SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
AMENDMENT NO. 1 ON FORM 10-K/A TO 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 October 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
incorporation or organization) (I.R.S. Employer Identification No.)
245 Winter Street
Waltham, Massachusetts 02454-9046
(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 29, 1999, was approximately $15,823,000.
As of October 29, 1999, the Registrant had 35,967,902 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended October 2, 1999, are incorporated by reference into Parts I and II.
<PAGE>
FORM 10-K/A
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(c) Exhibits
13 Annual Report to Shareholders for the fiscal year ended October
2, 1999 (only those portions incorporated herein by reference).
23 Consent of Arthur Andersen LLP.
27 Restated Financial Data Schedule for the fiscal year ended
October 2, 1999.
27.1 Restated Financial Data Schedule for the fiscal year ended
October 3, 1998.
27.2 Restated Financial Data Schedule for the fiscal year ended
September 27, 1997.
Attached is Exhibit 13 of the Registrant's Form 10-K for the year
ended October 2, 1999. The Registrant's financial statements have
been restated to reflect a decision by the Registrant's parent
company, Thermo Electron Corporation, to sell the Registrant's
Thermo Trilogy Corporation subsidiary, which has been classified as
discontinued operations. This amended information replaces the
corresponding information filed originally in the Exhibit 13 to
Form 10-K.
<PAGE>
FORM 10-K/A
THERMO ECOTEK CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 on
Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 4, 2000
THERMO ECOTEK CORPORATION
By: /s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 13
Thermo Ecotek Corporation
Consolidated Financial Statements
Fiscal Year 1999
<PAGE>
<TABLE>
<CAPTION>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Statement of Operations
Year Ended
-----------------------------------------
<S> <C> <C> <C>
(In thousands except per share amounts) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Revenues (Notes 11 and 13) $178,338 $175,943 $164,261
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues (includes $4,302, $4,668, and 133,119 116,275 106,827
$4,545 to related parties; Notes 7 and 8)
Selling, general, and administrative expenses 16,271 13,302 10,349
(includes $1,427, $1,490, and $1,643 to related
parties; Notes 7 and 8)
Restructuring and unusual costs, net (Note 9) 112,242 - -
-------- -------- --------
261,632 129,577 117,176
-------- -------- --------
Operating Income (Loss) (83,294) 46,366 47,085
Interest Income 2,721 4,087 5,089
Interest Expense (includes $379, $1,644, and $2,740 (7,252) (11,040) (13,926)
to parent company)
Other Expense (Note 9) (2,125) - -
-------- -------- --------
Income (Loss) from Continuing Operations Before (89,950) 39,413 38,248
Income Taxes and Minority Interest
Income Tax (Provision) Benefit (Note 6) 32,673 (14,530) (14,409)
Minority Interest (Expense) Income (Note 9) 320 (1,373) (1,334)
-------- -------- --------
Income (Loss) from Continuing Operations (56,957) 23,510 22,505
Income (Loss) from Discontinued Operations (net of (2,463) 7,699 40
income tax provision (benefit) and minority interest of
$(2,830), $1,480, and $6 in fiscal 1999 and 1998;
Note 18) -------- -------- --------
Net Income (Loss) $(59,420) $ 31,209 $ 22,545
======== ======== ========
Earnings (Loss) per Share from Continuing
Operations (Note 16):
Basic $ (1.58) $ .80 $ .91
======== ======== ========
Diluted $ (1.58) $ .65 $ .64
======== ======== ========
Earnings (Loss) per Share (Note 16):
Basic $ (1.65) $ 1.07 $ .92
======== ======== ========
Diluted $ (1.65) $ .86 $ .64
======== ======== ========
Weighted Average Shares (Note 16):
Basic 35,944 29,299 24,613
======== ======== ========
Diluted 35,944 39,152 38,740
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Balance Sheet
<S> <C> <C>
(In thousands) October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Assets
Current Assets:
Cash and cash equivalents (includes $21,207 under repurchase $ 20,002 $ 40,569
agreement with parent company in fiscal 1998)
Advance to affiliate 17,766 -
Restricted funds 28,024 24,536
Accounts receivable and unbilled revenues 57,980 35,636
Inventories 7,292 9,743
Deferred tax asset (Note 6) 37,384 9,449
Other current assets 2,573 1,928
Net assets of discontinued operations (Note 18) 39,280 36,773
-------- ---------
210,301 158,634
-------- ---------
Property, Plant, and Equipment, Net (Note 9) 188,207 285,982
-------- ---------
Long-term Available-for-sale Investment, at Quoted Market Value 6,111 8,502
(amortized cost of $6,379 and $8,504; Notes 2 and 9) -------- ---------
Restricted Funds 30,205 26,051
-------- ---------
Other Assets 7,990 8,908
-------- ---------
$442,814 $ 488,077
======== =========
3
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Liabilities and Shareholders' Investment
Current Liabilities:
Short-term obligations and current portion of long-term $ 37,752 $ 28,032
obligations (includes advance from affiliate of $4,972 in
fiscal 1999; Note 12)
Accounts payable 30,252 8,413
Accrued restructuring costs (Note 9) 7,473 -
Accrued income taxes (Note 6) 2,681 7,824
Other accrued expenses 14,082 16,383
Due to parent company 373 -
-------- ---------
92,613 60,652
-------- ---------
Long-term Obligations (Note 12):
Nonrecourse tax-exempt obligations 14,500 33,700
Subordinated convertible debentures (includes $2,826 due to 46,770 47,400
parent company in fiscal 1999)
Capital lease obligations - 12,346
-------- ---------
61,270 93,446
-------- ---------
Deferred Income Taxes (Note 6) 53,096 53,745
-------- ---------
Other Deferred Items 40,419 25,216
-------- ---------
Minority Interest 4,435 5,456
-------- ---------
Commitments and Contingencies (Notes 7, 8, and 10)
Shareholders' Investment (Notes 4, 5, and 12):
Common stock, $.10 par value, 50,000,000 shares authorized; 3,787 3,782
37,869,248 and 37,822,789 shares issued
Capital in excess of par value 175,895 175,673
Retained earnings 39,382 98,802
Treasury stock at cost, 1,901,346 and 1,944,179 shares (28,084) (28,735)
Deferred compensation (Note 5) (46) -
Accumulated other comprehensive items (Note 15) 47 40
-------- ---------
190,981 249,562
-------- ---------
$442,814 $ 488,077
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows
Year Ended
-----------------------------------------
<S> <C> <C> <C>
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Operating Activities
Net income (loss) $(59,420) $ 31,209 $ 22,545
(Income) loss from discontinued operations (Note 18) 2,463 (7,699) (40)
-------- -------- --------
Income (loss) from continuing operations (56,957) 23,510 22,505
Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
operating activities:
Noncash restructuring charges (Note 9) 118,351 - -
Gain on termination of power-sales agreement (Note 9) (13,462) - -
Depreciation and amortization 23,776 21,518 20,648
Deferred income tax expense (benefit) (Note 6) (29,135) 5,941 10,715
Minority interest (income) expense (Note 9) (320) 1,373 1,334
Other noncash items (Note 9) 11 - -
Deferred revenue (Note 11) - - (8,200)
Changes in current accounts, excluding the
effect of acquisitions:
Restricted funds (3,488) (3,763) (877)
Accounts receivable and unbilled revenues (18,915) (7,024) (454)
Inventories 1,603 (839) (656)
Other current assets 1,311 (7,854) 1,210
Accounts payable 20,229 6,285 398
Due from parent company (1,718) 12,631 3,667
Other current liabilities 4,740 (986) 382
-------- -------- --------
Net cash provided by continuing operations 46,026 50,792 50,672
Net cash used in discontinued operations (717) (717) (3,153)
-------- -------- --------
Net cash provided by operating activities 45,309 50,075 47,519
-------- -------- --------
Investing Activities
Proceeds from termination of power-sales agreement (Note 9) 40,000 - -
Payment for termination of lease agreement (Note 9) (17,425) - -
Payment for termination of fuel contract (Note 9) (6,800) - -
Acquisitions, net of cash acquired (Note 3) (12,615) - -
Purchases of property, plant, and equipment (23,969) (46,480) (16,543)
Advances to affiliate, net (17,766) - -
Funding of long-term restricted funds (4,122) (5,146) (6,793)
Increase in other deferred items 10,863 12,209 8,476
Increase in other assets (7,252) (2,432) (2,186)
-------- -------- --------
Net cash used in continuing operations (39,086) (41,849) (17,046)
Net cash used in discontinued operations (1,972) (21,347) (12,298)
-------- -------- --------
Net cash used in investing activities $(41,058) $(63,196) $(29,344)
-------- -------- --------
5
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Financing Activities
Net proceeds from issuance of subordinated convertible $ - $ - $48,470
debentures
Repayment of long-term obligations (18,317) (26,100) (16,800)
Payments under capital lease obligations (10,097) (8,912) (8,006)
Increase in short-term borrowings 5,284 - -
Net proceeds from issuance of Company and subsidiary 232 870 698
common stock
Payment of withholding taxes related to stock option (43) (319) (1,115)
exercises
Purchases of Company common stock - (10,248) (19,743)
Distribution to minority partner (1,547) (1,147) (1,346)
Capital contribution by minority partner 748 1,961 -
-------- -------- -------
Net cash provided by (used in) (23,740) (43,895) 2,158
continuing operations
Net cash provided by discontinued operations - 14,907 -
-------- -------- -------
Net cash provided by (used in) financing activities (23,740) (28,988) 2,158
-------- -------- -------
Exchange Rate Effect on Cash in Continuing Operations (58) 6 -
Exchange Rate Effect on Cash in Discontinued Operations 95 (66) (31)
-------- -------- -------
Increase (Decrease) in Cash and Cash Equivalents (19,452) (42,169) 20,302
Cash and Cash Equivalents at Beginning of Year 41,371 83,540 63,238
-------- -------- -------
21,919 41,371 83,540
Cash and Cash Equivalents of Discontinued (1,917) (802) (1,971)
Operations at End of Year -------- -------- -------
Cash and Cash Equivalents at End of Year $ 20,002 $ 40,569 $81,569
======== ======== =======
Cash Paid For
Interest $ 7,698 $ 12,727 $13,100
Income taxes $ 1,555 $ 38 $ 7
Noncash Activities
Fair value of assets of acquired companies $ 18,078 $ - $ -
Cash paid for acquired companies (12,778) - -
-------- -------- -------
Liabilities assumed of acquired companies $ 5,300 $ - $ -
======== ======== =======
Conversions of subordinated convertible debentures $ 630 $ 83,248 $19,579
(includes $68,500 converted by parent company in
fiscal 1998; Note 12) ======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Comprehensive Income
Net Income (Loss) $(59,420) $ 31,209 $22,545
-------- -------- -------
Other Comprehensive Items (Note 15):
Foreign currency translation adjustment 169 42 -
Unrealized losses on available for sale investments (162) (2,438) (6,327)
-------- -------- -------
$(59,413) $ 28,813 $16,218
======== ======== =======
Shareholders' Investment
Common Stock, $.10 Par Value:
Balance at beginning of year $ 3,782 $ 2,598 $ 1,617
Conversions of subordinated convertible 5 1,183 145
debentures (Note 12)
Issuance of Company common stock under employees' - 1 27
and directors' stock plans
Effect of three-for-two stock split - - 809
-------- -------- -------
Balance at end of year 3,787 3,782 2,598
-------- -------- -------
Capital in Excess of Par Value:
Balance at beginning of year 175,673 95,573 74,740
Conversions of subordinated convertible 625 81,701 18,991
debentures (Note 12)
Issuance of Company common stock under employees' (403) (1,601) 204
and directors' stock plans
Tax benefit related to employees' and directors' - - 2,447
stock plans
Effect of three-for-two stock split - - (809)
-------- -------- -------
Balance at end of year 175,895 175,673 95,573
-------- -------- -------
Retained Earnings:
Balance at beginning of year 98,802 67,593 45,048
Net income (loss) (59,420) 31,209 22,545
-------- -------- -------
Balance at end of year $ 39,382 $ 98,802 $67,593
-------- -------- -------
7
<PAGE>
Thermo Ecotek Corporation 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Treasury Stock:
Balance at beginning of year $(28,735) $(20,872) $ (481)
Activity under employees' and directors' stock plans 651 2,385 (648)
Purchases of Company common stock - (10,248) (19,743)
-------- -------- --------
Balance at end of year (28,084) (28,735) (20,872)
-------- -------- --------
Deferred Compensation:
Balance at beginning of year - - -
Issuance of restricted stock under employees' (59) - -
stock plans (Note 5)
Amortization of deferred compensation 13 - -
-------- -------- --------
Balance at end of year (46) - -
-------- -------- --------
Accumulated Other Comprehensive Items (Note 15):
Balance at beginning of year 40 2,436 8,763
Other comprehensive items 7 (2,396) (6,327)
-------- -------- --------
Balance at end of year 47 40 2,436
-------- -------- --------
$190,981 $249,562 $147,328
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
Thermo Ecotek Corporation 1999 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
and natural gas gathering, processing, storage, and marketing, through its Star
Natural Gas subsidiary (Note 3).
The Company primarily develops and operates alternative-energy
electricity-generating 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 ranged from 65% to 100% at October 2, 1999, and in each case, are held
by wholly owned subsidiaries of the Company. Of the principal facilities
operated by the Company at October 2, 1999, six were owned by the Operating
Companies and the remainder were owned by unaffiliated parties who leased them
to the Operating Companies under long-term leases (Notes 8 and 10).
Relationship with Thermo Electron Corporation
The Company was incorporated on November 30, 1989, as a wholly owned
subsidiary of Thermo Electron Corporation. At October 2, 1999, Thermo Electron
owned 33,693,931 shares of the Company's common stock, representing 94% of such
stock outstanding.
In January 2000, Thermo Electron updated its proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company.
Under this plan, the Company would be merged into Thermo Electron. As a result,
the Company would become a wholly owned subsidiary of Thermo Electron. In
addition, the Company has announced that it plans to seek a buyer for its Thermo
Trilogy Corporation subsidiary (Note 18).
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
its majority-owned and wholly owned Operating Companies, and its majority-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.
Basis of Presentation
The results of operations of the Company's Thermo Trilogy subsidiary,
which represents the Biopesticides segment, have been classified as discontinued
operations as a result of the Company's decision to divest this business (Note
18). In addition, certain amounts in fiscal 1998 and 1997 have been reclassified
to conform to the presentation in the fiscal 1999 financial statements.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
September 30. References to fiscal 1999, 1998, and 1997 are for the years ended
October 2, 1999, October 3, 1998, and September 27, 1997, respectively. Fiscal
1999 and 1997 each included 52 weeks; fiscal 1998 included 53 weeks.
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, with the exception of those
that terminated their agreements during fiscal 1999, have long-term power-supply
arrangements with local utilities, expiring between 2005 and 2014, to sell all
the output of the plants currently in operation at established or formula-based
defined rates (Notes 9 and 10). 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.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
The Company's Woodland, California, 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 following the transition
to avoided cost rates in August 1999 (Note 9). This funding requirement
significantly limits 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 fiscal 2000. Consequently, the results of the Woodland plant were
reduced to approximately breakeven in fiscal 1999 and 1998. During fiscal 1997,
the Woodland plant contributed $1.0 million of operating income.
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 at facilities that operate under
long-term power-sales agreements. Other accrued expenses in the accompanying
balance sheet includes approximately $0.3 million and $1.9 million at fiscal
year-end 1999 and 1998, respectively, in anticipation of scheduled maintenance
and overhauls.
Interest Rate Swap Agreements
The Company has entered into interest rate swap agreements in connection
with debt on certain alternative-energy facilities (Notes 12 and 14). 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. The Company does not enter into speculative 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 shareholders' investment.
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.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Earnings (Loss) per Share
Basic earnings (loss) per share have been computed by dividing net income
(loss) by the weighted average number of shares outstanding during the period.
Except where the result would be antidilutive, diluted earnings (loss) per share
have been computed assuming the conversion of convertible debentures and the
elimination of the related interest expense, and the exercise of stock options,
as well as their related income tax effects (Note 16).
Cash and Cash Equivalents and Restricted Funds
At fiscal year-end 1998, $21.2 million of the Company's cash equivalents
were invested in a repurchase agreement with Thermo Electron. Under this
agreement, the Company in effect lent excess cash to Thermo Electron, which
Thermo Electron collateralized with investments principally consisting of
corporate notes, U.S. government agency securities, commercial paper, money
market funds, and other marketable securities, in the amount of at least 103% of
such obligation. The repurchase agreement earned a rate based on the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter. Effective June 1999, the Company adopted a new cash management
arrangement with Thermo Electron, described below, that replaces the repurchase
agreement. Cash equivalents also include investments in money market accounts.
The use of cash and cash equivalents totaling $12.5 million and $12.0 million at
fiscal year-end 1999 and 1998, 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.
Advance to Affiliate
Effective June 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day Dealer Commercial Paper Rate (DCP Rate) plus 50
basis points, set at the beginning of each month. Thermo Electron is
contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash management arrangement by all Thermo Electron subsidiaries other than
wholly owned subsidiaries. The Company has the contractual right to withdraw its
funds invested in the cash management arrangement upon 30 days' prior notice.
Amounts invested in this arrangement are included in "advance to affiliate" in
the accompanying balance sheet.
In addition, under this arrangement, amounts may be borrowed from Thermo
Electron by the Company for domestic cash management purposes, bearing interest
at the 30-day DCP Rate plus 150 basis points, set at the beginning of each
month; provided such rate shall be reduced to the DCP Rate plus 50 points to the
extent of any funds invested by the Company's majority-owned subsidiary in the
cash management arrangement. Amounts borrowed under this arrangement are
included in short-term obligations and current portion of long-term obligations
in the accompanying balance sheet.
Inventories
Inventories consist of fuel, operating supplies, spare parts, and
materials and are stated at the lower of cost (on a first-in, first-out or
average basis) or market value. Work in process and finished goods were not
material at fiscal year-end 1999 and 1998.
The Company periodically reviews its quantities of inventories on hand and
compares these amounts to expected usage. The Company records as a charge to
cost of revenues any amounts required to reduce the carrying value of
inventories to net realizable value.
11
<PAGE>
</TABLE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Property, Plant, and Equipment
The costs of additions and improvements are capitalized. The Company
provides for depreciation and amortization primarily using the straight-line
method over the estimated useful lives of the property as follows: buildings and
electricity-generating facilities, 10 to 25 years; property under capital lease,
the life of the asset; leasehold improvements, the shorter of the term of the
lease or the life of the asset; and machinery and equipment, 3 to 7 years. The
Company's subbituminous coal-beneficiation facility was depreciated based on a
rate per ton of product produced that was computed by estimating total
production over the life of the facility (Note 9). Property, plant, and
equipment consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Land $ 4,812 $ 6,147
Buildings and Electricity-generating Facilities (Notes 8, 9, and 12) 182,220 280,748
Property Under Capital Lease 47,020 47,020
Machinery and Equipment 3,537 4,726
Leasehold Improvements 9,927 15,954
Construction in Process 3,954 16,846
--------- ---------
251,470 371,441
Less: Accumulated Depreciation and Amortization 63,263 85,459
--------- ---------
$ 188,207 $ 285,982
========= =========
In March 1998, the Company purchased two power-generation facilities and
related sites in California for approximately $9.5 million and the assumption of
certain liabilities.
Other Assets
Other assets in the accompanying balance sheet includes prepaid rent
relating to an Operating Company's lease agreement, certain costs associated
with the development of the Company's alternative-energy facilities, and
deferred debt expense relating to the Company's issuances of subordinated
convertible debentures. 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 $8.0 million and $8.9 million, net of accumulated amortization of
$8.0 million and $7.5 million at fiscal year-end 1999 and 1998, respectively.
Other Deferred Items
Other deferred items in the accompanying balance sheet includes
obligations under an Operating Company lease to cover projected short-falls in
lease payments beginning in fiscal 2000, as described above under the caption
"Revenue Recognition." Other deferred items also includes rent that has been
recognized ratably for financial reporting purposes in connection with an
Operating Company's lease agreement (Note 7).
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries 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 in the
"Accumulated other comprehensive items" component of shareholders' investment.
Foreign currency transaction gains and losses are included in the accompanying
statement of operations and are not material for the three years presented.
12
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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.
2. Available-for-sale Investment
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 in the "Accumulated other comprehensive items"
component of shareholders' investment. At fiscal year-end 1999 and 1998, the
Company held one long-term available-for-sale investment, an investment in the
common stock of KFx, Inc., 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 17%. Simultaneously with the execution
of the 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 then 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
diluted basis. These warrants are exercisable from January 1, 2000, through July
1, 2001.
The fair market value of this investment at October 2, 1999, was $6.1
million. The Company has written down the value of its investment in KFx in
fiscal 1999, as discussed in Note 9.
3. Acquisitions and Projects Under Development
Acquisitions
In May 1999, the Company's Star Natural Gas subsidiary acquired one gas
gathering system and two gas processing plants (the gas facilities) for $8.6
million in cash and future contingent payments based on the performance of the
gas facilities of up to $5.6 million, of which $1.1 million was accrued at
October 2, 1999. In September 1999, the Company acquired, through a joint
venture, a 58-megawatt electricity-generating facility in Germany for
approximately $4.5 million, including the assumption of debt.
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. The aggregate cost of
these acquisitions approximated the fair value of the net assets acquired.
Allocation of the purchase price was based on an estimate of the fair value of
the net assets acquired. Pro forma data is not presented since the acquisitions
were not material to the Company's results of operations.
Projects Under Development
During fiscal 1999, the Company completed a $32 million expansion of its
power operations in the Czech Republic. The Company is planning to expand and
repower an electricity-generating facility in Southern California bringing its
capacity to approximately 1,100 megawatts. In addition, the Company is in the
process of developing a 210-megawatt electricity-generating facility in Florida
and, together with a 10% joint venture partner, is developing a gas storage
facility in Colorado. The Company expects to expend approximately $700 million
dollars through fiscal 2003 to complete these projects, a large portion of which
it will seek to finance through external means.
13
<PAGE>
4. Shareholders' Investment
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 October 2, 1999, net assets of certain subsidiaries of approximately $114.2
million were not restricted from distribution.
At October 2, 1999, the Company had reserved 4,349,365 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. 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 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 a one- to ten-year period, after the first
anniversary of the grant date, depending on the term of the option, which
generally ranges 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 ten 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.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 71,200 shares at a weighted average exercise price of $14.93 per share
elected to participate in this exchange and, as a result, received options to
purchase 35,600 shares of Company common stock at $10.58 per share, which are
included in the fiscal 1999 grants in the table below. The other terms of the
new options are the same as the exchanged options except that the holders may
not sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
In June 1999, the Company awarded 5,600 shares of restricted Company
common stock to certain key employees. The shares had an aggregate value of
$59,000 and vest three years from the date of award, assuming continued
employment, with certain exceptions. The Company has recorded the fair value of
the restricted stock as deferred compensation in the accompanying balance sheet
and is amortizing such amount over the vesting period.
</TABLE>
14
<PAGE>
5. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
------------------ ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- -------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 1,124 $ 9.70 1,281 $ 8.64 1,439 $ 6.55
Granted 132 10.50 83 17.72 264 14.13
Exercised (41) 5.60 (205) 6.37 (369) 4.46
Forfeited (90) 11.33 (35) 9.33 (53) 8.21
Canceled due to exchange (71) 14.93 - -
----- ----- -----
Options Outstanding, End of Year 1,054 $ 9.47 1,124 $ 9.70 1,281 $ 8.64
===== ====== ===== ====== ===== ======
Options Exercisable 1,054 $ 9.47 1,124 $ 9.70 1,281 $ 8.64
===== ====== ===== ====== ===== ======
Options Available for Grant 333 305 353
===== ===== =====
</TABLE>
A summary of the status of the Company's stock options at October 2, 1999,
is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options Outstanding and Exercisable
-----------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ---------------------------------------------- ------------------- -------------------- ------------------
$ 5.50 - $ 8.96 485 5.4 years $ 5.71
8.97 - 12.42 379 6.0 years 11.46
12.43 - 15.87 143 6.8 years 13.79
15.88 - 19.33 47 4.6 years 19.10
-----
$ 5.50 - $19.33 1,054 5.8 years $ 9.47
=====
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 this program, shares of Company and Thermo Electron common stock
may be purchased at 85% of the lower of the fair market value at the beginning
or end of the plan year, and shares purchased are subject to a one-year resale
restriction. Prior to November 1, 1998, the applicable shares of common stock
could be purchased at the end of a 12-month period at 95% of the fair market
value at the beginning of the period and shares purchased were subject to a
six-month resale restriction. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages.
15
<PAGE>
5. Employee Benefit Plans (continued)
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 granted
after fiscal 1995 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on certain financial information of the
Company would have been as follows:
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Income (Loss) from Continuing Operations:
As reported $(56,957) $ 23,510 $22,505
Pro forma (57,676) 22,996 22,119
Basic Earnings (Loss) per Share from Continuing Operations:
As reported (1.58) .80 .91
Pro forma (1.60) .78 .90
Diluted Earnings (Loss) per Share from Continuing Operations:
As reported (1.58) .65 .64
Pro forma (1.60) .65 .63
Net Income (Loss):
As reported (59,420) 31,209 22,545
Pro forma (60,222) 30,614 22,159
Basic Earnings (Loss) per Share:
As reported (1.65) 1.07 .92
Pro forma (1.68) 1.04 .90
Diluted Earnings (Loss) per Share:
As reported (1.65) .86 .64
Pro forma (1.68) .84 .63
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.
Pro forma 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 weighted average fair value per share of options granted was $3.32,
$5.79, and $5.72 in fiscal 1999, 1998, and 1997, respectively. 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:
1999 1998 1997
- -------------------------------------------------------------------------- --------- ----------- ---------
Volatility 30% 28% 26%
Risk-free Interest Rate 4.8% 5.5% 6.1%
Expected Life of Options 4.0 years 4.2 years 6.4 years
16
<PAGE>
5. Employee Benefit Plans (continued)
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that 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. 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 $427,000, $325,000, and $271,000 in fiscal 1999, 1998, and 1997,
respectively.
6. Income Taxes
The components of income (loss) from continuing operations before income
taxes and minority interest are as follows:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Domestic $(89,086) $ 39,005 $ 37,666
Foreign (864) 408 582
-------- -------- --------
$(89,950) $ 39,413 $ 38,248
======== ======== ========
The components of the income tax (provision) benefit for continuing
operations are as follows:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Currently (Payable) Refundable:
Federal $ 4,104 $ (7,141) $ (3,209)
State (837) (1,305) (485)
Foreign 271 (143) -
-------- -------- --------
3,538 (8,589) (3,694)
-------- -------- --------
(Deferred) Prepaid:
Federal 26,557 (5,732) (9,250)
State 2,578 (209) (1,465)
-------- -------- --------
29,135 (5,941) (10,715)
-------- -------- --------
$ 32,673 $(14,530) $(14,409)
======== ======== ========
17
<PAGE>
6. Income Taxes (continued)
The total income tax (provision) benefit included in the accompanying
statement of operations was as follows:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Continuing Operations $ 32,673 $(14,530) $(14,409)
Discontinued Operations 2,143 (1,172) (6)
-------- -------- --------
$ 34,816 $(15,702) $(14,415)
======== ======== ========
The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the Company's common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect $1,012,000
of such benefits that have been allocated to capital in excess of par value in
fiscal 1998.
The income tax (provision) benefit for continuing operations in the
accompanying statement of operations differs from the provision calculated by
applying the statutory federal income tax rate of 35% to income (loss) from
continuing operations before income taxes and minority interest due to the
following:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Income Tax (Provision) Benefit at Statutory Rate $ 31,483 $(13,795) $(13,387)
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 1,132 (984) (1,267)
Minority interest expense 449 491 466
Nondeductible expenses (133) (84) (221)
Other (258) (158) -
-------- -------- --------
$ 32,673 $(14,530) $(14,409)
======== ======== ========
</TABLE>
Deferred income taxes in the accompanying balance sheet consist of the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Deferred Tax Asset (Liability):
Depreciation $ 54,947 $ 54,470
Restructuring costs (23,731) -
State tax net operating loss carryforwards (3,904) (2,811)
Capitalized costs and other (2,125) (2,097)
Other reserves and accruals (14,483) (9,788)
Available-for-sale investments (109) (2)
Intangible assets 959 1,372
Stock options not benefited 253 341
-------- --------
11,807 41,485
Valuation allowance 3,904 2,811
-------- --------
$ 15,711 $ 44,296
======== ========
18
<PAGE>
6. Income Taxes (continued)
The valuation allowance relates principally to uncertainty surrounding the
realization of certain state tax loss carryforwards. State tax loss
carryforwards of approximately $41 million began expiring in 1998.
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of its investment in the common stock of
its subsidiary (such difference relates primarily to unremitted earnings of
foreign subsidiaries and gain on issuance of stock by subsidiary) because the
Company does not expect this basis difference to become subject to tax at the
parent level. The Company believes it can implement certain tax strategies to
recover its investment in its domestic subsidiaries tax free.
7. Commitments
Leases
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 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.
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 October 2, 1999, the contractual amounts payable
pursuant to the lease agreements total approximately $104.5 million over the
remaining initial lease terms, averaging approximately $12.3 million per year.
The Company recognizes rent expense ratably over the respective lease terms. The
accompanying statement of operations includes expenses from operating leases for
the Operating Companies' facilities of $14.7 million, $15.2 million, and $15.5
million in fiscal 1999, 1998, and 1997, respectively.
In addition, the Company and a subsidiary lease office and production
facilities under operating lease arrangements expiring from fiscal 2002 through
fiscal 2004. The accompanying statement of operations includes expenses from
operating leases excluding the related-party lease discussed below of
$1,216,000, $804,000, and $688,000 in fiscal 1999, 1998, and 1997, respectively.
Future minimum lease payments due under noncancellable operating leases as of
October 2, 1999, net of annual sublease income of $187,000, are $611,000 in
fiscal 2000; $549,000 in fiscal 2001; $393,000 in fiscal 2002; $286,000 in
fiscal 2003; and $24,000 in fiscal 2004. Total future minimum lease payments are
$1,863,000.
During part of fiscal 1997, the Company leased part of 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 operations included expense of $27,000 in fiscal 1997,
under the agreement with Thermo Electron.
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 $20.9 million, $17.6 million, and $20.4 million of fuel under such
contracts in fiscal 1999, 1998, and 1997, respectively. The agreements call for
price adjustments based on certain published indices or stated rates over their
terms expiring between calendar 1999 and 2005. See Note 8 for fuel supply
agreements with related parties.
19
<PAGE>
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 currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In calendar years 1997 and 1996, the Company paid an
amount equal to 1.0% of the Company's revenues. For these services, the Company
was charged $1.4 million, $1.5 million, and $1.6 million in fiscal 1999, 1998,
and 1997, respectively. The fee is reviewed and adjusted annually by mutual
agreement of the parties. 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 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 1999, 1998, and 1997, the
Company paid $3.9 million, $4.2 million, and $4.2 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 1999, 1998,
and 1997, the Company paid $405,000, $386,000, and $368,000, 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 Cash
Management, Guarantee Reimbursement, and Loan 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.
Long-term Obligations
See Note 12 for a description of the Company's long-term obligations held
by Thermo Electron.
Cash Management
The Company invests excess cash in arrangements with Thermo Electron as
discussed in Note 1.
20
<PAGE>
9. Restructuring and Unusual Costs, Net
Continuing Operations
During fiscal 1999, the Company recorded restructuring costs of $125.7
million, unusual income of $13.5 million and other expense of $2.1 million, as a
result of the actions detailed below.
Following significant investments of resources in attempts to correct
operational problems, in May 1999, the Company made a decision to cease further
efforts and hold for sale or disposal its subbituminous coal-beneficiation
facility near Gillette, Wyoming (the K-Fuel Facility). As a result, the Company
recorded a charge of $68.0 million, including $63.3 million to write down the
plant and related equipment to a nominal salvage value, $4.4 million for
estimated land reclamation costs, and $0.3 million of other exit costs,
primarily abandoned-facility payments. The Company recorded $1.5 million of
minority interest income, representing a minority partner's share of these
charges. The Company is seeking damages against the facility contractor and its
bonding company. The amount of future recovery, if any, is dependent on the
successful resolution of this claim. Revenues of this facility were nominal
during the time it operated. The facility had unaudited operating losses,
excluding restructuring costs, of $10.1 million in fiscal 1999. The Company
expects to dispose of the facility or undertake salvage and reclamation
activities in 2000.
The Company's Delano, California, biomass facilities will reach the end of
the fixed price contract period of their power-sales agreement in September
2000. While the Company forecasts positive cash flows for periods after that
time, the facilities would operate at a loss due to depreciation expense that
extends beyond fiscal 2000. In response, in May 1999, the Company entered into
an agreement to terminate the power-sales agreement for its Delano facilities,
effective December 31, 1999. The terms of the agreement call for the Company to
receive payments over seven years in lieu of operating under its current
agreement. The Company recorded a charge of $51.0 million as a result of
entering into the new agreement, including $47.5 million to write down the
plants and related assets to the present value of their estimated future cash
flows, $2.4 million related to a charge for the cancellation of the facilities'
primary fuel contract, and $1.1 million to write off cost in excess of net
assets acquired that arose in connection with the acquisition of the facilities.
Pacific Gas & Electric (PG&E), the customer under a long-term power-sales
agreement at the Company's Woodland, California, plant, has interpreted the
terms of such agreement to permit PG&E to cease payment of fixed contract rates
effective August 1999, and to thereafter purchase power at avoided cost rates.
The Company believes that PG&E stopped paying fixed cost rates six months
earlier than called for under the Company's power-sales agreement with PG&E.
Although the Company is considering its alternatives concerning this dispute,
during fiscal 1999 the Company recorded a charge of $3.8 million, representing
impairment of the Company's remaining net investment in the Woodland facility as
a result of PG&E's decision to cease making payments of the fixed contract rates
six months earlier than anticipated.
During fiscal 1999, the Company recorded a charge of $1.5 million to write
off a power plant that is held for sale. The Company believes that the salvage
value, if any, is nominal. In addition, the Company wrote off $0.4 million of
unrecovered development costs for a project in Italy. The Company agreed to sell
its interest in the Italy project to its joint venture partner for $2.5 million
and wrote off the balance of its development costs. The Company also recorded
other restructuring costs of $0.8 million, primarily representing the write-off
of abandoned fixed assets.
In connection with certain of these restructuring actions, the Company
provided $0.2 million for severance for 3 employees.
In September 1999, the Company entered into an agreement to terminate the
power-sales agreement for its Gorbell facility in Athens, Maine. Under the terms
of the agreement, the Company received a payment in lieu of operating under its
current agreement, which was scheduled to expire in fiscal 2007. The Company has
recorded unusual income of $13.5 million as a result of entering into this
agreement. This amount represents the excess of the proceeds from the
termination of the agreement over lease and fuel agreement termination costs,
aggregating $17.4 million and $6.8 million, respectively, and $2.3 million of
assets that were written off. The assets principally consist of leasehold
improvements and related plant assets. The Company obtained ownership of the
Gorbell facility in this transaction, although the Company has not determined if
it will be economically beneficial to operate the plant in the future. In fiscal
1999, the Gorbell facility had revenues and operating income prior to the
nonrecurring gain of $9.2 million and $1.3 million, respectively.
21
<PAGE>
9. Restructuring and Nonrecurring Costs, Net (continued)
In fiscal 1999, the Company also recorded a charge of $2.1 million
representing the write-down of available-for-sale equity securities of KFx, its
minority partner in the K-Fuel Facility. The Company deemed the impairment to be
permanent based on stock prices at that time. This charge is included in other
expense in the accompanying fiscal 1999 statement of operations.
Except for activity recorded in accrued restructuring costs, the fiscal
1999 restructuring and related charges represent noncash charges. The Company
expects to pay amounts accrued in fiscal 2000.
A summary of the changes in accrued restructuring costs is as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Land Fuel Contract Severance Other
Reclamation Cancellation
(In thousands) Costs Total
- --------------------------------- -------------- -------------- -------------- ------------- -------------
Balance at October 3, 1998 $ - $ - $ - $ - $ -
Provision charged to expense 4,394 2,444 189 446 7,473
Usage - - - - -
------ ------ ----- ------ ------
Balance at October 2, 1999 $4,394 $2,444 $ 189 $ 446 $7,473
====== ====== ===== ====== ======
Discontinued Operations
During fiscal 1999, Thermo Trilogy recorded restructuring and related
costs of $3.6 million. Thermo Trilogy recorded $0.6 million of restructuring
costs, including $0.4 million for severance for 14 employees, all of whom were
terminated as of October 2, 1999, and $0.2 million of other restructuring costs.
In addition, following a period of weak performance in the biopesticides
industry, Thermo Trilogy established inventory provisions of $3.0 million for
inventories deemed unsaleable or excess based on current demand.
10. 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. 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,
including the Whitefield and Hemphill Operating Companies, and that the state
will support PSNH in such efforts. PSNH reached agreements in principle with
these two Operating Companies to settle the renegotiation of their rate orders.
The settlement agreements were subject to the approval of the NHPUC on terms
acceptable to both PSNH and the Operating Companies. The principal terms of the
agreement generally called for the two 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 $0.06 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. In May 1998,
the NHPUC issued a written ruling rejecting these settlement agreements. Certain
members of the N.H. Legislature filed a motion requesting that the NHPUC
reconsider its ruling and instead provide that the settlement agreements be left
open. The NHPUC approved this request in July 1998. No further action has
occurred on the settlement agreements. 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.
22
<PAGE>
10. Contingencies (continued)
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 the NHPUC from implementing the deregulation plan as it affects
PSNH, pending a determination by the court as to whether PSNH's claim could then
be heard by the court. In April 1997, the court ruled that it could hear the
case and ordered that the restraining order 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. In March 1998, the NHPUC addressed
the Operating Companies' motion and stated it was not the NHPUC's intent in the
February 1997 order to impair any of the Operating Companies' legal rights in
their rate orders. In August 1999, PSNH and the State reached a comprehensive
settlement agreement which was filed with the NHPUC. The NHPUC has stayed its
dockets concerning the deregulation plan pending review of this settlement
agreement. The federal district court lawsuit has also been stayed pending
settlement agreement review. If the NHPUC approves the settlement agreement as
filed, then the NHPUC deregulation plan docket, other related dockets, and the
federal district court lawsuits will be dismissed. The PSNH/State settlement
agreement purports not to make any changes in the Operating Companies' rate
orders. It does provide for PSNH to resell the power from the Operating
Companies to assist in mitigating the cost of that power. No assurances may be
made as to the outcome of this matter. 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.
11. Termination of Power-sales Agreement
In August 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.
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.
23
</TABLE>
<PAGE>
12. Long-term Obligations
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands except per share amounts) 1999 1998
- -------------------------------------------------------------------------- ---------- ---------- ---------
8.3% Tax-exempt Revenue Bonds, Series 1989 (payable in $13,400 $17,400
semi-annual installments, with a final payment in December 2000)
8.3% Tax-exempt Revenue Bonds, Series 1990 (payable in 13,800 18,200
semi-annual installments, with a final payment in December 2000)
6.0% Tax-exempt Revenue Bonds, Series 1991 (payable in 6,500 16,200
semi-annual installments, with a final payment in June 2000)
Noninterest-bearing Subordinated Convertible Debentures, due 1,820 2,450
March 2001 (convertible at $13.56 per share)
4.875% Subordinated Convertible Debentures, due April 2004 44,950 44,950
(convertible at $16.50 per share) ------- -------
80,470 99,200
Less: Current Portion of Long-term Obligations 19,200 18,100
------- -------
$61,270 $81,100
======= =======
</TABLE>
The annual requirements for long-term obligations are as follows:
<TABLE>
<CAPTION>
<S> <C>
(In thousands)
- ------------------------------------------------------------------------------------- ---------- ---------
2000 $19,200
2001 16,320
2002 -
2003 -
2004 44,950
-------
$80,470
=======
The Company's noninterest-bearing and 4.875% subordinated convertible
debentures are guaranteed on a subordinated basis by Thermo Electron.
In May 1998, Thermo Electron converted $68.5 million principal amount of
the Company's 4.0% subordinated convertible debentures, convertible at $6.33 per
share and due January 2001, into 10,815,846 shares of the Company's common
stock. In fiscal 1999 and 1998, $0.6 million and $14.7 million principal amount,
respectively, of the noninterest-bearing and 4.875% subordinated convertible
debentures were converted into 46,459 shares and 1,021,244 shares, respectively,
of the Company's common stock.
Thermo Electron purchased $2.8 million principal amount of the Company's
4.875% subordinated convertible debentures in the open market in fiscal 1999.
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 October 2, 1999, Delano I and
Delano II plant and equipment totaling approximately $93.8 million were
collateral for this debt.
24
<PAGE>
13. Significant Customers and Concentrations of Credit Risk
Significant Customers
Revenues from three electric utility customers as a percentage of total
revenues were approximately 19%, 34%, and 30% in fiscal 1999; 19%, 35%, and 35%
in fiscal 1998; and 20%, 34%, and 35% in fiscal 1997.
Concentrations of Credit Risk
At fiscal year-end 1999 and 1998, a significant amount of accounts
receivable due to the Company was from its four principal 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.
14. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, advance to affiliate, restricted funds, accounts receivable,
long-term available-for-sale investment, short-term and current portion of
long-term obligations, accounts payable, due to parent company, long-term
obligations, and interest rate swaps. The carrying amounts of these financial
instruments, with the exception of long-term available-for-sale investments,
long-term obligations, 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 information pertaining to
this financial instrument.
The carrying amount and fair value of the Company's long-term obligations
and interest rate swaps are as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 1998
--------------------- ---------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------------- ---------- ---------- ---------- ----------
Long-term Obligations:
Convertible obligations $46,770 $39,846 $47,400 $ 47,617
Other long-term obligations 14,500 15,329 46,046 48,098
------- ------- ------- --------
$61,270 $55,175 $93,446 $ 95,715
======= ======= ======= ========
Interest Rate Swaps Receivable $ 853 $ 2,052
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 1999 is
below the carrying amount primarily due to the conversion price of the
convertible obligations exceeding the market price of the Company's common
stock.
Interest rate swap agreements are in place on the borrowings associated
with the Delano 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 (Note 12) to fixed rate borrowings. Management
believes any credit risk associated with the swaps is remote. The notional
amount of the swap agreements was $33.6 million and $53.6 million at fiscal
year-end 1999 and 1998, 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 interest rates and creditworthiness of
the counterparties. During fiscal 1999 and 1998, the average variable rate
received under the swap agreement was 3.0% and 3.6%, respectively.
25
<PAGE>
15. Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted SFAS 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 (loss)
and "other comprehensive items, net," 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 losses on available-for-sale investments.
Accumulated other comprehensive items in the accompanying balance sheet
consist of the following:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------- ------- ------
Cumulative Translation Adjustment $ 211 $ 42
Net Unrealized Loss on Available-for-sale Investments (164) (2)
----- -----
$ 47 $ 40
===== =====
26
<PAGE>
</TABLE>
16. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ----------
Basic
Income (Loss) from Continuing Operations $(56,957) $ 23,510 $22,505
Income (Loss) from Discontinued Operations (2,463) 7,699 40
-------- -------- -------
Net Income (Loss) $(59,420) $ 31,209 $22,545
-------- -------- -------
Weighted Average Shares 35,944 29,299 24,613
-------- -------- -------
Basic Earnings (Loss) per Share:
Continuing operations $ (1.58) $ .80 $ .91
Discontinued operations (.07) .26 -
-------- -------- -------
$ (1.65) $ 1.07 $ .92
======== ======== =======
Diluted
Income (Loss) from Continuing Operations $(56,957) $ 23,510 $22,505
Income (Loss) from Discontinued Operations (2,463) 7,699 40
-------- -------- -------
Net Income (Loss) (59,420) 31,209 22,545
Effect of:
Convertible debentures - 2,387 2,374
Majority-owned subsidiary's dilutive securities - discontinued operations - (13) -
-------- -------- -------
Income (Loss) Available to Common Shareholders, as Adjusted $(59,420) $ 33,583 $24,919
-------- -------- -------
Weighted Average Shares 35,944 29,299 24,613
Effect of:
Convertible debentures - 9,541 13,746
Stock options - 312 381
-------- -------- -------
Weighted Average Shares, as Adjusted 35,944 39,152 38,740
-------- -------- -------
Diluted Earnings (Loss) per Share:
Continuing operations $ (1.58) $ .66 $ .64
Discontinued operations (.07) .20 -
-------- -------- -------
$ (1.65) $ .86 $ .64
======== ======== =======
Options to purchase 633,000, 73,000, and 76,000 shares of common stock
were not included in the computation of diluted earnings (loss) per share for
fiscal 1999, 1998, and 1997, respectively, because their effect would have been
antidilutive due to the options' exercise prices exceeding the average market
price for the common stock and, in fiscal 1999, due to the Company's net loss
position. In addition, the computation of diluted earnings (loss) per share for
27
<PAGE>
16. Earnings (Loss) per Share (continued)
fiscal 1999 excludes the effect of assuming the conversion of the Company's
$45.0 million principal amount of 4.875% convertible debentures, convertible at
$16.50 per share, and $1.8 million principal amount of noninterest-bearing
subordinated convertible debentures, convertible at $13.56 per share because the
effect would be antidilutive due to the Company's net loss position.
</TABLE>
17. Unaudited Quarterly Information
(In thousands except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 First Second Third (a) Fourth (b)
- --------------------------------------------------------- ----------- ------------ ----------- -----------
Revenues $40,375 $ 41,036 $ 45,403 $ 51,524
Gross Profit 9,876 7,959 12,732 14,652
Income (Loss) from Continuing Operations 3,067 1,871 (74,435) 12,540
Net Income (Loss) 2,510 1,754 (74,558) 10,874
Earnings (Loss) per Share from Continuing
Operations:
Basic .09 .05 (2.07) .35
Diluted .08 .05 (2.07) .33
Earnings (Loss) per Share:
Basic .07 .05 (2.07) .30
Diluted .07 .05 (2.07) .29
1998 First Second Third Fourth (c)
- --------------------------------------------------------- ----------- ------------ ----------- -----------
Revenues $41,420 $ 39,167 $42,930 $ 52,426
Gross Profit 13,671 10,249 12,394 23,354
Income from Continuing Operations 5,002 1,841 4,492 12,175
Net Income 9,258 4,198 4,824 12,929
Earnings per Share from Continuing Operations:
Basic .20 .08 .14 .34
Diluted .15 .06 .13 .32
Earnings per Share:
Basic .38 .17 .15 .36
Diluted .25 .13 .14 .34
(a) Reflects restructuring and related costs of $126.4 million.
(b) Reflects $1.1 million of fees associated with the sale of a power-sales
agreement, nonrecurring income of $13.5 million, and restructuring and
related costs of $1.3 million from continuing operations. Reflects
restructuring costs of $0.6 million and inventory provisions of $3.0 million
from discontinued operations.
(c) Reflects the inclusion of $1.9 million of fees received from the release by
the Company of certain rights relating to power-generating equipment.
28
<PAGE>
18. Subsequent Events
Proposed Reorganization
In January 2000, Thermo Electron updated its proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company.
Under this plan, Thermo Electron will acquire the minority interest in the
Company by exchanging 0.431 shares of Thermo Electron common stock for each
share of Company common stock. As a result, the Company would become a wholly
owned subsidiary of Thermo Electron. This transaction is expected to be
completed by the end of the third quarter of fiscal 2000. The proposed
transaction will require completion of review by the Securities and Exchange
Commission of necessary filings. Thermo Electron has determined that the Company
is no longer a core business and is therefore evaluating its strategic options
for the Company.
</TABLE>
Discontinued Operations
On January 31, 2000, Thermo Electron announced a plan under which the
Company will divest its Thermo Trilogy Corporation subsidiary, which represents
its Biopesticides segment. In accordance with the provisions of APB No. 30
concerning reporting the effect of disposal of a segment of a business, the
Company classified the results of operations of the Biopesticides segment as
discontinued in the accompanying statement of operations. In addition, the net
assets of the Biopesticides segment were classified as net assets of
discontinued operations in the accompanying balance sheet, and primarily
consisted of inventories, accounts receivable, and machinery and equipment, net
of certain current liabilities, principally accounts payable.
Summary operating results of the Biopesticides segment were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------- --- ---------- ----------- ---------
Revenues $27,155 $33,028 $15,930
Costs and Expenses 32,448 23,849 15,884
------- ------- -------
Income (Loss) from Discontinued Operations Before Income (5,293) 9,179 46
Tax Benefit and Minority Interest
Income Tax (Provision) Benefit 2,143 (1,172) (6)
Minority Interest (Expense) Income 687 (308) -
------- ------- -------
Income (Loss) from Discontinued Operations $(2,463) $ 7,699 $ 40
======= ======= =======
The Company expects to complete the sale of the Biopesticides segment by
the end of the first quarter of fiscal 2001.
29
<PAGE>
Thermo Ecotek Corporation 1999 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 94%-owned subsidiary of Thermo
Electron Corporation) and subsidiaries as of October 2, 1999, and October 3,
1998, the related consolidated statements of operations, cash flows, and
comprehensive income and shareholders' investment for each of the three years in
the period ended October 2, 1999. 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 October 2, 1999, and October 3, 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended October 2, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts November 8, 1999
(Except for the matters discussed in Note
18, as to which the date is January 31, 2000)
30
<PAGE>
Thermo Ecotek Corporation 1999 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 Operations under
the heading "Forward-looking Statements."
Overview
The Company's continuing operations operate independent electric
power-generation facilities through joint ventures, limited partnerships, or
wholly owned subsidiaries (the Operating Companies), as well as a natural gas
business (Star Natural Gas).
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company would be merged into and become a wholly owned subsidiary of Thermo
Electron. In addition, Thermo Electron has announced that the Company will
divest its Thermo Trilogy Corporation subsidiary, which represented its
Biopesticides segment (Note 18). Following this announcement, the Company's
continuing operations operate in one reportable segment, Energy.
Each Operating Company in the United States typically 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 Company 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 Company has historically operated at marginal profitability
during the second fiscal quarter due to the rate structure under these
agreements. The Company's profitability is also dependent on the amount of
development expenses that it incurs.
Through May 1999, the Company also operated in the field of engineered
clean fuels through a limited partnership agreement with KFx, Inc. The Company
is a 95% partner in a partnership that was established to develop, construct,
and operate a subbituminous coal-beneficiation facility near Gillette, Wyoming
(the K-Fuel Facility). In May 1999, the Company made a decision to hold the
K-Fuel Facility for sale or disposal (Note 9).
The Company has expanded its energy operations into international markets
and has begun business- development efforts in the Czech Republic and Germany.
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 an expansion of the facility to
50-megawatt capacity in March 1999. In September 1999, the Company purchased,
through a joint venture, a 58-megawatt electricity generating facility in
Premnitz, Germany (Premnitz) for $4.5 million, including the assumption of debt
(Note 3). 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 the equity
component of these 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. In May 1999, Star
purchased one gas gathering system and two gas processing plants (the gas
facilities) for $8.6 million in cash and future contingent payments based on the
performance of the gas facilities of up to $5.6 million (Note 3).
31
<PAGE>
Overview (continued)
Since its inception, the Company has derived a substantial majority of its
revenue from the development, construction, and operation of biomass-fueled
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 due to the expiration
or termination of power-sales agreements at the biomass facilities. In
anticipation of this decline, the Company has explored other options for its
biomass facilities, including disposal or repowering (Note 9). Such efforts will
continue in fiscal 2000. In addition, within the next few years, the Company
expects a substantial portion of its revenues to be derived from other business
ventures such as repowering, and natural gas gathering and storage. A major
portion of the Company's efforts will be focused on developing and acquiring new
power projects, including repowering existing power plants and natural gas
gathering and storage projects. The Company has had limited prior experience in
the repowering of power plants and in the natural gas gathering and storage
business, and there can be no assurance that the Company will be able to
successfully develop, market, or sell its 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
Fiscal 1999 Compared With Fiscal 1998
Revenues were $178.3 million in fiscal 1999, compared with $175.9 million
in fiscal 1998. Revenues increased by $5.7 million from the operation of newly
acquired electricity-generating facilities and by $3.5 million at Star Natural
Gas, primarily due to the inclusion of revenues from the gas facilities,
acquired in May 1999. Revenues also increased $4.7 million at the Company's
Czech Republic operations due to a plant expansion and, to a lesser extent, the
inclusion of its revenues for a full twelve months in fiscal 1999, compared with
nine months in fiscal 1998. These increases were offset in part by decreases in
revenues aggregating $9.1 million at the Company's Mendota and Woodland
facilities. The utility that purchases power from the Mendota and Woodland
facilities commenced paying for power at avoided cost rates during the fourth
quarter of fiscal 1999, as discussed below. During fiscal 1999 and 1998, the
Company included revenues of $1.1 million and $1.9 million, respectively, of
developer fees for the transfer to third parties of rights to two power-sales
agreements.
During fiscal 1999, Southern California Edison (SCE), the utility that
purchases the output of the Company's Delano I and Delano II facilities,
interpreted the power-sales agreement for the Delano facilities to permit SCE to
pay reduced rates for energy produced during off-peak periods. Although the
Company contests this interpretation, SCE has reduced its payments to reflect
the lower rate and accordingly, during the fourth quarter of fiscal 1999, the
Company recorded a reduction in revenues of $2.8 million related to this
dispute. The Company is considering its alternatives concerning its claim.
The gross profit margin decreased to 25% in fiscal 1999 from 34% in fiscal
1998, primarily due to a $5.8 million increase in operating losses before
restructuring charges at the Company's K-Fuel Facility, which was placed in
service in April 1998 and closed in May 1999. In addition, the transition to
avoided cost rates at the Mendota plant contributed to the decrease in the gross
profit margin.
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 Pacific Gas & Electric (PG&E), in the case of Mendota and Woodland, and
SCE, in the case of the Delano facilities, to purchase the power output of the
projects at fixed rates through specified periods. 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
32
<PAGE>
Fiscal 1999 Compared With Fiscal 1998 (continued)
cost). Avoided cost rates are currently substantially lower than the rates the
Company has received under the fixed-rate portions of its contracts and are
expected to remain so for the foreseeable future. PG&E stopped paying for power
purchased from the Mendota and Woodland facilities at fixed cost rates effective
in July and August 1999, respectively, although the Company believes that this
change from fixed cost rates occurred six months earlier than the power-sales
agreements provided. The Company is considering its alternatives concerning this
dispute. Based on current avoided cost rates, the Company expects that the
Woodland plant will operate at breakeven or nominal operating losses, primarily
as a result of nonrecourse lease obligations that have been partially funded
from the Woodland plant's past cash flows. Absent sufficient reductions in fuel
prices and other operating costs, the Company will draw down power reserve funds
to cover operating cash shortfalls and then, if such funds are depleted, either
renegotiate its nonrecourse lease for the Woodland plant or forfeit its interest
in the plant. Revenues from the Woodland plant were $28.9 million in fiscal
1999. The results of the Woodland facility were approximately breakeven, as a
result of recording as an expense the funding of reserves required under
Woodland's nonrecourse lease agreement to cover expected shortfalls in lease
payments.
As a result of the transition from fixed contract rates to avoided costs
rates, the Mendota plant operated at a loss in the fourth quarter of fiscal 1999
and expects to do so in the first quarter of fiscal 2000. However, based on
current avoided cost rates, the Mendota plant is expected to operate at a profit
subsequent to the first quarter of fiscal 2000. The Mendota plant's revenues and
operating income were $24.4 million and $3.8 million, respectively, in fiscal
1999. In May 1999, the Company reached an agreement to terminate its power-sales
agreement, effective December 31, 1999, for the Delano facilities. As a result
of reaching this agreement, the Company expects that the results of the Delano
facilities will be reduced to breakeven or a nominal loss subsequent to December
1999. The Delano plants' aggregate revenues and operating income before
restructuring charges were approximately $63.6 million and $33.4 million,
respectively, in fiscal 1999. If the Company had been paid avoided cost rates
for all of fiscal 1999 at its four principal California plants, revenues would
have been approximately $67 million lower. In anticipation of these expected
declines in revenues and operating income, the Company may continue to explore
other options for its biomass facilities, including disposal or repowering.
Selling, general, and administrative expenses as a percentage of revenues
increased to 9% in fiscal 1999 from 8% in fiscal 1998, primarily due to the
inclusion of higher selling, general, and administrative expenses as a
percentage of revenues at Star Natural Gas and an increase of $2.0 million in
business development costs over fiscal 1998.
During fiscal 1999, the Company recorded restructuring and unusual costs,
net, of $112.2 million (Note 9). Restructuring costs of $125.7 million include
$68.0 million recorded due to the Company's decision to hold the K-Fuel Facility
for sale or disposal, $51.0 million recorded as a result of entering into an
agreement to terminate the power-sales agreement at its Delano facilities, $3.8
million representing impairment of the Company's net investment in the Woodland
facility, $1.5 million to write off a power plant that is held for sale, $1.2
million of other asset write-offs, and $0.2 million for severance. The Company
also recorded $13.5 million of unusual income as a result of entering into an
agreement to terminate the power-sales agreement at its Gorbell facility in
Athens, Maine. The Gorbell plant's revenues and operating income before
nonrecurring items were $9.2 million and $1.3 million, respectively, in fiscal
1999. The Company expects to complete the sale or disposal of the K-Fuel
Facility in fiscal 2000.
Interest income decreased to $2.7 million in fiscal 1999 from $4.1 million
in 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 repurchase of Company common stock in fiscal 1998,
construction of the K-Fuel Facility, the purchase of power-generation facilities
and related sites in California, and the purchase of the gas facilities.
Interest expense decreased to $7.3 million in fiscal 1999 from $11.0
million in fiscal 1998, 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 Corporation of $68.5 million principal amount of the Company's
4% subordinated convertible debentures in May 1998.
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Fiscal 1999 Compared With Fiscal 1998 (continued)
Other expense of $2.1 million in fiscal 1999 represents the write-down of
available-for-sale equity securities held by the Company due to an impairment
that the Company deems permanent (Note 9).
The effective tax rate was a benefit of 36% in fiscal 1999 and a provision
of 37% in fiscal 1998. The effective tax rate in fiscal 1999 differed from the
statutory federal income tax rate, primarily due to tax credits earned from the
production of fuel prior to the closure of the K-Fuel Facility and the exclusion
of income taxed directly to a minority partner, offset in part by the effect of
certain nondeductible restructuring costs. The effective tax rate in fiscal 1998
exceeded the statutory federal tax rate, primarily due to the impact of state
income taxes, offset in part by the exclusion of income taxed directly to a
minority partner.
The Company recorded minority interest income in fiscal 1999, primarily
due to the allocation of $1.5 million in restructuring costs to the Company's
minority partner in the K-Fuel Facility (Note 9), offset in part by the
allocation of income from plant operations to a minority partner in an Operating
Company. Minority interest expense in fiscal 1998 represents the allocation of
income from plant operations to a minority partner in an Operating Company.
In accordance with the provisions of Accounting Principles Board Opinion
No. 30 concerning reporting the effect of disposal of a segment of a business,
the results of the Company's Biopesticides segment has been classified as
discontinued operations in the accompanying statement of operations (Note 18).
The Company's discontinued operations recorded a loss of $2.5 million in fiscal
1999, compared with income of $7.7 million in fiscal 1998. The loss from
discontinued operations in fiscal 1999 includes $0.6 million of restructuring
costs and $3.0 million of inventory provisions for inventories deemed excess
based on recent demand. Income from discontinued operations in fiscal 1998
includes a gain of $6.3 million on the sale of Thermo Trilogy common stock.
Fiscal 1998 Compared With Fiscal 1997
Revenues increased to $175.9 million in fiscal 1998 from $164.3 million in
fiscal 1997. The increase was primarily due to higher contractual energy rates
at the Company's Delano, Gorbell, and Whitefield facilities and, to a lesser
extent, the inclusion of $6.0 million of revenues from the Czech Republic
operations, acquired in January 1998. Revenues in fiscal 1998 included $1.9
million of fees received from the release by the Company of certain rights
relating to power-generating equipment. Revenues in fiscal 1997 included $8.2
million of previously deferred revenue related to an August 1993 agreement with
a utility (Note 11).
The gross profit margin decreased to 34% in fiscal 1998 from 35% in fiscal
1997. The decrease was primarily due to the effect on gross profit in fiscal
1997 of recording $8.2 million of previously deferred revenue and, to a lesser
extent, $4.2 million of losses in fiscal 1998 at the Company's K-Fuel Facility.
Selling, general, and administrative expenses as a percentage of revenues
increased to 8% in fiscal 1998 from 6% in fiscal 1997. The increase resulted
primarily from the inclusion of selling, general, and administrative expenses at
the K-Fuel Facility.
Interest income decreased to $4.1 million in fiscal 1998 from $5.1 million
in fiscal 1997. 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 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 $11.0 million in fiscal 1998 from $13.9
million in fiscal 1997. 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.
The effective tax rate was 37% and 38% in fiscal 1998 and 1997,
respectively. The effective tax rate exceeded the statutory federal income tax
rate, primarily due to the impact of state income taxes, offset in part by the
exclusion of income taxed directly to a minority partner.
Minority interest expense represents the allocation of income from plant
operations to a minority partner in an Operating Company.
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Fiscal 1998 Compared With Fiscal 1997 (continued)
The Company's discontinued operations had income of $7.7 million in fiscal
1998, compared with approximately breakeven results in fiscal 1997. Income from
discontinued operations in fiscal 1998 includes a gain of $6.3 million on the
sale of Thermo Trilogy common stock.
Liquidity and Capital Resources
Working capital was $117.7 million at October 2, 1999, compared with $98.0
million at October 3, 1998. The Company had cash, cash equivalents, and current
restricted funds of $48.0 million at October 2, 1999, compared with $65.1
million at October 3, 1998. In addition, at October 2, 1999, the Company had
$17.8 million invested in an advance to affiliate. Prior to the use of a new
domestic cash management arrangement between the Company and Thermo Electron,
which became effective June 1999, amounts invested with Thermo Electron were
included in cash and cash equivalents. Current restricted funds, which consists
of funds held in trust pursuant to certain lease and debt agreements, totaled
$28.0 million and $24.5 million at October 2, 1999, and October 3, 1998,
respectively. In addition, cash and cash equivalents in the accompanying balance
sheet includes $12.5 million and $12.0 million of cash at October 2, 1999, and
October 3, 1998, respectively, which is 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 fiscal 1999, the Company's operating activities provided cash and
restricted funds of $48.8 million, including $49.5 million from continuing
operations. Cash provided by the Company's operations and an increase in
accounts payable of $20.2 million was offset in part by $18.9 million of cash
used to fund an increase in accounts receivable. The increase in accounts
payable and accounts receivable are primarily due to increased business activity
at Star Natural Gas, which did not have substantial operations until fiscal
1999. The Company expects to pay accrued restructuring costs of $7.5 million
primarily over the next 12 months.
The Company's investing activities, excluding advance to affiliate
activity, used $23.3 million of cash during fiscal 1999, including $21.3 million
from continuing operations. The Company's continuing operations expended $24.0
million on capital expenditures during fiscal 1999, including $11.0 million to
complete construction on an expansion to 50-megawatt capacity at the Czech
Republic operations. In addition, the Company, through its Limited Partnership
Agreement with KFx Wyoming, Inc., expended $4.7 million for additions to the
K-Fuel Facility. The Company expects to make capital expenditures for existing
operations of approximately $47.0 million during fiscal 2000, primarily related
to the projects discussed below. The Company also expended $12.6 million, net of
cash acquired, for the purchase of one gas gathering system and two gas
processing facilities and a power-generation facility in Germany (Note 3).
Proceeds from the termination of a power-sales agreement provided $15.8 million
of cash in fiscal 1999 (Note 9).
During fiscal 1999, the Company's financing activities used cash of $23.7
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. The Company has begun repowering and expansion
efforts at an existing project in Southern California and development efforts
for an electricity-generating facility in Florida. The Company estimates the
total cost of the Southern California and Florida projects to be $570 million
and $105 million, respectively. The Company has committed to spend approximately
$140 million for the purchase of certain equipment for the Southern California
facility, of which it has expended $5 million as a nonrefundable deposit. The
Company expects to obtain project financing to fund this purchase although it
does not currently have any firm available credit facilities. In addition,
together with a 10% joint venture partner, the Company is developing a gas
storage facility in Colorado at an expected cost of $35 million. The Company
expects it will require significant financing for these development and
expansion projects, although the Company does not currently have any firm
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Liquidity and Capital Resources (continued)
available credit facilities. 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, or
through borrowings from third parties. The Company has no agreements with third
parties that assure funds will be available on acceptable terms, or at all.
Market Risk
The Company is exposed to market risk from changes in equity prices,
foreign currency exchange rates, and interest rates, which could affect its
future results of operations and financial condition. The Company manages its
exposure to these risks through its regular operating and financing activities.
Equity Prices
The Company's long-term available-for-sale investment includes an equity
security that is sensitive to fluctuations in price. In addition, the Company's
convertible debentures are sensitive to fluctuations in the price of Company
common stock into which the debentures are convertible. Changes in equity prices
would result in changes in the fair value of the Company's long-term
available-for-sale investment and convertible debentures due to the difference
between the current market price and the market price at the date of purchase or
issuance of the financial instrument. A 10% increase in the fiscal year-end 1999
and 1998 market equity prices would result in a negative impact of $1.1 million
and $6.2 million, respectively, on the net fair value of the Company's
price-sensitive equity financial instruments. The change in the net fair value
from fiscal 1998 to 1999 is primarily due to a decrease in the market price of
the Company's common stock relative to the conversion price of the debentures.
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in Czech koruna and British
pounds sterling. The effect of a change in foreign exchange rates on the
Company's net investment in foreign subsidiaries is recorded as a separate
component of shareholders' investment. A 10% depreciation in fiscal year-end
1999 and 1998 functional currencies, relative to the U.S. dollar, would result
in a reduction of shareholders' investment of $3.9 million and $0.5 million,
respectively.
Interest Rates
The Company's long-term obligations and interest rate swap agreements are
sensitive to changes in interest rates. Interest rate changes would result in a
change in the fair value of these financial instruments due to the difference
between the market interest rate and the rate at the date of purchase or
issuance of the financial instrument. A 10% decrease in fiscal year-end 1999 and
1998 market interest rates would result in a negative impact of $0.6 million and
$0.4 million, respectively, on the net fair value of the Company's
interest-sensitive financial instruments.
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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 date recognition issue
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 non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year 2000 compliance, has been completed.
During phase one, the Company tested and evaluated its significant computer
systems, software applications, and related equipment for year 2000 compliance.
The Company also evaluated the potential year 2000 impact on its critical
non-information technology systems, which efforts included testing the year 2000
readiness of its manufacturing, utility, and telecommunications systems at its
critical facilities. In phase two of its program, any material noncompliant
information technology systems or non-information technology systems that were
identified during phase one were prioritized and remediated. The Company
substantially completed the process of upgrading or replacing such noncompliant
information technology systems as of October 31, 1999. The Company has also
completed upgrading its hardware and software relating to plant control
operations at all eight of its U.S. facilities. In many cases, such upgrades or
replacements were made in the ordinary course of business, without accelerating
previously scheduled upgrades or replacements. For phase three of the program,
the Company will continue monitoring its critical internal business systems and
non-information technology systems in an effort to ensure that no operating
disruptions due to year 2000 issues occur.
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 has been 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, customers, and 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 monitor 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.
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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. 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 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. Further, while the Company has completed
work on its material business systems and supporting operations, there can be no
assurance that the Company will not encounter unexpected costs or delays beyond
its control. 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. 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.
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Thermo Ecotek Corporation 1999 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 risk 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 2000 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
General
Transition of Business Focus. Since its inception, the Company has derived
a substantial majority of its revenue from the development, construction, and
operation of biomass-fueled 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 due to the expiration or termination of power-sales agreements at
the biomass facilities. In anticipation of this decline, the Company has
explored other options for its biomass facilities, including disposal or
repowering. Such efforts will continue in fiscal 2000. In addition, within the
next few years, the Company expects a substantial portion of its revenues to be
derived from other business ventures such as repowering, and/or natural gas
gathering and storage. A major portion of the Company's efforts will be focused
on developing and acquiring new power projects, including repowering existing
power plants, and natural gas gathering and storage projects. The Company has
had limited prior experience in the repowering of power plants and in the
natural gas gathering and storage business, 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.
Risks Associated with Acquisition Strategy. The Company's strategy
includes the acquisition of businesses that complement or augment the Company's
business strategy or existing product lines. Promising acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory approvals,
including antitrust approvals. Any acquisitions completed by the Company may be
made at substantial premiums over the fair value of the net assets of the
acquired companies that would result in substantial expenses for the
amortization of goodwill. There can be no assurance that the Company will be
able to complete future acquisitions or that the Company will be able to
successfully integrate any acquired businesses. In order to finance such
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financing, if available
at all, may be on terms that are not favorable to the Company.
Risks Associated with Energy Business
Development Risks
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.
The Company currently operates seven U.S. facilities that utilize biomass
as fuel. The Company is not currently considering the development of further
biomass-fueled projects in the U.S. due to high biomass fuel costs and the
relatively high costs of constructing and operating biomass-fueled plants. The
Company is actively exploring opportunities for repowering or developing power
facilities in the U.S. The Company is considering the development of
biomass-fueled projects internationally in countries where market conditions may
support profitable biomass
39
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operations. The Company has also expanded its development focus to include
international clean power opportunities and other environmentally sound
technologies such as developing or repowering natural gas or coal-fueled power
facilities. In this regard, the Company has established operations in the Czech
Republic and Germany. 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
other material development activities such as obtaining required permits. 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 of Access to Capital. The Company has sought to finance the
debt portion of each of its power 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 entity, typically a joint venture or limited partnership in
which the Company has a majority interest or wholly owned subsidiary through
which the Company develops its projects and operates its facilities (an
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 a
nonrecourse basis or 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 power facilities is heavily dependent upon the power-sales
agreement that it has entered into with the electric utility or other customer.
Under certain of these agreements, in the event of service termination by the
Operating Company prior to the end of the applicable obligation period, the
Operating Company 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. 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 U.S. such agreements have increasingly
been awarded as a result of competitive bidding. Consequently, obtaining a
power-sales agreement in the U.S. has become progressively more competitive and
expensive and, in many cases, 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, if any, entered into by the Company in
the future will be as profitable as the Operating Companies' power-sales
agreements prior to fiscal 1999.
Risks Associated with Doing Business Outside the United States. The
Company believes that significant growth opportunities in the power market exist
outside of the U.S. In that regard, the Company is currently pursuing projects
in the Czech Republic and Germany, 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 U.S., 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. The Company's costs associated with business development efforts
outside the U.S. are expected to increase 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.
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Intense Competition for Projects. The Company believes that there are
approximately 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. Such competition may
reduce the ability of the Company to secure future projects and may have a
material adverse effect on the profitability of future projects.
Uncertainty of Regulatory or Community Support. Development, construction,
and operation of a power 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 power
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 and Delano II, to purchase the power output
of the projects at fixed rates through specified periods. 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 (CPUC)). 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. Avoided cost rates are currently substantially lower than the rates the
Company has received under the fixed-rate portions of its contracts and are
expected to remain so for the foreseeable future. PG&E stopped paying for power
purchased from the Mendota and Woodland facilities at fixed cost rates effective
in July and August 1999, respectively, although the Company believes that this
change from fixed cost rates occurred six months earlier than the power-sales
agreements provided. The Company is considering its alternatives concerning this
dispute. Based on current avoided cost rates, the Company expects that the
Woodland plant will operate at breakeven or nominal operating losses through
2010, primarily as a result of nonrecourse lease obligations that have been
partially funded from the Woodland plant's past cash flows. Absent sufficient
reductions in fuel prices and other operating costs, the Company will draw down
power reserve funds to cover operating cash shortfalls and then, if such funds
are depleted, either renegotiate its nonrecourse lease for the Woodland plant or
forfeit its interest in the plant. Revenues from the Woodland plant were $28.9
million in fiscal 1999. The results of the Woodland facility were approximately
breakeven, as a result of recording as an expense the funding of reserves
required under Woodland's nonrecourse lease agreement to cover expected
shortfalls in lease payments.
As a result of the transition from fixed costs rates to avoided costs
rates, the Mendota plant operated at a loss in the fourth quarter of fiscal 1999
and expects to do so in the first quarter of fiscal 2000. Based on current
avoided cost rates, the Mendota plant is expected to operate at a profit
subsequent to the first quarter of fiscal 2000. The Mendota plant's revenues and
operating income were $24.4 million and $3.8 million, respectively, in fiscal
1999. In May 1999, the Company reached an agreement to terminate its power-sales
agreements, effective December 31, 1999, for the Delano facilities. As a result
of reaching this agreement, the Company expects that the results of the Delano
facilities will be reduced to breakeven or a nominal loss subsequent to December
1999. The Delano plants' aggregate revenues and operating income before
restructuring charges were approximately $63.6 million and $33.4 million,
respectively, in fiscal 1999. In anticipation of these expected declines in
revenues and operating income, the Company may continue to explore other options
for its biomass facilities, including disposal or repowering.
41
<PAGE>
Potential Decreased Power Sales Due to Power Curtailments. The power-sales
agreements between the Woodland and Mendota Operating Companies and PG&E allowed
PG&E to curtail the quantity of power purchased under each of these agreements
by up to 2,000 hours of generating capacity annually. PG&E normally exercised
its curtailment rights during periods when cheaper hydroelectric power was
available, which generally occurred 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. In November 29, 1997, the Company renegotiated PG&E's curtailment
rights, limiting PG&E to 1,000 hours per calendar year effective January 1,
1998. The limitations on PG&E's curtailment rights ended at the same time as the
fixed-price portion of PG&E's power-sales agreement with Woodland and Mendota
(discussed above). During fiscal 1999, the Company experienced approximately
1,030 hours of aggregate utility imposed curtailments at 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
predetermined formulas or indexes. If fuel prices rise significantly, the
Company will be required to pay higher prices on the spot market for the portion
of its fuel not covered by agreements. 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
agreements 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 current U.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 1999, Public Service of New Hampshire (PSNH), SCE, and
PG&E accounted for 19%, 34%, and 30%, 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. Further, in a
deregulated market, the Company may do business with customers of various sizes
and levels of credit-worthiness.
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
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.
42
<PAGE>
Regulatory Risks
Potential Rate Reduction by PSNH. 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, including the Whitefield and Hemphill
Operating Companies, and that the state will support PSNH in such efforts. PSNH
reached agreements in principle with these two Operating Companies to settle the
renegotiation of their rate orders. The settlement agreements were subject to
the approval of the New Hampshire Public Utility Commission (NHPUC) on terms
acceptable to both PSNH and the Operating Companies. The principal terms of the
agreement generally called for the two 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 $0.06 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. In May 1998,
the NHPUC issued a written ruling rejecting these settlement agreements. Certain
members of the N.H. Legislature filed a motion requesting that the NHPUC
reconsider its ruling and instead provide that the settlement agreements be left
open. The NHPUC approved this request in July 1998. No further action has
occurred on the settlement agreements. 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 as to whether PSNH's claim could then
be heard by the court. In April 1997, the court ruled that it could hear the
case and ordered that the restraining order 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. In March 1998, the NHPUC addressed
the Operating Companies' motion and stated it was not the NHPUC's intent in the
February 1997 order to impair any of the Operating Companies' legal rights in
their rate orders. In August 1999, PSNH and the State reached a comprehensive
settlement agreement which was filed with the NHPUC. The NHPUC has stayed its
dockets concerning the deregulation plan pending review of this settlement
agreement. The federal district court lawsuit has also been stayed pending
settlement agreement review. If the NHPUC approves the settlement agreement as
filed, then the NHPUC deregulation plan docket, other related dockets, and the
federal district court lawsuits will be dismissed. The PSNH/State settlement
agreement purports not to make any changes in the Operating Companies' rate
orders. It does provide for PSNH to resell the power from the Operating
Companies to assist in mitigating the cost of that power. 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.
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 their avoided cost. Any
future changes to PURPA could have a material adverse effect on the Company.
43
<PAGE>
Public Utility Holding Company Act. 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 owns and/or
operates are QFs under PURPA or otherwise are exempt from regulation as public
utility holding companies under PUHCA. If a power plant were to lose such
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. In addition, to ensure that the Company
will not be subject to regulation as a holding company under PUHCA, the foreign
power plants it owns and/or operates also must be exempt from regulation as
public utility companies under PUHCA.
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 several years. The National Energy
Policy Act of 1992 exempts a new class of facilities, electric wholesale
generators (EWG), 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.
The Evolving California Electric Utility Market. The electric utility
market in California has undergone a complex restructuring which is not yet
complete. The CPUC and the California legislature have required the creation of
an Independent System Operator (ISO), which operates transmission facilities
owned by investor-owned utilities in the state, and a Power Exchange (PX), which
conducts hourly and daily auctions of electric energy that are designed to set
prices at market levels. The ISO and PX were created in May 1997 and commenced
operations on March 31, 1998. The activities of the ISO and PX are subject to
comprehensive Federal Energy Regulatory Commission (FERC) regulation. FERC has
approved tariffs and rates for the ISO and PX, but these approvals are not
final; they are subject to further FERC and judicial review. In addition, the
restructuring of the California electric utility market may have an effect on
avoided cost. Investor-owned utilities in California are required to buy power
through the PX. The avoided cost for such utilities thus potentially will be
determined based on market prices set through the PX. These market prices may be
lower than energy rates set in current QF contracts which may adversely affect
Operating Companies after the end of the fixed price period in their contracts
with utilities.
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.
44
<PAGE>
Natural Gas Business Operating Risks. The Company's proposed natural gas
business is subject to all of the operating risks normally associated with the
processing, transporting, and storage of natural gas, including blowouts,
pollution, and fires, each of which could result in damage to or destruction of
processing and storage facilities or properties, or in personal injury. The
Company intends to obtain insurance coverage limiting financial loss resulting
from certain of these operating hazards. Losses and liabilities arising from
uninsured or underinsured events could reduce revenues and increase costs to the
Company and could materially adversely affect the Company's financial condition
and results of operations.
Volatility of Natural Gas Prices. Historically, the market for natural gas
has been volatile and is likely to continue to be volatile in the future. Prices
for natural gas are subject to wide fluctuation in response to relatively minor
changes in the supply of and demand for natural gas and oil, market uncertainty
and other factors over which the Company has no control. These factors include
the extent of domestic production and importation of foreign natural gas and/or
oil, political instability in oil and gas producing countries and regions, the
ability of members of the Organization of Petroleum Exporting Countries to agree
upon price and production levels for oil, the effect of federal regulation on
the sale of natural gas and/or oil in interstate commerce, and other
governmental regulation of the production and transportation of natural gas
and/or oil. Certain other factors outside the Company's control, such as
operational and transportation difficulties of pipeline or oil purchasing
companies, may also limit sales. In addition, the price level of natural gas
obtainable by the Company depends upon the needs of the purchasers to which the
producer has access. Depending on the purchasers' needs and the price obtainable
for natural gas which the Company is able to sell, the revenues of the Company
from its proposed natural gas business could be materially adversely affected.
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 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.
Limitation on Access to Operating Company Assets and Cash Flow. The
Company's energy segment'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 restricted
from distribution to the Company. As of October 2, 1999, the Company and its
subsidiaries had cash and cash equivalents totaling $20.0 million, of which
approximately $12.5 million 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 operations, other than cash required for tax distributions, 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 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
45
<PAGE>
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 acceptable 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.
Risks Associated with Cash Management Arrangement with Thermo Electron.
The Company participates in a cash management arrangement with its parent
company, Thermo Electron. Under this cash management arrangement, the Company
lends its excess cash to Thermo Electron on an unsecured basis. The Company has
the contractual right to withdraw its funds invested in the cash management
arrangement upon 30 days' prior notice. Thermo Electron is contractually
required to maintain cash, cash equivalents and/or immediately available bank
lines of credit equal to at least 50% of all funds invested under the cash
management arrangement by all Thermo Electron subsidiaries other than wholly
owned subsidiaries. The funds are held on an unsecured basis and therefore are
subject to the credit risk of Thermo Electron. The Company's ability to receive
its cash upon notice of withdrawal could be adversely affected if participants
in the cash management arrangement demand withdrawal of their funds in an
aggregate amount in excess of the 50% reserve required to be maintained by
Thermo Electron. In the event of a bankruptcy of Thermo Electron, the Company
would be treated as an unsecured creditor and its right to receive funds from
the bankruptcy estate would be subordinated to secured creditors and would be
treated on a pari passu basis with all other unsecured creditors. Further, all
cash withdrawn by the Company from the cash management arrangement within one
year before the bankruptcy would be subject to rescission. The inability of
Thermo Electron to return the Company's cash on a timely basis or at all could
have a material adverse effect on the Company's results of operations and
financial position.
Potential Impact of Year 2000 on Processing Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. Further, while the Company has completed work on its
internal business systems and supporting operations there can be no assurance
that the Company will not encounter unexpected costs or delays beyond its
control. 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. The Company's research and development,
production, distribution, financial, administrative, and communications
operations might be disrupted. 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. 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.
46
<PAGE>
Risks Associated With International Operations. International sales
accounted for 6% of the Company's total revenues in fiscal 1999. Over the next
several years, the Company intends to continue to significantly expand its
presence in international markets. International revenues are subject to a
number of risks, including the following: agreements may be difficult to enforce
and receivables difficult to collect through a foreign country's legal system;
foreign customers may have longer payment cycles; foreign countries may impose
additional withholding taxes or otherwise tax the Company's foreign income,
impose tariffs, or adopt other restrictions on foreign trade; fluctuations in
exchange rates may affect product demand and adversely affect the profitability
in U.S. dollars of products and services provided by the Company in foreign
markets where payment for the Company's products and services is made in the
local currency; U.S. export licenses may be difficult to obtain; and the
protection of intellectual property in foreign countries may be more difficult
to enforce. There can be no assurance that any of these factors will not have a
material adverse impact on the Company's business and results of operations.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Thermo Ecotek Corporation 1999 Financial Statements
Selected Financial Information
Nine
Months
Year Ended Ended (e)
<S> <C> <C> <C> <C> <C> <C>
Oct. 2, Oct. 3, Sept. 27, Sept. 28, Sept. 30, Sept. 30,
(In thousands except per share amounts) 1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995 1995
- ------------------------------------------ ---------- ---------- --------- ---------- ---------- ---------
(Unaudited)
Statement of Operations Data
Revenues $ 178,338 $ 175,943 $164,261 $ 148,389 $ 139,319 $ 107,139
Income (Loss) from Continuing Operations (56,957) 23,510 22,505 18,126 12,540 10,264
Net Income (Loss) (59,420) 31,209 22,545 17,780 12,540 10,264
Earnings (Loss) per Share from
Continuing Operations:
Basic (1.58) .80 .91 .77 .58 .46
Diluted (1.58) .65 .64 .54 .43 .34
Earnings (Loss) per Share:
Basic (1.65) 1.07 .92 .76 .58 .46
Diluted (1.65) .86 .64 .54 .43 .34
Weighted Average Shares:
Basic 35,944 29,299 24,613 23,528 21,796 22,477
Diluted 35,944 39,152 38,740 36,292 33,014 33,815
Balance Sheet Data
Working Capital $ 117,688 $ 97,982 $103,826 $ 81,463 $ 58,361
Total Assets 442,814 488,077 479,100 448,058 390,476
Long-term Obligations 61,270 93,446 204,690 209,281 202,360
Shareholders' Investment 190,981 249,562 147,328 129,687 92,985
(a) Reflects a $127.8 million pretax charge for restructuring and related costs,
consisting of restructuring costs of $125.7 million and other expense of
$2.1 million. Also reflects $13.5 million of unusual income.
(b) Reflects the conversion by Thermo Electron of $68.5 million principal amount
of 4% subordinated convertible debentures.
(c) Reflects the April 1997 issuance of $50.0 million principal amount of 4.875%
subordinated convertible debentures.
(d) Reflects the March 1996 issuance of $37.0 million principal amount of
noninterest-bearing subordinated convertible debentures.
(e) 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.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Thermo Ecotek Corporation 1999 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TCK. The following table sets forth the high and low sale prices of
the Company's common stock for fiscal 1999 and 1998, as reported in the
consolidated transaction reporting system.
<S> <C> <C> <C> <C>
Fiscal 1999 Fiscal 1998
----------------- ----------------
Quarter High Low High Low
- -------------------------------------------------------------- ---------- ---------- ---------- ----------
First $15 1/4 $10 1/16 $18 1/2 $13
Second 11 1/8 7 3/4 19 3/4 16 3/4
Third 10 7/8 6 1/4 19 3/4 15 5/8
Fourth 9 1/4 7 3/8 16 7/8 14 1/8
As of October 29, 1999, the Company had 577 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 29, 1999, was $7 5/8 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
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.
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated November 8, 1999 (except for the matters
discussed in Note 18, as to which the date is January 31, 2000) included in or
incorporated by reference into Thermo Ecotek Corporation's Form 10-K/A for the
fiscal year ended October 2, 1999, 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), Registration Statement on Form S-8 (No. 33-80753), and
Registration Statement on Form S-8 (No. 333-70541).
Arthur Andersen LLP
Boston, Massachusetts
May 2, 2000
<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 PERIOD ENDED OCTOBER 2, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-END> OCT-02-1999
<CASH> 20,002
<SECURITIES> 0
<RECEIVABLES> 57,980
<ALLOWANCES> 0
<INVENTORY> 7,292
<CURRENT-ASSETS> 210,301
<PP&E> 251,470
<DEPRECIATION> 63,263
<TOTAL-ASSETS> 442,814
<CURRENT-LIABILITIES> 92,613
<BONDS> 58,444
0
0
<COMMON> 3,787
<OTHER-SE> 187,194
<TOTAL-LIABILITY-AND-EQUITY> 442,814
<SALES> 178,338
<TOTAL-REVENUES> 178,338
<CGS> 133,119
<TOTAL-COSTS> 133,119
<OTHER-EXPENSES> 112,242
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,252
<INCOME-PRETAX> (89,950)
<INCOME-TAX> (32,673)
<INCOME-CONTINUING> (56,957)
<DISCONTINUED> (2,463)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59,420)
<EPS-BASIC> (1.65)
<EPS-DILUTED> (1.65)
</TABLE>
<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 PERIOD ENDED OCTOBER 3, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> OCT-03-1998
<CASH> 40,569
<SECURITIES> 0
<RECEIVABLES> 35,636
<ALLOWANCES> 0
<INVENTORY> 9,743
<CURRENT-ASSETS> 158,634
<PP&E> 371,441
<DEPRECIATION> 85,459
<TOTAL-ASSETS> 488,077
<CURRENT-LIABILITIES> 60,652
<BONDS> 93,446
0
0
<COMMON> 3,782
<OTHER-SE> 245,780
<TOTAL-LIABILITY-AND-EQUITY> 488,077
<SALES> 175,943
<TOTAL-REVENUES> 175,943
<CGS> 116,275
<TOTAL-COSTS> 116,275
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,040
<INCOME-PRETAX> 39,413
<INCOME-TAX> 14,530
<INCOME-CONTINUING> 23,510
<DISCONTINUED> 7,699
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,209
<EPS-BASIC> 1.07
<EPS-DILUTED> 0.86
</TABLE>
<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 PERIOD ENDED SEPTEMBER 27, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> SEP-27-1997
<CASH> 81,569
<SECURITIES> 0
<RECEIVABLES> 27,984
<ALLOWANCES> 0
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0
0
<COMMON> 2,598
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</TABLE>
