation and
amortization 51,354 46,618
-------- --------
264,502 262,766
-------- --------
Due from Parent Company 13,551 12,116
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $6,004 in fiscal 1997 and 1996) 16,504 20,254
-------- --------
Restricted Funds 16,245 14,112
-------- --------
Other Assets 12,833 13,410
-------- --------
$459,410 $449,145
======== ========
2PAGE
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THERMO ECOTEK CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
December 28, September 28,
(In thousands except share amounts) 1996 1996
------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term obligations $ 24,806 $ 24,806
Accounts payable 2,730 1,517
Lease obligations payable 5,620 1,812
Accrued interest 5,976 3,159
Accrued income taxes 1,858 1,858
Other accrued expenses 12,664 15,532
Due to parent company 936 1,586
-------- --------
54,590 50,270
-------- --------
Long-term Obligations:
Nonrecourse tax-exempt obligations 77,900 77,900
4% Subordinated convertible debentures,
due to parent company 68,500 68,500
Noninterest-bearing subordinated
convertible debentures 22,205 31,727
Capital lease obligations 31,154 31,154
-------- --------
199,759 209,281
-------- --------
Deferred Income Taxes 43,992 42,633
-------- --------
Other Deferred Items 15,574 13,958
-------- --------
Minority Interest 3,080 3,316
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 50,000,000
shares authorized; 24,969,039 and
16,174,636 shares issued 2,497 1,617
Capital in excess of par value 84,462 74,740
Retained earnings 49,348 45,048
Treasury stock at cost, 19,657 and
21,413 shares (295) (481)
Net unrealized gain on available-for-sale
investments 6,403 8,763
-------- --------
142,415 129,687
-------- --------
$459,410 $449,145
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
3PAGE
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THERMO ECOTEK CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
--------------------------
December 28, December 30,
(In thousands except per share amounts) 1996 1995
------------------------------------------------------------------------
Revenues $38,514 $34,296
------- -------
Costs and Operating Expenses:
Cost of revenues (includes $1,241 and
$1,466 to related parties) 26,254 24,189
General and administrative expenses
(includes $412 and $456 to parent
company) 2,819 2,426
------- -------
29,073 26,615
------- -------
Operating Income 9,441 7,681
Interest Income 1,396 1,255
Interest Expense (includes $685 to parent
company in fiscal 1997 and 1996) (3,537) (3,843)
------- ------
Income Before Provision for Income Taxes
and Minority Interest 7,300 5,093
Provision for Income Taxes 2,749 1,793
Minority Interest Expense 251 248
------- ------
Net Income $ 4,300 $ 3,052
======= =======
Earnings per Share:
Primary $ .16 $ .13
======= =======
Fully diluted $ .12 $ .10
======= =======
Weighted Average Shares:
Primary 27,060 23,291
======= =======
Fully diluted 37,892 34,597
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
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THERMO ECOTEK CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
--------------------------
December 28, December 30,
(In thousands) 1996 1995
------------------------------------------------------------------------
Operating Activities:
Net income $ 4,300 $ 3,052
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest expense 251 248
Depreciation and amortization 5,160 5,006
Increase in deferred income taxes 2,749 1,793
Changes in current accounts:
Restricted funds (14,252) (15,160)
Accounts receivable and unbilled
revenues 6,233 5,199
Inventories (1,684) 366
Other current assets 497 (167)
Accounts payable 1,213 2,260
Lease obligations payable 3,808 3,808
Due (to) from parent company (650) 331
Other current liabilities (51) 1,512
-------- --------
Net cash provided by operating activities 7,574 8,248
-------- --------
Investing Activities:
Funding of long-term restricted funds (2,133) (160)
Increase in other deferred items 1,633 -
Increase in other assets - (3,000)
Purchases of property, plant and equipment (6,570) (4,306)
-------- --------
Net cash used in investing activities (7,070) (7,466)
-------- --------
Financing Activities:
Net proceeds from issuance of Company
common stock 65 109
Distribution to minority partner (487) (120)
-------- --------
Net cash used in financing activities (422) (11)
-------- --------
Increase in Cash and Cash Equivalents 82 771
Cash and Cash Equivalents at Beginning of Period 63,238 49,159
-------- --------
Cash and Cash Equivalents at End of Period $ 63,320 $ 49,930
======== ========
Conversion of noninterest-bearing subordinated
convertible debentures $ 9,522 $ -
The accompanying notes are an integral part of these consolidated
financial statements.
5PAGE
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THERMO ECOTEK CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been
prepared by Thermo Ecotek 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
December 28, 1996, the results of operations for the three-month periods
ended December 28, 1996 and December 30, 1995, and the cash flows for the
three-month periods ended December 28, 1996 and December 30, 1995.
Interim results are not necessarily indicative of results for a full
year.
The consolidated balance sheet presented as of September 28, 1996,
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 for the year ended September 28, 1996, filed with the
Securities and Exchange Commission.
2. Subsequent Event
On January 17, 1997, the Company, through its wholly owned
subsidiary, Thermo Trilogy Corporation, acquired substantially all of the
assets of biosys, inc., a biopesticide company, for approximately $11.2
million in cash. The acquisition will be accounted for using the purchase
method of accounting and its results of operations will be included in
the financial statements of the Company from the date of acquisition. The
aggregate cost of this acquisition approximated the fair market value of
the net assets acquired.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements,
including those detailed under the caption "Forward-looking Statements"
in Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 28, 1996, filed with the Securities and Exchange
Commission.
6PAGE
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THERMO ECOTEK CORPORATION
Overview
The Company earns revenues primarily from the operation of
independent electric power-generation facilities through joint ventures,
limited partnerships, or wholly owned subsidiaries (the Operating
Companies). Each Operating Company sells power under a long-term
power-sales agreement. The profitability of operating the Company's
facilities depends on the price received for power under the power-sales
agreements with power purchasers, on plant performance or availability,
on the degree to which utilities exercise curtailment rights granted
under power-sales agreements, and on the fuel, operating, and maintenance
costs for the facilities.
Curtailment rights allow a utility to require an Operating Company to
curtail power output up to pre-established annual levels during periods
of low system demand. A utility commonly experiences low system demand
when hydroelectric power is available, generally following periods of
heavy rain or snow. The contractually allowable maximum for such
curtailment at each of the Company's Woodland and Mendota plants is 1,000
hours per calendar year, which was reached in calendar 1995 and 1996. The
Woodland and Mendota plants each experienced approximately 111 hours of
curtailment from October through December 1996, and expect to experience
curtailment during the remainder of fiscal 1997.
The Company earns a disproportionately high share of its income in
May to October due to the rate structures under the power-sales
agreements relating to its California plants, which provide strong
incentives to operate during this period of high demand. Conversely, the
Company has historically operated at a loss or marginal profitability
during the second fiscal quarter due to the rate structure under these
agreements. The Company's profitability is also dependent on the amount
of development expenses that it incurs.
The Company is expanding beyond biomass power generation into other
environmentally responsible products and processes. Thermo Trilogy
Corporation (Thermo Trilogy), a wholly owned subsidiary, develops,
manufactures, and markets environmentally friendly products used for pest
control. Derived from seeds of the tropical neem tree and specially-
developed microbials, these biopesticides safely and effectively control
insects, fungi, and mites on numerous crops. The Company has also entered
the field of engineered clean fuels through a partnership agreement with
KFx Inc. (KFx). The Company is committed to provide approximately $48
million for the design, construction, and operation of the first
full-scale coal-beneficiation facility to use a patented "clean coal"
technology (K-Fuel technology). Once completed, the Gillette, Wyoming,
facility will use the K-Fuel technology to transform high-moisture,
low-energy coal into a low-moisture, high-energy, solid fuel.
The Company plans to expand its operations into international markets
and has begun business development efforts in India, Italy, and the Czech
Republic. The Company expects the cost of business development efforts to
increase as it expands into these markets due to increased complexity
inherent in foreign development. In addition, the amount of cash required
to fund equity investments is expected to increase due to the financing
requirements of lenders in foreign markets.
7PAGE
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THERMO ECOTEK CORPORATION
Results of Operations
First Quarter Fiscal 1997 Compared With First Quarter Fiscal 1996
Revenues in the first quarter of fiscal 1997 were $38.5 million,
compared with $34.3 million in the first quarter of fiscal 1996, an
increase of $4.2 million, or 12.3%. The increase was primarily due to
higher contractual energy rates at all of the Company's facilities,
except the Hemphill plant, as well as the inclusion of $0.9 million in
revenues from Thermo Trilogy, acquired in May 1996. Pursuant to the
Company's utility contracts for its four plants in California, there will
be no further contractual energy rate increases beginning in calendar
1998.
The gross profit margin increased to 32% in the first quarter of
fiscal 1997, compared with 29% in the first quarter of fiscal 1996. The
improvement results primarily from the effect of higher revenues.
The Company's plants have power-sales agreements under which
utilities presently purchase power at fixed rates. Certain of these
arrangements contain provisions under which the utilities will convert
from fixed rates to "avoided-cost" rates at specified dates. Avoided-cost
rates are currently substantially less than the Operating Companies'
fixed rates. The Woodland plant, which converts to avoided-cost rates in
March 2000, has conditions in its nonrecourse lease agreement that
require the funding of a "power reserve" in years prior to 2000, based on
projections of operating cash flow shortfalls in 2000 and thereafter. The
power reserve represents funds available to make lease payments in the
event that revenues are not sufficient after the plant converts to
avoided-cost rates.
Although it is difficult to predict future levels of avoided costs,
based on current estimates, avoided costs are expected to be lower in
2000 than the rates currently being paid. If the Woodland plant were to
operate at projected avoided-cost levels, substantial losses would
result, primarily due to nonrecourse lease obligations that extend beyond
2000. Absent sufficient reductions in fuel prices and other operating
costs, under such circumstances the Company would either renegotiate its
nonrecourse lease for the Woodland plant or forfeit its interest in the
plant. In November 1996, the Company began to record as an expense the
funding of reserves required under Woodland's nonrecourse lease agreement
to cover projected shortfalls in lease payments beginning in 2000.
Although the Company recorded $1.0 million of operating income from
Woodland during the quarter, the Company does not expect to record
additional operating income at Woodland during fiscal 1997 and
thereafter. The Woodland plant contributed operating income of $1.5
million in the first quarter of fiscal 1996 and $5.1 million in the full
fiscal year of 1996.
The resolution of the rate order renegotiations with Public Service
Company of New Hampshire (PSNH) is still pending. In January 1997, PSNH's
parent company, Northeast Utilities, disclosed in a filing with the
Securities and Exchange Commission that if a proposed restructuring plan
of the New Hampshire electric utility industry is adopted, PSNH could
8PAGE
<PAGE>
THERMO ECOTEK CORPORATION
First Quarter Fiscal 1997 Compared With First Quarter Fiscal 1996
(continued)
default on certain financial obligations and seek bankruptcy protection.
The effect of a PSNH bankruptcy on the Company's current rate orders for
its two New Hampshire plants is uncertain.
During the first quarter of fiscal 1997, a fire occurred at the
Company's Gillette, Wyoming, coal-beneficiation facility that is
currently under construction. Damage from the fire was restricted to an
oil heater and auxiliary oil storage tank and is unrelated to the plant's
four coal processors. Substantially all repair costs are expected to be
covered by insurance proceeds. As a result of the fire, expected
commercial operation of the facility will be delayed until the second
half of fiscal 1997.
General and administrative expenses as a percentage of revenues were
7.3% in the first quarter of fiscal 1997, compared with 7.1% in the first
quarter of fiscal 1996. The change results primarily from the inclusion
of higher general and administrative expenses as a percentage of revenues
at Thermo Trilogy.
Interest income increased to $1.4 million in the first quarter of
fiscal 1997 from $1.3 million in the first quarter of fiscal 1996,
primarily due to interest income earned on invested proceeds from the
Company's March 1996 issuance of noninterest-bearing subordinated
convertible debentures, net of funds expended for the construction of the
Gillette, Wyoming, coal-beneficiation facility.
Interest expense decreased to $3.5 million in the first quarter of
fiscal 1997 from $3.8 million in the first quarter of fiscal 1996,
primarily due to lower outstanding debt related to the Company's Delano
and Mendota plants.
The effective tax rates were 38% and 35% in the first quarter of
fiscal 1997 and 1996, respectively. The rates in both years reflect the
effect of state income taxes, offset in part by the exclusion of income
taxed directly to minority partners. The effective tax rate in fiscal
1996 also reflects the benefit of tax credits and loss carryforwards as a
result of the resolution of certain tax contingencies.
Minority interest expense represents the allocation of income from
plant operations to a minority partner in an Operating Company.
Liquidity and Capital Resources
Working capital increased to $81.2 million at December 28, 1996 from
$76.2 million at September 28, 1996. The Company had cash, cash
equivalents, and current restricted funds of $96.5 million at December
28, 1996, compared with $82.2 million at September 28, 1996. At December
28, 1996, current restricted funds held in trust pursuant to certain
lease and debt agreements totaled $33.2 million. The use of cash and cash
equivalents of $12.9 million and $7.6 million at December 28, 1996 and
September 28, 1996, respectively, was also restricted by the terms of
9PAGE
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THERMO ECOTEK CORPORATION
Liquidity and Capital Resources (continued)
certain lease and financing agreements. These restrictions limit the
ability of the Operating Companies to transfer funds to the Company in
the form of dividends, loans, advances, or other distributions. Until
such time, if ever, as projections of avoided costs change, all cash
flows from the Woodland Operating Company, other than cash distributed to
the Company for taxes on the income of the Operating Company, will be
restricted from distribution to the Company. During the first quarter of
fiscal 1997, the Company's operating activities provided cash and
restricted funds of $21.8 million. A seasonal decrease in accounts
receivable and unbilled revenues provided cash of $6.2 million, while an
increase in lease obligations payable due to semiannual payment
requirements contributed cash of $3.8 million during the first quarter of
fiscal 1997.
During the first quarter of fiscal 1997, the Company, through its
Limited Partnership Agreement with KFx Wyoming, Inc., expended $6.0
million for the construction of a coal-beneficiation facility near
Gillette, Wyoming, and $0.6 million on the purchase of other property,
plant, and equipment. The Company is committed to fund approximately an
additional $5.0 million to complete the construction of the
coal-beneficiation facility during the remainder of fiscal 1997. In
January 1997, the Company purchased an additional 1,250,000 shares of KFx
common stock for $2.5 million in cash, bringing its total equity interest
in KFx to approximately 18%. During the first quarter of fiscal 1997, the
Company distributed $0.5 million to a minority partner of one of its
Operating Companies.
In January 1997, the Company, through its wholly owned subsidiary,
Thermo Trilogy Corporation, acquired substantially all of the assets of
biosys, inc., a biopesticide company, for approximately $11.2 million in
cash.
The Company is committed to contribute $15 million for a minority
interest in a 185-megawatt combined cycle, steam-turbine
electric-generation facility located in Puerta Plata, Dominican Republic.
Funding is expected to occur during calendar 1997, assuming certain
conditions are met.
Although the Company's projects are designed to produce positive
cash flow over the long term, the Company will have to obtain significant
amounts of funds from time to time to meet project development
requirements, including the funding of equity investments. As the Company
acquires, invests in, or develops future plants or technologies, the
Company expects to finance them with nonrecourse debt and to fund equity
contributions through internal funds, raising additional equity, or
through borrowings from third parties or Thermo Electron Corporation
(Thermo Electron). While Thermo Electron has expressed its willingness to
provide funds to the Company to help finance the Company's equity
investments in future projects, the Company has no agreements with Thermo
Electron that assure funds will be available on acceptable terms, or at
all.
10PAGE
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THERMO ECOTEK CORPORATION
PART II - OTHER INFORMATION
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
11PAGE
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THERMO ECOTEK CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized as of the 3rd day of February
1997.
THERMO ECOTEK CORPORATION
Paul Kelleher
-------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
-------------------------
John N. Hatsopoulos
Vice President and
Chief Financial Officer
12PAGE
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THERMO ECOTEK CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
2 Asset Purchase Agreement among Thermo Trilogy
Corporation, biosys, inc., Crop Genetics
International Corporation, and Agridyne Technologies,
Inc. dated December 24, 1996 (filed as Exhibit 2 to
the Registrant's Current Report on Form 8-K filed
January 31, 1997 [File No. 1-3572]) and incorporated
herein by reference.
11 Statement re: Computation of earnings per share.
27 Financial Data Schedule.
Exhibit 11
THERMO ECOTEK CORPORATION
Computation of Earnings per Share
Three Months Ended
---------------------------
December 28, December 30,
1996 1995
--------------------------------------------------------------------------
Net income (a) $ 4,300,000 $ 3,052,000
Add: Convertible debenture interest,
net of tax 418,000 411,000
----------- ----------
Income applicable to common stock assuming
full dilution (b) $ 4,718,000 $ 3,463,000
=========== ===========
Shares:
Weighted average shares outstanding 24,507,305 23,291,259
Add: Shares issuable from assumed exercise of
options (as determined by the application
of the treasury stock method) 485,714 -
Shares issuable from assumed conversion
of noninterest-bearing subordinated
convertible debentures 2,067,162 -
----------- -----------
Weighted average shares - primary (c) 27,060,181 23,291,259
Add: Incremental shares issuable from
assumed exercise of options
(as determined by the application
of the treasury stock method) 10,230 484,582
Shares issuable from assumed
conversion of 4% subordinated
convertible debentures 10,821,484 10,821,484
----------- -----------
Weighted average shares - fully diluted (d) 37,891,895 34,597,325
=========== ===========
Primary earnings per share (a) / (c) $ .16 $ .13
=========== ===========
Fully diluted earnings per share (b) / (d) $ .12 $ .10
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
ECOTEK CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED DECEMBER
28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> DEC-28-1996
<CASH> 63,320
<SECURITIES> 0
<RECEIVABLES> 21,828
<ALLOWANCES> 0
<INVENTORY> 12,983
<CURRENT-ASSETS> 135,775
<PP&E> 315,856
<DEPRECIATION> 51,354
<TOTAL-ASSETS> 459,410
<CURRENT-LIABILITIES> 54,590
<BONDS> 131,259
0
0
<COMMON> 1,688
<OTHER-SE> 140,727
<TOTAL-LIABILITY-AND-EQUITY> 459,410
<SALES> 38,514
<TOTAL-REVENUES> 38,514
<CGS> 26,254
<TOTAL-COSTS> 26,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,537
<INCOME-PRETAX> 7,049
<INCOME-TAX> 2,749
<INCOME-CONTINUING> 4,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,300
<EPS-PRIMARY> .16
<EPS-DILUTED> .12
</TABLE>
