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 April 3, 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 Identification No.)
incorporation or organization)
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 April 30, 1999
Common Stock, $.10 par value 35,949,152
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO ECOTEK CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
<S> <C> <C>
April 3, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents $ 37,317 $41,371
Restricted funds 11,822 24,536
Accounts receivable and unbilled revenues 42,834 45,792
Inventories:
Raw materials and supplies 16,417 13,843
Work in process 2,779 2,802
Finished goods 8,482 6,995
Prepaid income taxes 11,724 11,724
Other current assets 4,538 2,335
-------- --------
135,913 149,398
-------- --------
Property, Plant, and Equipment, at Cost 404,376 389,553
Less: Accumulated depreciation and amortization 100,116 87,623
-------- --------
304,260 301,930
-------- --------
Long-term Available-for-sale Investments, at Quoted Market Value 6,376 8,502
(amortized cost of $8,504)
-------- --------
Restricted Funds 30,864 26,177
-------- --------
Other Assets 20,487 19,104
-------- --------
$497,900 $505,111
======== ========
2
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THERMO ECOTEK CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 3, October 3,
(In thousands except share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Notes payable and current portion of long-term obligations $ 43,411 $28,032
Accounts payable 13,142 10,775
Lease obligations payable 1,545 1,648
Accrued income taxes 4,412 5,378
Other accrued expenses 14,443 17,530
Due to parent company 2,096 2,446
-------- --------
79,049 65,809
-------- --------
Long-term Obligations:
Nonrecourse tax-exempt obligations 15,500 33,700
Subordinated convertible debentures (includes $2,826 due to parent 46,770 47,400
company in fiscal 1999)
Capital lease obligations - 12,346
-------- --------
62,270 93,446
-------- --------
Deferred Income Taxes 59,095 56,571
-------- -------
Other Deferred Items 29,885 25,216
-------- -------
Minority Interest 14,606 14,437
-------- -------
Shareholders' Investment:
Common stock, $.10 par value, 50,000,000 shares authorized; 37,869,248 3,787 3,782
and 37,822,789 shares issued
Capital in excess of par value 176,077 175,673
Retained earnings 103,066 98,802
Treasury stock at cost, 1,920,096 and 1,944,179 shares (28,367) (28,735)
Deferred compensation (59) -
Accumulated other comprehensive items (Note 2) (1,509) 110
-------- -------
252,995 249,632
-------- --------
$497,900 $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
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $47,330 $47,207
------- -------
Costs and Operating Expenses:
Cost of revenues (includes $1,324 and $1,443 to related parties) 36,761 33,645
Selling, general, and administrative expenses (includes $379 and $378 6,462 6,695
to related parties)
Research and development expenses 682 792
------- ------
43,905 41,132
------- ------
Operating Income 3,425 6,075
Interest Income 833 830
Interest Expense (includes $7 and $685 to parent company) (1,504) (3,147)
Gain on Issuance of Stock by Subsidiary - 2,214
Equity in Earnings of Joint Venture 53 80
------- ------
Income Before Provision for Income Taxes and Minority Interest 2,807 6,052
Provision for Income Taxes 750 1,283
Minority Interest Expense 303 571
------- ------
Net Income $ 1,754 $4,198
======= ======
Earnings per Share (Note 3):
Basic $ .05 $ .17
======= ======
Diluted $ .05 $ .13
======= ======
Weighted Average Shares (Note 3):
Basic 35,944 24,509
======= ======
Diluted 36,194 39,067
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMO ECOTEK CORPORATION
Consolidated Statement of Income
(Unaudited)
Six Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $92,391 $95,016
------- -------
Costs and Operating Expenses:
Cost of revenues (includes $2,725 and $2,966 to related parties) 70,309 65,040
Selling, general, and administrative expenses (includes $739 and $856 12,861 11,672
to related parties)
Research and development expenses 1,246 1,389
------- ------
84,416 78,101
------- ------
Operating Income 7,975 16,915
Interest Income 1,596 2,370
Interest Expense (includes $7 and $1,370 to parent company) (3,395) (6,768)
Gain on Issuance of Stock by Subsidiary - 6,269
Equity in Earnings of Joint Venture 75 123
------- ------
Income Before Provision for Income Taxes and Minority Interest 6,251 18,909
Provision for Income Taxes 1,818 4,609
Minority Interest Expense 169 844
------- ------
Net Income $ 4,264 $13,456
======= =======
Earnings per Share (Note 3):
Basic $ .12 $ .55
======= ======
Diluted $ .12 $ .38
======= ======
Weighted Average Shares (Note 3):
Basic 35,935 24,460
======= ======
Diluted 36,220 39,261
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
5
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THERMO ECOTEK CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 4,264 $13,456
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 13,444 11,396
Increase in deferred income taxes 3,354 4,599
Minority interest expense 169 844
Gain on issuance of stock by subsidiary - (6,269)
Changes in current accounts, excluding the effect of acquisition:
Restricted funds 12,714 6,350
Accounts receivable and unbilled revenues 2,596 (3,533)
Inventories (4,212) (918)
Other current assets (2,268) (1,019)
Accounts payable 2,801 1,411
Lease obligations payable (301) (302)
Due to parent company (350) (83)
Other current liabilities (3,914) (1,523)
-------- -------
Net cash provided by operating activities 28,297 24,409
-------- -------
Investing Activities:
Acquisition, net of cash acquired - (19,100)
Purchases of property, plant, and equipment (14,474) (25,742)
Funding of long-term restricted funds (4,687) (552)
Increase in other deferred items 4,867 4,567
Increase in other assets (2,813) (270)
-------- -------
Net cash used in investing activities (17,107) (41,097)
-------- -------
Financing Activities:
Repayment of long-term obligations (14,200) (18,400)
Payments under capital lease obligations (6,959) (6,298)
Increase in short-term borrowings 5,992 -
Net proceeds from issuance of Company and subsidiary common stock 88 15,044
Purchases of Company common stock - (10,248)
Contribution from minority partner 754 -
Distribution to minority partner (753) (533)
-------- -------
Net cash used in financing activities (15,078) (20,435)
-------- -------
Exchange Rate Effect on Cash (166) 48
-------- -------
Decrease in Cash and Cash Equivalents (4,054) (37,075)
Cash and Cash Equivalents at Beginning of Period 41,371 83,540
-------- -------
Cash and Cash Equivalents at End of Period $ 37,317 $46,465
======== =======
6
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THERMO ECOTEK CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Noncash Activities:
Fair value of assets of acquired company $ - $20,025
Cash paid for acquired company - (19,100)
-------- -------
Liabilities assumed of acquired company $ - $ 925
======== =======
Conversion of subordinated convertible debentures $ 630 $ 8,553
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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7
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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 April 3, 1999, the results of
operations for the three- and six-month periods ended April 3, 1999, and April
4, 1998, and the cash flows for the six-month periods ended April 3, 1999, and
April 4, 1998. The Company's results of operations for the six-month periods
ending April 3, 1999, and April 4, 1998, include 26 weeks and 27 weeks,
respectively. 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. 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 disclosures 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 second quarter of fiscal 1999 and
1998, the Company's comprehensive income totaled $1.6 million and $4.0 million,
respectively. During the first six months of fiscal 1999 and 1998, the Company's
comprehensive income totaled $2.7 million and $14.8 million, respectively.
3. Earnings per Share
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Basic and diluted earnings per share were calculated as follows:
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
April 3, April 4, April 3, April 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income $1,754 $ 4,198 $4,264 $13,456
------ ------- ------ -------
Weighted Average Shares 35,944 24,509 35,935 24,460
------ ------- ------ -------
Basic Earnings per Share $ .05 $ .17 $ .12 $ .55
====== ======= ====== =======
8
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3. Earnings per Share (continued)
Three Months Ended Six Months Ended
April 3, April 4, April 3, April 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Diluted
Net Income $1,754 $ 4,198 $4,264 $13,456
Effect of:
Convertible debentures - 790 - 1,579
Majority-owned subsidiary's dilutive securities - (2) - (4)
------ ------- ------ -------
Income Available to Common Shareholders, as Adjusted $1,754 $ 4,986 $4,264 $15,031
------ ------- ------ -------
Weighted Average Shares 35,944 24,509 35,935 24,460
Effect of:
Convertible debentures 134 14,192 148 14,458
Stock options 116 366 137 343
------ ------- ------ -------
Weighted Average Shares, as Adjusted 36,194 39,067 36,220 39,261
------ ------- ------ -------
Diluted Earnings per Share $ .05 $ .13 $ .12 $ .38
====== ======= ====== =======
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 April 3, 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- and
six-month periods ended April 3, 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.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K, as
amended, for the fiscal year ended October 3, 1998, filed with the Securities
and Exchange Commission.
Overview
The Company 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 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.
9
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Overview (continued)
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. 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 completed the expansion of the 12-megawatt
facility to 50-megawatt capacity in March 1999. The cost of business-development
efforts may 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.
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, 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. 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-powered
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 the fourth quarter of fiscal
1999, as discussed in Results of Operations below. In anticipation of this
decline, the Company may explore other options for its biomass facilities,
including disposal or repowering. 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, natural gas gathering and storage,
and biopesticides. A major portion of the Company's efforts will be focused on
developing and acquiring new power projects, natural gas gathering and storage
projects, and its
10
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Overview (continued)
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
Second Quarter Fiscal 1999 Compared With Second Quarter Fiscal 1998
Total revenues were $47.3 million and $47.2 million in the second quarter
of fiscal 1999 and 1998, respectively. Revenues from the Energy segment
increased to $41.0 million in the second quarter of fiscal 1999 from $39.2
million in the second quarter of fiscal 1998. The increase was primarily due to
higher contractual energy rates at the Company's Delano, Gorbell, and Whitefield
facilities. Effective on various dates in fiscal 1998, contractual energy rate
increases ceased at the Company's four California energy facilities.
Revenues at Thermo Trilogy decreased to $6.3 million in the second quarter
of fiscal 1999 from $8.0 million in the second quarter of fiscal 1998. The
decrease was primarily due to sales of $2.2 million of Bt products in the second
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 22% in the second quarter of fiscal
1999 from 29% in the second quarter of fiscal 1998. The gross profit margin for
the Energy segment decreased to 19% in fiscal 1999 from 26% in fiscal 1998,
primarily due to $4.3 million of operating 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 increased to 41% in the second quarter of
fiscal 1999 from 37% in the second quarter of fiscal 1998, primarily due to
improved margins on Thermo Trilogy's Bt products.
The power-sales agreements for the Company's Mendota, Woodland, 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 Mendota and Woodland,
Pacific Gas & Electric (PG&E) is required to purchase power at fixed rates until
January and February 2000, respectively. In the case of the Delano plants,
Southern California Edison (SCE) is required to purchase power at fixed rates
until September 2000. However, with respect to Mendota and Woodland, PG&E has
asserted that the fixed rates under its agreements will terminate in June and
July 1999, respectively, 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 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 plant would operate at
substantially reduced operating income levels or at a
11
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Second Quarter Fiscal 1999 Compared With Second Quarter Fiscal 1998 (continued)
loss beginning in fiscal 2000. In addition, although the Company expects that
its Delano facilities will continue to have positive cash flow in the first
quarter of fiscal 2001 and thereafter, the facilities will operate at
substantial operating losses at that time. 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 thereafter. 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 - $5 million, based on projected cash
flows. This impairment, and the operating losses that would arise in the fourth
quarter of fiscal 1999 and thereafter if the Woodland facility's operating costs
exceeded its revenues, would adversely affect the Company's future results of
operations. In anticipation of these expected declines in revenues and operating
income, the Company may explore other options for its biomass facilities,
including disposal or repowering.
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 difficulties in optimizing its
performance to achieve optimal and sustained operation. The Company continues to
experience operational problems relating to tar and fines residue build-up
within the system during production and other product-quality issues related to
product dusting. Although the Company continues to explore solutions to these
problems, the Company does not intend to provide significant amounts of
additional capital to implement operational solutions. If any proposed solutions
do require significant amounts of additional capital, the Company may pursue
alternatives including but not limited to seeking alternative sources of
capital, such as another partner; reducing the expected output of the facility;
or terminating its participation in the partnership by selling the facility or
its partnership interest. Given the operating history of the facility, any of
these alternatives could have a material adverse effect on the Company's
financial position and results of operations. The net book value of the K-Fuel
Facility at April 3, 1999, was $66.6 million. 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. The
Company is involved in a dispute with the primary construction contractor
regarding the withholding of payments under the construction contracts. The
Company believes that the K-Fuel Facility's continuing operational problems are
largely related to deficient design and construction and has filed a
counterclaim against the contractor for damages.
Selling, general, and administrative expenses as a percentage of revenues
were unchanged at 14% in the second quarter of fiscal 1999 and 1998.
Research and development expenses decreased slightly to $0.7 million in
the second quarter of fiscal 1999 from $0.8 million in the second quarter of
fiscal 1998, and represent Thermo Trilogy's ongoing new-product development.
Interest income was unchanged at $0.8 million in the second quarter of
fiscal 1999 and 1998. An increase in interest income due to cash provided by the
Company's operations was offset by a decrease in invested balances due to cash
expended for the 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.
12
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Second Quarter Fiscal 1999 Compared With Second Quarter Fiscal 1998 (continued)
Interest expense decreased to $1.5 million in the second quarter of fiscal
1999 from $3.1 million in the second 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 second quarter of fiscal 1998, the Company recorded a gain of
$2.2 million 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 27% in the second quarter of fiscal
1999 from 21% in the second quarter of fiscal 1998. The effective tax rate in
fiscal 1999 was below the statutory federal income tax rate primarily due to tax
credits earned from the production of K-Fuel and the exclusion of income taxed
directly to a minority partner, offset in part by state income taxes. The
effective tax rate in 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 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.
First Six Months Fiscal 1999 Compared With First Six Months Fiscal 1998
Total revenues decreased to $92.4 million in the first six months of
fiscal 1999 from $95.0 million in the first six months of fiscal 1998. Revenues
from the Energy segment increased to $81.4 million in fiscal 1999 from $80.6
million in fiscal 1998. Revenues increased $2.5 million due to the inclusion of
six months of revenues from the Czech Republic operations, compared to three
months in fiscal 1998. This increase was offset in part by lower revenues as a
result of unplanned outages at two of the Company's California facilities due to
mechanical problems in the first quarter of fiscal 1999.
Revenues at Thermo Trilogy decreased to $11.0 million in the first six
months of fiscal 1999 from $14.4 million in the first six months of fiscal 1998.
The decrease was primarily due to sales of $4.1 million of Bt products in 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 24% in the first six months of fiscal
1999 from 32% in the first six months of fiscal 1998. The gross profit margin
for the Energy segment decreased to 22% in fiscal 1999 from 30% in fiscal 1998,
primarily for the reason discussed in the results of operations for the second
quarter. During the first six months of fiscal 1999, operating losses at the
K-Fuel Facility totaled $7.5 million. The gross profit margin for Thermo Trilogy
decreased to 39% in the first six months of fiscal 1999 from 40% in the first
six months of fiscal 1998, primarily due to decreased revenues.
Selling, general, and administrative expenses as a percentage of
revenues increased to 14% in the first six months of fiscal 1999 from 12% in the
first six months 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.
Research and development expenses decreased to $1.2 million in the first
six months of fiscal 1999 from $1.4 million in the first six months of 1998,
primarily due to reduced field testing of Thermo Trilogy's products in
development.
13
<PAGE>
First Six Months Fiscal 1999 Compared With First Six Months Fiscal 1998 (continued)
Interest income decreased to $1.6 million in the first six months of
fiscal 1999 from $2.4 million in the first six months of fiscal 1998. The
decrease was primarily due to lower average invested balances due to cash
expended for the acquisition and expansion of the Czech Republic operations, the
acquisition of the Bt business, 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 $3.4 million in the first six months of
fiscal 1999 from $6.8 million in the first six months of fiscal 1998, primarily
due to the reasons discussed in the results of operations for the second
quarter.
During the first six months of fiscal 1998, the Company recorded a gain of
$6.3 million 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 29% in the first six months of fiscal
1999 from 24% in the first six months of fiscal 1998. The effective tax rate in
fiscal 1999 was below the statutory federal income tax rate primarily due to tax
credits earned from the production of K-Fuel and the exclusion of income taxed
directly to a minority partner, offset in part by state income taxes. The
effective tax rate in 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 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 $56.9 million at April 3, 1999, compared with $83.6
million at October 3, 1998. The Company had cash, cash equivalents, and current
restricted funds of $49.1 million at April 3, 1999, compared with $65.9 million
at October 3, 1998. Current restricted funds held in trust pursuant to certain
lease and debt agreements totaled $11.8 million and $24.5 million at April 3,
1999, and October 3, 1998, respectively. In addition, cash and cash equivalents
in the accompanying balance sheet include $11.0 million and $12.0 million at
April 3, 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, 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 six months of
fiscal 1999, the Company's operating activities provided cash and restricted
funds of $15.6 million. Cash provided by the Company's operations and a seasonal
decrease in accounts receivable of $2.6 million was offset in part by $4.2
million of cash used to fund an increase in inventories, primarily in
anticipation of increased product demand at Thermo Trilogy.
During the first six months of fiscal 1999, the Company's investing
activities used $17.1 million of cash. The Company, through its Limited
Partnership Agreement with KFx Wyoming, Inc., expended $4.7 million for
additions to the K-Fuel Facility in an effort to resolve operational problems at
the plant. The Company has also completed construction on a 50-megawatt
expansion at the Czech Republic operations and expended $8.4 million for
construction costs in the first six months of fiscal 1999. In addition, the
Company expended $1.4 million on other capital expenditures during the first six
months of fiscal 1999. The Company expects to make capital expenditures of
approximately $17.0 million during the remainder of fiscal 1999, including $8.6
million for the purchase of two gas processing facilities and one gas gathering
system.
14
<PAGE>
Liquidity and Capital Resources (continued)
During the first six months of fiscal 1999, the Company's financing
activities used cash of $21.1 million, primarily for the repayment of long-term
obligations and payments under capital lease obligations related to three of its
California plants.
The Company has completed the expansion project of its Czech Republic
operations. The cost of the acquisition and expansion of this facility was
approximately $32 million. 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. The Company has received preliminary
approval for the issuance of grant funds by the Italian Ministry of Treasury
sufficient to cover approximately 30% of the cost of constructing two
biomass-powered, electric-generating plants in Italy. If the Company proceeds
with construction, it may be obligated to provide up to $30 million towards
construction of the facilities during fiscal 1999 and 2000. 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 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 on a short-term basis 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.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 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) assessing the year 2000 readiness of its 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 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 75% complete as of April 3, 1999.
The Company is also upgrading its hardware and software relating to plant
control operations at each of its facilities and, to date, has completed such
upgrades at five of its eight U.S. 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 ongoing testing of its critical internal business
systems and facilities in an effort to ensure that no operating disruptions due
to year 2000 issues occur.
15
<PAGE>
Year 2000 (continued)
The Company is continuing its 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 ongoing effort, the
Company has developed and distributed questionnaires requesting year 2000
compliance information from its significant suppliers, vendors, and customers.
To date, no significant supplier, vendor, or customer has indicated that it
believes its business operations will be materially disrupted by the year 2000
issue. The Company is actively contacting and working with its significant
suppliers, vendors, and customers to verify the information that has been
provided. The Company has placed increased focus on any significant supplier,
vendor, or customer that either does not respond to the Company's questionnaire
or, from information provided, is considered to be lacking in its year 2000
compliance effort. The Company has completed its assessment of significant
vendors, suppliers, and customers and is proceeding with its efforts to assess
all other third-party risks. The Company has developed and implemented internal
systems and procedures to monitor the response of its significant suppliers,
vendors, and customers regarding the state of their year 2000 compliance
readiness.
Contingency Plan
The Company has developed a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan includes 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.
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.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers, vendors, or customers experience business disruptions due to the year
2000 issue and, with respect to suppliers and vendors, are unable to provide
materials and services to the Company on time and, with respect to customers,
may result in their inability to accept power produced. The Company's operations
could be delayed or temporarily shut down, and it could be unable to meet its
obligations to customers in a timely fashion. The Company's business,
operations, and financial condition could be adversely affected in amounts that
cannot be reasonably estimated at this time. If the Company believes that any of
its key suppliers or vendors may not be year 2000 ready, it will seek to
identify and secure other suppliers or vendors as part of its contingency plan.
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
16
<PAGE>
Year 2000 (continued)
2000 issues, the Company might also be materially adversely affected. If any of
the countries in which the Company operates experience significant year 2000
disruption, the Company could also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a 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 4 - Submission of Matters to a Vote of Security Holders
On March 10, 1999, at the Annual Meeting of Shareholders, the shareholders
elected seven directors to a one-year term expiring in 2000. The directors
elected at the meeting were: Mr. Jerry P. Davis, Dr. George N. Hatsopoulos, Mr.
John N. Hatsopoulos, Mr. Brian D. Holt, Mr. Frank Jungers, Mr. William A.
Rainville, and Dr. Susan F. Tierney. Mr. Davis received 33,928,237 shares voted
in favor of his election and 29,857 shares voted against. Dr. Hatsopoulos
received 33,928,206 shares voted in favor of his election and 29,888 shares
voted against. Mr. Hatsopoulos received 33,928,236 shares voted in favor of his
election and 29,858 shares voted against. Mr. Holt received 33,928,067 shares
voted in favor of his election and 30,027 shares voted against. Mr. Jungers
received 33,928,216 shares voted in favor of his election and 29,878 shares
voted against. Mr. Rainville received 33,928,246 shares voted in favor of his
election and 29,848 shares voted against. Dr. Tierney received 33,928,396 shares
voted in favor of her election and 29,698 shares voted against. No abstentions
or broker nonvotes were recorded on the election of directors.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 7th day of May 1999.
THERMO ECOTEK CORPORATION
/s/ Paul F. Kelleher
-------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
-------------------------
Theo Melas-Kyriazi
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
ECOTEK CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 3,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-END> APR-03-1999
<CASH> 37,317
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<RECEIVABLES> 42,834
<ALLOWANCES> 0
<INVENTORY> 27,678
<CURRENT-ASSETS> 135,913
<PP&E> 404,376
<DEPRECIATION> 100,116
<TOTAL-ASSETS> 497,900
<CURRENT-LIABILITIES> 79,049
<BONDS> 59,444
0
0
<COMMON> 3,787
<OTHER-SE> 249,208
<TOTAL-LIABILITY-AND-EQUITY> 497,900
<SALES> 92,391
<TOTAL-REVENUES> 92,391
<CGS> 70,309
<TOTAL-COSTS> 70,309
<OTHER-EXPENSES> 1,246
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<INTEREST-EXPENSE> 3,395
<INCOME-PRETAX> 6,251
<INCOME-TAX> 1,818
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