SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 27, 1997.
[ ] 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
Waltham, Massachusetts 02154-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
---------------------------- ------------------------------------
Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of October 31, 1997, was approximately $40,534,000.
As of October 31, 1997, the Registrant had 24,502,685 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended September 27, 1997, are incorporated by reference into Parts I and
II.
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on March 10, 1998, are incorporated by
reference into Part III.
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PART I
Item 1. Business
(a) General Development of Business
Thermo Ecotek Corporation (the Company or the Registrant) is an
environmental company providing a range of environmentally responsible
technologies and products, including nonutility electric power generation
using clean combustion processes and engineered clean fuels, as well as
environmentally friendly pest-control products, through its biopesticides
subsidiary, Thermo Trilogy Corporation (Thermo Trilogy).
The Company operated as a division of Thermo Electron Corporation's
(Thermo Electron's) Energy Systems Division (the Division) from 1979
until its incorporation as Thermo Energy Systems Corporation in November
1989. On January 2, 1990, Thermo Electron transferred certain of the
assets and businesses of the Division to the Company in exchange for
15,750,000 shares of common stock and the assumption by the Company of
certain liabilities of the Division. On January 2, 1990, Thermo Electron
and the Company signed an Agreement and Plan of Reorganization to
recapitalize $10 million of loans made to the Company by Thermo Electron
into 1,111,111 shares of redeemable convertible preferred stock. These
shares were issued in May 1990 and were converted into 2,500,000 shares
of common stock during 1993 at a conversion price of $4.00 per share. In
December 1994, the Company changed its name to Thermo Ecotek Corporation.
The Company completed an initial public offering in February 1995. In
March 1996, the Company issued and sold at par $37 million principal
amount of noninterest-bearing subordinated convertible debentures due
2001. The debentures are convertible into shares of the Company's common
stock at a conversion price of $13.56 per share and are guaranteed on a
subordinated basis by Thermo Electron. In April 1997, the Company issued
and sold at par $50 million principal amount of 4.875% subordinated
convertible debentures due 2004. The debentures are convertible into
shares of the Company's common stock at a conversion price of $16.50 per
share and are guaranteed on a subordinated basis by Thermo Electron.
Initially, the Division designed, developed, and acted as general
contractor for the construction of cogeneration systems fueled by natural
gas and diesel. These turnkey facilities were generally sold to third-
party operators upon completion and had a total generating capacity of
approximately 60 megawatts. In the mid-1980s, the Division began
developing biomass-fueled power plants to take advantage of a favorable
regulatory environment and attractive power-sales agreements. Biomass
plants use environmentally responsible fuels, including wood and
agricultural wastes.
The Company currently operates seven biomass facilities with a total
electric generating capacity of 140 megawatts. The Company develops and
operates its facilities through joint ventures or limited partnerships in
which the Company has a majority interest, or through wholly owned
subsidiaries (the Operating Companies).
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In September 1996, the Company, through a wholly owned subsidiary,
formed a joint venture with Marcegaglia Group of Mantova, Italy, to
develop, own, and operate biomass-fueled electric power facilities in
that country.
In January 1996, the Company, through a wholly owned subsidiary,
signed a joint development agreement with a Czech/American power
development company, EMD Praha Spol s.r.o. (EMD). The initial focus will
be on expansion and environmental retrofits of existing Czech energy
centers.
The Company is expanding beyond biomass power generation into other
products and processes that protect the environment. In May 1996, two of
the Company's wholly owned subsidiaries acquired the assets of the W.R.
Grace & Co.'s biopesticide unit for approximately $8.1 million and the
assumption of certain liabilities. In addition, the Company will pay a
royalty fee of seven percent on annual sales of the acquired business in
excess of $14 million through the year 2000. Renamed Thermo Trilogy, the
subsidiary develops, manufactures, and markets environmentally friendly
products used for pest control. Derived from seeds of the tropical "neem"
tree and pesticidal microbials isolated from nature, these biopesticides
safely and effectively control insects, diseases, and mites on numerous
crops. The state of California recently approved Trilogy(TM) 90EC, a neem
oil-based miticide and fungicide, for use by California growers of fruits
and vegetables. Thermo Trilogy's neem-based products, Neemix(R) and
Trilogy(TM) 90EC, are both approved for use on certified organic
products. In January 1997, Thermo Trilogy acquired substantially all of
the assets of biosys, inc. through bankruptcy liquidation for
approximately $11.2 million in cash and the assumption of certain
liabilities. In November 1997, Thermo Trilogy acquired the sprayable
bacillus thuringiensis (Bt)- biopesticide product line of Novartis AG and
its affiliate for approximately $19.1 million in cash and the assumption
of certain liabilities.
The Company has also entered into the field of engineered "clean"
fuels through a partnership agreement with KFx, Inc. (KFx). In August
1995, the Company, through two wholly owned subsidiaries, entered into a
Limited Partnership Agreement with KFx Wyoming, Inc., a subsidiary of
KFx. Through September 27, 1997, the Company has provided $50 million,
and is committed to provide up to an additional $5 million, for the
design, construction, and operation of the first full-scale coal
production facility to use the patented K-Fuels "clean coal" technology.
The Company will have a 95% equity interest in the plant. Once completed,
the Gillette, Wyoming, facility will transform high-moisture, low-energy
coal into 500,000 tons per year of low-moisture, high-energy, solid fuel,
using the Koppelman "C" process. KFx holds certain rights to this
process, which produces coal known as K-Fuels for utility and industrial
use. Construction began in August 1995, with commercial operation
expected to commence during the first half of fiscal 1998.
In fiscal 1995, the Company purchased 1,500,000 shares of KFx common
stock for $3 million, representing an approximate 7% equity interest in
KFx. In fiscal 1996, the Company purchased an additional 1,500,000 shares
of KFx common stock for $3.0 million, representing an additional 7%
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equity interest in KFx. In fiscal 1997, the Company purchased an
additional 1,250,000 shares of KFx common stock for $2.5 million,
bringing its total equity interest in KFx to approximately 18%. The
Company has warrants, exercisable from January 1, 2000, through July 1,
2001, to purchase 7,750,000 shares at $3.65 per share. In addition, the
Company may purchase further shares at that time for then fair market
value so that when added to all other shares of KFx common stock owned by
the Company, would result in the Company owning up to a total 51% equity
interest in KFx on a fully diluted basis.
At September 27, 1997, Thermo Electron owned approximately 87% of the
Company's outstanding common stock, giving Thermo Electron the power to
elect all Directors of the Company. Thermo Electron is a world leader in
environmental monitoring and analysis instruments, biomedical products
such as heart-assist devices and mammography systems, papermaking and
paper-recycling equipment, biomass electric power generation, and other
specialized products and technologies. Thermo Electron also provides a
range of services related to environmental quality. Thermo Electron
intends for the foreseeable future to maintain at least 80% ownership of
the Company, so that it may continue to file consolidated U.S. federal
income tax returns with the Company. This will require the purchase by
Thermo Electron of additional shares of the Company's common stock from
time to time as the number of outstanding shares issued by the Company
increases. These and any other purchases may be made either on the open
market or directly from the Company. During fiscal 1997,* Thermo Electron
purchased 898,159 shares of the Company's common stock on the open market
for a total price of $12,717,000. The Company has sold $68.5 million of
subordinated convertible debentures to Thermo Electron that could be
converted to maintain at least 80% ownership by Thermo Electron. See
Notes 5 and 11 to Consolidated Financial Statements in the Company's
Fiscal 1997 Annual Report to Shareholders for a description of
outstanding stock options and convertible notes issued by the Company.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report
on Form 10-K. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," "seeks," "estimates," and similar
expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the results of the
Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in the Registrant's Fiscal 1997 Annual Report to
Shareholders, which statements are incorporated herein by reference.
* In June 1995, the Company changed its fiscal year end from the
Saturday nearest December 31 to the Saturday nearest September 30.
References to "fiscal 1997," "fiscal 1996," and "fiscal 1995" herein
are for the years ended September 27, 1997, and September 28, 1996,
and the nine months ended September 30, 1995, respectively.
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(b) Financial Information About Industry Segments
The Company conducts business in one industry segment: the design,
development, and operation of independent (nonutility) electric power
generation facilities using a range of environmentally responsible
combustion technologies. In addition, the Company's Thermo Trilogy
subsidiary is engaged in the development, manufacture, and marketing of
biopesticides. This new business segment was not significant to the
Company's operations in fiscal 1997.
(c) Description of Business
(i) Principal Products and Services
Independent Power Production
Operating Projects
The following table summarizes certain information relating to the
Company's projects currently in operation. With the exception of the
Mendota plant, at the end of each leased facility's applicable lease
term, the Company has the option to renew the lease for a specified
period or purchase the facility at fair market value. The Mendota plant
may be purchased for a fixed amount at the end of its lease term.
Ownership
Plant of In-
Combustion Size Operating service Lease/
Project Location Technology (net mw) Company Date Own
-------------------------------------------------------------------------
New Stoker December
Hemphill Hampshire Fired 13.6 67% 1987 Lease
Stoker December
Gorbell Maine Fired 13.6 80% 1987 Lease
New Stoker July
Whitefield Hampshire Fired 13.6 100% 1988 Own
Circulating
Fluidized May
Mendota California Bed 25 100% 1990 Lease
Circulating
Fluidized May
Woodland California Bed 25 100% 1990 Lease
Bubbling
Fluidized January
Delano I California Bed 27 100% 1991 Own
Bubbling
Fluidized January
Delano II California Bed 22 100% 1994 Own
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Hemphill. The Hemphill facility, a 13.6-megawatt, wood-waste plant,
was completed in late 1987. It is located on a 50-acre site in
Springfield, New Hampshire. The Operating Company is a joint venture in
which the Company has a 67% interest. The Hemphill facility is owned by
BankBoston Leasing Services Inc., which leases the facility to the
Operating Company through March 2003. Public Service of New Hampshire
(PSNH) purchases power produced by the plant at a fixed rate under a rate
order issued by the New Hampshire Public Utility Commission (NHPUC)
expiring in 2006. The Operating Company purchases wood-waste pursuant to
two contracts with affiliates of the Company's joint venture partner,
each of which expires in 2003. The contracts provide for the supply of
wood-waste to the Operating Company at prescribed prices through December
1997 and at market prices thereafter. In 1990, a plan of reorganization
(the Plan) for PSNH was approved by the U.S. Bankruptcy Court for the
District of New Hampshire. Pursuant to the plan, Northeast Utilities (NU)
acquired the assets of PSNH. An agreement between NU and the State of New
Hampshire contains language to the effect that PSNH will seek to
renegotiate some of the terms of certain rate orders with small power
producers and that the state will support PSNH in such efforts. PSNH has
commenced discussions with these two Operating Companies and other small
power producers through which it is seeking to renegotiate the rate
orders applicable to the Companies and other facilities. The state,
acting through NHPUC, has indicated that it supports such efforts. Any
resolution is subject to the approval of NHPUC. Should the matter not
reach resolution, the Company does not believe that PSNH has the right to
take unilateral action to reduce the price of purchased power under such
arrangements. Rejection of the Company's rate orders would result in a
claim for damages by the Company and could be the subject of lengthy
litigation. In January 1997, NU disclosed in a filing with the Securities
and Exchange Commission that if a proposed deregulation plan for the New
Hampshire electric utility industry were adopted, PSNH could default on
certain financial obligations and seek bankruptcy protection. In February
1997, NHPUC voted to adopt a deregulation plan, and in March 1997, PSNH
filed suit to block the plan. In March 1997, the federal district court
issued a temporary restraining order which prohibits the NHPUC from
implementing the deregulation plan as it affects PSNH, pending a
determination by the court whether PSNH's claim could then be heard by
the court. In April 1997, the court ruled that it could now hear the case
and ordered that the restraining order would continue indefinitely
pending the outcome of the suit. In addition, in March 1997, the Company,
along with a group of other biomass power producers, filed a motion with
the NHPUC seeking clarification of the NHPUC's proposed deregulation plan
regarding several issues, including purchase requirements and payment of
current rate order prices with respect to the Company's energy output. An
unfavorable resolution of this matter, including the bankruptcy of PSNH,
could have a material adverse effect on the Company's results of
operations and financial position.
Gorbell. The Gorbell facility, a 13.6-megawatt wood-waste plant, was
completed in late 1987. It is located on a 56-acre site in Athens, Maine.
The design of the facility is substantially similar to the Hemphill
plant. The Operating Company is a joint venture in which the Company has
an 80% interest, which decreases to 60% in 1998. The Gorbell facility is
owned by BankBoston Leasing Services Inc., which leases the facility to
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the Operating Company through March 2003, with an option to renew or
purchase the facility for fair value. Power produced by the plant is sold
to Central Maine Power Company (CMP) through 2007 at a fixed price per
kilowatt hour that is indexed annually to the rate of inflation. The
Operating Company's fuel is purchased from an affiliate of the Company's
joint venture partner pursuant to an agreement expiring in 2002 under
which the price escalates based upon a prescribed index.
Whitefield. The Whitefield facility is a 13.6-megawatt wood-waste
plant that has been in operation since 1988. It is located on a 46-acre
site in Whitefield, New Hampshire. The power produced by the plant is
sold to PSNH at established rates under a power sale agreement that
expires in 2005. This plant is also subject to PSNH's attempt to
renegotiate rate orders. See "Hemphill" above. Fuel is purchased pursuant
to an agreement expiring in 1998 under which the price escalates based
upon a prescribed index. The Whitefield facility was originally owned by
Chrysler Capital Corp., and leased to the Operating Company. The Company
purchased the Whitefield facility in August 1992.
Mendota. The Mendota facility is a 25-megawatt agricultural and urban
wood-waste plant that has been in operation since 1990. It is located on
an 80-acre site in Mendota, California. The Operating Company is a
limited partnership, 100% of which is owned by the Company. The facility
is owned by Chrysler Capital Corp., which leases the facility to the
Operating Company through 1999 at which point the Company will have an
option to purchase the facility for $5 million. In June 1995, the
Operating Company amended the facility lease which resulted in the
agreement being treated as a capital lease. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
incorporated by reference into Item 7 hereof. The power generated by the
plant is sold to Pacific Gas & Electric (PG&E) under a standard offer #4
(SO#4) contract expiring in 2014. Under the contract, PG&E is required to
purchase the plant's electricity at predetermined prices until 2000, and
at a price equal to PG&E's avoided-cost for the remainder of the
contract. Payments for capacity are fixed. PG&E has asserted that the
fixed rates under this contract will terminate mid-1999, however, the
Company disputes this assertion. Approximately 48% of the fuel for the
plant is purchased pursuant to long-term contracts terminating between
1998 and 2002, under which prices increase in accordance with prescribed
schedules or market-based indexes. The remainder of the plant's fuel is
purchased by the Operating Company on the spot market.
The power sale agreements between the Mendota and Woodland (discussed
below) Operating Companies and PG&E allow PG&E to curtail the quantity of
power purchased under these agreements by up to 1,000 hours of generating
capacity annually at each plant. PG&E normally exercises its curtailment
rights during periods when cheaper hydroelectric power is available,
which generally occurs following periods of heavy rain or snow.
Curtailment reduces the power payment received by the Operating Companies
and, therefore, has an adverse effect on the financial results of those
Operating Companies. The Company experienced approximately 860, 930, and
950 hours of utility-imposed curtailments at each of the two plants
during fiscal 1997, 1996, and 1995, respectively.
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Woodland. The Woodland facility is a 25-megawatt agricultural and
urban wood-waste plant located on a 38-acre site in Woodland, California.
The design of the plant is essentially the same as the Mendota plant. The
Operating Company is a limited partnership in which the Company owns all
of the equity. The facility is owned by BankBoston Leasing Services Inc.,
which leases the facility to the Operating Company through March 2010,
with an option to renew or purchase the facility for fair value. The
electricity generated by the plant is sold to PG&E under an SO#4 contract
expiring in 2014, at predetermined prices until 2000. PG&E has asserted
that the fixed rates under this contract will terminate mid-1999,
however, the Company disputes this assertion. The price for the remainder
of the contract is PG&E's avoided-cost. Payments for capacity are fixed.
Approximately 17% of the fuel for the plant is purchased pursuant to
long-term contracts terminating in 2000, under which prices increase in
accordance with prescribed schedules or market-based indexes. The
remaining fuel is purchased by the Operating Company on the spot market.
The Operating Company 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 in March 2000. This funding requirement
will significantly limit future profit distributions the Operating
Company may make to the Company. Accordingly, beginning in the first
quarter of fiscal 1997, the Company has expensed the funding of reserves
required under Woodland's nonrecourse lease agreement to cover projected
shortfalls in lease payments beginning in 2000. Consequently, the results
of the Woodland plant were greatly diminished during 1997, and the
Company expects that such results will be reduced to approximately
break-even in 1998 and thereafter. During fiscal 1997 and 1996, the
Woodland plant contributed $1.0 million and $5.1 million of operating
income, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" incorporated by reference
into Item 7 hereof.
Delano I. The Delano I facility is a 27-megawatt agricultural and
urban wood-waste plant located on a 124-acre site in Delano, California.
Southern California Edison (SCE) purchases power under an SO#4 contract
expiring in 2020, under which energy prices are predetermined until
September 2000, and then at avoided-cost for the remainder of the
contract. Approximately 66% of the fuel supply is purchased pursuant to
long-term contracts with terms expiring from 1997 to 2004 under which
prices increase in accordance with prescribed schedules or market-based
indexes. The remaining fuel is purchased by the Operating Company on the
spot market. The Company has guaranteed to the Operating Company the
price and availability of fuel that is not purchased pursuant to the
long-term contracts. The Delano I facility was originally owned by
Westinghouse Credit Corporation and leased to the Company. In December
1993, the Company purchased Delano I for $21.5 million in cash and the
assumption of $66.9 million of nonrecourse, long-term, tax-exempt bonds
issued by the California Pollution Control Finance Authority (CPCFA).
These bonds effectively bear interest at a rate of 8.3%, with principal
and interest payable semi-annually until maturity in 2000. The cash
portion of the purchase price was funded by borrowings from Thermo
Electron.
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Delano II. In January 1994, the Delano Operating Company commenced
operation of phase II of the Delano project, a 22-megawatt agricultural
and urban wood-waste plant located on the same site as Delano I. The
facility is wholly owned by the Delano Operating Company. Power generated
by the Delano II facility is also purchased by SCE under the Delano I
contract described above, under which prices are fixed until September
2000. Fuel is also purchased pursuant to the same contracts as Delano I.
The Delano II facility is owned by the Company and is subject to $66
million principal amount of nonrecourse, long-term tax-exempt bonds
issued by CPCFA. These bonds effectively bear interest at a rate of 6%,
with principal and interest payable semi-annually until maturity in 2000.
Projects in Development
Domestic - U.S.
In January 1997, the Company entered into a two-year project
development agreement with Brant Energy L.L.C. (Brant) to develop and/or
acquire natural gas infrastructure assets including a certain salt dome
storage development project located in southeastern Mississippi. The
agreement provides for Brant to work exclusively with the Company to
identify and secure project opportunities such as natural gas pipelines,
storage facilities, gathering systems and processing plants, and provides
Brant with the opportunity to contribute up to 10% of the equity
investment.
The Company is also pursuing a number of domestic electric power
projects. The project opportunities are located in New England, Florida
and California and involve the repowering or reconfiguration of existing
power stations. The projects are subject to a number of conditions which
may impact their economic viability and as a result there is no assurance
that the Company will be successful in operating these facilities.
In November 1997, the Company entered into an agreement to acquire
two power generation facilities and related sites in California during
the first six months of 1998 for approximately $9.5 million in cash and
the assumption of certain liabilities. These natural gas-fired facilities
were built in the 1950's and have been designated "non must run" by the
Independent System Operator, meaning they are not essential for supplying
electricity to the California power grid. During calendar 1997, the
plants operated at less than five percent capacity. The Company is
currently evaluating its options with respect to the operation of these
plants in the future.
Czech Republic
In January 1996, the Company, through a wholly owned subsidiary,
signed a joint development agreement with a Czech/American power
development company, EMD. The initial focus is on expansion and
environmental retrofit of existing Czech energy centers. To support this
effort, the Company has opened an office in Prague. The projects are
subject to a number of conditions including negotiation of definitive
agreements for power sale, fuel supply, and other agreements with third
parties. No assurance can be given that conditions or agreements will be
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satisfied on a timely basis, or at all. The Company does not believe that
any of the projects will be operational before mid-1998.
Italy
In September 1996, the Company, through a wholly owned subsidiary,
formed a joint venture (the Joint Venture) with Marcegaglia Group of
Mantova, Italy, to develop, own, and operate biomass-fueled electric
power facilities in that country. The Joint Venture has begun development
of six facilities for which it has signed preliminary power purchase
contracts with ENEL (the Italian electric utility), and all of which have
been approved by the Italian government's price subsidy program for
biomass-fueled plants. In addition, European Union grants which would
cover a portion of the capital costs are being pursued for several of the
projects. The Joint Venture has established an office near Milan to
coordinate the process of securing site locations, permits, and fuel
sources and arranging for the construction and financing of these
facilities. The facilities are subject to a number of conditions
including negotiation of definitive agreements for power sale, fuel
supply, and other agreements with third parties. No assurance can be
given that conditions or agreements will be satisfied on a timely basis.
The Company does not expect that any of the projects will be operational
before 2000.
India
The Company is in the initial stages of developing the IPS Power
project, a 105-megawatt combined cycle, gas turbine electricity
generation plant to be located near Mysore in the state of Karnataka,
India. The Bangalore project is one of eight projects that received a
state order allowing development of 500 additional megawatts of
generating capacity. To support this project, the Company has opened an
office in Bangalore. The total financing of the project is expected to be
approximately $110 million, which is expected to involve significant
equity investments and bank borrowings.
The Company is in the process of negotiating a power sale agreement
with the Karnataka State Electricity Board and will be seeking a payment
guarantee from the state government. The project is subject to a number
of conditions including negotiation of definitive agreements for power
sale, fuel supply, and other agreements with third parties. No assurance
can be given that these conditions or agreements will be satisfied on a
timely basis, or at all.
Engineered Clean Fuels
KFx, Fuel Partners, L.P. In August 1995, the Company, through two
wholly owned subsidiaries, entered into a Limited Partnership Agreement
with KFx Wyoming, Inc. (the Partnership) a subsidiary of KFx, Inc., to
develop, construct, and operate a subbituminous coal beneficiation plant
to be constructed near Gillette, Wyoming. The Partnership has been
granted, in exchange for certain future contingent royalty payments, a
nonexclusive right and license to use certain patented clean coal
technology (K-Fuel) to create a low-moisture, high-energy fuel with
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reduced sulfur that will help coal-burning utilities meet the SO2
emission restrictions contained in the Clean Air Act. See "Regulatory
Matters -- Domestic Energy Regulation." The Partnership procured a
24-acre site for construction of the plant and began construction in
August 1995 under a third party, turnkey construction contract. The plant
is expected to begin operations during the first half of fiscal 1998. In
return for a 95% equity interest in the plant, the Company has provided
$50 million, and is committed to provide up to an additional $5 million,
for the design, construction, and operation of the plant. During 1996,
the U.S. government enacted legislation granting an 18-month extension of
the Oil Barrel Equivalent tax credit for facilities producing alternative
fuels, such as K-fuel. To be eligible, companies must enter into binding,
written contracts for the construction of the facility, by December 31,
1996, and facilities must be placed in service no later than June 30,
1998. In light of the new legislation, the Company has adjusted its
construction schedule in consideration of these deadlines. During the
first quarter of fiscal 1997, a fire occurred at the Company's facility.
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. The fire has caused certain delays with respect to the
commencement of commercial operations of the facility. In addition, the
Company is currently experiencing certain construction problems including
issues relating to the flow of material within the facility and design
and operation of certain pressure-release equipment which will further
delay the commencement of the facility's commercial operations. The
Company expects to complete repairs and resolve these construction
problems in time to begin commercial operation of the facility during the
first half of fiscal 1998. However, because the technology being
developed is new and untested, no assurance can be given that other
difficulties will not arise or that the Company will be able to correct
these construction problems and commence commercial operations prior to
the end of the first half of fiscal 1998, or at all.
In fiscal 1995, the Company purchased 1,500,000 shares of KFx Inc.
common stock for $3.0 million, representing an approximate 7% equity
interest in the Company. In fiscal 1996, the Company purchased an
additional 1,500,000 shares of KFx common stock for $3,000,000,
representing an additional 7% equity interest in KFx. In 1997, the
Company purchased an additional 1,250,000 shares of KFx common stock for
$2,500,000, bringing its total equity interest in KFx to approximately
18%. The Company has warrants, exercisable from January 1, 2000, through
July 1, 2001, to purchase 7,750,000 shares at $3.65 per share. In
addition, the Company has the right to purchase further shares at that
time for then fair market value so that when added to all other shares of
KFx common stock owned by the Company, would result in the Company owning
up to a total 51% equity interest in KFx on a fully diluted basis. See
Note 2 of Notes to Consolidated Financial Statements in the Registrant's
Fiscal 1997 Annual Report to Shareholders incorporated by reference into
Item 8 hereof.
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Biopesticides
In May 1996, the Company, through two of its wholly owned
subsidiaries, acquired the assets of the biopesticide division of W.R.
Grace & Co. (renamed Thermo Trilogy) that develops, manufactures, and
markets environmentally friendly products used for pest control, for
approximately $8.1 million in cash and the assumption of certain
liabilities. In addition, the Company will pay a royalty fee of seven
percent on annual sales of the acquired business in excess of $14 million
through the year 2000. In January 1997, Thermo Trilogy acquired
substantially all of the assets of biosys, inc. through bankruptcy
liquidation for approximately $11.2 million and the assumption of certain
liabilities. In November 1997, Thermo Trilogy acquired the sprayable
bacillus thuringiensis (Bt)- biopesticide business of Novartis AG and its
affiliate for approximately $19.1 million in cash and the assumption of
certain liabilities.
Thermo Trilogy is a leading biopesticide company with a broad range
of biopesticide products. Products produced by Thermo Trilogy include
botanical extracts from the seed of tropical neem trees, microbial-based
pesticides (fungal-based insecticides and fungicides, bacculovirus,
beneficial nematodes, and Bts), insect pheromone-based products such as
traps and lures, and disease-free sugarcane planting stock. As compared
to the conventional chemical pesticides, most of Thermo Trilogy's
products are derived from natural origins with minimal or no toxicity,
and are environmentally friendly as they have minimal or no residue and
do not harm beneficial insects. Thermo Trilogy's products are used
primarily by agricultural farmers, consumers, and pest-control operators
and are sold through various distribution channels worldwide.
Market acceptance of the Company's biopesticide products depends in
part on educating customers on the benefits of the Company's products
compared to conventional chemical pesticides. Although response from
growers to date has been positive, there is no assurance that the Company
will be able to obtain satisfactory levels of market acceptance.
Additionally, until its acquisition of the biopesticide division of W.R.
Grace, the Company had no experience in product marketing and
merchandising. There is no assurance that the Company will be successful
selling its biopesticide products to the agricultural market.
Regulatory Matters
The Company is subject to energy and environmental laws and
regulations at the federal, state, local, and international levels in
connection with the development, ownership, and operation of its plants.
Federal laws and regulations govern power purchase and sale transactions
with regulated utility companies, the types of fuel that may be used by a
plant, the ownership of a plant, the plant's efficiency, and the type and
use of combustion and pollution-control technology at a plant. State
utility regulatory commissions must establish the rates and, in some
instances, other terms and conditions under which public utilities
purchase electric power from nonutility generators. Under certain
circumstances where specific exemptions are otherwise unavailable, state
utility regulatory commissions may have broad jurisdiction over
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<PAGE>
nonutility electric power plants. Energy-producing projects also are
subject to federal, state, local, and international laws, as well as
administrative regulations governing the emissions and other substances
produced by a plant, and geographical location, zoning, and land use.
Public Utility Regulatory Policies Act of 1978, as amended (PURPA).
The U.S. market for nonutility generators developed after the passage of
PURPA. Prior to the passage of PURPA, regulated utilities were the
primary producers of electric power. PURPA was passed in the wake of the
energy crises of the 1970s as a means to increase energy efficiency and
foster the development of alternative power generation technologies. The
1978 enactment of PURPA and the adoption of regulations thereunder by the
Federal Energy Regulatory Commission (FERC) provided incentives for the
development of cogeneration and small power-production facilities.
A domestic electricity-generating project must be a Qualifying
Facility (QF), in order to take advantage of certain rate and regulatory
incentives provided by PURPA. To qualify as a QF, a plant must be a
cogeneration facility or small power producer (less than 80 megawatts)
that burns waste or alternative fuels, and an electric utility or its
subsidiary must not own more than 50% of the economic interest in the
plant. PURPA exempts QFs from the Public Utility Holding Company Act of
1935 (PUHCA), most provisions of the Federal Power Act (the FPA) and,
except under certain limited circumstances, state laws concerning rate or
financial regulation. Each of the plants that the Company currently owns
and/or operates meets the requirements under PURPA necessary for QF
status.
PURPA provides two primary benefits to QFs. First, QFs are relieved
of compliance with extensive federal, state, and local regulations that
control the development, financial structure, and operation of any
energy-producing plant and the prices and terms on which energy may be
sold by the plant. Second, FERC's regulations promulgated under PURPA
require that electric utilities purchase electricity generated by QFs, at
a price based on the purchasing utility's full "avoided cost." This is
defined as the incremental cost to an electric utility of electric energy
or capacity that the utility would have to generate itself or purchase
from another source if it did not have power available from the QF. FERC
regulations also permit QFs and utilities to negotiate agreements for
utility purchases of power at rates lower than the utility's avoided-
costs. While public utilities are not explicitly required by PURPA to
enter into long-term contracts, PURPA helped to create a regulatory
environment in which it has become common for long-term contracts to be
negotiated. While all of the Company's existing projects have long-term
power sale agreements at rates equal to or greater than the utilities'
current avoided-costs, the current practice is for most power sale
agreements to be awarded at a rate below avoided-cost, due to increasing
competition for utility contracts. Moreover, whereas in the 1980s power
sale agreements were often entered into as a result of negotiations
between a nonutility generator and a utility, increasingly, these
agreements are the subject of competitive bidding, which tends to lower
the price that a nonutility generator may receive for power. Currently,
the demand for the construction of cogeneration plants has significantly
diminished in the U.S.; therefore, the Company does not anticipate
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entering into any new construction projects of this type in the near
future.
The Company endeavors to design its projects, monitor its compliance
with applicable regulations, and choose its customers in a manner that
minimizes the risks of losing QF status for its projects. However, if one
of the Company's plants should lose its status as a QF, the Operating
Company would no longer be entitled to the exemptions from PUHCA unless
the Operating Company qualified as an Exempt Wholesale Generator (EWG)
under the National Energy Policy Act of 1992. See "National Energy Policy
Act" below. If the Operating Company was unable to qualify as a QF, the
facility could be subject to regulation as a public utility under the FPA
and could result in the Company inadvertently becoming a public utility
holding company by owning or controlling more than 10% of a facility that
would no longer be exempt from PUHCA. A loss of QF status could result in
defaults under the Operating Company leases, power sale agreements, and
other contracts, which could have a material adverse effect on the
Company.
PUHCA. Under the PUHCA, any corporation, partnership, or other legal
entity that owns or controls 10% or more of the outstanding voting
securities of a "public utility company," or a company that is a "holding
company" of a public utility company, is subject to registration with the
Securities and Exchange Commission and regulation under PUHCA, unless
eligible for an exemption. PURPA provides that companies that only own
QFs are not public utility holding companies under PUHCA. A holding
company of a public utility company that is subject to registration is
required by PUHCA to limit its utility operations to a single integrated
utility system and to divest any other operations not functionally
related to the operation of that utility system. Approval by the
Securities and Exchange Commission is required for nearly all important
financial and business dealings of the holding company.
FPA. The FPA grants FERC exclusive rate-making jurisdiction over
wholesale sales of electricity in interstate commerce, including ongoing
as well as initial rate jurisdiction, which enables FERC to revoke or
modify previously approved rates. These rates may be based on a
cost-of-service approach or may be determined through competitive bidding
or negotiation, or, lastly, may be based on other criteria as long as the
rates are "just and reasonable" and in the public interest. While QFs
under PURPA are exempt from the rate-making and certain other provisions
of the FPA, projects not qualifying for QF status would be subject to the
FPA and to FERC rate-making jurisdiction which may limit their
flexibility in negotiations with power purchasers.
National Energy Policy Act. In 1992, Congress enacted comprehensive
new energy policy legislation in its passage of the National Energy
Policy Act. This law is primarily designed to foster competition in
energy production and provide nonutility generators with competitive
access to the transmission grid. To achieve these goals, the National
Energy Policy Act amended PUHCA to create Exempt Wholesale Generators
(EWGs), a new class of generating facility that is exempt from public
utility regulation under PUHCA. An EWG is an entity determined by FERC to
be exclusively engaged, directly or indirectly, in the business of owning
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and/or operating certain eligible facilities and selling energy
wholesale. EWGs may own facilities of any size, use any fuel source, and
may be owned by utilities or nonutilities. EWGs may not own transmission
facilities or otherwise exert market control. The National Energy Policy
Act also provides new authority to FERC to mandate that owners of
electric transmission lines provide wheeling access to non-utility
generators at just and reasonable rates. Previously limited, wheeling
rights enhance the ability of nonutility generators to negotiate
transmission access and encourage development of facilities whose most
feasible siting lies outside the purchasing utility's service area. The
Company believes that the National Energy Policy Act could benefit the
Company by expanding its ability to own and operate facilities that do
not qualify for QF status. However, this legislation may also result in
increased competition by allowing utilities and others to develop such
facilities without being subject to the constraints of PUHCA.
State Regulation. State public utility commissions (PUCs) have broad
authority to regulate the rates, expenses, financings, and power sale
transactions of regulated electric utilities. Since a power sale
agreement will become a part of a utility's expenses (and therefore will
be reflected in its rates), sale agreements with nonutility generators
typically fall under the regulatory purview of PUCs. Recognizing the
competitive nature of the acquisition process, most PUCs will permit
utilities to "pass through" expenses associated with an independent power
contract to the utility's retail customers.
Nonutility generators (including EWGs) that are not QFs under PURPA
are considered to be public utilities in many states, and are subject to
broad regulation by PUCs - ranging from the requirement of certificates
of public convenience and necessity - to regulation of organizational,
accounting, financial, and other corporate matters. Although FERC
generally has exclusive jurisdiction over the rates charged by such a
producer to its wholesale customers, PUCs have the ability, in practice,
to influence the establishment of such rates by asserting jurisdiction
over the purchasing utility's ability to pass through the resulting cost
of the purchased power to its retail customers. In addition, states may
assert jurisdiction over the siting and construction of facilities, and
over the issuance of securities and the sale or other transfer of assets
by these facilities.
Certain states have adopted or are considering legislation that will
remove many of the restrictions that currently limit the ability of
nonutility generators to sell electrical power directly to industrial and
commercial customers. The Company believes that the removal of these
restrictions will result in greater competition and greater opportunities
to negotiate power sale agreements with industrial and commercial
customers and may result in state PUC's attempting to reduce, or forcing
the renegotiation of, fixed rates or contracts. Although the Company
believes that the trend in the power market is toward deregulation, to
date, only a few states have passed any such legislation, and there can
be no assurance that any further similar legislation will ultimately be
passed.
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<PAGE>
EPA and Related-state Regulation. No pesticide may be manufactured,
used or sold without federal and state approvals. Such approvals, called
registrations, must be obtained for each individual product formulation
for use on specific pests for specific crops. Adding new uses, new pests,
new crops or new formulations requires submission of additional
applications or data for approval.
The U.S. Environmental Protection Agency (EPA) regulates pesticides
under the Federal Insecticide, Fungicide, and Rodenticide Act and
implementing EPA regulations. To obtain a pesticide registration from the
EPA, the applicant must submit extensive field test data evidencing
product effectiveness, nontargeted organism testing, environmental impact
studies, residue chemistry, and toxicity studies on plants and animals.
Initial product registrations can take many years to obtain, and an
applicant may incur considerable additional delay and expense if the EPA
requests further testing and data. To promote the development and use of
biopesticides, the EPA has established special guidelines for their
registration which are set out in subdivision M of the EPA's Pesticide
Assessment Guidelines which generally require less time and expense than
that required for synthetic pesticides.
As a part of the pesticide registration process, the applicant must
submit labeling data describing the chemical composition of the
pesticide, concentrations, manufacturer directions for application, pest
and crop use, and cautionary and warning statements to be put on all
packaging of the pesticides. All pesticide packages must contain the
approved label and no changes can be made to the label without EPA
approval.
Pesticide registrations must also be obtained from each state where
the pesticide will be sold. Some states such as California, which
represents an important market for the Company's products, have their own
extensive testing and pesticide registration procedures and may impose
additional restrictions on the use of the pesticide in such state beyond
those imposed by the EPA regulations. Other states simply follow the EPA
registration and labeling guidelines.
Foreign countries may also require extensive testing and data
submission before pesticides can be manufactured or sold in such foreign
country. The relevant regulations vary from country to country and may be
stricter and more difficult and costly to comply with than EPA's
regulations. Some of the Company's products are registered for sale in
Belgium, Spain, Morocco, Mexico, India, Taiwan, Thailand, Malaysia,
Japan, and Israel.
The Company's activities may also be subject to regulation under
other state, federal, and foreign government laws and regulations
governing employee and public health and safety, environmental pollution,
clean water, disposal of hazardous wastes, manufacture of chemicals,
product liability, food and agriculture applications, and public
disclosure of the use of chemicals.
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(ii) New Products
Not applicable.
(iii) Raw Materials
Fuel and operating supplies purchased by the Company's independent
power projects are either available from a number of different suppliers
or from alternative sources that could be developed without a material
adverse effect on the Company. To date, the Company has experienced no
difficulties in obtaining these materials.
(iv) Patents, Licenses, and Trademarks
Not applicable.
(v) Seasonal Influences
The Company earns a disproportionately high share of its income in
the months of May through October due to rate structures under the power
sale agreements relating to its California plants, which provide strong
incentives to operate during this period of high demand. Conversely, the
Company historically has operated at a loss or at a marginal profit
during its second fiscal quarter due to the rate structure under these
agreements.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended
to customers that would have a material adverse effect on the Company's
working capital.
(vii) Dependency on a Single Customer
The Company derived 10% or more of its revenues during the past three
years from its three most significant electric utility customers: PSNH,
SCE, and PG&E. Revenues from these three customers as a percentage of
total revenues were approximately 18%, 31%, and 32%, respectively, in
fiscal 1997.
(viii) Backlog
Not applicable.
(ix) Government Contracts
Not applicable.
(x) Competition
The worldwide independent power market now consists of numerous
companies, ranging from small startups to multinational industrial
companies. In addition, a number of regulated utilities have created
subsidiaries that compete as nonutility generators. Nonutility generators
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<PAGE>
often specialize in market "niches," such as a specific technology or
fuel (i.e., gas-fired cogeneration, refuse-to-energy, hydropower,
geothermal, wind, solar, wood, or coal) or a specific region of the
country where they believe they have a market advantage. However, many
nonutility generators, seek to develop projects powered by the best fuel
available. Many companies in this market have substantially greater
financial, technical, and operational resources than the Company. The
Company competes primarily on the basis of project experience, technical
expertise, capital resources, and power pricing. The market in which the
Company's biopesticide business competes is highly competitive and
subject to rapid technological change. Many of the Company's competitors
are large chemical and pharmaceutical companies with greater financial,
marketing, and technological resources than the Company. The Company's
biopesticide business competes primarily based on performance and
effectiveness, and also on price, ease of application, and environmental
impact of use.
(xi) Research and Development
During fiscal 1997 and 1996, the Company expended approximately
$1,597,000 and $693,000, respectively, on internally sponsored research
and development programs. No amounts were expended on research and
development programs during fiscal 1995.
(xii) Environmental Protection Regulation
The construction and operation of power projects are subject to
extensive federal, state, and local laws and regulations adopted for the
protection of health, safety, and the environment, and to regulate land
use. The laws and regulations applicable to the Company primarily involve
the discharge of emissions into the water and air, and the use of water,
but can also include wetlands preservation, endangered species, waste
disposal, and noise regulation. These laws and regulations in many cases
require a lengthy and complex process of obtaining licenses, permits, and
approvals from federal, state, and local agencies. If such laws and
regulations are changed and the Company's facilities are not
grandfathered, extensive modifications to project technologies and
facilities could be required.
In November 1990, comprehensive amendments to the Clean Air Act were
enacted. The first major revisions to the Clean Air Act since 1977, the
1990 Amendments expand the scope of federal regulations and enforcement
in several significant respects. In particular, provisions relating to
nonattainment, air toxins, permitting, enforcement, and acid deposition
may affect many power projects. Although the majority of these new
provisions were implemented by 1993, the full scope of the new
requirements remains uncertain pending implementation of new regulations
by the United States Environmental Protection Agency. The Clean Air Act
and the 1990 Amendments contain provisions that regulate the amount of
sulfur dioxide and nitrous oxide that may be emitted by both new and
existing projects. None of the Company's projects are expected to be
affected by the acid rain provisions of the 1990 Amendments. However,
many power generating facilities may have to take various repowering
steps to comply with the 1990 Amendments.
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The Company does not believe that it will be required to make
material capital expenditures to comply with existing environmental
regulations.
(xiii) Number of Employees
As of September 27, 1997, the Company employed, directly and through
its Operating Companies and subsidiary, a total of 275 employees. None of
the employees of the Company or the Operating Companies is represented by
a labor union, and the Company considers its relations with its employees
to be good.
(d) Financial Information about Exports by Domestic Operations and
about Foreign Operations
Not applicable.
(e) Executive Officers of the Registrant
Present Title (Year First Became
Name Age Executive Officer)
-----------------------------------------------------------------------
Brian D. Holt 48 President and Chief Executive
Officer (1994)
John N. Hatsopoulos* 63 Chief Financial Officer and
Vice President (1989)
Parimal S. Patel 54 Executive Vice President, Project
Finance (1989)
Brian P. Chatlosh 38 Vice President, Business Development
(1996)
Robert R. Fini 55 Vice President, Technical
Services (1994)
Floyd M. Gent 48 Vice President, Asset
Management (1994)
Randall W. Miselis 44 Vice President, Accounting and
Administration (1996)
Robert P. Nordstrom 55 Vice President, Business Development,
Asia (1996)
Paul F. Kelleher 55 Chief Accounting Officer (1989)
* John N. Hatsopoulos and George N. Hatsopoulos, a director of the
Company, are brothers.
All of the Company's executive officers are elected annually by the
Board of Directors and serve until their successors are elected and
qualified. All executive officers, except Messrs. Holt, Chatlosh, Gent,
Miselis, and Nordstrom have held comparable positions for at least five
years either with the Company or Thermo Electron. Mr. Holt has been
President and Chief Executive Officer of the Company since February 1994,
and a Director since January 1995. For more than five years prior to that
time, he was President and Chief Executive Officer of Pacific Generation
Company, a financier, builder, owner, and operator of independent power
facilities. Mr. Chatlosh has been Vice President, Business Development
since January 1996 and has worked for the Company in various managerial
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capacities in business development since 1993. Prior to joining the
Company, Mr. Chatlosh worked for Oxbow Power Corporation, an independent
power company, in various managerial capacities in project development
from 1986 to 1992. Mr. Gent has been Vice President, Asset Management of
the Company since September 1994. For more than five years prior to that
time, Mr. Gent held various positions, most recently as Executive Vice
President, at KTI Environmental Group, a developer, owner, and operator
of waste-to-energy plants. Mr. Miselis has been Vice President of
Accounting and Administration since January 1996 and has worked for the
Company in various accounting capacities since November 1988. Mr.
Nordstrom has been Vice President of Business Development, Asia, since
January 1996 and has worked for the Company in various managerial
capacities within marketing, project development, and operations since
1984. Messrs. Hatsopoulos and Kelleher are full-time employees of Thermo
Electron, but devote such time to the affairs of the Company as the
Company's needs reasonably require.
Item 2. Properties
The Company's corporate headquarters are located in Waltham,
Massachusetts, and consist of approximately 15,000 square feet that are
occupied pursuant to a lease expiring in 2003. The Company also leases
office space in Calcutta, India; Bangalore, India; Prague, Czech
Republic; and Roseville, California. The Company's other properties
consist of the power plants described under "Operating Projects." The
Company owns all of the land on which the plants are built.
Thermo Trilogy's corporate headquarters are located in Columbia,
Maryland, where it leases 17,000 square feet of space for office,
laboratory, warehouse, and fermentation pilot plant use. Thermo Trilogy
also leases a 26,000 square foot building, in which it has built a
formation/formulation facility in Decatur, Illinois. Thermo Trilogy owns
an 80,000 square foot formentation/formulation facility in Wasco,
California. Thermo Trilogy's wholly owned subsidiary in the U.K. leases a
20,000 square foot pheromone trap and lure manufacturing facility.
The Company's California plants are located in areas where there is a
risk of potentially significant earthquake activity. Projects that the
Company develops in the future may also be located in areas, including
India, where there is earthquake risk. The Company's earthquake insurance
is not sufficient to cover all potential losses and there can be no
assurance that such insurance will continue to be available on reasonable
terms.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
Information concerning the market and market price for the
Registrant's Common Stock, $.10 par value, and dividend policy is
included under the sections labeled "Common Stock Market Information" and
"Dividend Policy" in the Registrant's Fiscal 1997 Annual Report to
Shareholders and is incorporated herein by reference.
Item 6. Selected Financial Data
The information required under this item is included under the
sections labeled "Selected Financial Information" and "Dividend Policy"
in the Registrant's Fiscal 1997 Annual Report to Shareholders and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required under this item is included under the
heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Registrant's Fiscal 1997 Annual Report to
Shareholders and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements and Supplementary
Data are included in Registrant's Fiscal 1997 Annual Report to
Shareholders and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning Directors required under this item is
incorporated herein by reference from the material contained under
"Election of Directors" in the Registrant's definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A, not later than 120 days after the close of the fiscal
year. The information concerning delinquent filers pursuant to Item 405
of Regulation S-K is incorporated herein by reference from the material
contained under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated herein by
reference from the material contained under the caption "Executive
Compensation" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated herein by
reference from the material contained under the caption "Stock Ownership"
in the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by
reference from the material contained under the caption "Relationship
with Affiliates" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation
14A, not later than 120 days after the close of the fiscal year.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a, d) Financial Statements and Schedule
(1) The consolidated financial statements set forth in the list
below are filed as part of this Report.
(2) The consolidated financial statement schedule set forth in
the list below is filed as part of this Report.
(3) Exhibits filed herewith or incorporated herein by reference
are set forth in Item 14(c) below.
List of Financial Statements and Schedule Referenced in this
Item 14
Information incorporated by reference from Exhibit 13 filed
herewith:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule I: Condensed Financial Information of the
Registrant
All other schedules are omitted because they are not applicable
or not required, or because the required information is shown
either in the financial statements or in the notes thereto.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated August 26,
1997, pertaining to the acquisition of the assets of biosys, inc.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed by the undersigned, thereunto duly authorized.
Date: December 8, 1997 THERMO ECOTEK CORPORATION
By: Brian D. Holt
-------------------------
Brian D. Holt
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated, as of December 8, 1997.
Signature Title
--------- -----
By: Brian D. Holt President, Chief Executive Officer,
----------------------------- and Director
Brian D. Holt
By: John N. Hatsopoulos Chief Financial Officer, Vice President,
----------------------------- and Director
John N. Hatsopoulos
By: Paul F. Kelleher Chief Accounting Officer
-----------------------------
Paul F. Kelleher
By: Chairman of the Board and Director
-----------------------------
Frank Jungers
By: Jerry P. Davis Director
-----------------------------
Jerry P. Davis
By: Dr. George N. Hatsopoulos Director
-----------------------------
Dr. George N. Hatsopoulos
By: William A. Rainville Director
-----------------------------
William A. Rainville
By: Susan F. Tierney Director
-----------------------------
Susan F. Tierney
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<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Ecotek Corporation:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements included in Thermo
Ecotek Corporation's Annual Report to Shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated
November 3, 1997 (except with respect to the matters discussed in Note
15, as to which the date is November 26, 1997). Our audits were made for
the purpose of forming an opinion on those statements taken as a whole.
The schedule listed in Item 14 on page 23 is the responsibility of the
Company's management and is presented for the purposes of complying with
the Securities and Exchange Commission's rules and is not part of the
basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in
all material respects the consolidated financial data required to be set
forth therein in relation to the basic consolidated financial statements
taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
November 3, 1997
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SCHEDULE I
THERMO ECOTEK CORPORATION
Condensed Financial Information of Registrant
Unconsolidated Balance Sheet
September 27, September 28,
(In thousands) 1997 1996
------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 69,465 $ 52,728
Accounts and notes receivable from
subsidiaries 3,789 2,883
Prepaid income taxes and prepaid expenses 4,351 2,082
Current portion of note receivable and other
current assets 23 965
-------- --------
77,628 58,658
-------- --------
Investment in Subsidiaries (on the equity
method) 233,513 196,135
-------- --------
Office Equipment, at Cost 237 340
Less: Accumulated Depreciation (184) (251)
-------- --------
53 89
-------- --------
Long-term Available-for-sale Investments, at
Quoted Market Value (amortized cost of $8,504
and $6,004) 12,497 20,254
-------- --------
Deferred Debt Expense 1,432 807
-------- --------
Due from Parent Company 10,164 12,116
-------- --------
$335,287 $288,059
======== ========
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SCHEDULE I
THERMO ECOTEK CORPORATION
Condensed Financial Information of Registrant
Unconsolidated Balance Sheet (continued)
September 27, September 28,
(In thousands) 1997 1996
------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 162 $ 114
Accrued expenses 6,048 5,750
Due to parent company 1,219 1,448
-------- --------
7,429 7,312
-------- --------
Long-term Obligations:
Noninterest-bearing subordinated
convertible debentures 12,148 31,727
4% Subordinated convertible debentures, due
to parent company 68,500 68,500
4.875% Subordinated convertible debentures 50,000 -
-------- --------
130,648 100,227
-------- --------
Deferred Income Taxes 49,934 42,633
-------- --------
Other Deferred Items - 8,200
-------- --------
Shareholders' Investment:
Common stock 2,598 1,617
Capital in excess of par value 95,573 74,740
Retained earnings 67,593 45,048
Treasury stock (20,872) (481)
Cumulative translation adjustment (52) -
Net unrealized gain on available-for-sale
investments 2,436 8,763
-------- --------
147,276 129,687
-------- --------
$335,287 $288,059
======== ========
27PAGE
<PAGE>
SCHEDULE I
THERMO ECOTEK CORPORATION
Condensed Financial Information of Registrant
Statement of Unconsolidated Income
Nine
Year Ended Year Ended Months Ended
September 27, September 28, September 30,
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Revenues $ 8,200 $ - $ -
Equity in Earnings of Subsidiaries 39,817 34,148 23,329
------- ------- -------
48,017 34,148 23,329
------- ------- -------
General and Administrative Expenses 10,219 9,404 6,686
------- ------- -------
Operating Income 37,798 24,744 16,643
Interest Income (Expense), Net (838) 307 (352)
------- ------- -------
Income Before Provision for
Income Taxes 36,960 25,051 16,291
Provision for Income Taxes 14,415 7,271 6,027
------- ------- -------
Net Income $22,545 $17,780 $10,264
======= ======= =======
28PAGE
<PAGE>
SCHEDULE I
THERMO ECOTEK CORPORATION
Condensed Financial Information of Registrant
Statement of Unconsolidated Cash Flows
Nine
Year Ended Year Ended Months Ended
September 27, September 28, September 30,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Operating Activities:
Net income $ 22,545 $ 17,780 $ 10,264
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 513 182 54
Deferred revenue (8,200) - -
Deferred income tax expense 10,715 3,086 3,987
Equity in earnings of
subsidiaries (39,817) (34,148) (23,329)
Changes in current accounts:
Accounts and notes
receivable from
subsidiaries (906) 282 (1,823)
Other assets 55 1,520 5,526
Accounts payable 48 18 (470)
Accrued expenses 99 (804) 3,633
Due (to) from parent
company 3,471 5,181 (91)
-------- -------- --------
Net cash used in operating
activities (11,477) (6,903) (2,249)
-------- -------- --------
Investing Activities:
Acquisitions, net of cash
acquired (10,865) (8,088) -
Purchase of available-for-sale
investments (2,500) (3,004) (2,030)
Purchases of property, plant,
and equipment (15) (8) (26)
Distribution from (investment
in) subsidiaries 13,315 (9,828) 7,843
-------- -------- --------
Net cash provided by (used in)
investing activities $ (65) $(20,928) $ 5,787
-------- -------- --------
29PAGE
<PAGE>
SCHEDULE I
THERMO ECOTEK CORPORATION
Condensed Financial Information of Registrant
Statement of Unconsolidated Cash Flows (continued)
Nine
Year Ended Year Ended Months Ended
September 27, September 28, September 30,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of
subordinated convertible
debentures $ 48,470 $ 35,942 $ -
Repurchases of Company common
stock (19,743) - -
Net proceeds from issuance of
Company common stock (417) 5,026 27,575
-------- -------- --------
Net cash provided by financing
activities 28,310 40,968 27,575
-------- -------- --------
Exchange Rate Effect on Cash (31) - -
-------- -------- --------
Increase in Cash and Cash
Equivalents 16,737 13,137 31,113
Cash and Cash Equivalents at
Beginning of Period 52,728 39,591 8,478
-------- -------- --------
Cash and Cash Equivalents at
End of Period $ 69,465 $ 52,728 $ 39,591
======== ======== ========
30PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
2.1 Asset Purchase Agreement among Thermo Trilogy
Corporation, Thermo Ecotek International Holdings, Inc.,
and W.R. Grace & Co. - Conn. dated March 5, 1996 (filed
as Exhibit 2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 30, 1996 [File No.
1-13572] and incorporated herein by reference).
2.2 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).
3.1 Certificate of Incorporation, as amended, of the
Registrant (filed as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
3.2 By-Laws of the Registrant (filed as Exhibit 3.2 to the
Registrant's Transition Report on Form 10-K for the nine
months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference).
4.1 Fiscal Agency Agreement dated as of March 14, 1996,
among the Registrant, Thermo Electron Corporation, and
Chemical Bank as fiscal agent, relating to $37 million
principal amount of noninterest-bearing subordinated
convertible debentures due 2001 (filed as Exhibit 4 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 30, 1996 [File No. 1-13572] and
incorporated herein by reference).
4.2 Fiscal Agency Agreement dated as of April 15, 1997,
among the Registrant, Thermo Electron Corporation, and
Bankers Trust Company as fiscal agent, relating to $50
million principal amount of 4 7/8% Convertible
Subordinated Debentures due 2004 (filed as Exhibit 4 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 29, 1997 [File No. 1-13572] and
incorporated herein by reference).
10.1 Asset Transfer Agreement between Thermo Electron
Corporation and the Registrant dated January 2, 1990
(filed as Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
31PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.2 Corporate Services Agreement dated January 3, 1993,
between Thermo Electron Corporation and the Registrant
(filed as Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.3 Thermo Electron Corporate Charter as amended and
restated effective January 3, 1993 (filed as
Exhibit 10.3 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
10.4 Amended and Restated Tax Allocation Agreement dated as
of December 4, 1996, between Thermo Electron and the
Registrant (filed as Exhibit 10.4 to the Registrant's
Report on Form 10-K for the fiscal year ended September
28, 1996 [File No. 1-13572] and incorporated herein by
reference).
10.5 Master Repurchase Agreement dated as of January 1, 1994,
between the Registrant and Thermo Electron Corporation.
10.6 Master Reimbursement and Loan Agreement dated as of
January 1, 1994, between Thermo Electron and the
Registrant (filed as Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
10.7 Lease Agreement dated as of December 2, 1991, between
Thermo Electron and the Registrant (filed as
Exhibit 10.7 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
10.8 Purchase and sale of $38,500,000 principal amount 4%
subordinated convertible note due 2001 (filed as
Exhibit 10.8 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
10.9 Purchase and sale of $30,000,000 principal amount 4%
subordinated convertible note due 2001 (filed as
Exhibit 10.9 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
10.10 Power Purchase Agreement between Mendota Biomass Power,
Ltd. and Pacific Gas and Electric Company dated May 7,
1984 (filed as Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
32PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.11 Project Lease between Chrysler Capital Corporation and
Mendota Biomass Power, Ltd. dated October 30, 1989
(filed as Exhibit 10.11 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.12 First Amendment to Project Lease between Chrysler
Capital Corporation and Mendota Biomass Power, Ltd.,
dated June 30, 1995 (filed as Exhibit 1 to the
Registrant's Current Report on Form 8-K dated June 30,
1995 and incorporated herein by reference).
10.13 Mendota Biomass Power, Ltd. Limited Partnership
Agreement dated December 10, 1986 (filed as
Exhibit 10.12 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
10.14 Rate Order and Interconnection Agreement between
Whitefield Power and Light Company and Public Service
Company of New Hampshire dated September 4, 1986 (filed
as Exhibit 10.13 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.15 Wood Supply Contract between North County Procurement,
Inc. and Whitefield Power and Light Company dated June
4, 1993 (filed as Exhibit 10.14 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
10.16 Leasing Agreement between BankBoston Leasing Services
Inc. and Gorbell Thermo Electron Power Company dated
December 24, 1987 (filed as Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
10.17 Amended and Restated Wood Supply Contract between
Linkletter and Sons and Gorbell Thermo Electron Power
Company dated January 15, 1993 (filed as Exhibit 10.16
to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
33PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.18 Power Purchase Agreement between Gorbell Thermo Electron
Power Company and Central Maine Power Company dated
February 3, 1984, as amended (filed as Exhibit 10.17 to
the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
10.19 Reduced Power Operation Agreement between Gorbell Thermo
Electron Power Company and Central Maine Power Company
dated January 14, 1994 (filed as Exhibit 10.18 to the
Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
10.20 Joint Venture Agreement establishing Gorbell Thermo
Electron Power Company dated September 13, 1985 (filed
as Exhibit 10.19 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.21 Leasing Agreement between BankBoston Leasing Services,
Inc. and Hemphill Power and Light Company dated December
23, 1987 (filed as Exhibit 10.20 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
10.22 Rate Order Support Agreement between Hemphill Power and
Light Company and Thermo Electron dated December 23,
1987 (filed as Exhibit 10.21 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
10.23 Wood Supply Contract between Durgin & Crowell Lumber
Company, Inc. and Hemphill Power and Light Company dated
June 4, 1985 (filed as Exhibit 10.22 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
10.24 Fuel Supply Contract between Springfield Management
Company and Hemphill Power and Light Company dated June
4, 1985, as amended (filed as Exhibit 10.23 to the
Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
10.25 Rate Order and Interconnection Agreement between
Hemphill Power and Light Company and Public Service
Company of New Hampshire dated June 26, 1986 (filed as
Exhibit 10.24 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
34PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.26 Joint Venture Agreement establishing Hemphill Power and
Light Company dated June 4, 1985 (filed as Exhibit 10.25
to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
10.27 Letter Agreement dated July 15, 1988, among the partners
of Hemphill Power and Light Company amending various
agreements (filed as Exhibit 10.26 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
10.28 Letter Agreement dated January 1, 1990, between the
partners of Hemphill Power and Light Company (filed as
Exhibit 10.27 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
10.29 Assignment and Assumption Agreement of Delano II plant
by Delano Energy Company, Inc. dated December 1, 1993
(filed as Exhibit 10.28 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.30 Loan Agreement between California Pollution Control
Financing Authority ("CPCFA") and Delano Energy Company,
Inc. dated August 1, 1989, as supplemented on May 1,
1990 (Delano I; filed as Exhibit 10.29 to the
Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
10.31 Indenture of Trust between CPCFA and Bankers Trust
Company dated August 1, 1990, as supplemented on May 1,
1990 (Delano I; filed as Exhibit 10.30 to the
Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
10.32 Indenture of Trust between CPCFA and Bankers Trust
Company dated October, 1991 (Delano II; filed as
Exhibit 10.31 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein
by reference).
10.33 Loan Agreement between CPCFA and Delano Energy Company,
Inc. dated October 1, 1991 (filed as Exhibit 10.32 to
the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
35PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.34 Power Purchase Contract between Southern California
Edison Co. and Signal Delano Energy Company, Inc. dated
July 31, 1987 (filed as Exhibit 10.33 to the
Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
10.35 Amended Restated Reimbursement Agreement among Chemical
Trust Company of California ("CTCC"), Delano Energy
Company, Inc. and ABN AMRO Bank N.V. and other banks
dated December 31, 1993 (filed as Exhibit 10.34 to the
Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
10.36 Amended and Restated Lease Agreement between CTCC and
Delano Energy Company, Inc. dated December 31, 1993
(filed as Exhibit 10.35 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.37 Biomass Fuel Supply Contract between the Registrant and
Delano Energy Company, Inc. dated December 31, 1993
(filed as Exhibit 10.36 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.38 Agreement between Consolidated Edison Company of New
York, Inc. and Staten Island Cogeneration Corporation
(filed as Exhibit 10.37 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.39 Power Purchase Agreement between Woodland Biomass Power,
Ltd. and Pacific Gas & Electric Company dated May 7,
1987 (filed as Exhibit 10.38 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
10.40 Stock Purchase Agreement dated as of August 18, 1995,
between the Registrant and KFx, Inc. (filed as Exhibit
10.40 to the Registrant's Transition Report on Form 10-K
for the nine months ended September 30, 1995 [File No.
1-13572] and incorporated herein by reference). Pursuant
to Item 601(b)(2) of Regulation S-K, schedules to this
Agreement have been omitted. The Company hereby
undertakes to furnish supplementally a copy of such
schedules to the commission upon request.
36PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.41 Stock Purchase Warrant issued by KFx, Inc. to the
Company dated August 18, 1995 (filed as Exhibit 10.41 to
the Registrant's Transition Report on Form 10-K for the
nine months ended September 30, 1995 [File No. 1-13572]
and incorporated herein by reference).
10.42 Stock Purchase Warrant issued by KFx, Inc. to the
Company dated August 18, 1995 (filed as Exhibit 10.42 to
the Registrant's Transition Report on Form 10-K for the
nine months ended September 30, 1995 [File No. 1-13572]
and incorporated herein by reference).
10.43 Limited Partnership Agreement of KFx Fuel Partners, L.P.
dated as of August 18, 1995 (filed as Exhibit 10.43 to
the Registrant's Transition Report on Form 10-K for the
nine months ended September 30, 1995 [File No. 1-13572]
and incorporated herein by reference). (Certain portions
of this Exhibit have been omitted subject to an
application for confidential treatment filed with the
Commission pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934).
10.44 Turnkey Design and Construction Agreement dated as of
August 18, 1995, between KFx Fuel Partners, L.P. and
Walsh Construction Company, a Division of Guy F.
Atkinson Company (filed as Exhibit 10.44 to the
Registrant's Transition Report on Form 10-K for the nine
months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference). (Certain portions of
this Exhibit have been omitted subject to an application
for confidential treatment filed with the Commission
pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934).
10.45 Lease Agreement between Manufacturers Hanover Trust
Company of California and Woodland Biomass Power, Ltd.
dated December 29, 1989 (filed as Exhibit 10.39 to the
Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
10.46 Incentive Stock Option Plan of the Registrant (filed as
Exhibit 10.44 to the Registrant's Registration Statement
on Form S-1 [Reg. No 33-86682] and incorporated herein
by reference). (Maximum number of shares issuable in the
aggregate under this plan and the Registrant's
Nonqualified Stock Option Plan is 1,350,000 shares,
after adjustment to reflect share increase approved in
December 1993 and 3-for-2 stock split effected in
October 1996).
37PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.47 Nonqualified Stock Option Plan of the Registrant (filed
as Exhibit 10.45 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference). (Maximum number of
shares issuable in the aggregate under this plan and the
Registrant's Incentive Stock Option Plan is 1,350,000
shares, after giving affect to share increase approved
in December 1993 and 3-for-2 stock split effected in
October 1996).
10.48 Equity Incentive Plan of the Registrant (filed as
Exhibit 10.40 to the Registrant's Registration Statement
on Form S-1 (Reg. No. 33-86682) and incorporated herein
by reference).
10.49 Deferred Compensation Plan for Directors of the
Registrant (filed as Exhibit 10.41 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
10.50 Amended and Restated Directors Stock Option Plan of the
Registrant (filed as Exhibit 10.42 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682]
and incorporated herein by reference).
10.51 Thermo Ecotek Corporation - Thermo Trilogy Corporation
Nonqualified Stock Option Plan (filed as Exhibit 10.51
to the Registrant's Report on Form 10-K for the fiscal
year ended September 28, 1996 [File No. 1-13572] and
incorporated herein by reference).
10.52 Thermo Trilogy Corporation Equity Incentive Plan (filed
as Exhibit 10.52 to the Registrant's Report on Form 10-K
for the fiscal year ended September 28, 1996 [File No.
1-13572] and incorporated herein by reference.
10.53 Form of Indemnification Agreement between the Registrant
and its officers and directors (filed as Exhibit 10.43
to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by
reference).
In addition to the stock-based compensation plans of the
Registrant, the executive officers of the Registrant may
be granted awards under stock-based compensation plans
of Thermo Electron Corporation, for services rendered to
the Registrant or such affiliated corporations. Such
plans were filed as Exhibits 10.21 through 10.45 to the
Annual Report on Form 10-K of Thermo Electron
Corporation for the fiscal year ended December 28, 1996
[File No. 1-8002] and are incorporated herein by
reference.
38PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.54 Restated Stock Holding Assistance Plan and Form of
Promissory Note.
11 Statement re: Computation of Earnings per Share.
13 Annual Report to Shareholders for the fiscal year ended
September 27, 1997 (only those portions incorporated
herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
EXHIBIT 10.5
MASTER REPURCHASE AGREEMENT
The Master Repurchase Agreement dated as of January 1, 1994
between Thermo Electron Corporation, a Delaware corporation
("Seller"), and Thermo Ecotek Corporation, a Delaware corporation
(the "Buyer").
1. Applicability
From time to time Buyer and Seller may enter into
transactions in which Seller agrees to transfer to Buyer certain
securities and/or financial instruments ("Securities") against
the transfer of funds by Buyer, with a simultaneous agreement by
Buyer to transfer to Seller such Securities on demand, against
the transfer of funds by Seller. Each such transaction shall be
referred to herein as a "Transaction" and shall be governed by
this Agreement, unless otherwise agreed in writing.
2. Definitions
(a) "Act of Insolvency", with respect to either party (i)
the commencement by such party as debtor of any case or
proceeding under any bankruptcy, insolvency, reorganization,
liquidation, dissolution or similar law, or such party seeking
the appointment of a receiver, trustee, custodian or similar
official for such party or any substantial part of its property;
or (ii) the commencement of any such case or proceeding against
such party, or another seeking such an appointment, which (A) is
consented to or not timely contested by such party, (B) results
in the entry of an order for relief, such an appointment or the
entry of an order having a similar effect, or (C) is not
dismissed within 15 days; or (iii) the making by a party of a
general assignment for the benefit of creditors; or (iv) the
admission in writing by a party of such party's inability to pay
such party's debts as they become due;
(b) "Additional Purchased Securities", Securities provided
by Seller to Buyer pursuant to Paragraph 4(a) hereof;
(c) "Income", with respect to any Security at any time, any
principal thereof then payable and all interest, dividends or
other distributions thereon;
(d) "Market Value", with respect to any Securities as of
any date, the price for such Securities on such date obtained
from a generally recognized source agreed to by the parties or
the most recent closing bid quotation from such a source, plus
accrued Income to the extent not included therein (other than any
Income transferred to Seller pursuant to Paragraph 6 hereof) as
of such date (unless contrary to market practice for such
Securities);
PAGE
<PAGE>
(e) "Other Buyers", third parties that have entered into an
agreement with Seller that is substantially similar to this
Agreement;
(f) "Pricing Rate", a rate equal to the Commercial Paper
Composite rate for 90-day maturities provided by Merrill Lynch,
Pierce, Fenner & Smith Incorporated (or, if such rate is not
available, a substantially equivalent rate agreed to by Buyer and
Seller) plus 25 basis points, which rate shall be adjusted on the
first business day of each fiscal quarter and shall be in effect
for the entirety such fiscal quarter;
(g) "Purchase Price", the price at which Purchased
Securities are transferred by Seller to Buyer;
(h) "Purchased Securities", the Securities transferred by
Seller to Buyer in a Transaction hereunder, and any Securities
substituted therefor in accordance with Paragraph 9 hereof. The
term "Purchased Securities" with respect to any Transaction at
any time also shall include Additional Purchase Securities
transferred pursuant to Paragraph 4(a) and shall exclude
Securities returned pursuant to Paragraph 4(b);
(i) "Repurchase Collateral Account", a book account
maintained by Seller containing, among other Securities, the
Purchased Securities; and
(j) "Repurchase Price", for any Purchased Security, an
amount equal to the Purchase Price paid by Buyer to Seller for
such Purchased Security.
3. Transactions
(a) A Transaction may be initiated by Buyer upon the
transfer of the Purchase Price to Seller's account. Upon such
transfer, Seller shall transfer to Buyer Purchased Securities
having a Market Value equal to 103% of the Purchase Price.
(b) Purchased Securities shall be held in custody for Buyer
by Seller in the Repurchase Collateral Account. Seller shall
indicate on its books for such account Buyer's ownership of the
Purchased Securities. Upon reasonable request from Buyer, Seller
shall provide Buyer with a complete list of Purchased Securities
owned by Buyer.
(c) Upon demand by Buyer or Seller, Seller shall repurchase
from Buyer, and Buyer shall sell to Seller, for the Repurchase
Price all or any part of the Purchased Securities then owned by
Buyer.
4. Margin Maintenance
(a) If at any time the aggregate Market Value of all
Purchased Securities then owned by Buyer is less than 103% of the
2PAGE
<PAGE>
aggregate Repurchase Price for such Purchased Securities, then
Seller shall transfer to Buyer additional Securities ("Additional
Purchased Securities"), so that the aggregate Market Value of
such Purchased Securities, including any such Additional
Purchased Securities, will thereupon equal or exceed 103% of such
aggregate Repurchase Price.
(b) If at any time the aggregate Market Value of all
Purchased Securities then owned by Buyer exceeds 103% of the
aggregate Repurchase Price for such Purchased Securities, then
Seller may transfer Purchased Securities to Seller, so that the
aggregate Market Value of such Purchased Securities will
thereupon not exceed 103% of such aggregate Repurchase Price.
5. Interest Payments
If during any fiscal month Buyer owned Purchased Securities,
then on the first day of the next following fiscal month Seller
shall pay to Buyer an amount equal to the sum of the aggregate
Repurchase Prices of the Purchased Securities owned by Buyer at
the close of each day during the preceding fiscal month divided
by the number of days in such month and the product multiplied by
the Pricing Rate times the number of days in such month divided
by 360.
6. Income Payments and Voting Rights
Where a particular Transaction's term extends over an Income
payment date on the Purchased Securities subject to that
Transaction, Buyer shall, on the date such Income is payable,
transfer to Seller an amount equal to such Income payment or
payments with respect to any Purchased Securities subject to such
Transaction. Seller shall retain all voting rights with respect
to Purchased Securities sold to Buyer under this Agreement.
7. Security Interest
Although the parties intend that all Transactions hereunder
be sales and purchases and not loans, in the event any such
Transactions are deemed to be loans, Seller shall be deemed to
have pledged to Buyer as security for the performance by Seller
of its obligations under each such Transaction and this
Agreement, and shall be deemed to have granted to Buyer a
security interest in, all of the Purchased Securities with
respect to all Transactions hereunder and all proceeds thereof.
8. Payment and Transfer
Unless otherwise mutually agreed, all transfers of funds
hereunder shall be in immediately available funds. As used
herein with respect to Securities, "transfer" is intended to have
3PAGE
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the same meaning as when used in Section 8-313 of the
Massachusetts Uniform Commercial Code or, where applicable, in
any federal regulation governing transfers of the Securities.
9. Substitution
Buyer hereby grants Seller the authority to manage, in
Seller's sole discretion, the Purchased Securities held in
custody for Buyer by Seller in the Repurchase Collateral Account.
Buyer expressly agrees that Seller may (i) substitute other
Securities for any Purchased Securities and (ii) commingle
Purchased Securities with other Securities held in the Repurchase
Collateral Account. Substitutions shall be made by transfer to
Buyer of such other Securities and transfer to Seller of the
Purchased Securities for which substitution is being made. After
substitution, the substituted Securities shall be deemed to be
Purchased Securities. Securities which are substituted for
Purchased Securities shall have a Market Value at the time of
substitution equal to or greater than the Market Value of the
Purchase Securities for which such Securities were substituted.
10. Representations
Each of Buyer and Seller represents and warrants to the
other that (i) it is duly authorized to execute and deliver this
Agreement, to enter into the Transactions contemplated hereunder
and to perform its obligations hereunder and has taken all
necessary action to authorize such execution, delivery and
performance, (ii) the person signing this Agreement on its behalf
is duly authorized to do so on its behalf, (iii) it has obtained
all authorizations of any governmental body required in
connection with this Agreement and the Transactions hereunder and
such authorizations are in full force and effect and (iv) the
execution, delivery and performance of this Agreement and the
Transactions hereunder will not violate any law, ordinance,
charter, by-law or rule applicable to it or any agreement by
which it is bound or by which any of its assets are affected. On
the date for any Transaction Buyer and Seller shall each be
deemed to repeat all the foregoing representations made by it.
11. Events of Default
In the event that (i) Seller fails to repurchase or Buyer
fails to transfer Purchased Securities upon demand for repurchase
from either Buyer or Seller, (ii) Seller or Buyer fails, after
one business day's notice, to comply with Paragraph 4 hereof,
(iii) Buyer fails to make payment to Seller pursuant to Paragraph
6 hereof, (iv) Seller fails to comply with Paragraph 5 hereof,
(v) an Act of Insolvency occurs with respect to Seller or Buyer,
(vi) any representation made by Seller or Buyer shall have been
incorrect or untrue in any material respect when made or repeated
or deemed to have been made or repeated, or (vii) Seller or Buyer
shall admit to the other its inability to, or its intention not
4PAGE
<PAGE>
to, perform any of its obligations hereunder (each an "Event of
Default"):
(a) At the option of the nondefaulting party, exercised by
written notice to the defaulting party (which option shall be
deemed to have been exercised, even if no notice is given,
immediately upon the occurrence of any Act of Insolvency), Seller
shall become obligated to repurchase, and Buyer shall become
obligated to sell, all Purchased Securities then owned by Buyer
for the Repurchase Price of such Purchased Securities.
(b) If Seller is the defaulting party and Buyer exercises
or is deemed to have exercised the option referred to in
subparagraph (a) of this Paragraph, (i) the Seller's obligations
hereunder to repurchase all Purchased Securities in such
Transactions shall thereupon become immediately due and payable,
(ii) all Income paid after such exercise or deemed exercise shall
be retained by Buyer and applied to the aggregate unpaid
Repurchase Prices owed by Seller, and (iii) Seller shall
immediately deliver to Buyer any Purchased Securities subject to
such Transactions then in Seller's possession.
(c) In all Transactions in which Buyer is the defaulting
party, upon tender by Seller of payment of the aggregate
Repurchase Prices for all such Transactions, Buyer's right, title
and interest in all Purchased Securities subject to such
Transactions shall be deemed transferred to Seller, and Buyer
shall deliver all such Purchased Securities to Seller.
(d) After one business day's notice to the defaulting party
(which notice need not be given if an Act of Insolvency shall
have occurred, and which may be the notice given under
subparagraph (a) of this Paragraph or the notice referred to in
clause (ii) of the first sentence of this Paragraph), the
nondefaulting party may:
(i) as to Transactions in which Seller is the
defaulting party, (A) immediately sell, in a recognized market at
such price or prices as Buyer may reasonably deem satisfactory,
any or all Purchased Securities subject to such Transactions and
apply the proceeds thereof to the aggregate unpaid Repurchase
Prices and any other amounts owing by Seller hereunder or (B) in
its sole discretion elect, in lieu of selling all or a portion of
such Purchased Securities, to give Seller credit for such
Purchased Securities in an amount equal to the price therefor on
such date, obtained from a generally recognized source or the
most recent closing bid quotation from such a source, against the
aggregate unpaid Repurchase Prices and any other amounts owing by
Seller hereunder; and
(ii) as to Transactions in which Buyer is the
defaulting party, (A) purchase securities ("Replacement
Securities") of the same class and amount as any Purchased
Securities that are not delivered by Buyer to Seller as required
5PAGE
<PAGE>
hereunder or (B) in its sole discretion elect, in lieu of
purchasing Replacement Securities, to be deemed to have purchased
Replacement Securities at the price therefor on such date,
obtained from a generally recognized source or the most recent
closing bid quotation from such a source.
(e) As to Transactions in which Buyer is the defaulting
party, Buyer shall be liable to Seller (i) with respect to
Purchased Securities (other than Additional Purchased
Securities), for any excess of the price paid (or deemed paid) by
Seller for Replacement Securities therefor over the Repurchase
Price for such Purchased Securities and (ii) with respect to
Additional Purchased Securities, for the price paid (or deemed
paid) by Seller for the Replacement Securities therefor.
(g) The defaulting party shall be liable to the
nondefaulting party for the amount of all reasonable legal or
other expenses incurred by the nondefaulting party in connection
with or as a consequence of an Event of Default.
(h) The nondefaulting party shall have, in addition to its
rights hereunder, any rights otherwise available to it under any
other agreement or applicable law.
12. Single Agreement
Buyer and Seller acknowledge that, and have entered hereinto
and will enter into each Transaction hereunder in consideration
of and in reliance upon the fact that, all Transactions hereunder
constitute a single business and contractual relationship and
have been made in consideration of each other. Accordingly, each
of Buyer and Seller agrees (i) to perform all of its obligations
in respect of each Transaction hereunder, and that a default in
the performance of any such obligations shall constitute a
default by it in respect of all Transactions hereunder, (ii) that
each of them shall be entitled to set off claims and apply
property held by them in respect of any Transaction against
obligations owing to them in respect of any other Transactions
hereunder and (iii) that payments, deliveries and other transfers
made by either of them in respect of any Transaction shall be
deemed to have been made in consideration of payments, deliveries
and other transfers in respect of any other Transactions
hereunder, and the obligations to make any such payments,
deliveries and other transfers may be applied against each other
and netted.
13. Entire Agreement; Severability
This Agreement shall supersede any existing agreements
between the parties containing general terms and conditions for
repurchase transactions. Each provision and agreement and
agreement herein shall be treated as separate and independent
from any other provision or agreement herein and shall be
6PAGE
<PAGE>
enforceable notwithstanding the unenforceability of any such
other provision or agreement.
14. Non-assignability; Termination
The rights and obligations of the parties under this
Agreement and under any Transactions shall not be assigned by
either party without the prior written consent of the other
party. Subject to the foregoing, this Agreement and any
Transactions shall be binding upon and shall inure to the benefit
of the parties and their respective successors and assigns. This
Agreement may be canceled by either party upon giving written
notice to the other, except that this Agreement shall,
notwithstanding such notice, remain applicable to any
Transactions then outstanding.
15. Governing Law
This Agreement shall be governed by the laws of the
Commonwealth of Massachusetts without giving effect to the
conflict of law principles thereof.
16. No Waivers, Etc.
No express or implied waiver of any Event of Default by
either party shall constitute a waiver of any other Event of
Default and no exercise of any remedy hereunder by any party
shall constitute a wavier of its right to exercise any other
remedy hereunder. No modification or waiver of any provision of
this Agreement and no consent by any party to a departure
herefrom shall be effective unless and until such shall be in
writing and duly executed by both of the parties hereto.
17. Intent
(a) The parties recognize that each Transaction is a
"repurchase agreement" as that term is defined in Section 101 of
Title 11 of the United States Code, as amended (except insofar as
the type of Securities subject to such Transaction or the term of
such Transaction would render such definition inapplicable), and
a "securities contract" as that term is defined in Section 741 of
Title 11 of the United States Code, as amended.
(b) It is understood that either party's right to liquidate
Securities delivered to it in connection with Transactions
hereunder or to exercise any other remedies pursuant to Paragraph
11 hereof, is a contractual right to liquidate such Transaction
as described in Sections 555 and 559 of Title 11 of the United
States Code, as amended.
7PAGE
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this
Agreement as of the date first above written.
THERMO ELECTRON CORPORATION THERMO ECOTEK CORPORATION
By:_____________________________ By:_____________________________
Name: Melissa F. Riordan Name: Brian D. Holt
Title: Treasurer Title: President
EXHIBIT 10.54
THERMO ECOTEK CORPORATION
RESTATED STOCK HOLDING ASSISTANCE PLAN
SECTION 1. Purpose.
The purpose of this Plan is to benefit Thermo Ecotek
Corporation (the "Company") and its stockholders by encouraging
Key Employees to acquire and maintain share ownership in the
Company, by increasing such employees' proprietary interest in
promoting the growth and performance of the Company and its
subsidiaries and by providing for the implementation of the Stock
Holding Policy.
SECTION 2. Definitions.
The following terms, when used in the Plan, shall have the
meanings set forth below:
Committee: The Human Resources Committee of the Board of
Directors of the Company as appointed from time to time.
Common Stock: The common stock of the Company and any
successor thereto.
Company: Thermo Ecotek Corporation, a Delaware
corporation.
Stock Holding Policy: The Stock Holding Policy of the
Company, as adopted by the Committee and as in effect from time
to time.
Key Employee: Any employee of the Company or any of its
subsidiaries, including any officer or member of the Board of
Directors who is also an employee, as designated by the
Committee, and who, in the judgment of the Committee, will be in
a position to contribute significantly to the attainment of the
Company's strategic goals and long-term growth and prosperity.
Loans: Loans extended to Key Employees by the Company
pursuant to this Plan.
Plan: The Thermo Ecotek Corporation Stock Holding
Assistance Plan, as amended from time to time.
SECTION 3. Administration.
The Plan and the Stock Holding Policy shall be administered
by the Committee, which shall have authority to interpret the
Plan and the Stock Holding Policy and, subject to their
provisions, to prescribe, amend and rescind any rules and
regulations and to make all other determinations necessary or
desirable for the administration thereof. The Committee's
PAGE
<PAGE>
interpretations and decisions with regard to the Plan and the
Stock Holding Policy and such rules and regulations as may be
established thereunder shall be final and conclusive. The
Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or the Stock Holding
Policy, or in any Loan in the manner and to the extent the
Committee deems desirable to carry it into effect. No member of
the Committee shall be liable for any action or omission in
connection with the Plan or the Stock Holding Policy that is made
in good faith.
SECTION 4. Loans and Loan Limits.
The Committee has determined that the provision of Loans
from time to time to Key Employees in such amounts as to cause
such Key Employees to comply with the Stock Holding Policy is, in
the judgment of the Committee, reasonably expected to benefit the
Company and authorizes the Company to extend Loans from time to
time to Key Employees in such amounts as may be requested by such
Key Employees in order to comply with the Stock Holding Policy.
Such Loans may be used solely for the purpose of acquiring Common
Stock (other than upon the exercise of stock options or under
employee stock purchase plans) in open market transactions or
from the Company.
Each Loan shall be full recourse and evidenced by a
non-interest bearing promissory note substantially in the form
attached hereto as Exhibit A (the "Note") and maturing in
accordance with the provisions of Section 6 hereof, and
containing such other terms and conditions, which are not
inconsistent with the provisions of the Plan and the Stock
Holding Policy, as the Committee shall determine in its sole and
absolute discretion.
SECTION 5. Federal Income Tax Treatment of Loans.
For federal income tax purposes, interest on Loans shall be
imputed on any interest free Loan extended under the Plan. A Key
Employee shall be deemed to have paid the imputed interest to the
Company and the Company shall be deemed to have paid said imputed
interest back to the Key Employee as additional compensation.
The deemed interest payment shall be taxable to the Company as
income, and may be deductible to the Key Employee to the extent
allowable under the rules relating to investment interest. The
deemed compensation payment to the Key Employee shall be taxable
to the employee and deductible to the Company, but shall also be
subject to employment taxes such as FICA and FUTA.
SECTION 6. Maturity of Loans.
Each Loan to a Key Employee hereunder shall be due and
payable on demand by the Company. If no such demand is made,
then each Loan shall mature and the principal thereof shall
become due and payable on the fifth anniversary of the date of
PAGE
<PAGE>
the Loan, provided that the Committee may, in its sole and
absolute discretion, authorize such other maturity and repayment
schedule as the Committee may determine. Each Loan shall also
become immediately due and payable in full, without demand, upon
the occurrence of any of the events set forth in the Note;
provided that the Committee may, in its sole and absolute
discretion, authorize an extension of the time for repayment of a
Loan upon such terms and conditions as the Committee may
determine.
SECTION 7. Amendment and Termination of the Plan.
The Committee may from time to time alter or amend the Plan
or the Stock Holding Policy in any respect, or terminate the Plan
or the Stock Holding Policy at any time. No such amendment or
termination, however, shall alter or otherwise affect the terms
and conditions of any Loan then outstanding to Key Employee
without such Key Employee's written consent, except as otherwise
provided herein or in the promissory note evidencing such Loan.
SECTION 8. Miscellaneous Provisions.
(a) No employee or other person shall have any claim or
right to receive a Loan under the Plan, and no employee shall
have any right to be retained in the employ of the Company due to
his or her participation in the Plan.
(b) No Loan shall be made hereunder unless counsel for the
Company shall be satisfied that such Loan will be in compliance
with applicable federal, state and local laws.
(c) The expenses of the Plan shall be borne by the Company.
(d) The Plan shall be unfunded, and the Company shall not
be required to establish any special or separate fund or to make
any other segregation of assets to assure the making of any Loan
under the Plan.
(e) Except as otherwise provided in Section 7 hereof, by
accepting any Loan under the Plan, each Key Employee shall be
conclusively deemed to have indicated his acceptance and
ratification of, and consent to, any action taken under the Plan
or the Stock Holding Policy by the Company, the Board of
Directors of the Company or the Committee.
(f) The appropriate officers of the Company shall cause to
be filed any reports, returns or other information regarding
Loans hereunder, as may be required by any applicable statute,
rule or regulation.
SECTION 9. Effective Date.
The Plan and the Stock Holding Policy shall become effective
upon approval and adoption by the Committee.
PAGE
<PAGE>
EXHIBIT A TO STOCK HOLDING ASSISTANCE PLAN
THERMO ECOTEK CORPORATION
Promissory Note
$_________
Dated:____________
For value received, ________________, an individual whose
residence is located at _______________________ (the "Employee"),
hereby promises to pay to Thermo Ecotek Corporation (the
"Company"), or assigns, ON DEMAND, but in any case on or before
[insert date which is the fifth anniversary of date of issuance]
(the "Maturity Date"), the principal sum of [loan amount in
words] ($_______), or such part thereof as then remains unpaid,
without interest. Principal shall be payable in lawful money of
the United States of America, in immediately available funds, at
the principal office of the Company or at such other place as the
Company may designate from time to time in writing to the
Employee.
Unless the Company has already made a demand for payment in
full of this Note, the Employee agrees to repay to the Company
from the Employee's annual cash incentive compensation (referred
to as bonus), beginning with the first such bonus payment to
occur after the date of this Note and on each of the next four
bonus payment dates occurring prior to the Maturity Date, such
amount as may be designated by the Company but which shall not
exceed 20% of the Employee's bonus payment. Any amount remaining
unpaid under this Note, if no demand has been made by the
Company, shall be due and payable on the Maturity Date.
This Note may be prepaid at any time or from time to time,
in whole or in part, without any premium or penalty. The
Employee acknowledges and agrees that the Company has advanced to
the Employee the principal amount of this Note pursuant to the
Company's Stock Holding Assistance Plan, and that all terms and
conditions of such Plan are incorporated herein by reference.
The unpaid principal amount of this Note shall be and become
immediately due and payable without notice or demand, at the
option of the Company, upon the occurrence of any of the
following events:
(a) the termination of the Employee's employment with
the Company, with or without cause, for any reason or for no
reason;
(b) the death or disability of the Employee;
PAGE
<PAGE>
(c) the failure of the Employee to pay his or her
debts as they become due, the insolvency of the Employee,
the filing by or against the Employee of any petition under
the United States Bankruptcy Code (or the filing of any
similar petition under the insolvency law of any
jurisdiction), or the making by the Employee 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 property of the Employee; or
(d) the issuance of any writ of attachment, by trustee
process or otherwise, or any restraining order or injunction
not removed, repealed or dismissed within thirty (30) days
of issuance, against or affecting the person or property of
the Employee or any liability or obligation of the Employee
to the Company.
In case any payment herein provided for shall not be paid
when due, the Employee further promises to pay all costs of
collection, including all reasonable attorneys' fees.
No delay or omission on the part of the Company in
exercising any right hereunder shall operate as a waiver of such
right or of any other right of the Company, 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 Employee hereby waives presentment, demand, notice of
prepayment, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or
enforcement of this Note. The undersigned hereby assents to any
indulgence and any extension of time for payment of any
indebtedness evidenced hereby granted or permitted by the
Company.
This Note has been made pursuant to the Company's Stock
Holding Assistance Plan and shall be governed by and construed in
accordance with, such Plan and the laws of the State of Delaware
and shall have the effect of a sealed instrument.
_______________________________
Employee Name: _________________
________________________
Witness
Exhibit 11
THERMO ECOTEK CORPORATION
Computation of Earnings Per Share
Nine
Year Ended Months Ended
------------------------------------ ------------
Sept. 27, Sept. 28, Sept. 30, Sept. 30,
1997 1996 1995 1995
---------------------------------------------------------------------------
Income:
Net Income (a) $22,545,000 $17,780,000 $12,540,000 $10,264,000
Add: Convertible
debenture
interest,
net of tax 2,374,000 1,644,000 1,727,000 1,295,000
----------- ----------- ----------- -----------
Income applicable to
common stock assuming
dilution (b) 24,919,000 $19,424,000 $14,267,000 $11,559,000
----------- ----------- ----------- -----------
Shares:
Weighted average
shares outstanding 24,613,073 23,527,511 21,795,850 22,476,561
Add: Shares issuable
from assumed
conversion of
noninterest-
bearing
subordinated
convertible
debentures 1,496,110 1,445,948 - -
Shares issuable
from assumed
exercise of
other options (as
determined by the
application of
the treasury
stock method) 381,721 502,649 - -
----------- ----------- ----------- -----------
PAGE
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Exhibit 11
THERMO ECOTEK CORPORATION
Computation of Earnings Per Share (continued)
Nine
Year Ended Months Ended
------------------------------- ------------
Sept. 27, Sept. 28, Sept. 30, Sept. 30,
1997 1996 1995 1995
--------------------------------------------------------------------------
Weighted average
shares - primary (c)$26,490,904 $25,476,108 $21,795,850 $22,476,561
Incremental shares
issuable from
assumed exercise
of other options
(as determined by
the application of
the treasury stock
method) 5,697 22,984 502,002 502,002
Shares issuable
from assumed
conversion of
convertible
debentures 12,249,463 10,815,789 10,815,789 10,815,789
----------- ----------- ----------- -----------
Weighted average
shares - fully
diluted (d) 38,746,064 36,314,881 33,113,641 33,794,352
=========== =========== =========== ===========
Primary Earnings
per Share (a) / (c) $ .85 $ .70 $ .58 $ .46
=========== =========== =========== ===========
Fully Diluted Earnings
per Share (b) / (d) $ .64 $ .53 $ .43 $ .34
=========== =========== =========== ===========
Exhibit 13
Thermo Ecotek Corporation
Consolidated Financial Statements
Fiscal Year 1997
PAGE
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Thermo Ecotek Corporation 1997 Financial Statements
Consolidated Statement of Income
Nine Months
Year Ended End
--------------------------------- -----------
Sept. 27, Sept. 28, Sept. 30, Sept. 30,
(In thousands) 1997 1996 1995 1995
------------------------------------------------------------------------
(Unaudited)
Revenues (Notes 10 and 12) $180,191 $150,076 $139,319 $107,139
-------- -------- -------- --------
Costs and Operating
Expenses:
Cost of revenues
(includes $4,545,
$4,952, $4,689, and
$3,223 to related
parties; Notes 7
and 8) 113,236 101,883 98,822 74,097
Selling, general, and
administrative
expenses (includes
$1,802, $1,759,
$1,885, and $1,429
to related parties;
Notes 7 and 8) 19,857 12,218 9,307 7,856
-------- -------- -------- --------
133,093 114,101 108,129 81,953
-------- -------- -------- --------
Operating Income 47,098 35,975 31,190 25,186
Interest Income 5,089 5,104 3,340 2,820
Interest Expense
(includes $2,740,
$2,740, $2,740, and
$2,055 to parent
company) (13,926) (14,727) (13,333) (10,567)
Equity in Earnings (Loss)
of Joint Venture 33 (26) - -
-------- -------- -------- --------
Income Before Provision
for Income Taxes and
Minority Interest 38,294 26,326 21,197 17,439
Provision for Income
Taxes (Note 6) 14,415 7,271 7,200 6,027
Minority Interest Expense 1,334 1,275 1,457 1,148
-------- -------- -------- --------
Net Income $ 22,545 $ 17,780 $ 12,540 $ 10,264
======== ======== ======== ========
2PAGE
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Thermo Ecotek Corporation 1997 Financial Statements
Consolidated Statement of Income (continued)
Nine Months
Year Ended Ended
--------------------------------- -----------
(In thousands except Sept. 27, Sept. 28, Sept. 30, Sept. 30,
per share amounts) 1997 1996 1995 1995
------------------------------------------------------------------------
Unaudited)
Earnings per Share:
Primary $ .85 $ .70 $ .58 $ .46
======== ======== ======== ========
Fully diluted $ .64 $ .53 $ .43 $ .34
======== ======== ======== ========
Weighted Average Shares:
Primary 26,491 25,476 21,796 22,477
======== ======== ======== ========
Fully diluted 38,746 36,315 33,114 33,794
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
3PAGE
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Thermo Ecotek Corporation 1997 Financial Statements
Consolidated Balance Sheet
Sept. 27, Sept. 28,
(In thousands) 1997 1996
------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 83,540 $ 63,238
Restricted funds 20,773 18,936
Accounts receivable and unbilled revenues 33,039 28,061
Inventories 13,916 11,299
Prepaid income taxes (Note 6) 4,298 2,016
Other current assets 1,728 2,937
-------- --------
157,294 126,487
-------- --------
Property, Plant, and Equipment, Net 263,067 262,766
-------- --------
Due from Parent Company (Note 6) 10,164 12,116
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost of
$8,504 and $6,004; Note 2) 12,497 20,254
-------- --------
Restricted Funds 20,905 14,112
-------- --------
Other Assets 21,378 13,410
-------- --------
$485,305 $449,145
======== ========
4PAGE
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Thermo Ecotek Corporation 1997 Financial Statements
Consolidated Balance Sheet (continued)
Sept. 27, Sept. 28,
(In thousands except share amounts) 1997 1996
------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Current portion of long-term obligations
(Note 11) $ 35,012 $ 24,806
Accounts payable 4,031 1,517
Lease obligations payable 1,736 1,812
Accrued interest 3,524 3,159
Accrued income taxes (Note 6) 2,057 1,858
Other accrued expenses 18,965 15,532
Due to parent company 1,255 1,586
-------- --------
66,580 50,270
-------- --------
Long-term Obligations (Note 11):
Nonrecourse tax-exempt obligations 51,800 77,900
Subordinated convertible debentures (includes
$68,500 due to parent company) 130,648 100,227
Capital lease obligations 22,242 31,154
-------- --------
204,690 209,281
-------- --------
Deferred Income Taxes (Note 6) 49,934 42,633
-------- --------
Other Deferred Items (Note 10) 13,521 13,958
-------- --------
Minority Interest 3,304 3,316
-------- --------
Commitments and Contingencies
(Notes 3, 7, 8, and 9)
Shareholders' Investment (Notes 4 and 5):
Common stock, $.10 par value, 50,000,000
shares authorized; 25,978,198 and
16,174,636 shares issued 2,598 1,617
Capital in excess of par value 95,573 74,740
Retained earnings 67,593 45,048
Treasury stock at cost, 1,477,250 and
21,413 shares (20,872) (481)
Cumulative translation adjustment (52) -
Net unrealized gain on available-for-sale
investments (Note 2) 2,436 8,763
-------- --------
147,276 129,687
-------- --------
$485,305 $449,145
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
5PAGE
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Thermo Ecotek Corporation 1997 Financial Statements
Consolidated Statement of Cash Flows
Nine Months
Year Ended Ended
--------------------------------- -----------
Sept. 27, Sept. 28, Sept. 30, Sept. 30,
(In thousands) 1997 1996 1995 1995
------------------------------------------------------------------------
(Unaudited)
Operating Activities:
Net income $ 22,545 $ 17,780 $ 12,540 $ 10,264
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Minority interest
expense 1,334 1,275 1,457 1,148
Depreciation and
amortization 21,618 20,425 15,239 12,752
Deferred revenue
(Note 10) (8,200) - - -
Deferred income tax
expense (Note 6) 10,715 3,086 6,088 3,987
Changes in current
accounts, excluding
the effect of
acquisitions:
Restricted funds (1,837) (6,944) 2,038 3,453
Accounts
receivable and
unbilled
revenues (3,740) (2,130) (3,236) (11,050)
Inventories (1,371) 1,584 (1,078) 582
Other current
assets 1,229 544 5,423 3,418
Accounts payable 2,457 148 (969) (931)
Lease obligations
payable (602) 389 879 (1,668)
Due (to) from
parent company 3,170 5,319 (874) (91)
Other current
liabilities 201 3,599 2,787 3,572
Other - 26 (77) 720
-------- -------- -------- --------
Net cash provided by
operating activities 47,519 45,101 40,217 26,156
-------- -------- -------- --------
Investing Activities:
Acquisitions, net of
cash acquired (Note 3) (10,865) (8,088) - -
Funding of long-term
restricted funds (6,793) (2,073) (10,485) (7,907)
Increase in other
deferred items 8,476 - - -
Increase in other assets (2,452) (3,004) (2,030) (2,030)
Purchases of property,
plant, and equipment $(17,710) $(36,587) $ (5,472) $ (5,350)
-------- -------- -------- --------
6PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Consolidated Statement of Cash Flows (continued)
Nine Months
Year Ended Ended
--------------------------------- -----------
Sept. 27, Sept. 28, Sept. 30, Sept. 30,
(In thousands) 1997 1996 1995 1995
------------------------------------------------------------------------
(Unaudited)
Net cash used in
investing activities $(29,344) $(49,752) $(17,987) $(15,287)
-------- -------- -------- --------
Financing Activities:
Net proceeds from
issuance of
subordinated
convertible debentures
(Note 11) 48,470 35,942 - -
Repayment of long-term
obligations (16,800) (14,100) (11,200) (3,400)
Payments under capital
lease obligations (8,006) (7,191) (2,649) (2,649)
Net proceeds from
issuance of Company
common stock (Note 4) 698 6,247 27,598 27,598
Payment of withholding
taxes related to stock
option exercises (1,115) (1,221) (23) (23)
Repurchases of Company
common stock (19,743) - - -
Distribution to minority
partner (1,346) (947) (1,598) (1,060)
Due from parent company - - 542 -
-------- -------- -------- --------
Net cash provided by
financing activities 2,158 18,730 12,670 20,466
-------- -------- -------- --------
Exchange Rate Effect
on Cash (31) - - -
-------- -------- -------- --------
Increase in Cash and Cash
Equivalents 20,302 14,079 34,900 31,335
Cash and Cash Equivalents
at Beginning of Period 63,238 49,159 14,259 17,824
-------- -------- -------- --------
Cash and Cash Equivalents
at End of Period $ 83,540 $ 63,238 $ 49,159 $ 49,159
======== ======== ======== ========
7PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Consolidated Statement of Cash Flows (continued)
Nine Months
Year Ended Ended
--------------------------------- -----------
Sept. 27, Sept. 28, Sept. 30, Sept. 30,
(In thousands) 1997 1996 1995 1995
------------------------------------------------------------------------
(Unaudited)
Cash Paid For:
Interest $ 13,100 $ 14,267 $ 12,310 $ 11,409
Income taxes $ 7 $ 101 $ 26 $ 25
Noncash Activities:
Acquisition of asset
under capital lease $ - $ - $ 47,020 $ 47,020
Reduction in lease
obligations payable - - 1,980 1,980
-------- -------- -------- --------
Assumption of
obligations under
capital lease $ - $ - $ 49,000 $ 49,000
======== ======== ======== ========
Fair value of assets of
acquired companies $ 15,183 $ 8,983 $ - $ -
Cash paid for acquired
companies (11,223) (8,088) - -
-------- -------- -------- --------
Liabilities assumed
of acquired
companies $ 3,960 $ 895 $ - $ -
======== ======== ======== ========
Conversions of
subordinated
convertible
debentures $ 19,579 $ 5,273 $ - $ -
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
8PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Consolidated Statement of Shareholders' Investment
(In thousands) 1997 1996 1995
------------------------------------------------------------------------
Common Stock, $.10 Par Value
Balance at beginning of period $ 1,617 $ 1,551 $ 1,316
Effect of three-for-two stock split 809 - -
Net proceeds from private placement
of Company common stock (Note 4) - 22 -
Issuance of Company common stock
under employees' and directors'
stock plans 27 18 2
Conversions of noninterest-bearing
subordinated convertible debentures 145 26 -
Capitalization of Company - - 233
-------- -------- --------
Balance at end of period 2,598 1,617 1,551
-------- -------- --------
Capital in Excess of Par Value
Balance at beginning of period 74,740 64,188 36,826
Effect of three-for-two stock split (809) - -
Net proceeds from private placement
of Company common stock (Note 4) - 4,942 -
Issuance of Company common stock
under employees' and directors'
stock plans 204 503 89
Tax benefit related to employees'
and directors' stock plans 2,447 - -
Conversions of noninterest-bearing
subordinated convertible debentures 18,991 5,107 -
Capitalization of Company - - 27,273
-------- -------- --------
Balance at end of period 95,573 74,740 64,188
-------- -------- --------
Retained Earnings
Balance at beginning of period 45,048 27,268 17,004
Net income 22,545 17,780 10,264
-------- -------- --------
Balance at end of period 67,593 45,048 27,268
-------- -------- --------
Treasury Stock
Balance at beginning of period (481) (22) -
Activity under employees' and
directors' stock plans (648) (459) (22)
Purchases of Company common stock (19,743) - -
-------- -------- --------
Balance at end of period $(20,872) $ (481) $ (22)
-------- -------- --------
9PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Consolidated Statement of Shareholders' Investment (continued)
(In thousands) 1997 1996 1995
------------------------------------------------------------------------
Cumulative Translation Adjustment
Balance at beginning of period $ - $ - $ -
Translation adjustment (52) - -
-------- -------- --------
Balance at end of period (52) - -
-------- -------- --------
Net Unrealized Gain on Available-for-
sale Investments
Balance at beginning of period 8,763 - -
Change in net unrealized gain on
available-for-sale investments
(Note 2) (6,327) 8,763 -
-------- -------- --------
Balance at end of period 2,436 8,763 -
-------- -------- --------
Total Shareholders' Investment $147,276 $129,687 $ 92,985
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
10PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Ecotek Corporation (the Company) is an environmental company
providing a range of environmentally responsible technologies and
products, including nonutility electric power generation using clean
combustion processes, engineered clean fuels, as well as environmentally
friendly pest control products through its biopesticides subsidiary,
Thermo Trilogy Corporation (Thermo Trilogy; Note 3).
The Company is principally engaged in the development and operation
of alternative-energy electrical generation facilities. The Company
develops and operates facilities through joint ventures or limited
partnerships in which the Company has a majority interest, or through
wholly owned subsidiaries (the Operating Companies). The Company's
interests in the Operating Companies range from 67% to 100% and, in each
case, are held by wholly owned subsidiaries of the Company. Of the
facilities operated by the Company, three are owned by the Company and
the remainder are owned by unaffiliated parties who lease them to the
Operating Companies under long-term leases (Note 7).
Relationship with Thermo Electron Corporation
The Company was incorporated on November 30, 1989, as a wholly owned
subsidiary of Thermo Electron Corporation (Thermo Electron). At
September 27, 1997, Thermo Electron owned 21,382,660 shares of the
Company's common stock, representing 87% of such stock outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the
Company, its majority-owned and wholly owned Operating Companies, and its
wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company accounts
for investments in businesses in which it owns between 20% and 50% using
the equity method.
Fiscal Year
In June 1995, the Company changed its fiscal year end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the Company's transition period, which ended on
September 30, 1995, was the 39-week period from January 1, 1995, to
September 30, 1995, referenced as "fiscal 1995." References to fiscal
1997 and 1996 are for the years ended September 27, 1997, and
September 28, 1996, respectively. Fiscal 1997 and 1996 each included
52 weeks. The unaudited statements of income and cash flows for the
52-week period ended September 30, 1995, are presented for comparative
purposes only.
Revenue Recognition
The Company earns revenues primarily from the operation of
alternative-energy facilities. Revenues from plant operations are
recorded as electricity is delivered. The Operating Companies have
long-term power supply arrangements with local utilities, expiring
11PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
between 2005 and 2020, to sell all the output of the plants currently in
operation at established or formula-based defined rates (Note 9). Under
certain of these arrangements, in the event of service termination by the
Operating Companies prior to the end of the obligation period, the
Operating Companies may be required to reimburse the utilities to the
extent that cumulative revenue calculated at established rates exceeds
the amounts calculated at the utilities' "avoided cost" rates. Management
does not expect to incur any obligation under these provisions in the
foreseeable future.
The Woodland plant 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 in March 2000. This funding requirement
will significantly limit future profit distributions that Woodland may
make to the Company. Accordingly, beginning during the first quarter of
fiscal 1997, the Company began recording as an expense the funding of
reserves required under Woodland's nonrecourse lease agreement to cover
projected shortfalls in lease payments beginning in 2000. Consequently,
the results of the Woodland plant were greatly diminished during 1997 and
the Company expects that such results will be reduced to approximately
break even in 1998 and thereafter. During fiscal 1997 and 1996, the
Woodland plant contributed $1.0 million and $5.1 million of operating
income, respectively.
Repairs and Maintenance
The Company charges routine repairs and maintenance to expense in the
period the costs are incurred. The Company accrues for major maintenance
and overhauls in anticipation of scheduled outages. Other accrued
expenses in the accompanying balance sheet includes approximately
$3.9 million and $4.7 million at fiscal year-end 1997 and 1996,
respectively, in anticipation of major maintenance and overhauls.
Accounting for Derivatives
The Company has entered into interest rate swap agreements in
connection with debt on certain alternative-energy facilities (Notes 11
and 13). The interest rate swap agreements convert floating debt
obligations to fixed rate obligations. Interest rate swap agreements are
accounted for under the accrual method. Amounts to be received from or
paid to the counter-parties of the agreements are accrued during the
period to which the amounts relate and are reflected as interest expense.
The related amounts payable to the counter-parties are included in other
accrued expenses in the accompanying balance sheet. The fair value of the
swap agreements is not recognized in the accompanying financial
statements since the agreements are accounted for as hedges.
12PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
The Company enters into foreign currency agreements to manage
specifically identifiable risks. The Company's short-term foreign
exchange forward contracts are part of the Company's management of
foreign currency exposures. Foreign currency agreements are treated as a
hedge on currency movements on certain customer deposits received and
held in foreign denominated currency. Gains and losses on the forward
contract offset gains and losses on the foreign denominated account.
The Company does not enter into speculative foreign currency or
interest rate swap agreements.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 5). Accordingly,
no accounting recognition is given to stock options granted at fair
market value until they are exercised. Upon exercise, net proceeds,
including tax benefits realized, are credited to equity.
Income Taxes
The Company and Thermo Electron have a tax allocation agreement under
which the Company is included in the consolidated federal and certain
state income tax returns filed by Thermo Electron. The agreement provides
that Thermo Electron charges or pays the Company amounts based on the
Company's relative contribution to Thermo Electron's tax liability. If
Thermo Electron's equity ownership of the Company were to drop below 80%,
the Company would be required to file its own tax returns.
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," the Company recognizes deferred
income taxes based on the expected future tax consequences of differences
between the financial statement basis and the tax basis of assets and
liabilities, calculated using enacted tax rates in effect for the year in
which the differences are expected to be reflected in the tax return.
Earnings per Share
Primary earnings per share has been computed based on the weighted
average number of common shares outstanding during the year and common
stock equivalents, where dilutive. Common stock equivalents in all
periods represent the effect of the assumed exercise of stock options,
where material, and in fiscal 1997 and 1996, include the assumed
conversion of the Company's noninterest-bearing subordinated convertible
debentures. Fully diluted earnings per share has been computed assuming
the conversion of the Company's subordinated convertible debentures, and
elimination of the related interest expense, as well as the exercise of
stock options and their related tax effects.
Cash Equivalents and Restricted Funds
As of September 27, 1997, $69.3 million of the Company's cash
equivalents were invested in a repurchase agreement with Thermo Electron.
13PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Under this agreement, the Company in effect lends excess cash to Thermo
Electron, which Thermo Electron collateralizes with investments
principally consisting of corporate notes, U.S. government-agency
securities, money market funds, commercial paper, and other marketable
securities, in the amount of at least 103% of such obligation. The
Company's funds subject to the repurchase agreement are readily
convertible into cash by the Company. The repurchase agreement earns a
rate based on the 90-day Commercial Paper Composite Rate plus 25 basis
points, set at the beginning of each quarter. Cash equivalents also
include investments in money market accounts. The use of cash and cash
equivalents totaling $10.8 million and $7.6 million at September 27,
1997, and September 28, 1996, respectively, was restricted by the terms
of certain Operating Companies' lease and financing agreements.
Restricted funds in the accompanying balance sheet represents amounts
held in trust for lease and debt payments and working capital
requirements, as required by certain of the Operating Companies' lease
and financing agreements, and are invested in money market accounts.
Restricted funds that are not expected to be used within the next fiscal
year are classified as long-term in the accompanying balance sheet.
All cash equivalents and restricted funds are carried at cost, which
approximates market value.
Inventories
Inventories consist of raw materials, fuel, operating supplies, spare
parts, and include, where applicable, materials and overhead. Inventories
are stated at the lower of cost (on a first-in, first-out or average
basis) or market value. The components of inventories are as follows:
(In thousands) 1997 1996
-----------------------------------------------------------------------
Raw materials and supplies $11,886 $11,299
Work in process and finished goods 2,030 -
------- -------
$13,916 $11,299
======= =======
Available-for-sale Investments
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," the Company's investments in long-term debt and
marketable equity securities are accounted for at market value (Note 2).
Property, Plant, and Equipment
The costs of additions and improvements are capitalized. The Company
provides for depreciation and amortization using the straight-line method
over the estimated useful lives of the property as follows: electric
generating facilities - 25 years, property under capital lease - the life
of the asset, leasehold improvements - the shorter of the term of the
14PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
lease or the life of the asset, and machinery and equipment - 3 to 7
years. Property, plant, and equipment consists of the following:
(In thousands) 1997 1996
------------------------------------------------------------------------
Land $ 3,479 $ 3,479
Electric generating facilities (Notes 8 and 11) 200,573 200,425
Property under capital lease 47,020 47,020
Machinery and equipment 7,366 4,369
Leasehold improvements 15,814 15,032
Construction in process (Note 3) 54,585 39,059
-------- --------
328,837 309,384
Less: Accumulated depreciation and amortization 65,770 46,618
-------- --------
$263,067 $262,766
======== ========
Other Assets
Other assets in the accompanying balance sheet includes certain costs
associated with the development of the Company's alternative-energy
facilities; prepaid rent relating to an Operating Company's lease
agreement; and goodwill that arose in connection with the acquisition of
an Operating Company. Other assets also includes deferred debt expense
relating to the Company's issuances of subordinated convertible
debentures, and patents, licenses, and other intangible assets arising
from the Thermo Trilogy and biosys acquisitions (Note 3). These assets
are being amortized using the straight-line method over their estimated
useful lives, which range from 5 to 30 years. These assets were $19.9
million and $12.2 million, net of accumulated amortization of $8.2
million and $4.5 million, at fiscal year-end 1997 and 1996, respectively.
In addition, other assets includes an investment in a joint venture
of $1.5 million and $1.2 million at fiscal year-end 1997 and 1996,
respectively.
Other Deferred Items
Other deferred items in the accompanying 1997 balance sheet includes
obligations under an Operating Company lease to cover projected
short-falls in lease payments beginning in 2000, as described above under
the caption "Revenue Recognition." In addition, other deferred items
includes rent that has been recognized ratably for financial reporting
purposes in connection with an Operating Company's lease agreement at
fiscal year-end 1997 and 1996 (Note 7), and deferred income in connection
with the termination of a power-sales agreement at fiscal year-end 1996
(Note 10).
15PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Foreign Currency
All assets and liabilities of the Company's foreign subsidiary are
translated at year-end exchange rates, and revenues and expenses are
translated at average exchange rates for the year in accordance with SFAS
No. 52, "Foreign Currency Translation". Resulting translation adjustments
are reflected as a separate component of shareholders' investment titled
"Cumulative translation adjustment". Foreign currency transaction gains
and losses are included in the accompanying statement of income and are
not material for the three years presented.
Stock Split
All share and per share information, except for share information in
the accompanying 1996 balance sheet, was restated in fiscal 1996 to
reflect a three-for-two stock split, effected in the form of a 50% stock
dividend, which was distributed in October 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Presentation
Certain amounts in fiscal 1996 and 1995 have been reclassified to
conform to the presentation in the fiscal 1997 financial statements.
2. Available-for-sale Investments
The Company's marketable equity securities are considered
available-for-sale investments in the accompanying balance sheet and are
carried at market value, with the difference between cost and market
value, net of related tax effects, recorded currently as a component of
shareholders' investment titled "Net unrealized gain on
available-for-sale investments." As of September 27, 1997, the Company
held one long-term available-for-sale investment, an investment in the
common stock of KFx, Inc. (KFx), described below.
In fiscal 1995, the Company purchased 1,500,000 shares of KFx common
stock for $3.0 million, representing an approximate 7% equity interest in
KFx. In fiscal 1996, the Company purchased an additional 1,500,000 shares
of KFx common stock for $3.0 million, representing an additional 7%
equity interest in KFx. In fiscal 1997, the Company purchased an
additional 1,250,000 shares of KFx common stock for $2.5 million pursuant
to the purchase agreement, bringing its total equity interest in KFx to
approximately 18%. The fair market value of this investment at September
27, 1997, was $12.5 million. Simultaneously with the execution of the
16PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
2. Available-for-sale Investments (continued)
purchase agreement, KFx granted to the Company a warrant to purchase an
additional 7,750,000 shares at $3.65 per share, as well as a warrant to
purchase further shares of the common stock of KFx at market value,
defined so that the number, when added to all other shares of such common
stock owned by the Company, would result in the Company owning 51% of the
common stock of KFx on a fully-diluted basis. These warrants are
exercisable from January 1, 2000, through July 1, 2001.
3. Acquisitions and Project Under Development
Acquisitions
In January 1997, Thermo Trilogy acquired substantially all of the
assets of biosys, inc. (biosys), a biopesticide company, for $11.2
million in cash and the assumption of certain liabilities. Allocation of
the purchase price for this acquisition was based on an estimate of the
fair value of the net assets acquired and is subject to adjustment based
on finalization of purchase price allocation. The Company does not expect
that the final allocation will differ materially from the preliminary
estimate.
In May 1996, the Company, through two wholly owned subsidiaries,
acquired the assets of the biopesticides division of W.R. Grace & Co.
(renamed Thermo Trilogy), which develops, manufactures, and markets
environmentally friendly products used for pest control, for $8.1 million
in cash and the assumption of certain liabilities. In addition, the
Company will pay a royalty fee of seven percent on annual sales of the
acquired business in excess of $14 million through the year 2000.
The aggregate cost of these acquisitions approximated the fair value
of the net assets acquired. These acquisitions have been accounted for
using the purchase method of accounting and their results have been
included in the accompanying financial statements from their respective
dates of acquisition.
Based upon unaudited data, the following table presents selected
financial information for the Company and biosys on a pro forma basis,
assuming the companies had been combined since the beginning of fiscal
1996. The effect of the acquisition of Thermo Trilogy is not included in
the pro forma data as it was not material to the Company's results of
operations.
(In thousands except per share amounts) 1997 1996
----------------------------------------------------------------------
Revenues $185,108 $172,569
Net income 15,464 3,931
Earnings per share:
Primary .58 .15
Fully diluted .46 .15
17PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
3. Acquisitions and Project Under Development (continued)
The pro forma results are not necessarily indicative of future
operations or the actual results that would have occurred had the
acquisition of biosys been made at the beginning of fiscal 1996.
Project Under Development
In August 1995, the Company, through two wholly owned subsidiaries,
entered into a Limited Partnership Agreement with KFx Wyoming, Inc., a
subsidiary of KFx, to develop, construct, and operate a 500,000-ton-per-
year subbituminous coal-beneficiation plant near Gillette, Wyoming. The
Company has provided approximately $50 million, and is committed to provide
up to an additional $5 million, for the design, construction, and operation
of the plant and will have a 95% equity interest in the project. During the
first quarter of fiscal 1997, a fire occurred which caused certain delays
with respect to the commencement of commercial operations of the facility,
with substantially all repair costs anticipated to be reimbursable by
insurance proceeds. Commercial operation of the facility is now expected to
begin during the first half of fiscal 1998. The Company has also made an
investment in KFx (Note 2).
4. Shareholders' Investment
In June 1996, the Company sold 330,000 shares of its common stock in a
private placement at $16.08 per share, for net proceeds of $5.0 million.
In February 1995, the Company sold 3,500,334 shares of its common stock
in an initial public offering at $8.50 per share, for net proceeds of $27.5
million.
The net assets of certain Operating Companies are generally restricted
as to the amounts that can be transferred to the parent company in the form
of dividends, loans or advances, pursuant to certain lease or debt
agreements. As of September 27, 1997, net assets of certain subsidiaries of
approximately $94.0 million were not restricted from distribution.
At September 27, 1997, the Company had reserved 16,486,355 unissued
shares of its common stock for possible issuance under stock-based
compensation plans and for issuance upon possible conversion of the
Company's convertible obligations.
5. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
------------------
The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans permit the grant of nonqualified
and incentive stock options. A third plan permits the grant of a variety of
stock and stock-based awards as determined by the human resources committee
of the Company's Board of Directors (the Board Committee), including
restricted stock, stock options, stock bonus shares, or performance-based
shares. To date, only nonqualified stock options have been awarded under
these plans. The option recipients and the terms of options granted under
these plans are determined by the Board Committee. Generally, options
granted to date are exercisable immediately, but are subject to certain
18PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
transfer restrictions and the right of the Company to repurchase shares
issued upon exercise of the options at the exercise price, upon certain
events. The restrictions and repurchase rights generally lapse ratably over
periods ranging from four to ten years after the first anniversary of the
grant date, depending on the term of the option, which may range from five
to twelve years. Nonqualified stock options may be granted at any price
determined by the Board Committee, although incentive stock options must be
granted at not less than the fair market value of the Company's stock on the
date of grant. To date, all options have been granted at fair market value.
The Company also has a directors' stock option plan that provides for the
grant of stock options to outside directors pursuant to a formula approved
by the Company's shareholders. Options awarded under this plan are
exercisable six months after the date of grant and expire three to seven
years after the date of grant. In addition to the Company's stock-based
compensation plans, certain officers and key employees may also participate
in the stock-based compensation plans of Thermo Electron.
A summary of the Company's stock option information is as follows:
1997 1996 1995
---------------- ---------------- -----------------
Weighted Weighted Range of
Number Average Number Average Number Option
(Shares in of Exercise of Exercise of Prices
thousands) Shares Price Shares Price Shares per Share
------------------------------------------------------------------------
Options outstanding,
beginning of $4.00-
period 1,439 $ 6.55 1,491 $ 4.96 1,539 $6.00
Granted 264 14.13 309 11.48 - -
4.00-
Exercised (369) 4.46 (349) 4.16 (22) 5.83
4.00-
Forfeited (53) 8.21 (12) 6.98 (26) 5.83
----- ----- -----
Options outstanding, $4.00-
end of period 1,281 $ 8.64 1,439 $ 6.55 1,491 $6.00
===== ====== ===== ====== ===== =====
$4.00-
Options exercisable 1,281 $ 8.64 1,439 $ 6.55 1,491 $6.00
===== ====== ===== ====== ===== =====
Options available
for grant 353 365 662
===== ===== =====
Weighted average fair
value per share of
options granted
during year $ 5.72 $ 4.49
====== ======
19PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
A summary of the status of the Company's stock options at
September 27, 1997, is as follows:
Options Outstanding and Exercisable
---------------------------------------
Weighted
Average Weighted
Number Remaining Average
of Contractual Exercise
Range of Exercise Prices Shares Life Price
------------------------------------------------------------------------
(Shares in thousands)
$ 5.50 - $10.22 949 6.8 years $ 6.65
10.23 - 14.94 260 9.0 years 13.98
14.95 - 19.66 71 5.9 years 15.55
19.67 - 24.38 1 2.7 years 24.38
-----
$ 5.50 - $24.38 1,281 7.2 years $ 8.64
=====
Employee Stock Purchase Program
Substantially all of the Company's employees are eligible to
participate in an employee stock purchase program sponsored by the
Company and Thermo Electron, under which employees can purchase shares of
the Company's and Thermo Electron's common stock. Prior to November 1,
1996, the program was sponsored by Thermo Electron. Under this program,
the applicable shares of common stock can be purchased at the end of a
12-month plan year at 95% of the fair market value at the beginning of
the period, and shares purchased are subject to a six-month resale
restriction. Prior to November 1, 1995, shares of Thermo Electron's
common stock could be purchased at 85% of the fair market value at the
beginning of the period, and shares purchased were subject to a one-year
resale restriction. Shares are purchased through payroll deductions of up
to 10% of each participating employee's gross wages.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-based Compensation," which sets forth a
fair-value based method of recognizing stock-based compensation expense.
As permitted by SFAS No. 123, the Company has elected to continue to
apply APB No. 25 to account for its stock-based compensation plans. Had
compensation cost for awards in fiscal 1997 and 1996 under the Company's
stock-based compensation plans been determined based on the fair value at
20PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
the grant dates consistent with the method set forth under SFAS No. 123,
the effect on the Company's net income and earnings per share would have
been as follows:
(In thousands except per share amounts) 1997 1996
------------------------------------------------------------------------
Net income:
As reported $22,545 $17,780
Pro forma 22,159 17,565
Earnings per share:
Primary:
As reported .85 .70
Pro forma .84 .69
Fully diluted:
As reported .64 .53
Pro forma .63 .53
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1995, the resulting pro forma
compensation expense may not be representative of the amount to be
expected in future years. Compensation expense for options granted is
reflected over the vesting period; therefore, future pro forma
compensation expense may be greater as additional options are granted.
The fair value of each option grant was estimated on the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1997 1996
------------------------------------------------------------------------
Volatility 26% 26%
Risk-free interest rate 6.1% 6.0%
Expected life of options 6.4 years 6.1 years
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions including
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
401(k) Savings Plans
Substantially all of the Company's corporate, full-time employees are
eligible to participate in Thermo Electron's 401(k) savings plan.
21PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
Contributions to the Thermo Electron 401(k) savings plan are made by both
the employee and the Company. Company contributions are based upon the
level of employee contributions. Employees of the Operating Companies who
meet eligibility requirements may participate in a separate defined
contribution plan. Contributions to the plan are made by both the
employee and the Operating Companies. The Operating Companies'
contributions are based on the level of employee contributions. The
Company contributed and charged to expense for these plans $401,000,
$279,000, and $157,000 in fiscal 1997, 1996, and 1995, respectively.
6. Income Taxes
The components of the provision for income taxes are as follows:
(In thousands) 1997 1996 1995
-----------------------------------------------------------------------
Currently payable:
Federal $ 3,214 $ 2,899 $ 1,647
State 486 1,286 393
------- ------- -------
3,700 4,185 2,040
------- ------- -------
Deferred:
Federal 9,250 2,485 3,257
State 1,465 601 730
------- ------- -------
10,715 3,086 3,987
------- ------- -------
$14,415 $ 7,271 $ 6,027
======= ======= =======
The provision for income taxes in the accompanying statement of
income differs from the provision calculated by applying the statutory
federal income tax rate of 35% in fiscal 1997 and 34% in fiscal 1996 and
1995 to income before provision for income taxes and minority interest
due to the following:
(In thousands) 1997 1996 1995
-----------------------------------------------------------------------
Provision for income taxes at
statutory rate $13,403 $ 8,951 $ 5,929
Increases (decreases) resulting from:
State income taxes, net of federal tax 1,268 1,245 741
Minority interest expense (466) (434) (390)
Tax losses and credits benefited - (2,528) (270)
Nondeductible expenses 210 37 17
------- ------- -------
$14,415 $ 7,271 $ 6,027
======= ======= =======
22PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
6. Income Taxes (continued)
Tax losses and credits benefited during fiscal 1996 relate to the
resolution of certain tax contingencies.
Prepaid income taxes and deferred income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1997 1996
-----------------------------------------------------------------------
Deferred (prepaid) income taxes:
Depreciation $48,377 $40,924
Partnership allocations - 577
Available-for-sale investments 1,557 5,487
State tax net operating loss carryforwards (2,570) (1,789)
Capitalized costs (324) (5,253)
Other reserves and accruals (3,974) (2,994)
------- -------
43,066 36,952
Valuation allowance 2,570 3,665
------- -------
$45,636 $40,617
======= =======
The valuation allowance relates to uncertainty surrounding the
realization of certain state tax loss carryforwards and, in 1996, stock
option exercises not benefited. The decrease in the valuation allowance
in fiscal 1997 primarily relates to the realization of the benefit of
stock options exercised. State tax loss carryforwards of approximately
$19 million will begin to expire in 1998. The long-term due from parent
company in the accompanying balance sheet represents amounts due from
Thermo Electron for tax benefits arising from the Company's operations.
7. Commitments
Leases
During fiscal 1997, the Company entered into a seven-year fixed rate
lease agreement with a third party for office space that expires in 2003.
The Company's commitment under this agreement is approximately $300,000
per year, net of sublease income of $178,000 per year. During part of
fiscal 1997 and in 1996 and 1995, the Company leased its office
facilities from Thermo Electron. The agreement called for the Company to
pay rent based on Thermo Electron's occupancy costs per square foot. The
accompanying statement of income includes expenses of $27,400, $177,000,
and $143,000 in fiscal 1997, 1996, and 1995, respectively, under the
agreement with Thermo Electron.
Certain Operating Companies have operating lease agreements for their
facilities expiring in various years through 2010. The lease agreements
provide for renewal of each of the leases for additional periods ranging
from one to five years at the Operating Companies' option. In general,
renewal options are at the lower of a predetermined percentage of the
23PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
7. Commitments (continued)
average annual lease rental during the lease terms or the fair market
rental as determined by an independent appraisal. In general, at the end
of the lease terms or renewal terms, the Operating Companies have a right
of first refusal or an option to purchase the facilities, at their fair
market value, as determined by an independent appraisal. During fiscal
1995, the Company amended an existing facility operating lease, which
resulted in the agreement being treated as a capital lease (Note 11).
Lease payments under the operating leases are made to the owner of
the facility only to the extent that power revenues exceed essential
operating expenses, as defined, up to certain specified maximum levels
(Note 8). Subject to the foregoing, as of September 27, 1997, the
contractual amounts payable pursuant to the lease agreements total
approximately $148.4 million over the remaining initial lease terms,
averaging approximately $16.0 million per year. The Company recognizes
rent expense ratably over the respective lease terms. The accompanying
statement of income includes expenses from operating leases (excluding
the operating lease with Thermo Electron) of $15.5 million, $15.2
million, and $13.4 million in fiscal 1997, 1996, and 1995, respectively.
Fuel Supply
The Operating Companies have entered into fuel supply agreements with
various suppliers guaranteeing the purchase of certain minimum quantities
of acceptable fuel at negotiated prices and terms. The Operating
Companies purchased $20.4 million, $20.0 million, and $13.8 million of
fuel under such contracts in fiscal 1997, 1996, and 1995, respectively.
The agreements call for price adjustments based on certain published
indices or stated rates over their terms expiring between 1997 and 2005.
See Note 8 for fuel supply agreements with related parties.
8. Related-party Transactions
Corporate Service Agreement
The Company and Thermo Electron have a corporate services agreement
under which Thermo Electron's corporate staff provides certain
administrative services, including certain legal advice and services,
risk management, certain employee benefit administration, tax advice and
preparation of tax returns, centralized cash management, and certain
financial and other services, for which the Company pays Thermo Electron
annually an amount equal to 1.0% of the Company's revenues. The Company
paid an annual fee equal to 1.20% of the Company's revenues in calendar
year 1995. The annual fee is reviewed and adjusted annually by mutual
agreement of the parties. For these services, the Company was
charged $1.8 million, $1.6 million, and $1.3 million in fiscal 1997,
1996, and 1995, respectively. Management believes that the service fee
charged by Thermo Electron is reasonable and that such fees are
representative of the expenses the Company would have incurred on a
stand-alone basis. The corporate services agreement is renewed annually
but can be terminated upon 30 days' prior notice by the Company or upon
24PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
8. Related-party Transactions (continued)
the Company's withdrawal from the Thermo Electron Corporate Charter (the
Thermo Electron Corporate Charter defines the relationships among Thermo
Electron and its majority-owned subsidiaries). For additional items such
as employee benefit plans, insurance coverage, and other identifiable
costs, Thermo Electron charges the Company based upon costs attributable
to the Company.
Fuel Supply
A portion of the fuel used by the Operating Companies' facilities is
obtained under agreements with related parties of the Operating Companies
or their joint venture partners (Note 7). During fiscal 1997, 1996, and
1995, the Company paid $4.2 million, $4.6 million, and $2.9 million,
respectively, under these agreements.
Management Fees
One of the Operating Companies has entered into management agreements
with a related party of its joint venture partner for the day-to-day
operation of its facility and the procurement and management of fuel.
During fiscal 1997, 1996, and 1995, the Company paid $368,000, $350,000,
and $253,000, respectively, under these agreements.
Thermo Electron Guarantees
Thermo Electron has issued an operating standards support agreement
for each of the facilities leased or financed by the Operating Companies.
These agreements provide that Thermo Electron will loan the Operating
Companies, on a subordinated basis, enough funds to meet their lease or
debt payments in the event the power plants are unable to generate power
at a designated level and such inability is related to the design,
construction, operation, or maintenance of the plants and not caused by
certain uncontrollable circumstances.
Thermo Electron has also guaranteed the lease payments of one of the
Operating Companies under certain events. Under the terms of this
guarantee, Thermo Electron will loan funds to the Operating Company to
cover any shortfall in its lease payment in the event and to the extent
the terms of the Operating Company's power purchase agreements are
changed by Public Service Company of New Hampshire (PSNH; Note 9). No
such payments have been required under this guarantee.
The Company and Thermo Electron have entered into a Master Guarantee
Reimbursement Agreement through which the Company will reimburse Thermo
Electron in the event that Thermo Electron is required to make any
payments pursuant to guarantees, including those guarantees described
above.
Operating Lease
See Note 7 for a description of the Company's operating lease with
Thermo Electron.
25PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
8. Related-party Transactions (continued)
Long-term Obligations
See Note 11 for long-term obligations of the Company held by Thermo
Electron.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
9. Contingencies
Two of the Operating Companies have rate orders from the New
Hampshire Public Utilities Commission (NHPUC) to sell all of their power
to PSNH. An agreement between Northeast Utilities, parent to PSNH, and
the State of New Hampshire, arising from the settlement of PSNH
bankruptcy proceedings, contains language to the effect that PSNH will
seek to renegotiate some of the terms of certain rate orders with small
power producers and that the state will support PSNH in such efforts.
PSNH has commenced discussions with these two Operating Companies and
other small power producers through which it is seeking to renegotiate
the rate orders applicable to the Company's and other facilities. The
state, acting through NHPUC, has indicated that it supports such efforts.
Any resolution is subject to the approval of NHPUC. Should the matter not
reach resolution, the Company does not believe that PSNH has the right to
take unilateral action to reduce the price of purchased power under such
arrangements. Rejection of the Company's rate orders would result in a
claim for damages by the Company and could be the subject of lengthy
litigation. In January 1997, PSNH's parent company, Northeast Utilities,
disclosed in a filing with the Securities and Exchange Commission that if
a proposed deregulation plan for the New Hampshire electric utility
industry were adopted, PSNH could default on certain financial
obligations and seek bankruptcy protection. In February 1997, NHPUC voted
to adopt a deregulation plan, and in March 1997, PSNH filed suit to block
the plan. In March 1997, the federal district court issued a temporary
restraining order which prohibits the NHPUC from implementing the
deregulation plan as it affects PSNH, pending a determination by the
court whether PSNH's claim could then be heard by the court. In April
1997, the court ruled that it could now hear the case and ordered that
the restraining order would continue indefinitely pending the outcome of
the suit. In addition, in March 1997, the Company, along with a group of
other biomass power producers, filed a motion with the NHPUC seeking
clarification of the NHPUC's proposed deregulation plan regarding several
issues, including purchase requirements and payment of current rate order
prices with respect to the Company's energy output. An unfavorable
resolution of this matter, including the bankruptcy of PSNH, could have a
material adverse effect on the Company's results of operations and
financial position.
The Company is contingently liable with respect to lawsuits and
matters that arose in the normal course of business. In the opinion of
management, these contingencies will not have a material adverse effect
on the financial position or results of operations of the Company.
26PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
10. Termination of Power-sales Agreement
On August 2, 1993, in exchange for a cash payment, the Company agreed
to terminate a power-sales agreement with a utility, which required the
utility to purchase the power that was to be generated by the Company's
55-megawatt natural gas cogeneration facility under development in Staten
Island, New York.
Under the agreement, the Company received $18.0 million in a series of
payments through May 1997, plus interest at 5.8%. The Company would have
been obligated to return $8.2 million of this amount if the Company had
elected to proceed with the Staten Island facility and the plant were to
commence commercial operation before January 1, 2000. Accordingly, the
Company deferred recognition of $8.2 million through fiscal 1996, pending
final determination of the project's status, with the deferred revenue being
included in other deferred items in the accompanying 1996 balance sheet.
During fiscal 1997, the Company determined that due to continuing
economic conditions in the domestic energy market it would not be feasible
to design, construct, and commence commercial operation of the Staten Island
facility prior to January 1, 2000. As a result, the refund obligation
terminated and the previously deferred revenue was recognized during fiscal
1997.
11. Long-term Obligations
Long-term obligations consist of the following:
(In thousands, except per share amounts) 1997 1996
------------------------------------------------------------------------
8.3% Nonrecourse tax-exempt revenue bonds,
Series 1989, payable in semi-annual
installments, with a final payment in
December 2000 $ 20,700 $ 24,700
8.3% Nonrecourse tax-exempt revenue bonds,
Series 1990, payable in semi-annual
installments, with a final payment in
December 2000 22,000 26,500
6.0% Nonrecourse tax-exempt revenue bonds,
Series 1991, payable in semi-annual
installments, with a final payment in
June 2000 35,200 43,500
4.0% Subordinated convertible debentures,
due January 2001, convertible at $6.33
per share, due to Thermo Electron 68,500 68,500
Noninterest-bearing subordinated convertible
debentures, due March 2001, convertible at
$13.56 per share 12,148 31,727
4.875% Subordinated convertible debentures,
due April 2004, convertible at $16.50 per share 50,000 -
-------- --------
208,548 194,927
Less: Current portion of long-term obligations 26,100 16,800
-------- --------
$182,448 $178,127
======== ========
27PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
11. Long-term Obligations (continued)
The annual requirements for long-term obligations are as follows:
(In thousands)
--------------------------------------------
1998 $ 26,100
1999 18,100
2000 19,200
2001 95,148
2002 -
Thereafter 50,000
--------
$208,548
========
The Company's noninterest-bearing subordinated convertible
debentures, as well as the 4.875% subordinated convertible debentures,
are guaranteed on a subordinated basis by Thermo Electron. In fiscal 1997
and 1996, $19.6 million and $5.3 million principal amount, respectively,
of the noninterest-bearing subordinated convertible debentures were
converted into 1,443,869 shares and 388,862 shares, respectively, of the
Company's common stock.
The tax-exempt revenue bonds were issued by the California Pollution
Control Financing Authority to finance the construction of the Delano I
and Delano II facilities. The obligations are credit-enhanced by a letter
of credit issued by a bank group. Repayment of the debt is an obligation
of Delano and the obligations are nonrecourse to the Company. As of
September 27, 1997, Delano I and Delano II plant and equipment totaling
approximately $173.0 million were collateral for this debt.
On June 30, 1995, the Mendota Operating Company entered into a First
Amendment to its Project Lease. The Amendment, effective April 1, 1995,
modified, among other terms of the lease, the lease term, the base rent,
the application of cash flow from the facility, and the lessee's option
to purchase the facility. The terms of the lease, as amended, met the
requirements for treatment as a capital lease and accordingly, the
facility has been recorded as an asset of the Company in the amount of
$47.0 million and is included in property, plant, and equipment, net in
the accompanying balance sheet.
28PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
11. Long-term Obligations (continued)
The future minimum lease payments under the amended lease are as
follows:
(In thousands)
--------------------------------------------------
1998 $12,033
1999 12,033
2000 12,868
-------
36,934
Less: Amount representing interest 5,780
-------
Present value of minimum lease payments 31,154
Less: Current portion 8,912
-------
Long-term capital lease obligations $22,242
=======
See Note 13 for information pertaining to the fair value of the
Company's long-term obligations.
12. Significant Customers and Concentrations of Credit Risk
Revenues from three electric utility customers as a percentage of
total revenues were approximately 18%, 31%, and 32% in fiscal 1997; 21%,
36%, and 36% in fiscal 1996; and 22%, 36%, and 36% in fiscal 1995.
At fiscal year-end 1997 and 1996, substantially all accounts
receivable due to the Company were from its four electric utility
customers. The Company does not normally require collateral or other
security to support its accounts receivable. Management does not believe
that this concentration of credit risk has or will have a significant
negative impact on the Company.
13. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, restricted funds, accounts receivable, long-term
available-for-sale investments, due from parent company, current portion
of long-term obligations, accounts payable, due to parent company,
long-term obligations, forward exchange contracts, and interest rate
swaps. The carrying amounts of these financial instruments, with the
exception of long-term available-for-sale investments, due from parent
company, long-term obligations, forward exchange contracts, and interest
rate swaps, approximate fair value due to their short-term nature.
The Company's long-term available-for-sale investments are carried
at fair value in the accompanying balance sheet. The fair value was
determined based on a quoted market price. See Note 2 for the fair value
29PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
13. Fair Value of Financial Instruments (continued)
information pertaining to this financial instrument. The carrying amount
of due from parent company in the accompanying balance sheet approximates
fair value.
During fiscal 1997, the Company entered into a forward exchange
contract to hedge certain customer deposits denominated in currencies
other than its foreign subsidiary's local currency. The purpose of the
Company's foreign currency hedging activities is to protect the Company's
local currency cash flows related to the customer deposits from
fluctuations in foreign exchange rates. The amount of foreign exchange
contracts at year-end 1997 was $1.0 million. The carrying amount and fair
value of the Company's long-term obligations and off-balance sheet
financial instruments are as follows:
1997 1996
------------------- --------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
------------------------------------------------------------------------
Long-term obligations:
Convertible obligations $130,648 $224,294 $100,227 $199,696
Other long-term
obligations 74,042 64,861 109,054 111,727
-------- -------- -------- --------
$204,690 $289,155 $209,281 $311,423
======== ======== ======== ========
Off-balance-sheet financial
instruments:
Interest rate swaps
receivable (payable) $ 9,199 $ (2,673)
Foreign exchange
contract payable 69 -
The fair value of long-term obligations was determined based on
quoted market prices and on borrowing rates available to the Company at
the respective year ends. The fair value of convertible obligations at
fiscal year-end 1997 and 1996 exceeds the carrying amount primarily due
to the market price of the Company's common stock exceeding the
conversion price of the convertible obligations.
Interest rate swap agreements are in place on the borrowings
associated with the Delano I and Delano II facilities and are with a
different counter-party than the holders of the underlying debt. These
swaps have terms expiring in December 2000 commensurate with the final
maturity of the debt. The swaps have effectively converted floating rate
debt to fixed rate borrowings. Interest expense is adjusted with changes
in the interest rate and management believes any credit risk is remote.
The notional amount of the swap agreements was $127.0 million and $95.7
million at fiscal year-end 1997 and 1996, respectively. The fair value of
such agreements is the estimated amount that the Company would pay upon
termination of the contract, taking into account the change in market
30PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
13. Fair Value of Financial Instruments (continued)
interest rates and creditworthiness of the counterparties. During fiscal
1997 and 1996, the average variable rate received under the swap
agreement was 3.5% and 3.6%, respectively.
The fair value of forward exchange contracts is the estimated amount
that the Company would be required to pay if it were to terminate the
contract, taking into account the change in foreign exchange rates.
14. Unaudited Quarterly Information
(In thousands except per share amounts)
1997 First Second(a) Third Fourth(b)
------------------------------------------------------------------------
Revenues $38,514 $38,674 $43,524 $59,479
Gross profit 12,260 9,793 14,682 30,220
Net income 4,300 952 3,598 13,695
Earnings per share:
Primary .16 .04 .14 .53
Fully diluted .12 .04 .11 .37
1996 First Second Third(c) Fourth
------------------------------------------------------------------------
Revenues $34,296 $33,505 $35,316 $46,959
Gross profit 10,107 6,945 10,852 20,289
Net income 3,052 609 3,024 11,095
Earnings per share:
Primary .13 .02 .11 .41
Fully diluted .10 .02 .09 .31
(a) Reflects the January 1997 acquisition of biosys, inc.
(b) Reflects the inclusion of $8.2 million of previously deferred revenue
in connection with the termination of a power-sales agreement
relating to a cogeneration facility in Staten Island, New York.
(c) Reflects the May 1996 acquisition of the biopesticides division of
W.R. Grace & Co.
15. Subsequent Events
In November 1997, Thermo Trilogy acquired the sprayable bacillus
thuringiensis (Bt) - biopesticide business of Novartis AG and its
affiliate for approximately $19.1 million in cash and the assumption of
certain liabilities.
Also in November 1997, the Company entered into an agreement to
acquire two power generation facilities and related sites in California
during the first six months of 1998 for approximately $9.5 million in
cash and the assumption of certain liabilities.
31PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Ecotek Corporation:
We have audited the accompanying consolidated balance sheet of Thermo
Ecotek Corporation (a Delaware corporation and 87%-owned subsidiary of
Thermo Electron Corporation) and subsidiaries as of September 27, 1997,
and September 28, 1996, and the related consolidated statements of
income, shareholders' investment, and cash flows for the years ended
September 27, 1997, and September 28, 1996, and the nine months ended
September 30, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Thermo Ecotek Corporation and subsidiaries as of September 27, 1997, and
September 28, 1996, and the results of their operations and their cash
flows for the years ended September 27, 1997, and September 28, 1996, and
the nine months ended September 30, 1995, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 3, 1997
(except with respect to
the matters discussed in
Note 15, as to which the
date is November 26, 1997)
32PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements,
including those detailed immediately after this Management's Discussion
and Analysis of Financial Condition and Results of Operation under the
heading "Forward-looking Statements."
Overview
The Company 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 during periods when hydroelectric power is
available, generally following periods of heavy rain or snow. The
contractually allowable maximum for such curtailment at each of the
Woodland and Mendota plants is 1,000 hours per year. The Company
experienced approximately 860, 930, and 950 hours of curtailment at each
of the two plants during fiscal 1997, 1996, and 1995, respectively. The
Company earns a disproportionately high share of its income from May to
October due to the rate structures under the power-sales agreements for
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 its 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. Through two wholly
owned subsidiaries, the Company acquired the assets of the biopesticides
division of W.R. Grace & Co. (renamed Thermo Trilogy) in May 1996. In
January 1997, Thermo Trilogy acquired substantially all of the assets of
biosys, inc. In November 1997, Thermo Trilogy acquired the sprayable
bacillus thuringiensis ("Bt") - biopesticide business of Novartis AG.
Products produced by Thermo Trilogy include botanical extracts from the
33PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview (continued)
seed of tropical "neem" trees, microbial based pesticides (fungal based
insecticides and fungicides, bacterial based insecticides, baculovirus,
and beneficial nematodes), insect pheromone based products such as traps
and lures, and disease free sugar cane planting stock. These biopesticide
products are used as alternatives or complements to conventional chemical
based pest control technologies. As a result of these transactions, the
Company expects that Thermo Trilogy's operations will have an
increasingly significant impact on the Company's results of operations in
fiscal 1998 and beyond.
The Company has also entered the field of engineered "clean" fuels
through a partnership agreement with KFx, Inc. (KFx). The Company is a
95% partner in a partnership established to design, build, and operate
the first full-scale coal production facility to use a patented K-fuels
"clean coal" 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 cost of business development efforts is expected to
increase as the Company 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.
Results of Operations
In June 1995, the Company changed its fiscal year end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the results of operations for 1996 compares the year ended
September 28, 1996 (fiscal 1996) with the unaudited year ended September
30, 1995 (1995).
Fiscal 1997 Compared With Fiscal 1996
Revenues increased 20% to $180.2 million in fiscal 1997 from $150.1
million in fiscal 1996. Revenues increased $14.2 million due to the
inclusion of revenues for the full fiscal year from Thermo Trilogy,
including operations from the biosys acquisition in January 1997. In
addition, during fiscal 1997, the Company decided not to proceed in its
development of a natural gas cogeneration facility in Staten Island, New
York (Note 10) and, accordingly, recorded $8.2 million of previously
deferred revenues related to an August 1993 agreement with a utility. The
increase in revenues was also due to higher contractual energy rates at
all of the Company's facilities, except the Hemphill plant. 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.
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Thermo Ecotek Corporation 1997 Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Fiscal 1997 Compared With Fiscal 1996 (continued)
The gross profit margin increased to 37% during fiscal 1997 from 32%
in fiscal 1996. The improvement results primarily from the effect of the
Staten Island agreement and, to a lesser extent, the inclusion of
higher-margin Thermo Trilogy revenues for all of fiscal 1997, and the
effect of higher contractual energy rates. The increases were offset in
part by lower profitability at the Company's Woodland plant, as discussed
below.
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. Beginning during the first quarter of fiscal 1997, the Company
began recording as an expense the funding of reserves required under
Woodland's nonrecourse lease agreement to cover projected shortfalls in
lease payments beginning in 2000. Consequently, the results of the
Woodland plant were greatly diminished during 1997 and the Company
expects that such results will be reduced to approximately breakeven in
1998 and thereafter. During fiscal 1997 and 1996, the Woodland plant
contributed $1.0 million and $5.1 million of operating income,
respectively.
The resolution of the rate order negotiations 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 deregulation plan
for the New Hampshire electric utility industry were adopted, PSNH could
default on certain financial obligations and seek bankruptcy protection.
In February 1997, the New Hampshire Public Utilities Commission (NHPUC)
voted to adopt a deregulation plan, and in March 1997, PSNH filed suit to
block the plan. In March 1997, the federal district court issued a
temporary restraining order which prohibits the NHPUC from implementing
the deregulation plan as it affects PSNH, pending a determination by the
court whether PSNH's claim could then be heard by the court. In April
1997, the court ruled that it could now hear the case and ordered that
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Thermo Ecotek Corporation 1997 Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Fiscal 1997 Compared With Fiscal 1996 (continued)
the restraining order would continue indefinitely pending the outcome of
the suit. In addition, in March 1997, the Company, along with a group of
other biomass power producers, filed a motion with the NHPUC seeking
clarification of the NHPUC's proposed deregulation plan regarding several
issues, including purchase requirements and payment of current rate order
prices with respect to the Company's energy output. An unfavorable
resolution of this matter, including the bankruptcy of PSNH, could have a
material adverse effect on the Company's results of operations and
financial position.
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. The fire has caused certain delays with
respect to the commencement of commercial operations of the facility. In
addition, the Company is currently experiencing certain construction
problems including issues relating to the flow of material within the
facility and design and operation of certain pressure-release equipment
which will further delay the commencement of the facility's commercial
operations. The Company expects to complete repairs and resolve these
construction problems in time to begin commercial operation of the
facility during the first half of fiscal 1998. However, because the
technology being developed is new and untested, no assurance can be given
that other difficulties will not arise or that the Company will be able
to correct these construction problems and commence commercial operations
prior to the end of the first half of fiscal 1998, or at all. The
facility must be placed in service by June 30, 1998, to qualify for
certain tax credits on its output.
Selling, general, and administrative expenses as a percentage of
revenues were 11% in fiscal 1997, compared with 8% in fiscal 1996. The
increase resulted primarily from the inclusion of higher selling,
general, and administrative expenses as a percentage of revenues at
Thermo Trilogy for a full year, offset in part by higher revenues.
Interest income was unchanged at $5.1 million in fiscal 1997 and
fiscal 1996. Increases in fiscal 1997 invested balances as a result of
the Company's April 1997 issuance of 4.875% subordinated convertible
debentures (Note 11) and operating cash flows were offset by amounts
expended for the repurchase of the Company's common stock, construction
of the Gillette, Wyoming, coal-beneficiation facility, and the January
1997 acquisition of biosys. Interest expense decreased to $13.9 million
in fiscal 1997 from $14.7 million in fiscal 1996, due to lower
outstanding debt related to the Company's Delano and Mendota plants,
offset in part by an increase in interest expense due to the April 1997
issuance of 4.875% subordinated convertible debentures.
The effective tax rates were 38% and 28% in fiscal 1997 and 1996,
respectively. The fiscal 1997 rate exceeded the statutory federal income
tax rate as a result of the impact of state income taxes, offset in part
by the exclusion of income taxed directly to a minority partner. The
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Thermo Ecotek Corporation 1997 Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Fiscal 1997 Compared With Fiscal 1996 (continued)
effective tax rate in fiscal 1996 was lower than the statutory federal
income tax rate due to the full utilization of tax loss and credit
carryforwards as a result of the resolution of certain tax contingencies,
offset in part by the impact of state income taxes.
Minority interest expense represents the allocation of income from
plant operations to a minority partner in an Operating Company.
Fiscal 1996 Compared With 1995
Revenues increased 8% to $150.1 million in fiscal 1996 from $139.3
million in 1995. The increase was primarily due to higher contractual
energy rates in fiscal 1996 at all of the Company's facilities, except
the Hemphill plant, as well as fewer days of scheduled and unscheduled
outages at the Delano plants, and the inclusion of $1.7 million in
revenues from Thermo Trilogy, which was acquired in May 1996.
The gross profit margin increased to 32% during fiscal 1996 from 29%
in 1995. The improvement results largely from the effect of higher energy
rates in 1996 and, to a lesser extent, lower fuel costs.
Selling, general, and administrative expenses as a percentage of
revenues were 8% in fiscal 1996, compared with 7% in 1995. The change
results primarily from an ongoing increase in business development
efforts and the inclusion of higher general and administrative expenses
as a percentage of revenues at Thermo Trilogy.
Interest income increased to $5.1 million in fiscal 1996 from $3.3
million in 1995, primarily due to interest income earned on invested
proceeds from the issuance of $37.0 million principal amount of
noninterest bearing subordinated convertible debentures in March 1996
(Note 11) and the Company's initial public offering in February 1995.
Interest expense increased to $14.7 million in fiscal 1996 from $13.3
million in 1995, primarily due to the conversion of the Mendota plant
lease to a capital lease effective April 1995.
The effective tax rates were 28% and 34% in fiscal 1996 and 1995,
respectively. The rates in both years reflect the exclusion of income
taxed directly to minority partners, as well as the benefit of tax
credits and loss carryforwards, offset in part by the impact of state
income taxes. The effective tax rate decreased in fiscal 1996 from 1995
due to the full utilization of tax loss and credit 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 $90.7 million at September 27, 1997,
from $76.2 million at September 28, 1996. The Company had cash, cash
equivalents, and current restricted funds of $104.3 million at
September 27, 1997, compared with $82.2 million at September 28, 1996. At
September 27, 1997, and September 28, 1996, restricted funds held in
trust pursuant to certain lease and debt agreements totaled $20.8 million
and $18.9 million, respectively. The use of cash and cash equivalents of
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Thermo Ecotek Corporation 1997 Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources (continued)
$12.0 million and $7.6 million at September 27, 1997, and September 28,
1996, respectively, was also restricted by the terms of 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. In addition, until
such time, if ever, as projections of avoided costs change, all cash
flows from the Woodland Operating Company, other than cash required for
tax distribution, will be restricted from distribution to the Company.
During fiscal 1997, the Company's operating activities provided cash and
restricted funds of $49.4 million. Cash of $3.7 million, used to fund an
increase in accounts receivable, was offset by an increase of $2.5
million in accounts payable. These increases were in support of higher
volumes of business in fiscal 1997.
During fiscal 1997, the Company's investing activities used cash of
$29.3 million. The Company, through its Limited Partnership Agreement
with KFx Wyoming, Inc., expended $15.5 million (net of insurance proceeds
related to fire damage) for the construction of a coal-beneficiation
facility in Gillette, Wyoming, and $2.2 million for the purchase of other
property, plant, and equipment. The Company expects to fund up to an
additional $5 million of construction and related costs prior to
commercial operation of the facility, provided there are no further
construction difficulties requiring additional funding (Note 3). The
Company also 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 fiscal 1997, the Company canceled its
nonbinding commitment 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. In January 1997,
Thermo Trilogy acquired substantially all of the assets of biosys, inc.,
a biopesticides company, for $10.9 million in cash, net of cash acquired,
and the assumption of certain liabilities. In November 1997, Thermo
Trilogy acquired the sprayable Bt-biopesticide business of Novartis AG
and its affiliate for approximately $19.1 million in cash and the
assumption of certain liabilities. Also in November 1997, the Company
entered into an agreement to acquire two power generation facilities and
related sites in California during the first six months of 1998 for
approximately $9.5 million in cash and the assumption of certain
liabilities. These natural gas-fired generating facilities were built in
the 1950's and have been designated "non must run" by the Independent
System Operator, meaning they are not essential for supplying electricity
to the California power grid. During calendar 1997, the plants operated
at less than five percent capacity. The Company is currently evaluating
its options with regard to the operation of these plants in the future.
In December 1997, the Company committed to loan $4.3 million to an entity
to finance the acquisition of certain generating equipment. The Company
has funded $2.9 million of the commitment and the loan is secured by the
equipment acquired.
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<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources (continued)
During fiscal 1997, the Company's financing activities provided
$2.2 million of cash. In April 1997, the Company issued and sold at par
$50.0 million principal amount of 4.875% convertible debentures due 2004
(Note 11). The Company used cash of $24.8 million for the repayment of
long-term obligations and payments under capital lease obligations
related to two of its California plants. Through a series of transactions
commencing in April 1997, the Company's Board of Directors has authorized
the repurchase, through various dates ending in November 1998, of up to
$30 million of its own securities in the open market, or in negotiated
transactions. Through September 27, 1997, the Company had repurchased
$19.7 million in common stock under these authorizations. Any such
repurchases are funded from working capital. In addition, the Company
distributed $1.3 million to a minority partner of one of its Operating
Companies.
The Company is developing a gas-fired plant near Mysore, India, which
if successful, would require an equity contribution from the Company of
between $35 and $60 million. In September 1996, the Company, through a
wholly owned subsidiary, formed a joint venture with Marcegaglia Group of
Mantova, Italy, to develop, own, and operate biomass-fueled electric
power facilities in that country, which may require significant equity
investments if development efforts are successful. In January 1996, the
Company, through a wholly owned subsidiary, entered into a joint
development agreement with EMD Praha Spol s.r.o. in the Czech Republic,
which may require significant equity investments if development efforts
are successful.
The Company's short-term financing requirements at September 27,
1997, consisted primarily of $35.3 million, due in fiscal 1998, of
principal and interest payments related to the long-term financing
provisions for the Mendota and Delano projects. The Company expects that
the cash flows of its Mendota, Delano I, and Delano II plants will be
sufficient to make future lease and debt payments. The Company believes
that its short-term liquidity needs will be met through cash flows from
operating activities. While the Company does not currently have any firm
available credit facilities, it does not expect to require funding for
currently existing operations in the foreseeable future. The Company is
in the early stages of developing projects in India, Italy, and the Czech
Republic. Equity investments required by the Company for these
development efforts, if successful, are uncertain, but may be
significant. Although the Company's projects are designed to produce cash
flow over the long-term, the Company will have to obtain significant
additional funds from time to time to complete acquisitions and to meet
project development requirements, including the funding of equity
investments. As the Company acquires, invests in, or develops future
plants, the Company expects to finance them with nonrecourse debt,
internal funds, additional equity or through borrowings from third
parties or Thermo Electron Corporation (Thermo Electron). Although Thermo
Electron has expressed its willingness to provide funds to the Company to
help finance acquisitions and equity investments in future projects, the
Company has no agreements with Thermo Electron or third parties that
assure funds will be available on acceptable terms or at all.
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Thermo Ecotek Corporation 1997 Financial Statements
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 1998 and beyond to
differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company.
Uncertainty of Project Development. The process of locating,
developing, permitting, financing, and constructing power plants is
complex, lengthy, and expensive. Only a small percentage of the projects
that the Company evaluates and pursues ultimately results in operating
projects. As a result, the Company may not recover any expenses that it
incurs in the evaluation and development of many projects.
Although all the plants currently operated by the Company utilize
biomass as fuel, the Company is not currently considering the development
of further biomass-fueled projects in the United States due to high fuel
costs and the relatively high costs of constructing and operating
biomass-fueled plants. The Company is considering the development of
biomass-fueled projects internationally in countries where market
conditions may support profitable biomass operations. The Company has
also expanded its development focus to include international clean
combustion opportunities, engineered clean fuels, and other
environmentally sound technologies. In this regard, the Company has
established offices in India, the Czech Republic, and Italy. The
completion or success of these projects and new ventures is subject to a
number of significant conditions, including obtaining financing,
negotiating key contracts with partners and other third parties, and
further due diligence. No assurance can be given that these projects or
new ventures will be completed on a timely basis, or at all. Any failure
by the Company to successfully develop new projects would have a material
adverse effect on the future growth of the Company.
Uncertainty Regarding K-Fuel Plant. The Company has entered into a
limited partnership agreement with KFx Wyoming, Inc., a subsidiary of
KFx, Inc. (the Partnership), to develop, construct, and operate a
subbituminous coal beneficiation plant near Gillette, Wyoming. The plant
will utilize certain patented clean coal technology (the K-Fuel
technology) to produce low-moisture, high-energy fuel with reduced
sulfur. The Company has provided approximately $50 million, and is
committed to provide up to an additional $5 million for the design,
construction, and operation of the plant. A tax credit is available with
respect to qualifying alternative fuels produced and sold by a facility
placed in service before June 30, 1998, pursuant to a binding written
contract in effect before December 31, 1996. During the first quarter of
fiscal 1997, a fire occurred at the facility. Although the facility's
four coal processors were undamaged, the fire caused certain delays with
respect to the commencement of commercial operations of the facility. In
addition, the Company has experienced certain construction problems,
including issues relating to the flow of material within the facility and
design and operations of certain pressure release equipment, which has
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Thermo Ecotek Corporation 1997 Financial Statements
Forward-looking Statements
caused further delay of the commencement of the facility's commercial
operation. The Company expects to complete repairs and resolve these
construction problems in time to begin commercial operations during the
first half of fiscal 1998, however, no assurance can be given that the
Company will be able to correct these construction problems and place the
facility in service before June 30, 1998, or at all. If the Company is
not eligible for this tax credit, the profitability of the Partnership
would be materially adversely affected. In addition, the technology being
developed at the facility is new and untested and no assurance can be
given that the plant will not experience other technical or operating
problems or that the plant will be successful in producing fuel with the
desired physical characteristics. Further, the Company currently has an
agreement for the sale of only 33% of the plant's anticipated output for
the first three years of operation and, at the purchaser's option, the
plant's entire output from the fourth through the tenth year of
operation. No assurance can be given that the purchaser of the fuel will
exercise its option in years four through ten or that the Company will be
able to enter into additional contracts for the sale of fuel on
acceptable terms, or at all. Demand for the fuel produced by the plant is
expected to result in large part from the requirement that coal-burning
utilities comply with the future scheduled sulfur dioxide emissions
restrictions contained in the Clean Air Act. If the fuel produced by the
plant does not allow the achievement of desired emissions reductions, or
if regulations relating to emissions become less restrictive in the
future, demand for the plant's fuel output would be materially adversely
affected.
Development Risks
Uncertainty of Access to Capital. The Company has sought to finance
the debt portion of each of its clean combustion projects in a manner
that is substantially nonrecourse to the Company. To minimize its equity
commitment, the Company must borrow substantial amounts from third party
lenders. The borrowings are typically secured only by the applicable
project assets and the capital stock of the appropriate Operating
Company. The Company anticipates that it will require substantial
financing to fund both the equity and debt components of future projects.
No assurance can be given that financing for future projects will be
available on acceptable terms, or at all. Any failure by the Company to
obtain adequate amounts of financing on acceptable terms would have a
material adverse effect on the future growth of the Company.
Dependence on Terms of Power-sales Agreement. The profitability of
any of the Company's clean combustion facilities is heavily dependent
upon the power-sales agreement that it has entered into with the electric
utility or other customer. Most of the Company's existing power-sales
agreements were obtained as a direct negotiation with the purchasing
utility. However, in recent years, in the United States such agreements
have increasingly been awarded as a result of competitive bidding.
Consequently, obtaining a power-sales agreement in the United States has
become progressively more competitive and expensive and, in many cases,
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Thermo Ecotek Corporation 1997 Financial Statements
Forward-looking Statements
less profitable. In the future, foreign power-sales agreements also may
increasingly be subject to competitive bidding. In addition, the passage
of the National Energy Policy Act of 1992 has removed certain barriers to
entry into the independent power market by utilities and others, and is
expected to increase competition in that market. There can be no
assurance that power-sales agreements entered into by the Company in the
future will not be less profitable than the power-sales agreements to
which the Operating Companies are currently parties.
Risks Associated with Doing Business Outside the United States. The
Company believes that the most significant growth opportunities in the
power market exist outside of the United States. In that regard, the
Company is pursuing projects in India, Italy, and the Czech Republic, and
intends to identify other countries in which to develop power projects.
Doing business in many foreign countries exposes the Company to many
risks that are not present in the United States, including political,
military, privatization, currency exchange and repatriation risks, and
higher credit risks related to the utility purchaser. In addition, it is
possible that legal obligations may be more difficult for the Company to
enforce in foreign countries and that the Company may be at a
disadvantage in any legal proceeding with the local entity. Local laws
may also limit the ability of the Company to hold a majority interest in
some of the projects that it develops or acquires.
Intense Competition for Projects. The Company believes that there are
almost 200 companies that are actively engaged in the worldwide
nonutility power market. Many of the companies in the power market have
substantially greater financial and technical resources than those of the
Company. Domestic competition in this market is expected to intensify as
a result of deregulation at the federal and state levels, and due to the
trend toward awarding contracts based upon competitive bidding.
Uncertainty of Community Support. Development, construction and
operation of a clean combustion project requires numerous environmental,
siting, and other permits. The process of obtaining these permits can be
lengthy and expensive. In addition, local opposition to a particular
project can substantially increase the cost and time associated with
developing a project, and can potentially render a project unfeasible or
uneconomic. The Company may incur substantial costs or delays or may be
unsuccessful in developing clean combustion projects as a result of such
opposition.
Operating Risks
Expected Price Reductions under California SO#4 Contracts. The
power-sales agreements for the Company's Woodland, Mendota, and Delano
plants in California are so-called standard offer #4 (SO#4) contracts,
which require Pacific Gas & Electric (PG&E), in the case of Woodland and
Mendota, and Southern California Edison (SCE), in the case of Delano I
and Delano II, to purchase the power output of the projects at fixed
rates until 2000. However, with respect to Woodland and Mendota, PG&E has
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Thermo Ecotek Corporation 1997 Financial Statements
Forward-looking Statements
asserted that the fixed rates under its agreements will terminate
mid-1999, although the Company disputes this assertion. Thereafter, the
utility will pay a rate based upon its avoided costs (as determined from
time to time by the California Public Utility Commission). Avoided-cost
is determined pursuant to a formula that is intended to estimate the
price that the utility would, but for its contract with the power
producer, be paying for the same amount of energy. The rate fluctuates
with the price of fuels and certain other factors. At present, the
avoided-cost is substantially lower than the payments currently being
made by PG&E and SCE. 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 by PG&E and SCE.
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. The nonrecourse debt for the Mendota
and Delano plants will be paid by 2000. Absent sufficient reductions in
fuel prices and other operating costs, under such circumstances the
Company would draw down power reserve funds to cover operating cash
shortfalls and then, should such funds be depleted, either renegotiate
its nonrecourse lease for the Woodland plant or forfeit its interest in
the plant. Beginning during the first quarter of fiscal 1997, the Company
began recording as an expense the funding of reserves required under
Woodland's nonrecourse lease agreement to cover projected shortfalls in
lease payments beginning in 2000. Consequently, the results of the
Woodland plant were greatly diminished during 1997 and the Company
expects that such results will be reduced to approximately breakeven in
1998 and thereafter. During fiscal 1997 and 1996, the Woodland plant
contributed $1.0 million and $5.1 million of operating income,
respectively.
Potential Decreased Power Sales due to Power Curtailments. The
power-sales agreements between the Woodland and Mendota Operating
Companies and PG&E allow PG&E to curtail the quantity of power purchased
under each of these agreements by up to approximately 1,000 hours of
generating capacity annually. PG&E generally exercises its curtailment
rights during periods when cheaper hydroelectric power is available,
which generally occurs following periods of heavy rain or snow.
Curtailment reduces the power payment received by the Operating Companies
and, therefore, has an adverse effect on the financial results of those
Operating Companies. During fiscal 1997, the Company experienced
approximately 860 hours of utility imposed curtailments at each of these
plants.
Potential Increased Fuel Prices and Reduced Availability of Fuel. The
profitability of the Company's plants is dependent in part upon the
difference between the price the Company receives from its utility
customers for power and the price the Company pays for the fuel. The
Company has typically entered into long-term fuel supply agreements for a
significant portion of its fuel requirements. These agreements generally
provide for prices based upon pre-determined formulas or indexes. If fuel
prices rise significantly, the Company will be required to pay higher
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Thermo Ecotek Corporation 1997 Financial Statements
Forward-looking Statements
prices on the spot market. The Company's existing power-sales agreements
do not adjust to account for changes in the Company's fuel prices.
Therefore, the profitability of these agreements, and any future
power-sales agreement that do not provide for such an adjustment, could
be materially adversely affected by increases in the Company's fuel
prices. In addition, future fuel shortages could adversely affect the
Company's ability to deliver power, and therefore receive payments,
pursuant to its power-sales agreements.
Operating Difficulties. The financial performance of each of the
Company's plants depends to a significant extent upon the ability of each
plant to be capable of performing at or near capacity. If a plant is
unable to perform at these levels, payments under the power-sales
agreement will be reduced, possibly significantly. The Company has in the
past experienced mechanical problems with the boilers at its Mendota and
Woodland plants and suffered major equipment damage at its Whitefield
plant. Although the Company believes that these problems have been
corrected, no assurance can be given that these or other plants will not
experience operating problems in the future. No assurance can be given
that business interruption insurance will be adequate to cover all
potential losses, or that such insurance will continue to be available on
reasonable terms.
Dependence on Utility Customers. Each of the Company's projects
relies upon one power-sales agreement with a single electric utility
customer for the majority, if not all, of its revenues over the life of
the power-sales agreement. During fiscal 1997, PSNH, SCE, and PG&E
accounted for 18%, 31%, and 32%, respectively, of the Company's revenues.
The failure of any one utility customer to fulfill its contractual
obligations could have a substantial negative impact on the Company. No
assurance can be given that a particular utility will not be unwilling or
unable, at some time, to make required payments under its power-sales
agreements.
Potential Earthquake Damage. The Company's California plants are
located in areas where there is a risk of potentially significant
earthquake activity. Projects that the Company develops in the future may
also be located in areas, including India, where there is earthquake
risk. The Company's earthquake insurance is not sufficient to cover all
potential losses and there can be no assurance that such insurance will
continue to be available on reasonable terms.
Regulatory Risks
Potential Rate Reduction by PSNH. PSNH is currently required to
purchase the electricity produced by two of the Company's Operating
Companies under long-term power purchase rate orders issued by NHPUC. An
agreement between Northeast Utilities (NU), parent to PSNH, and the state
of New Hampshire, arising from the settlement of PSNH bankruptcy
proceedings, contains language to the effect that PSNH will seek to
renegotiate some of the terms of certain rate orders with small power
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Thermo Ecotek Corporation 1997 Financial Statements
Forward-looking Statements
producers and the state, acting through NHPUC, has supported such
efforts. The two affected Operating Companies have reached an agreement
in principle with PSNH to settle the renegotiation of their rate orders.
The settlement agreement is subject to the approval of the NHPUC on terms
acceptable to both PSNH and the Operating Companies and the satisfaction
of certain other conditions. The principal terms of the agreement
generally call for the two affected Operating Companies to reduce the
amount of power sold annually to PSNH to 70% of the plants' capacities,
and to reduce the price per kilowatt paid by PSNH to $.06 per kilowatt
hour, escalating three percent per year for the remainder of the term of
the original, applicable rate order. In consideration of these
reductions, the Operating Companies would receive certain cash settlement
payments, paid over several years. According to the terms of the
settlement agreement, the agreement has technically expired, however,
while not required, no party to the settlement agreement has notified the
other that it would not proceed in accordance with the terms thereof if
approved by NHPUC. The settlement, if approved and executed, is not
expected to have a material impact on the Company's consolidated results
of operations or financial condition. Should the settlement not be
approved and executed, the Company does not believe that PSNH has the
right to take unilateral action to reduce the price of purchased power
under such arrangements. Any such unilateral action, therefore, would
result in a claim for damages by the Company and could be the subject of
lengthy litigation. In January 1997, NU disclosed in a filing with the
Securities and Exchange Commission that if a proposed deregulation plan
for the New Hampshire electric utility industry were adopted, PSNH could
default on certain financial obligations and seek bankruptcy protection.
In February 1997, the NHPUC voted to adopt a deregulation plan and in
March 1997, PSNH filed suit to block the plan. In March 1997, the federal
district court issued a temporary restraining order which prohibits NHPUC
from implementing the deregulation plan as it affects PSNH, pending a
determination by the court whether PSNH's claim could then be heard by
the court. In April 1997, the court ruled that is could now hear the case
and ordered that the restraining order would continue indefinitely
pending the outcome of the suit. In addition, in March 1997, the Company,
along with a group of other biomass power producers, filed a motion with
the NHPUC seeking clarification of the NHPUC's proposed deregulation plan
regarding several issues, including purchase requirements and payment of
current rate order prices with respect to the Company's energy output. An
adverse resolution of this matter, including the bankruptcy of PSNH,
could materially affect the Company's operations, cash flows, and
financial position.
Potential Effects of Loss of QF Status or Changes to PURPA. The
Company 's existing facilities are subject to the provisions of various
laws and regulations, including the Public Utility Regulatory Policies
Act of 1978, as amended (PURPA). PURPA provides to Qualifying Facilities
(QFs) certain exemptions from substantial federal and state legislation,
including regulation as public utilities. PURPA also requires electric
utilities to purchase electricity generated by QFs at prices not
exceeding the costs that would otherwise have been incurred by the
45PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Forward-looking Statements
purchasing utilities in generating their own electricity or in purchasing
it from other sources (known as "avoided-cost"). Any future changes to
PURPA could have a material adverse effect on the Company.
The Public Utility Holding Company Act of 1935 (PUHCA) regulates
public utility holding companies and their subsidiaries. The Company is
not and will not be subject to regulation as a holding company under
PUHCA as long as the domestic power plants it operates are QFs under
PURPA. If a power plant were to lose its QF status, the Operating Company
owning or leasing that plant could become a public utility company, which
could result in the Company becoming a public utility holding company. In
addition, loss of QF status, regardless of the Company's ability to avoid
public utility holding company status, could be a default under many of
the Company's facility lease and power-sales agreements. In the event of
any such default, the other parties to such agreements could seek various
remedies against the Company or could seek to renegotiate such agreements
on terms more favorable to such parties.
Potential Increased Competition Due to Regulatory Changes. The
Company believes that certain regulatory changes are likely to have a
significant impact on the domestic power market over the next five years.
The National Energy Policy Act of 1992 exempts a new class of facilities
from certain federal utility regulation and liberalizes access for
nonutility generators to the utility power transmission grid. In
addition, many states are considering the elimination of many of the
regulations that currently limit the ability of power generators to
negotiate power-sales agreements directly with industrial and commercial
customers. The Company believes that the effect of these regulatory
changes will be to increase competition for the sale of power.
Limitations Imposed by Environmental Regulation. Federal, state, and
local environmental laws govern air emissions and discharges into water
and the generation, transportation, storage, and treatment and disposal
of solid and hazardous waste. These laws establish standards governing
most aspects of the construction and operation of the Company's
facilities, and often require multiple governmental permits before these
facilities can be constructed, modified, or operated. There can be no
assurance that all required permits will be issued for the Company's
projects under development or for future projects, or that the
requirements for continued environmental regulatory laws and policies
governing their enforcement may change, requiring new technology or
stricter standards for the control of discharges of air or water
pollutants, or for solid or hazardous waste or ash handling and disposal.
Such future developments could affect the manner in which the Company
operates its plants and could require significant additional expenditures
to achieve compliance with such requirements. It is possible that
compliance may not be technically or economically feasible.
Risks Associated with the Biopesticide Business
Need for Regulatory Approval. The Company's Thermo Trilogy
subsidiary's (Thermo Trilogy's) biopesticide products cannot be sold
46PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Forward-looking Statements
unless the EPA grants Thermo Trilogy a registration for each pesticide
product it intends to manufacture or sell. Thermo Trilogy must submit
extensive toxicological studies and results of field testing as well as
other studies to the EPA to apply for a product registration. Pesticide
registrations under state laws and regulations must also be obtained. In
addition, pesticide registrations must be obtained from foreign
governments before Thermo Trilogy's products can be sold in a particular
country, and these countries may also require costly and extensive
studies to support the registration applications some of which may be
more stringent then current U.S. regulations. Registration of Thermo
Trilogy's new products likely will be lengthy and expensive. There is no
assurance that the EPA, states or foreign governments will timely grant
pesticide registrations to Thermo Trilogy, or at all. Pesticide
registrations may also be revoked if new registrations are adopted or if
Thermo Trilogy violates regulations regarding the manufacturing, sale or
labeling of Thermo Trilogy's products. Such regulation applies to all
stages of field testing and to the manufacture, sale and use of most of
Thermo Trilogy's products. There can be no assurance that Thermo Trilogy
will continue to be able to comply with EPA regulations or any changes
thereto. The regulatory process or private litigation contesting products
of Thermo Trilogy may be costly and time-consuming and may delay
research, development, production and/or marketing of such products and
require costly and time-consuming procedures, all of which may furnish an
advantage to competitors. There can be no assurance that requisite
regulatory approvals and/or registrations of any or all of Thermo
Trilogy's products will be granted on a timely basis, if at all. In
addition, new or more stringent regulations may be adopted or imposed,
which could have a material adverse effect on Thermo Trilogy's business,
financial condition and results of operations.
Uncertainty of Market Acceptance/Penetration. Thermo Trilogy's sales
growth is dependent on the penetration of its products into new markets.
The primary competition to Thermo Trilogy's products are chemical
pesticides, and Thermo Trilogy must educate customers on the cost
effectiveness and efficacy and minimal environmental effects of Thermo
Trilogy's products compared to chemical pesticides in order to gain
acceptance for application on new crop types in different parts of the
world. In addition, the rate of acceptance of Thermo Trilogy's products
in the U.S. will be substantially affected by ongoing EPA review and
registration of the use of currently available chemical insecticides and
biopesticides and the extent to which the EPA restricts or bans chemical
pesticides for which Thermo Trilogy has biopesticide alternatives. No
assurance can be given that Thermo Trilogy's products will gain increased
acceptance in new market segments.
Highly Competitive Markets and Technological Change. Most of markets
in which Thermo Trilogy operates are highly competitive and are subject
to rapid technological change. Several of Thermo Trilogy's products are
in testing or early marketing stages. Many of Thermo Trilogy's
competitors are large chemical and pharmaceutical companies with greater
financial, marketing, and technological resources than Thermo Trilogy.
There is no assurance that competitors will not develop new products that
47PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Forward-looking Statements
will render Thermo Trilogy's products noncompetitive. The development of
transgenic plants and seeds, genetically engineered seeds or plants
designed to improve resistance to insects or disease or to improve
product quality may pose a competitive threat to Thermo Trilogy's
products in the future.
Reliance on Third Party Manufacturers and Producers. Thermo Trilogy
relies on overseas producers of the raw materials for its neem-based
products and on third parties to manufacture products. In particular,
Thermo Trilogy's sole supplier of neem products is P.J. Margo Pvt. Ltd.,
a joint venture in India in which Thermo Trilogy holds a fifty percent
interest, pursuant to an exclusive supply contract that expires in 2001.
There is no assurance that Thermo Trilogy will have an uninterrupted
supply of raw materials or that third party manufacturers will produce
the products at competitive prices.
Uncertainty of Product Development and Commercialization. Thermo
Trilogy's products are at various stages of development and
commercialization. The ability of Thermo Trilogy to sell its products in
large commercial markets will be dependent upon continued product
development to allow increased efficiency and reduced costs in
production. There can be no assurance that increased efficiency and
reduced costs of production can be achieved. Thermo Trilogy cannot
accurately predict whether any of its products under development can be
produced and marketed profitably.
Seasonality of Product Sales. Thermo Trilogy currently markets its
products predominantly for use in the northern hemisphere, where the
growing season generally runs from March to October; therefore, the
seasonal nature of agriculture will cause Thermo Trilogy's product sales
to be concentrated during such period and will result in substantial
variations in quarter to quarter financial results.
Perishability of Products. Certain of Thermo Trilogy's microbial
products are living organisms and thus have a limited shelf-life, may
biodegrade quickly when exposed to light and heat and are perishable. In
addition, such products may be perishable when exposed to hostile
environments including severe or changing weather patterns particularly
during shipping and storage. Failure of these products as a result of
perishability could have material adverse consequences on the business of
Thermo Trilogy.
Testing. Commercial introduction of additional products and the
expansion of label claims for current products to include additional
insects are both contingent upon, among other factors, completion of
field testing. Unusual weather conditions during field tests prior to the
growing season or other tests in subsequent growing seasons could result
in delays in product development and commercialization. Such delays could
result in additional losses due to increased operating expenses in the
intervening period without significant offsetting revenues.
48PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Forward-looking Statements
Product and Warranty Liability. Thermo Trilogy faces an inherent
business risk of exposure to product liability and warranty claims in the
event that the use of its current products or prospective products lack
efficacy or result in adverse effects. Further, product liability claims
could result in Company exposure for crop damage or personal injury.
Run-off excess concentrations of pesticide products could also expose
Thermo Trilogy to claims and liabilities for water pollution, including
governmental fines and penalties. There can be no assurance that the
scope of Thermo Trilogy's insurance coverage is sufficient, that it can
obtain additional coverage or that Thermo Trilogy will have sufficient
resources to satisfy any product liability and warranty claims.
Other Risks
Significant Quarterly Fluctuations in Operating Results. The
Company's operating results fluctuate significantly from quarter to
quarter based on a number of factors, primarily seasonal energy demand in
California, which results in higher payments under the Company's
California power-sales agreements in the months of May through October,
and lower payments during the remainder of the year, and seasonal demand
for its biopesticide products. The Company historically has operated at a
loss or marginal profitability during its second fiscal quarter due to
the rate structure under these agreements. In addition, the Company's
operating results can be affected by utility imposed curtailments or by
any operating problems that cause a plant to operate at less than normal
capacity, and with respect to its biopesticide business, by agricultural
conditions such as pest infestation, amount of rain, and other adverse
weather conditions, the occurrence of natural resistance factors, and the
increase or decrease in agricultural plantings and produce prices.
Limitation on Access to Operating Company Assets and Cash Flow. The
Company's operations are conducted through the Operating Companies, and
the Company's cash flow is contingent on the ability of the Operating
Companies to make dividends or other distributions to the Company. The
terms of certain leases and financial agreements to which the Operating
Companies are parties require that certain funds be held in trust and
that certain funds be restricted from distribution to the Company. As of
September 27, 1997, approximately $12.0 million of the Company's cash and
cash equivalents was restricted from distribution by the terms of certain
operating companies lease and financing agreements. In addition, until
such time, if ever, as projections of avoided-cost change, all cash flows
from the Woodland operation, other than cash required for tax
distribution, will be restricted from distribution to the Company. The
inability of the Company to receive distributions from the Operating
Companies could have a material adverse effect on the future growth of
the Company.
Dependence on Proprietary Technology. Proprietary rights relating to
the Company's products will be 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. The Company has
a number of U.S. patents and also owns corresponding foreign patents in a
49PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Forward-looking Statements
number of jurisdictions throughout the world. There can be no assurance
that any patents now or hereafter owned by the Company will afford
protection against competitors. 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, some
of whom have substantially greater resources than those 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. The Company could
incur substantial costs and diversion of management resources with
respect to the defense of any such claims, which could have a material
adverse effect on the Company's business, financial condition, and
results of operation. Furthermore, parties making such claims could
secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief, which could effectively block the Company's
ability to make, use, sell, distribute or market its products and
services in the U.S. and abroad. 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. In the event that a claim
relating to proprietary technology or information is asserted against the
Company, the Company may need to acquire licenses to, or contest the
validity of, any such competitor's proprietary technology. It is likely
that significant funds would be required to contest the validity of any
such competitor's proprietary technology. There can be no assurance that
any license required under any such competitor's proprietary technology
would be made available on acceptance terms or that the Company would
prevail in any such contest. There can be no assurance that the steps
taken by the Company to protect its proprietary rights will be adequate
to prevent misappropriation of its technology or independent development
by others of similar technology. In addition, the laws of some
jurisdictions do not protect the Company's proprietary rights to the same
extent as the laws of the U.S. There can be no assurance that these
protections will be adequate.
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.
50PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Selected Financial Information
Nine
Months
Year Ended Ended Year Ended
(In thousands ------------------------------ --------- ------------------
except per Sept. 27, Sept. 28, Sept. 30, Sept. 30, Dec. 31, Jan. 1,
share amounts) 1997(a) 1996(b) 1995 1995(c) 1994 1994
- -------------------------------------------------------------------------------
(Unaudited)
Statement of Income
Data:
Revenues $180,191 $150,076 $139,319 $107,139 $134,261 $117,691
Net income 22,545 17,780 12,540 10,264 9,651 3,890
Earnings per share:
Primary .85 .70 .58 .46 .48 .19
Fully diluted .64 .53 .43 .34 .37 .19
Weighted average
shares:
Primary 26,491 25,476 21,796 22,477 20,118 19,999
Fully diluted 38,746 36,315 33,114 33,794 31,193 19,999
Balance Sheet Data:
Working capital $ 90,714 $ 76,217 $ 58,361 $ 28,418 $ 17,295
Total assets 485,305 449,145 390,476 285,970 302,345
Long-term
obligations 204,690 209,281 202,360 163,800 177,300
Shareholders'
investment 147,276 129,687 92,985 55,146 45,495
(a) Reflects the January 1997 acquisition of biosys, inc. and the April 1997
issuance of $50.0 million principal amount of 4.875% subordinated
convertible debentures.
(b) Reflects the March 1996 issuance of $37.0 million principal amount of
noninterest-bearing subordinated convertible debentures and the May 1996
acquisition of the biopesticides division of W.R. Grace & Co.
(c) In June 1995, the Company changed its fiscal year end from the Saturday
nearest December 31 to the Saturday nearest September 30. Accordingly, the
Company's 39-week transition period ended September 30, 1995, is presented.
51PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Common Stock Market Information
The following table shows the market range for the Company's common
stock based on reported sales prices on the American Stock Exchange
(symbol TCK). Prices were restated to reflect a three-for-two stock split
distributed in October 1996.
Fiscal 1997 Fiscal 1996
---------------------- -----------------------
Quarter High Low High Low
------------------------------------------------------------------------
First $16 1/4 $14 1/2 $11 1/6 $ 8 11/12
Second 15 3/4 14 1/8 14 10 3/4
Third 16 11 3/8 16 5/6 13 1/6
Fourth 15 1/2 13 1/4 16 5/12 13 1/3
As of October 31, 1997, the Company had 710 holders of record of its
common stock. This does not include holdings in street or nominee names.
The closing market price on the American Stock Exchange for the Company's
common stock on October 31, 1997, was $13 13/16 per share.
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent
and maintains shareholder activity records. The agent will respond to
questions on issuance of stock certificates, change of ownership, lost
stock certificates, and change of address. For these and similar matters,
please direct inquiries to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Shareholder Services
Shareholders of Thermo Ecotek Corporation who desire information
about the Company are invited to contact John N. Hatsopoulos, Vice
President and Chief Financial Officer, Thermo Ecotek Corporation, 81
Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046,
(781) 622-1111. A mailing list is maintained to enable shareholders whose
stock is held in street name, and other interested individuals, to
receive quarterly reports, annual reports, and press releases as quickly
as possible. Quarterly distributions of printed reports are limited to
the second quarter report only. All quarterly reports and press releases
are available through the Internet from Thermo Electron's home page
(http://www.thermo.com/subsid/tck.html).
52PAGE
<PAGE>
Thermo Ecotek Corporation 1997 Financial Statements
Dividend Policy
The Company has never paid cash dividends because its policy has been
to use earnings to finance expansion and growth. Payment of dividends
will rest within the discretion of the Board of Directors and will depend
upon, among other factors, the Company's earnings, capital requirements,
and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of
certain restrictions applicable to the use of certain funds.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the year ended September
27, 1997, as filed with the Securities and Exchange Commission, may be
obtained without charge by writing to John N. Hatsopoulos, Vice President
and Chief Financial Officer, Thermo Ecotek Corporation, 81 Wyman Street,
P.O. Box 9046, Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Tuesday, March 10,
1998, at 10:00 a.m., at Thermo Electron Corporation, 81 Wyman Street,
Waltham, Massachusetts.
53<PAGE>
Exhibit 21
THERMO ECOTEK CORPORATION
Significant Subsidiaries of the Registrant
State or Registrant's
Jurisdiction % of
Name of Incorporation Ownership
-------------------------------- ---------------- ------------
Caribbean Cogeneration Company, Inc. Massachusetts 100%
Delano Energy Company Inc. Delaware 100%
Delano Operations Company, Inc. California 100%
Eco Fuels Inc. Wyoming 100%
EuroEnergy Group, B.V. Italy 50%
Gatepeak Corporation Delaware 100%
KFP Operating Company, Inc. Delaware 100%
Independent Power Services Corporation Nevada 100%
SFS Corporation New Hampshire 100%
TCK Fuels Inc. Delaware 100%
KFx Fuel Partners, L.P. (a Wyoming Delaware 95%
limited partnership, of which TCK
Fuels Inc. is a limited partner
and has a 93% economic interest
and of which Eco Fuels, Inc. is
the general partner and has a 2%
economic interest)
Tenpeak Corporation Nevada 100%
TES Securities Corporation Delaware 100%
Thermendota, Inc. California 100%
Mendota Biomass Power, Ltd. California 100%
(a California limited partnership
of which Thermendota, Inc. is the
general partner and has a 60%
economic interest)
MBPL Agriwaste Corporation California 100%
Thermo Ecotek International
Holdings Inc. Cayman Islands 100%
Thermo Ecotek International Inc. Cayman Islands 100%
TCK Cogeneration Dominicana Inc. Cayman Islands 100%
(1% of which shares are owned
directly by Thermo Ecotek
International Holdings Inc.)
TCK Dominicana Holdings Inc. Cayman Islands 100%
(1% of which shares are owned
directly by Thermo Ecotek
International Holdings Inc.)
Thermo Electron of Maine, Inc. Maine 100%
Gorbell/Thermo Electron Power Company Maine 80%
(a general partnership, of which
Thermo Electron of Maine, Inc. is a
general partner and has an 80%
economic interest)
PAGE
<PAGE>
Exhibit 21
THERMO ECOTEK CORPORATION
Significant Subsidiaries of the Registrant (continued)
State or Registrant's
Jurisdiction % of
Name of Incorporation Ownership
----------------------------------- ---------------- ------------
Thermo Electron of New Hampshire, Inc. New Hampshire 100%
Hemphill Power and Light Company New Hampshire 66%
(a general partnership, of which
Thermo Electron of New Hampshire,
Inc. is a general partner and has
a 67% economic interest)
Thermo Electron of Whitefield, Inc. New Hampshire 100%
Whitefield Power and Light Company New Hampshire 100%
(a general partnership, of which
Thermo Electron of Whitefield, Inc.
is a general partner and has a 61%
economic interest and of which SFS
Corporation is the other general
partner and has a 39% economic
interest)
Thermo Fuels Company, Inc. California 100%
Thermo Trilogy Corporation Delaware 100%
Woodland Biomass Power, Inc. California 100%
Woodland Biomass Power, Ltd. California 100%
(a California limited partnership,
of which Woodland Biomass Power,
Inc. is the general partner and
has a 99% economic interest)
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation by reference of our reports dated November 3, 1997 (except
with respect to the matters dicussed in Note 15 as to which the date is
November 26, 1997), included in or incorporated by reference into Thermo
Ecotek Corporation's Form 10-K for the fiscal year ended September 27,
1997, into the Company's previously filed Registration Statement on
Form S-8 (No. 33-91538), Registration Statement on Form S-8 (No. 33-91542),
Registration Statement on Form S-8 (No. 33-91546), Registration Statement
on Form S-8 (No. 33-91544), Registration Statement on Form S-8 (No.
33-91548), and Registration Statement on Form S-8 (No. 33-80753).
Arthur Andersen LLP
Boston, Massachusetts
December 4, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
ECOTEK CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SPETEMBER 27,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> SEP-27-1997
<CASH> 83,540
<SECURITIES> 0
<RECEIVABLES> 33,039
<ALLOWANCES> 0
<INVENTORY> 13,916
<CURRENT-ASSETS> 157,294
<PP&E> 328,837
<DEPRECIATION> 65,770
<TOTAL-ASSETS> 485,305
<CURRENT-LIABILITIES> 66,580
<BONDS> 136,190
0
0
<COMMON> 2,598
<OTHER-SE> 144,678
<TOTAL-LIABILITY-AND-EQUITY> 485,305
<SALES> 180,191
<TOTAL-REVENUES> 180,191
<CGS> 113,236
<TOTAL-COSTS> 113,236
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,296
<INCOME-PRETAX> 38,294
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<INCOME-CONTINUING> 22,545
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