SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended January 2, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-13572
THERMO ECOTEK CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-3072335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 Winter Street, Suite 300
Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Class Outstanding at January 29, 1999
----------------------------- -------------------------------
Common Stock, $.10 par value 35,935,603
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO ECOTEK CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
January 2, October 3,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 26,698 $ 41,371
Restricted funds 19,941 24,536
Accounts receivable and unbilled revenues 35,507 45,792
Inventories:
Raw materials and supplies 15,807 13,843
Work in process 2,873 2,802
Finished goods 7,156 6,995
Prepaid income taxes 11,724 11,724
Other current assets 3,910 2,335
-------- --------
123,616 149,398
-------- --------
Property, Plant, and Equipment, at Cost 398,024 389,553
Less: Accumulated depreciation and
amortization 93,533 87,623
-------- --------
304,491 301,930
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $8,504) 6,376 8,502
-------- --------
Restricted Funds 30,470 26,177
-------- --------
Other Assets 20,123 19,104
-------- --------
$485,076 $505,111
======== ========
2
<PAGE>
THERMO ECOTEK CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
January 2, October 3,
(In thousands except share amounts) 1999 1998
- --------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term obligations $ 32,444 $ 28,032
Accounts payable 8,053 10,775
Lease obligations payable 5,555 1,648
Accrued income taxes 5,378 5,378
Other accrued expenses 12,214 17,530
Due to parent company 2,237 2,446
-------- --------
65,881 65,809
-------- --------
Long-term Obligations:
Nonrecourse tax-exempt obligations 15,500 33,700
Subordinated convertible debentures 46,770 47,400
Capital lease obligations 6,694 12,346
-------- --------
68,964 93,446
-------- --------
Deferred Income Taxes 57,070 56,571
-------- --------
Other Deferred Items 28,071 25,216
-------- --------
Minority Interest 13,712 14,437
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 50,000,000
shares authorized; 37,869,248 and
37,822,789 shares issued 3,787 3,782
Capital in excess of par value 176,172 175,673
Retained earnings 101,312 98,802
Treasury stock at cost, 1,933,645 and
1,944,179 shares (28,572) (28,735)
Accumulated other comprehensive items (Note 3) (1,321) 110
-------- --------
251,378 249,632
-------- --------
$485,076 $505,111
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMO ECOTEK CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
-----------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Revenues $45,061 $47,809
------- -------
Costs and Operating Expenses:
Cost of revenues (includes $1,401 and $1,523 to
related parties) 33,547 31,395
Selling, general, and administrative expenses
(includes $360 and $478 to related parties) 6,400 4,977
Research and development expenses 564 597
------- -------
40,511 36,969
------- -------
Operating Income 4,550 10,840
Interest Income 763 1,540
Interest Expense (includes $685 to parent company
in fiscal 1998) (1,891) (3,621)
Gain on Issuance of Stock by Subsidiary - 4,055
Equity in Earnings of Joint Venture 22 43
------- -------
Income Before Provision for Income Taxes and
Minority Interest 3,444 12,857
Provision for Income Taxes 1,068 3,326
Minority Interest (Income) Expense (134) 273
------- -------
Net Income $ 2,510 $ 9,258
======= =======
Earnings per Share (Note 2):
Basic $ .07 $ .38
======= =======
Diluted $ .07 $ .25
======= =======
Weighted Average Shares (Note 2):
Basic 35,925 24,412
======= =======
Diluted 36,247 39,456
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO ECOTEK CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
-----------------------
January 2, January 3,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------
Operating Activities:
Net income $ 2,510 $ 9,258
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,408 5,540
Increase in deferred income taxes 1,328 3,324
Minority interest (income) expense (134) 273
Gain on issuance of stock by subsidiary - (4,055)
Changes in current accounts, excluding
the effect of acquisition:
Restricted funds 4,595 6,669
Accounts receivable and unbilled
revenues 10,190 (553)
Inventories (2,207) (638)
Other current assets (1,575) 279
Accounts payable (2,745) (1,006)
Lease obligations payable 3,808 3,808
Due to parent company (314) (299)
Other current liabilities (5,184) (2,220)
-------- --------
Net cash provided by operating activities 16,680 20,380
-------- --------
Investing Activities:
Acquisition, net of cash acquired - (19,100)
Purchases of property, plant, and equipment (8,530) (11,128)
Funding of long-term restricted funds (4,293) (270)
Increase in other deferred items 2,954 2,636
Increase in other assets (1,517) (193)
-------- --------
Net cash used in investing activities (11,386) (28,055)
-------- --------
Financing Activities:
Repayment of long-term obligations (14,200) (18,400)
Payments under capital lease obligations (5,240) (4,703)
Net proceeds from issuance of Company and
subsidiary common stock 48 9,020
Purchases of Company common stock - (6,877)
Distribution to minority partner (591) (453)
-------- --------
Net cash used in financing activities (19,983) (21,413)
-------- --------
Exchange Rate Effect on Cash 16 28
-------- --------
Decrease in Cash and Cash Equivalents (14,673) (29,060)
Cash and Cash Equivalents at Beginning of Period 41,371 83,540
-------- --------
Cash and Cash Equivalents at End of Period $ 26,698 $ 54,480
======== ========
5
<PAGE>
THERMO ECOTEK CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
-----------------------
January 2, January 3,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------
Noncash Activities:
Fair value of assets of acquired company $ - $ 19,825
Cash paid for acquired company - (19,100)
-------- --------
Liabilities assumed of acquired company $ - $ 725
======== ========
Conversion of subordinated convertible
debentures $ 630 $ 4,030
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
THERMO ECOTEK CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Ecotek Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at January 2, 1999, and the results of
operations and the cash flows for the three-month periods ended January 2, 1999,
and January 3, 1998. The Company's results of operations for the three-month
periods ending January 2, 1999, and January 3, 1998, include 13 weeks and 14
weeks, respectively. In addition, prior period amounts have been reclassified to
conform to the presentation in the current financial statements. Interim results
are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of October 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
October 3, 1998, filed with the Securities and Exchange Commission.
2. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
----------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Basic
Net Income $ 2,510 $ 9,258
------- -------
Weighted Average Shares 35,925 24,412
------- -------
Basic Earnings per Share $ .07 $ .38
======= =======
Diluted
Net Income $ 2,510 $ 9,258
Effect of:
Convertible debentures - 790
------- -------
Income Available to Common Shareholders,
as Adjusted $ 2,510 $10,048
------- -------
Weighted Average Shares 35,925 24,412
Effect of:
Convertible debentures 142 14,725
Stock options 180 319
------- -------
Weighted Average Shares, as Adjusted 36,247 39,456
------- -------
Diluted Earnings per Share $ .07 $ .25
======= =======
7
<PAGE>
2. Earnings per Share (continued)
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of January 2, 1999, there were 312,600 of such options
outstanding, with exercise prices ranging from $11.93 to $19.33 per share.
In addition, the computation of diluted earnings per share for the
three-month period ended January 2, 1999, excludes the effect of assuming the
conversion of $45.0 million principal amount of 4.875% subordinated convertible
debentures, convertible at $16.50 per share, because the effect would be
antidilutive.
3. Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represents certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheet, including foreign currency
translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. During the first quarter of fiscal 1999 and
1998, the Company's comprehensive income totaled $1.1 million and $10.8 million,
respectively.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 3, 1998, filed with the Securities and Exchange
Commission.
Overview
The Company reports its results in two business segments. The Energy segment
operates independent electric power-generation facilities through joint
ventures, limited partnerships, or wholly owned subsidiaries (the Operating
Companies) and also operates a subbituminous coal-beneficiation
8
<PAGE>
Overview (continued)
facility (the K-Fuel Facility) and a natural gas business (Star Natural Gas).
The Biopesticide segment manufactures and sells biopesticides through the
Company's majority-owned subsidiary, Thermo Trilogy Corporation.
In the Energy segment, each Operating Company in the United States 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, and on the fuel, operating, and maintenance costs for the
facilities. Beginning in January 1998, the Energy segment's operations include a
12-megawatt energy center and five auxiliary boilers in the Czech Republic. The
Energy segment earns a disproportionately high share of its income in 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 Energy segment has historically operated at
marginal profitability during the second fiscal quarter due to the rate
structure under these agreements. The Energy segment's profitability is also
dependent on the amount of development expenses that it incurs.
The Company has also entered the field of engineered clean fuels through a
limited partnership agreement with KFx, Inc. The Company is a 95% partner in a
partnership established to develop, construct, and operate a subbituminous
coal-beneficiation facility using the patented K-Fuel technology licensed from
KFx. This facility, located near Gillette, Wyoming, uses the K-Fuel technology,
which transforms low-energy, high- moisture coal into low-moisture, high-energy
fuel with reduced sulfur. A tax credit per ton of fuel produced and sold is
available with respect to qualifying alternative fuels from a facility placed in
service before June 30, 1998, pursuant to a binding written contract in effect
before December 31, 1996. The economic returns of the K-Fuel Facility primarily
result from tax credits on the facility's production of K-Fuel. The Company
expects that the K-Fuel Facility will report operating losses for financial
reporting purposes.
The Company has expanded its energy operations into international markets
and has begun business-development efforts in Italy and the Czech Republic. In
January 1998, the Company, through a wholly owned subsidiary's participation in
a joint venture, indirectly acquired a majority interest in the assets of a
12-megawatt energy center near Tabor, Czech Republic, along with the business of
five auxiliary boilers in the town of Pribram, Czech Republic (the Czech
Republic operations). The Company has begun construction to expand the
12-megawatt facility to 50-megawatt capacity. 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.
9
<PAGE>
Overview (continued)
During fiscal 1998, the Company established its Star Natural Gas subsidiary
in Dallas, Texas, to pursue opportunities in the natural gas gathering,
processing, storage, and marketing business.
Thermo Trilogy's biopesticide products include botanical extracts from the
seed of the tropical neem tree, microbial-based pesticides (fungal-based
insecticides and fungicides, bacterial-based insecticides, bacculovirus, 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. 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 and its
affiliates (the Bt business). Whereas Thermo Trilogy currently markets its
products predominantly for use in the northern hemisphere, where the growing
season generally runs from March to October, Thermo Trilogy generally earns a
disproportionately high share of its income in its third and fourth fiscal
quarters.
Since its inception, the Company has derived a substantial majority of its
revenue from the development, construction, and operation of biomass
electric-generation facilities. While the Company's U.S. biomass energy business
is expected to continue to generate revenues for the foreseeable future, the
Company expects the aggregate revenues and profitability associated with this
business to decline significantly beginning in fiscal 2000. In addition, within
the next few years, the Company expects a substantial portion of its revenues to
be derived from new business ventures in clean power resources, clean fuels, and
biopesticides. A major portion of the Company's efforts will be focused on
developing and acquiring new power projects, additional clean fuel projects, and
its biopesticide business. The Company has had limited prior experience in the
repowering of power plants and the development and sale of clean fuels, and
there can be no assurance that the Company will be able to successfully develop,
market, or sell its products and services in these areas. The Company's future
success will depend significantly on its ability to develop, introduce, and
integrate new products and services in these areas. No assurance can be given
that the Company will be successful in this regard. Any failure or inability of
the Company to implement these strategies would have a material adverse effect
on the Company's business, financial condition, and results of operations.
Results of Operations
First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
Total revenues decreased to $45.1 million in the first quarter of fiscal
1999 from $47.8 million in the first quarter of fiscal 1998. Revenues from the
Energy segment decreased to $40.4 million in the first
10
<PAGE>
First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
(continued)
quarter of fiscal 1999 from $41.4 million in the first quarter of fiscal 1998.
The decrease was primarily due to lower revenues as a result of unplanned
outages at two of the Company's California facilities due to mechanical
problems, offset in part by the inclusion of $2.4 million of revenues from the
Czech Republic operations, acquired in January 1998. The facilities that
experienced outages have been repaired and resumed power generation prior to the
end of the first quarter.
Revenues at Thermo Trilogy decreased to $4.7 million in the first quarter of
fiscal 1999 from $6.4 million in the first quarter of fiscal 1998. The decrease
was primarily due to sales of $1.9 million of Bt products to Novartis, the
previous owner of the Bt business, in the first quarter of fiscal 1998 under a
transition agreement that expired in February 1998, during which Thermo Trilogy
shifted its Bt business distribution network from Novartis' in-country direct
sales force to an indirect network of distributors.
The gross profit margin decreased to 26% in the first quarter of fiscal 1999
from 34% in the first quarter of fiscal 1998. The gross profit margin for the
Energy segment decreased to 24% in the first quarter of fiscal 1999 from 33% in
the first quarter of fiscal 1998, primarily due to losses at the Company's
K-Fuel Facility, which was placed in service in April 1998. As discussed in the
Overview, the economic returns expected from this facility arise from tax
benefits and the facility is expected to report pre-tax operating losses.
The gross profit margin for Thermo Trilogy decreased to 33% in the first
quarter of fiscal 1999 from 43% in the first quarter of fiscal 1998, primarily
due to decreased revenues.
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 the utilities involved to purchase the power output of the projects at
fixed rates until a certain deadline. In the case of Woodland and Mendota,
Pacific Gas & Electric (PG&E) is required to purchase power until the year 2000.
In the case of the Delano plants, Southern California Edison (SCE) is required
to purchase power until the year 2001. However, with respect to Woodland and
Mendota, PG&E has 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 the costs that would have otherwise been
incurred by the purchasing utilities in generating their own electricity or in
purchasing it from other sources (avoided cost, 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 to the Company under the fixed-rate
portions of their contracts. In addition, although it is
11
<PAGE>
First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
(continued)
difficult to predict future levels of avoided costs, based on current estimates,
avoided cost is expected to be substantially lower in 2000 than the rates
currently being paid by PG&E and SCE under their fixed-rate contracts. The
Company expects, that at current avoided cost rates, absent sufficient
reductions in fuel prices and other operating costs, the Company's Mendota and
Delano plants would operate at substantially reduced operating income levels or
at a loss beginning in fiscal 2000 and fiscal 2001, respectively. In fiscal
1998, the Mendota and Delano plants' operating income was approximately $10.0
million and $33.0 million, respectively. Further, 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 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.
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 reduced to approximately
breakeven in fiscal 1998. If PG&E ultimately prevails in its assertion that its
obligation to pay fixed rates ends in mid-1999, and if the Company is
unsuccessful in renegotiating the terms of its lease or its power purchase
agreement with PG&E, the Company's investment in its Woodland operating assets
could be impaired by approximately $3 to 5 million, based on projected cash
flows. This impairment and the operating losses that would arise in fiscal 1999
if the Woodland facility's operating costs exceeded its revenues would adversely
affect the Company's future results of operations.
The Company began reporting the K-Fuel Facility's results of operations in
April 1998. Although the facility is operating and producing commercially
salable product, the Company has encountered certain difficulties in optimizing
its performance to achieve optimal and sustained operation. The Company has
addressed and resolved certain problems previously encountered, including a fire
at the facility and certain construction problems, including issues relating to
the flow of materials within the facility and the design and operation of
certain pressure-release equipment. The Company continues to experience certain
operational problems relating to tar and fines residue build-up within the
system during production and other product-quality issues related to product
dusting. The Company is actively exploring solutions to these problems. 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 problems and achieve optimal and sustained performance.
Selling, general, and administrative expenses as a percentage of revenues
increased to 14% in the first quarter of fiscal 1999 from 10% in the first
quarter of fiscal 1998, primarily due to the inclusion of higher selling,
general, and administrative expenses as a percentage of revenues at Star Natural
Gas and the K-Fuel Facility.
12
<PAGE>
First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
(continued)
Research and development expenses were unchanged at $0.6 million in the
first quarter of fiscal 1999 and 1998 and represent Thermo Trilogy's ongoing new
product development.
Interest income decreased to $0.8 million in the first quarter of fiscal
1999 from $1.5 million in the first quarter of fiscal 1998. The decrease was
primarily due to lower average invested balances due to cash expended for the
acquisition of the Bt business, the acquisition and expansion of the Czech
Republic operations, the repurchase of Company common stock, construction of the
K-Fuel Facility, and the purchase of power-generation facilities and related
sites in California.
Interest expense decreased to $1.9 million in the first quarter of fiscal
1999 from $3.6 million in the first quarter of fiscal 1998. The decrease was
primarily due to lower outstanding debt related to the Company's Delano and
Mendota plants and, to a lesser extent, the conversion by Thermo Electron of
$68.5 million principal amount of the Company's 4% subordinated convertible
debentures in May 1998.
During the first quarter of fiscal 1998, the Company recorded a gain from
the issuance of Thermo Trilogy common stock.
Equity in earnings of joint venture represents the Company's proportionate
share of earnings from a joint venture.
The effective tax rate increased to 31% in the first quarter of fiscal 1999
from 26% in the first quarter of fiscal 1998. The effective tax rate in the
first quarter of fiscal 1999 was below the statutory federal income tax rate
primarily due to tax credits earned from the production of K-Fuel. The effective
tax rate in the first quarter of fiscal 1998 was below the statutory federal tax
rate due to the nontaxable gain on issuance of stock by subsidiary and the
exclusion of income taxed directly to a minority partner, offset in part by
state income taxes.
Minority interest (income) expense represents the allocation of income from
plant operations to a minority partner in an Operating Company and the minority
shareholders' proportionate share of Thermo Trilogy's results.
Liquidity and Capital Resources
Working capital was $57.7 million at January 2, 1999, compared with $83.6
million at October 3, 1998. The Company had cash, cash equivalents, and current
restricted funds of $46.6 million at January 2, 1999, compared with $65.9
million at October 3, 1998. Current restricted funds held in trust pursuant to
certain lease and debt agreements totaled $19.9 million and $24.5 million at
January 2, 1999, and October 3, 1998, respectively. In addition, cash and cash
equivalents in the accompanying balance sheet include $14.2 million and $12.0
million at January 2, 1999, and October 3, 1998, respectively, which are
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.
Further,
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<PAGE>
Liquidity and Capital Resources (continued)
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
distributions, will be restricted from distribution to the Company. During the
first quarter of fiscal 1999, the Company's operating activities provided cash
and restricted funds of $12.1 million. Cash of $10.2 million provided by a
seasonal decrease in accounts receivable was offset in part by cash of $5.2
million used to fund a decrease in other current liabilities, primarily accrued
interest.
During the first quarter of fiscal 1999, the Company's investing activities
used $11.4 million of cash. The Company, through its Limited Partnership
Agreement with KFx Wyoming, Inc., expended $3.3 million for additions to the
K-Fuel Facility to resolve operational problems at the plant. The Company has
also begun construction on a 50-megawatt expansion at the Czech Republic
operations and expended $3.9 million for construction costs in the first quarter
of fiscal 1999. In addition, the Company expended $1.3 million on other capital
expenditures during the first quarter of fiscal 1999. The Company expects to
make capital expenditures of approximately $15.0 million during the remainder of
fiscal 1999, primarily for the expansion of the Czech Republic operations.
During the first quarter of fiscal 1999, the Company's financing activities
used cash of $20.0 million. The Company used cash of $19.4 million for the
repayment of long-term obligations and payments under capital lease obligations
related to three of its California plants.
The Company has commenced an expansion project of its Czech Republic
operations, acquired in January 1998. The Company estimates the cost of this
expansion will be $32 million, of which $20.5 million had been funded at January
2, 1999. Although the Company has provided all of the funding to date, the
Company expects that approximately 50% of the total cost will ultimately be
funded by bank financing. 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, with the exception of the
financing required for the expansion project at its Czech Republic operations.
The Company is in the early stages of developing projects in Italy, Southern
California, Florida, and Germany. 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 positive cash flow over
the long term, the Company will have to obtain significant additional funds from
time to time to meet project development requirements, including the funding of
equity investments, and to complete acquisitions. As the Company acquires,
invests in, or develops future plants, the Company expects to finance them with
nonrecourse debt, internal funds, additional equity financing, or through
borrowings from third parties or 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.
14
<PAGE>
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems and operations. The Company's year 2000
initiatives include (i) testing and upgrading significant information technology
systems and facilities; (ii) contacting key suppliers, customers, and vendors to
determine their year 2000 compliance status; and (iii) developing a contingency
plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its critical
information technology systems and facilities will be ready for the year 2000.
The first phase of the program, testing and evaluating the Company's critical
information technology systems and facilities for year 2000 compliance, has
largely been completed. During phase one, the Company tested and evaluated its
significant computer systems, software applications, and related equipment for
year 2000 compliance. The Company also evaluated the potential year 2000 impact
on its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. The Company is
currently upgrading or replacing such noncompliant information technology
systems, and this process was approximately 70% complete as of January 2, 1999.
The Company is also upgrading its hardware and software relating to plant
control operations at each of its facilities. In many cases, such upgrades or
replacements are being made in the ordinary course of business, without
accelerating previously scheduled upgrades or replacements. The Company expects
that all of its material information technology systems and critical facilities
will be year 2000 compliant by October 31, 1999. For phase three of the program,
the Company will continue periodic testing of its critical internal business
systems and facilities in an effort to minimize operating disruptions due to
year 2000 issues.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers, vendors, and customers that are believed to be
significant to the Company's business operations, including its most significant
electric utility customers. As part of this effort, the Company has developed
and is distributing questionnaires relating to year 2000 compliance to its
significant suppliers, vendors, and customers. The Company intends to follow-up
and monitor the year 2000 compliance progress of significant suppliers, vendors,
and customers that indicate that they are not year 2000 compliant or that do not
respond to the Company's questionnaires. The Company has substantially completed
its assessment of third party risk.
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. This plan may include identifying and securing other suppliers and
modifying production facilities and schedules. As the Company continues to
evaluate the year 2000 readiness of its business systems and facilities,
significant suppliers, vendors, and customers, it will modify and adjust its
contingency plan as may be required.
15
<PAGE>
Year 2000 (continued)
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not been
material. The Company does not expect total year 2000 remediation costs to be
material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
relating to facilities were funded from working capital. All internal costs and
related external costs other than capital additions related to year 2000
remediation have been and will continue to be expensed as incurred. The Company
does not track the internal costs incurred for its year 2000 compliance project.
Such costs are principally the related payroll costs for its information systems
group.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
If any of the Company's material suppliers, vendors, or customers experience
business disruptions due to year 2000 issues, the Company might also be
materially adversely affected. There is expected to be a significant amount of
litigation relating to the year 2000 issue and there can be no assurance that
the Company will not incur material costs in defending or bringing lawsuits. In
addition, if any year 2000 issues are identified, there can be no assurance that
the Company will be able to retain qualified personnel to remedy such issues.
Any unexpected costs or delays arising from the year 2000 issue could have a
significant adverse impact on the Company's business, operations, and financial
condition in amounts that cannot be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in equity prices, foreign
currency exchange rates, and interest rates has not changed materially from its
exposure at fiscal year-end 1998.
PART II - OTHER INFORMATION
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
16
<PAGE>
THERMO ECOTEK CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 8th day of February 1999.
THERMO ECOTEK CORPORATION
/s/ Paul F. Kelleher
-------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
-------------------------
Theo Melas-Kyriazi
Chief Financial Officer
<PAGE>
THERMO ECOTEK CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
ECOTEK CORPORATION'S REPORT ON FORM 10-Q FOR THE QUARTER ENDED JANUARY 2, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 26,698
<SECURITIES> 0
<RECEIVABLES> 35,507
<ALLOWANCES> 0
<INVENTORY> 25,836
<CURRENT-ASSETS> 123,616
<PP&E> 398,024
<DEPRECIATION> 93,533
<TOTAL-ASSETS> 485,076
<CURRENT-LIABILITIES> 65,881
<BONDS> 68,964
0
0
<COMMON> 3,787
<OTHER-SE> 247,591
<TOTAL-LIABILITY-AND-EQUITY> 485,076
<SALES> 45,061
<TOTAL-REVENUES> 45,061
<CGS> 33,547
<TOTAL-COSTS> 33,547
<OTHER-EXPENSES> 564
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,891
<INCOME-PRETAX> 3,444
<INCOME-TAX> 1,068
<INCOME-CONTINUING> 2,510
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,510
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
