<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
THERMO ELECTRON CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3569 04-2209186
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Classification Identification No.)
Code Number)
</TABLE>
81 WYMAN STREET
WALTHAM, MASSACHUSETTS 02454-9046
(781) 622-1000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
SANDRA L. LAMBERT, SECRETARY
THERMO ELECTRON CORPORATION
81 WYMAN STREET
WALTHAM, MASSACHUSETTS 02454-9046
(781) 622-1000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
SETH H. HOOGASIAN, ESQ. NEIL H. ARONSON, ESQ.
GENERAL COUNSEL MINTZ, LEVIN, COHN, FERRIS,
THERMO ELECTRON CORPORATION GLOVSKY & POPEO, P.C.
81 WYMAN STREET ONE FINANCIAL CENTER
WALTHAM, MASSACHUSETTS 02454-9046 BOSTON, MASSACHUSETTS 02111-2621
(781) 622-1000 (617) 542-6000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and upon the
effective time of the merger (the "Merger") of Ecotek Acquisition Inc., a
wholly-owned subsidiary of the Registrant, with and into Thermo Ecotek
Corporation, which is expected to occur on the twentieth business day following
the mailing of the information statement-prospectus included in this
Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value(3)
(including preferred stock purchase rights attached
thereto) 1,422,373 shares N/A $27,127,381 $7,162
</TABLE>
(1) Based upon the maximum number of shares of common stock, par value $1.00 per
share ("Thermo Electron Common Stock"), of Thermo Electron Corporation
("Thermo Electron") that may be issued pursuant to the merger described in
the enclosed information statement-prospectus, calculated as the product of
(a) 3,300,168, representing the aggregate number of shares of common stock,
par value $0.10 per share ("Thermo Ecotek Common Stock"), of Thermo Ecotek
Corporation ("Thermo Ecotek") outstanding on March 31, 2000 (other than
shares owned by the Registrant) plus the number of such shares for which
options were outstanding on March 31, 2000 and (b) the exchange ratio of
0.431 shares of Thermo Electron Common Stock for each share of Thermo Ecotek
Common Stock.
(2) Estimated solely for purposes of calculating the registration fee required
by Section 6(b) of the Securities Act of 1933, as amended. This fee has been
computed pursuant to Rules 457(f) and (c) thereof and is based upon
(i) $8.22, the average of the high and low per share prices of Thermo Ecotek
Common Stock on the American Stock Exchange, on May 3, 2000, multiplied by
(ii) 3,300,168, representing the number of shares of Thermo Ecotek Common
Stock outstanding on March 31, 2000 (other than shares owned by the
Registrant) plus the number of shares for which options were outstanding on
March 31, 2000.
(3) The Thermo Electron Common Stock being registered hereby includes associated
preferred stock purchase rights. Until the occurrence of certain prescribed
events, such rights are not exercisable, are evidenced by the certificate
for the Thermo Electron Common Stock and will be transferred along with and
only with the Thermo Electron Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
THE INFORMATION IN THIS INFORMATION STATEMENT-PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS INFORMATION
STATEMENT-PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 8, 2000
THERMO ECOTEK CORPORATION
INFORMATION STATEMENT
------------------------
THERMO ELECTRON CORPORATION
PROSPECTUS
We are sending you this information statement-prospectus to describe the
proposed merger between Thermo Ecotek Corporation and a subsidiary of Thermo
Electron Corporation. As used in this information statement-prospectus, "we,"
"us" and "our" refer to Thermo Electron. Thermo Ecotek has not reviewed or
approved this information statement-prospectus. If we complete this merger,
Ecotek Acquisition Inc., a wholly-owned subsidiary of Thermo Electron, will
merge with and into Thermo Ecotek Corporation, and unless you seek to exercise
your appraisal rights, your shares of Thermo Ecotek common stock will be
converted into shares of Thermo Electron common stock. For each of your shares
of Thermo Ecotek common stock, you will receive 0.431 shares of Thermo Electron
common stock. We will round the total number of shares of Thermo Electron common
stock you receive down to the nearest whole number of shares, and you will
receive a cash payment for any remaining fraction of a share.
The board of directors of Thermo Electron has voted to merge Ecotek
Acquisition into Thermo Ecotek. As of March 31, 2000, Thermo Electron owned
approximately 93.6% of all outstanding shares of common stock of Thermo Ecotek.
Prior to the merger, Thermo Electron will transfer all of the shares of Thermo
Ecotek common stock that it owns to Ecotek Acquisition. Because Thermo Electron
will cause the board of directors of Ecotek Acquisition to approve the merger,
no further action by Thermo Ecotek stockholders is necessary to complete the
merger. WE ARE NOT ASKING YOU FOR A PROXY TO VOTE YOUR SHARES AND YOU ARE
REQUESTED NOT TO SEND US A PROXY TO VOTE YOUR SHARES. We expect the merger will
be completed on the 20(th) business day following the mailing of this
information statement-prospectus.
This information statement-prospectus is also Thermo Electron's prospectus
for the shares of Thermo Electron common stock that it will issue to Thermo
Ecotek stockholders in the merger. Thermo Electron common stock trades on the
New York Stock Exchange under the symbol "TMO." Thermo Ecotek common stock
trades on the American Stock Exchange under the symbol "TCK." On May 5, 2000,
the last reported sale price for Thermo Electron's common stock was $20.00 and
the last reported sale price for Thermo Ecotek's common stock was $8.125.
PLEASE CAREFULLY CONSIDER ALL OF THE INFORMATION IN THIS INFORMATION
STATEMENT-PROSPECTUS REGARDING THERMO ECOTEK, THERMO ELECTRON AND THE MERGER,
INCLUDING IN PARTICULAR THE DISCUSSION IN THE SECTION CALLED "RISK FACTORS" ON
PAGE 13.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE MERGER OR THE SECURITIES TO BE
ISSUED UNDER THIS INFORMATION STATEMENT-PROSPECTUS OR DETERMINED IF THIS
INFORMATION STATEMENT-PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This information statement-prospectus is dated , 2000 and was
first mailed to stockholders of Thermo Ecotek on or about , 2000.
<PAGE>
SOURCES OF ADDITIONAL INFORMATION
THIS INFORMATION STATEMENT-PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT THERMO ELECTRON OR THERMO ECOTEK THAT IS NOT
INCLUDED OR DELIVERED WITH THIS DOCUMENT. SUCH INFORMATION IS AVAILABLE WITHOUT
CHARGE TO THERMO ECOTEK STOCKHOLDERS UPON WRITTEN OR ORAL REQUEST. CONTACT
SANDRA L. LAMBERT, CORPORATE SECRETARY, THERMO ELECTRON CORPORATION, 81 WYMAN
STREET, WALTHAM, MASSACHUSETTS 02454 (TELEPHONE: (781) 622-1000;
FACSIMILE: (781) 768-6620). TO OBTAIN TIMELY DELIVERY OF REQUESTED DOCUMENTS
PRIOR TO THE TIME BY WHICH YOU MUST EXERCISE YOUR APPRAISAL RIGHTS TO AVOID
WAIVING THEM, YOU MUST REQUEST THE INCORPORATED INFORMATION NO LATER THAN
, 2000. ALSO SEE "WHERE YOU CAN FIND MORE INFORMATION" IN THIS INFORMATION
STATEMENT-PROSPECTUS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 3
RISK FACTORS................................................ 13
THE MERGER.................................................. 20
FEDERAL INCOME TAX CONSEQUENCES............................. 34
INFORMATION ABOUT THERMO ELECTRON, THERMO ECOTEK AND
ECOTEK ACQUISITION........................................ 36
COMPARISON OF RIGHTS OF HOLDERS OF THERMO ECOTEK AND
THERMO ELECTRON COMMON STOCK.............................. 37
MATERIAL CONTRACTS.......................................... 45
RECENT DEVELOPMENTS......................................... 45
LEGAL OPINION............................................... 45
EXPERTS..................................................... 45
STOCKHOLDER PROPOSALS....................................... 45
WHERE YOU CAN FIND MORE INFORMATION......................... 46
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS............ 49
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS........ F-1
APPENDIX A--Section 262 of the Delaware General Corporation
Law....................................................... A-1
APPENDIX B--Annual Report on Form 10-K of Thermo Ecotek for
the Fiscal Year Ended October 2, 1999, as Amended......... B-1
APPENDIX C--Quarterly Report on Form 10-Q of Thermo Ecotek
for the Quarter Ended January 1, 2000..................... C-1
</TABLE>
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
1. WHAT IS THE PROPOSED TRANSACTION?
The proposed transaction is a merger of a subsidiary of Thermo Electron with
and into Thermo Ecotek. As a result, Thermo Ecotek will become a wholly-owned
subsidiary of Thermo Electron and Thermo Ecotek stockholders will have their
shares of Thermo Ecotek common stock converted into shares of Thermo Electron
common stock.
2. WHAT WILL I RECEIVE IN THE MERGER?
Each share of Thermo Ecotek common stock that you own will be converted into
0.431 shares of Thermo Electron common stock. You will receive a cash payment in
place of any fractional share of Thermo Electron common stock you would have
otherwise received.
For example, if you own 100 shares of Thermo Ecotek common stock and the
last reported sale price per share of Thermo Electron common stock on the New
York Stock Exchange on the trading day prior to the day the merger becomes
effective is $20.00, which was the closing price on May 5, 2000, you will
receive 43 shares of Thermo Electron common stock plus cash in the amount of
$2.00. The total number of the shares of Thermo Electron common stock Thermo
Electron will issue in this transaction, based on the outstanding number of
shares of Thermo Ecotek common stock on March 31, 2000, is approximately
986,569.
3. WILL THE EXCHANGE RATIO AND THE VALUE OF THE SHARES I WILL RECEIVE CHANGE
BETWEEN NOW AND THE TIME THE MERGER IS COMPLETED?
The exchange ratio (which affects the number of shares you will receive)
will not change. The value of the shares you will receive may fluctuate between
the date of this information statement-prospectus and the completion of the
merger, based upon changes in the market price for Thermo Electron common stock.
4. WHY IS THERE NO STOCKHOLDER VOTE?
Thermo Electron owns approximately 93.6% of the outstanding voting stock of
Thermo Ecotek. Prior to the merger, Thermo Electron will contribute its shares
of Thermo Ecotek common stock to Ecotek Acquisition. Thermo Electron will cause
the board of directors of Ecotek Acquisition to vote to merge with and into
Thermo Ecotek and assume its obligations. This vote of the Ecotek Acquisition
board of directors meets the requirements for a merger under Delaware law,
Thermo Ecotek's certificate of incorporation and Thermo Ecotek's bylaws, so no
Thermo Ecotek stockholder vote or board of directors vote is necessary.
5. AM I ENTITLED TO APPRAISAL RIGHTS?
Yes. Under Delaware law, which governs the merger, you have the right to
seek appraisal of your Thermo Ecotek stock. See "THE MERGER--Dissenters' and
Appraisal Rights."
6. WHAT DO I NEED TO DO NOW?
Nothing. After the merger is completed, you will receive an appraisal rights
notice and written instructions and a letter of transmittal for converting your
shares of Thermo Ecotek common stock into shares of Thermo Electron common stock
and receiving your cash payment in place of any fraction of a share of Thermo
Electron common stock. Please do not send your share certificates until you
receive the instructions and a letter of transmittal.
1
<PAGE>
7. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
No. As soon as practicable after the merger is completed, Thermo Electron
will send Thermo Ecotek stockholders written instructions for converting their
share certificates, together with a letter of transmittal for such certificates.
8. WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
We expect to complete the merger on the 20(th) business day after the date
this information statement-prospectus is mailed to Thermo Ecotek's stockholders.
We expect that this will occur on or about , 2000.
9. ARE THERE ANY TAX CONSEQUENCES TO THE MERGER?
Thermo Electron intends that no gain or loss will generally be recognized by
you as a Thermo Ecotek stockholder from the receipt of your shares of Thermo
Electron common stock in the merger, except for cash you may receive in lieu of
fractional shares. However, if the Internal Revenue Service succeeds in
establishing a contrary view, you will recognize taxable gain or loss based on
the difference between the value of the Thermo Electron shares you receive in
the merger and the tax basis of the Thermo Ecotek shares you exchange. See
"FEDERAL INCOME TAX CONSEQUENCES" for a fuller discussion of the tax
consequences of the merger.
10. WILL I HAVE TO PAY ANY FEES OR COMMISSIONS?
If you are the record owner of your shares, you will not have to pay
brokerage fees or incur similar expenses. If you own your shares through a
broker or other nominee, your broker may charge you a fee. You should consult
your broker or nominee to determine whether any charges will apply.
11. WHERE CAN I FIND MORE INFORMATION ABOUT THERMO ELECTRON?
More information about Thermo Electron is available from various sources
described under "WHERE YOU CAN FIND MORE INFORMATION."
12. WHO SHOULD I CALL IF I HAVE ADDITIONAL QUESTIONS?
If you have any questions about the merger, you should call our information
agent, D.F. King & Co., Inc. If you are a banker or broker, call collect at
(212) 269-5550. All others should call toll-free at (800) 290-6433.
2
<PAGE>
SUMMARY
As used in this information statement-prospectus, "we," "us" and "our" refer
to Thermo Electron. Thermo Ecotek has not reviewed or approved this information
statement-prospectus.
This summary highlights selected information from this information
statement-prospectus and may not contain all of the information that is
important to you. You should carefully read this entire document and the other
documents we refer to for a more complete understanding of the merger. In
addition, we incorporate by reference important business and financial
information about Thermo Electron and Thermo Ecotek into this information
statement-prospectus. You can obtain that information without charge by
following the instructions in the section entitled "WHERE YOU CAN FIND MORE
INFORMATION" on page 46 of this information statement-prospectus. We have
included page references in parentheses to direct you to a more complete
description of the topics presented in this summary.
PARTIES TO THE MERGER (SEE PAGE 36)
THERMO ELECTRON
Thermo Electron develops, manufactures and sells measurement and detection
instruments that its customers use to monitor, collect and analyze data. Thermo
Electron, through its majority-owned subsidiary Thermo Ecotek, also operates
electric power generation facilities.
On January 31, 2000, Thermo Electron announced that its board of directors
had authorized management to proceed with a major reorganization of the
operations of Thermo Electron and its subsidiaries, including Thermo Ecotek. As
part of this reorganization, Thermo Electron plans to:
- acquire the minority interests in most of its public subsidiaries;
- spin off its business that serves the health care industry with a range of
medical products for diagnosis and monitoring, and its paper recycling and
papermaking equipment business; and
- sell various non-core businesses.
The primary goal of the reorganization plan is for Thermo Electron and each
of its spun-off subsidiaries to focus on their core businesses. The purpose of
the merger described in this information statement-prospectus is to allow Thermo
Electron to acquire the minority public interest in Thermo Ecotek as part of
Thermo Electron's reorganization. Although we no longer consider Thermo Ecotek a
core business under our new strategy, we expect to retain Thermo Ecotek after
the merger while we continue to evaluate how to best exit that business and
create maximum value for our stockholders.
Thermo Electron's principal executive offices are located at 81 Wyman
Street, Waltham, Massachusetts 02454-9046, and its telephone number is
(781) 622-1000.
THERMO ECOTEK
Thermo Ecotek operates independent electric power generation facilities as
well as a natural gas gathering, processing, storage and marketing business.
As part of Thermo Electron's corporate reorganization, announced on
January 31, 2000, Thermo Ecotek expects to sell its biopesticides subsidiary,
Thermo Trilogy Corporation, which manufactures and sells environmentally
friendly pest control products.
Thermo Ecotek's principal executive offices are located at 245 Winter
Street, Waltham, Massachusetts 02451-8709, and its telephone number is
(781) 622-1000.
3
<PAGE>
ECOTEK ACQUISITION
Ecotek Acquisition is a newly-formed Delaware corporation organized by
Thermo Electron for the sole purpose of effecting the merger. Ecotek Acquisition
has not conducted any prior business.
Ecotek Acquisition's principal executive offices are located at 81 Wyman
Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046, and its telephone
number is (781) 622-1000.
NO STOCKHOLDER APPROVAL REQUIRED; THERMO ELECTRON AND ECOTEK ACQUISITION BOARD
APPROVAL (SEE PAGE 20)
We are not asking you to vote on the merger. At a meeting held on
January 28, 2000, the board of directors of Thermo Electron resolved to acquire,
by merger, the minority interest in Thermo Ecotek. Thermo Electron intends to
acquire this minority interest by merging Ecotek Acquisition, a wholly-owned
subsidiary of Thermo Electron, into Thermo Ecotek. As of March 31, 2000, Thermo
Electron owned approximately 93.6% of the outstanding voting stock of Thermo
Ecotek. Prior to the merger, Thermo Electron will transfer all of the shares of
Thermo Ecotek stock that it owns to Ecotek Acquisition. Thermo Electron will
cause the board of directors of Ecotek Acquisition to resolve that the merger
will be effective on the filing of a certificate of ownership and merger in
Delaware, which is expected to occur on the 20(th) business day following the
mailing of this information statement-prospectus. Because Ecotek Acquisition
will own approximately 93.6% of the outstanding voting stock of Thermo Ecotek,
the resolution will be sufficient to authorize the merger under Delaware law,
Thermo Ecotek's certificate of incorporation and Thermo Ecotek's bylaws.
Though no stockholder vote is required, we note that directors and officers
of Thermo Electron beneficially own approximately 2.16% of the voting securities
of Thermo Electron. The directors and officers of Thermo Ecotek own
approximately 1.71% of the voting securities of Thermo Ecotek.
THE MERGER (SEE PAGE 20)
Unless you exercise your appraisal rights, each share of Thermo Ecotek
common stock that you own will be converted into 0.431 shares of Thermo Electron
common stock. Thermo Electron will not issue any fractional shares. Instead,
each Thermo Ecotek stockholder who would otherwise have been entitled to receive
a fractional share of Thermo Electron common stock will receive cash in place of
that fractional share.
FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 34)
The merger is intended to qualify as a reorganization under the Internal
Revenue Code, with the result that no gain or loss will generally be recognized
by you as a Thermo Ecotek stockholder from your receipt of shares of Thermo
Electron common stock in the merger. However, if the Internal Revenue Service
succeeds in establishing a contrary view, you will recognize taxable gain or
loss based on the difference between the value of the Thermo Electron shares you
receive in the merger and the tax basis of the Thermo Ecotek shares you
exchange. In general, Thermo Ecotek stockholders will recognize taxable gain
from cash received in lieu of fractional shares in the merger. You should
consult your own tax advisor for a full understanding of the merger's tax
consequences. Additionally, no gain or loss will generally be recognized by
Thermo Ecotek, Thermo Electron or Ecotek Acquisition as a result of the merger.
Please read the section called "FEDERAL INCOME TAX CONSEQUENCES" for a fuller
discussion of the tax consequences of the merger.
EXCHANGE OF SHARES (SEE PAGE 27)
You will receive detailed instructions regarding the surrender of your stock
certificates from Thermo Ecotek's transfer agent, American Stock Transfer &
Trust Company, promptly following the effective time of the merger. You will
receive certificates for Thermo Electron common stock as soon
4
<PAGE>
as practicable after the transfer agent receives your Thermo Ecotek stock
certificates and other required documents. Please do not send any stock
certificates to Thermo Electron, Thermo Ecotek or the exchange agent until you
receive these instructions.
EFFECT OF THE MERGER ON THERMO ECOTEK STOCK OPTIONS AND DEBENTURES (SEE PAGE 28)
Thermo Electron will assume Thermo Ecotek's stock option plans and any
outstanding options to purchase shares of Thermo Ecotek common stock under these
plans at the effective time of the merger. Thermo Ecotek's options will be
exercisable for Thermo Electron common stock after the merger. The number of
shares of Thermo Electron common stock underlying each option will equal the
number of shares of Thermo Ecotek common stock underlying the option before the
merger, multiplied by the exchange ratio. The exercise price for each assumed
option will be calculated by dividing the exercise price of each Thermo Ecotek
stock option before the merger by the exchange ratio, rounded up to the nearest
whole cent.
After the merger, Thermo Ecotek's non-interest bearing subordinated
convertible debentures due March 15, 2001 and its 4.875% subordinated
convertible debentures due April 15, 2004, will be convertible into shares of
Thermo Electron common stock, instead of Thermo Ecotek common stock. The
debentures are now convertible into Thermo Ecotek common stock at a price of
$13.56 and $16.50 per share, respectively. A total of $1,820,000 principal
amount of the non-interest bearing debentures and a total of $44,950,000
principal amount of the 4.875% debentures was outstanding as of January 1, 2000.
Holders of the debentures will not have the right to require Thermo Ecotek to
redeem the debentures as a result of the merger. With an exchange ratio of
0.431, the non-interest bearing debentures would be convertible into 57,852
shares of Thermo Electron common stock at a conversion price of $31.46 per share
and the 4.875% debentures would be convertible into 1,174,243 shares of Thermo
Electron common stock at a conversion price of $38.28 per share. See "THE
MERGER--Effect of the Merger on Thermo Ecotek Stock Options and Debentures."
PURPOSES AND REASONS FOR THE MERGER (SEE PAGE 22)
The purpose of the merger is to acquire all of the outstanding shares of
Thermo Ecotek common stock as part of our overall reorganization. In deciding to
undertake the merger, Thermo Electron considered the following factors, among
others:
- recent public capital market trends affecting small companies;
- the latest trends in Thermo Ecotek's markets, primarily the independent
electric power generation and biopesticides industries;
- Thermo Ecotek's debt, including debt owed to Thermo Electron;
- reducing the public information available to competitors about Thermo
Ecotek's business, which would result from Thermo Ecotek no longer having
to file reports with the Securities and Exchange Commission; and
- the costs of being a public company, including elimination of fees
associated with SEC reporting and the related legal and accounting fees,
that Thermo Electron anticipates could result in savings of approximately
$450,000 per year.
Thermo Electron also considered the advantages and disadvantages of some
alternatives to taking Thermo Ecotek private, including leaving Thermo Ecotek as
a public majority-owned subsidiary. Thermo Electron considered the following
factors, among others:
- the relative lack of liquidity for Thermo Ecotek's common stock;
- the impact on its own common stock of the issuance of shares to Thermo
Ecotek's stockholders; and
5
<PAGE>
- the advancement of Thermo Electron's proposed corporate reorganization.
CONFLICTS OF INTEREST (SEE PAGE 24)
In setting the exchange ratio, Thermo Electron's financial interest was
adverse to the interest of the public stockholders of Thermo Ecotek. Thermo
Electron set the exchange ratio on its own and without any negotiations with
Thermo Ecotek.
You should be aware that some officers and directors of Thermo Ecotek have
interests in the merger that are different from, or in addition to, yours. These
interests include ownership of Thermo Ecotek common stock and options to
purchase Thermo Ecotek common stock, ownership of Thermo Electron common stock
and options to purchase Thermo Electron common stock, and indemnification
arrangements between the directors and Thermo Ecotek and Thermo Electron.
In addition, some of Thermo Electron's officers and directors are also
officers and directors of Thermo Ecotek and have interests that are in addition
to, or different from, your interests.
CONDITIONS TO THE MERGER (SEE PAGE 29)
A few limited conditions must be satisfied before the merger will be
completed. These include:
- the receipt by Thermo Electron of a tax opinion regarding certain tax
matters relating to the merger; and
- the effectiveness of the registration statement of which this information
statement-prospectus forms a part.
ACCOUNTING TREATMENT (SEE PAGE 30)
The merger, if completed, will be accounted for as the acquisition of a
minority interest by Thermo Electron using the purchase method of accounting.
FEDERAL AND STATE REGULATORY REQUIREMENTS (SEE PAGE 30)
Except for filing a certificate of ownership and merger in Delaware and
except for compliance with federal and state securities laws, Thermo Electron is
not aware of any material United States federal or state or foreign governmental
regulatory requirement necessary to be complied with, or approval that must be
obtained, in connection with the merger.
RESTRICTIONS ON THE ABILITY TO SELL THERMO ELECTRON STOCK (SEE PAGE 30)
All shares of Thermo Electron common stock you receive in the merger will be
freely transferable unless you are considered an "affiliate" of Thermo Electron
under the Securities Act of 1933. Shares of Thermo Electron common stock held by
its affiliates may only be sold under a registration statement or an exemption
under the Securities Act.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS OF THERMO ECOTEK (SEE PAGE 30)
If you object to the merger, Delaware law permits you to seek relief as a
dissenting stockholder and have the "fair value" of your shares of Thermo Ecotek
common stock determined by a court and paid to you in cash. This value may be
more or less than the market value of the 0.431 shares of Thermo Electron common
stock issuable for each share of Thermo Ecotek common stock in the merger. See
"THE MERGER--Dissenters' and Appraisal Rights."
The relevant provisions of Delaware law are technical in nature and complex.
If you wish to exercise appraisal rights and obtain appraisal of the fair value
of your shares, you may wish to consult with legal counsel because the failure
to comply strictly with these provisions may result in waiver or forfeiture of
your appraisal rights.
6
<PAGE>
DIFFERENCES BETWEEN YOUR RIGHTS AS A THERMO ECOTEK STOCKHOLDER AND AS A THERMO
ELECTRON STOCKHOLDER (SEE PAGE 37)
There are differences between the rights you have as a holder of Thermo
Ecotek common stock and the rights you will have as a holder of Thermo Electron
common stock. For a description of these differences, please see the section
called "COMPARISON OF RIGHTS OF HOLDERS OF THERMO ECOTEK AND THERMO ELECTRON
COMMON STOCK."
FORWARD LOOKING STATEMENTS IN THIS INFORMATION STATEMENT-PROSPECTUS (SEE PAGE
49)
This information statement-prospectus and the documents incorporated by
reference into this information statement-prospectus contain forward-looking
statements within the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions
identify forward-looking statements. These forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from the results contemplated by
the forward-looking statements. In evaluating the merger, you should carefully
consider the discussion of risks and uncertainties in the section entitled "RISK
FACTORS" on pages 13-19.
7
<PAGE>
SELECTED FINANCIAL INFORMATION--THERMO ELECTRON
The selected financial information presented below as of and for the fiscal
years ended January 1, 2000, and January 2, 1999, and for the fiscal year ended
January 3, 1998, has been derived from Thermo Electron's consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report incorporated by reference into this
information statement-prospectus. The selected financial information presented
below as of January 3, 1998, and as of and for the fiscal years ended
December 28, 1996, and December 30, 1995, has been derived from Thermo
Electron's consolidated financial statements, which have been audited by Arthur
Andersen LLP, but have not been included or incorporated by reference herein.
This information should be read in conjunction with Thermo Electron's
consolidated financial statements and related notes incorporated by reference
into this information statement-prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR (1)
--------------------------------------------------------------
1999 (2) 1998 (3) 1997 1996 (4) 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $2,471,193 $2,055,805 $1,979,602 $1,573,005 $1,059,064
Income (Loss) from Continuing Operations
Before Extraordinary Items............... (14,580) 114,676 174,665 164,172 76,167
Net Income (Loss).......................... (174,573) 181,901 239,328 190,816 139,582
Earnings (Loss) per Share from Continuing
Operations Before Extraordinary Items:
Basic................................ (.09) .71 1.15 1.16 .60
Diluted.............................. (.11) .67 1.05 1.03 .55
Earnings (Loss) per Share:
Basic................................ (1.10) 1.12 1.57 1.35 1.10
Diluted.............................. (1.13) 1.08 1.41 1.17 .95
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital............................ $1,450,858 $2,163,010 $2,001,963 $2,218,617 $1,317,146
Total Assets............................... 5,181,842 5,421,060 4,961,046 4,546,942 3,247,952
Long Term Obligations...................... 1,565,974 1,808,582 1,518,687 1,531,668 1,079,761
Minority Interest.......................... 364,278 399,512 464,191 364,163 200,868
Common Stock of Subsidiaries Subject to
Redemption............................... 7,692 40,500 40,500 2,613 --
Shareholders' Investment................... 2,014,486 2,254,802 2,007,862 1,755,576 1,311,311
OTHER DATA (UNAUDITED):
Book Value per Share....................... $ 12.87 $ 14.23 $ 12.62 $ 11.71 $ 9.82
Cash Dividend Declared per Share........... -- -- -- -- --
</TABLE>
- ------------------------
(1) Thermo Electron's 1999, 1998, 1997, 1996, and 1995 fiscal years ended
January 1, 2000, January 2, 1999, January 3, 1998, December 28, 1996, and
December 30, 1995, respectively.
(2) Reflects a $182.4 million pretax charge for restructuring and related costs.
(3) Reflects a $32.5 million pretax charge for restructuring and related costs,
the issuance of $150.0 million principal amount of Thermo Electron's notes,
and Thermo Electron's public offering of common stock for net proceeds of
$290.1 million.
(4) Reflects the issuance of $585.0 million principal amount of Thermo
Electron's convertible debentures.
8
<PAGE>
SELECTED FINANCIAL INFORMATION--THERMO ECOTEK
The selected financial information presented below as of and for the fiscal
years ended October 2, 1999, and October 3, 1998, and for the fiscal year ended
September 27, 1997, has been derived from Thermo Ecotek's consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included in this information
statement-prospectus. The selected financial information presented below as of
the fiscal year ended September 27, 1997, as of and for the fiscal year ended
September 28, 1996, and as of and for the nine month period ended September 30,
1995, has been derived from Thermo Ecotek's consolidated financial statements,
which have been audited by Arthur Andersen LLP, but have not been included or
incorporated by reference herein. This information should be read in conjunction
with Thermo Ecotek's consolidated financial statements and related notes
included in this information statement-prospectus. The selected financial
information as of and for the three months ended January 1, 2000, and
January 2, 1999, and for the fiscal year ended September 30, 1995, has not been
audited but, in the opinion of Thermo Ecotek, includes all adjustments
(consisting only of normal, recurring adjustments) necessary to present fairly
such information in accordance with generally accepted accounting principles
applied on a consistent basis. The results of operations for the three months
ended January 1, 2000, are not necessarily indicative of results for the entire
year.
<TABLE>
<CAPTION>
NINE
THREE MONTHS MONTHS
ENDED YEAR ENDED ENDED(6)
------------------- ------------------------------------------------------- ---------
JAN. 1, JAN. 2, OCT. 2, OCT. 3, SEPT. 27, SEPT. 28, SEPT. 30, SEPT. 30,
2000(1) 1999 1999(2) 1998(3) 1997(4) 1996(5) 1995 1995
-------- -------- -------- -------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 38,610 $ 40,375 $178,338 $175,943 $164,261 $148,389 $139,319 $107,139
Income (Loss) from Continuing
Operations.......................... 2,420 3,067 (56,957) 23,510 22,505 18,126 12,540 10,264
Net Income (Loss)..................... (10,675) 2,510 (59,420) 31,209 22,545 17,780 12,540 10,264
Earnings (Loss) per Share from
Continuing Operations:
Basic........................... .07 .09 (1.58) .80 .91 .77 .58 .46
Diluted......................... .07 .08 (1.58) .65 .64 .54 .43 .34
Earnings (Loss) per Share:
Basic........................... (.30) .07 (1.65) 1.07 .92 .76 .58 .46
Diluted......................... (.30) .07 (1.65) .86 .64 .54 .43 .34
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital....................... $ 90,229 $117,688 $ 97,982 $103,826 $ 81,463 $ 58,361
Total Assets.......................... 402,775 442,814 488,077 479,100 448,058 390,476
Long-term Obligations................. 46,770 61,270 93,446 204,690 209,281 202,360
Shareholders' Investment.............. 181,314 190,981 249,562 147,328 129,687 92,985
OTHER DATA:
Book Value per Share.................. $ 5.04 $ 5.31 $ 6.96 $ 6.01 $ 5.35 $ 4.00
Cash Dividends........................ -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) Reflects a provision for loss on disposal of discontinued operations of
$12.6 million, net of an income tax benefit of $2.7 million.
(2) 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.
(3) Reflects the conversion by Thermo Electron of $68.5 million principal amount
of 4% subordinated convertible debentures.
(4) Reflects the April 1997 issuance of $50.0 million principal amount of 4.875%
subordinated convertible debentures.
(5) Reflects the March 1996 issuance of $37.0 million principal amount of
noninterest-bearing subordinated convertible debentures.
(6) In June 1995, Thermo Ecotek changed its fiscal year end from the Saturday
nearest December 31 to the Saturday nearest September 30. Accordingly,
Thermo Ecotek's 39-week transition period ended September 30, 1995, is
presented. References to fiscal 1999, 1998, 1997, and 1996 are for the
fiscal years ended October 2, 1999, October 3, 1998, September 27, 1997, and
September 28, 1996.
9
<PAGE>
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL INFORMATION
The following table presents unaudited pro forma combined selected financial
information for Thermo Electron and Thermo Ecotek, historical selected financial
information for Thermo Electron and Thermo Ecotek, and unaudited pro forma
combined per share data for Thermo Electron and Thermo Ecotek. The historical
financial information is derived from the financial statements of Thermo
Electron and Thermo Ecotek, included in or incorporated by reference into this
information statement-prospectus. The pro forma information is derived from the
pro forma combined condensed financial information included elsewhere in this
information statement-prospectus. The unaudited pro forma consolidated condensed
statement of operations data sets forth the results of continuing operations for
the year ended January 1, 2000, as if the merger had become effective at the
beginning of calendar 1999. The unaudited pro forma consolidated condensed
balance sheet data sets forth the financial position as of January 1, 2000, as
if the merger had become effective on January 1, 2000.
This data is not necessarily indicative of the results of the future
operations of the combined entity or the actual results that would have occurred
had the merger been consummated prior to the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 1, 2000
-----------------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
PRO FORMA COMBINED:
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $2,417,193
Loss from Continuing Operations Before Extraordinary
Items................................................... (18,571)
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital........................................... $1,450,858
Total Assets.............................................. 5,191,123
Long-term Obligations..................................... 1,565,974
Minority Interest......................................... 352,025
Common Stock of Subsidiary Subject to Redemption.......... 7,692
Shareholders' Investment.................................. 2,036,020
PER SHARE DATA:
THERMO ELECTRON (HISTORICAL):
Book Value per Common Share............................... $ 12.87
Cash Dividends Declared per Share......................... --
Loss per Share from Continuing Operations Before
Extraordinary Items:
Basic................................................. $ (.09)
Diluted............................................... $ (.11)
PRO FORMA:
COMBINED PER SHARE OF THERMO ELECTRON STOCK:
Book Value per Common Share............................... $ 12.93
Cash Dividends Declared per Share......................... --
Loss per Share from Continuing Operations Before
Extraordinary Items:
Basic................................................. $ (.12)
Diluted............................................... $ (.14)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 1, 2000
-----------------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
COMBINED PER THERMO ELECTRON SHARE EQUIVALENT (1):
Book Value per Common Share............................... $ 5.57
Cash Dividends Declared per Share......................... --
Loss per Share from Continuing Operations Before
Extraordinary Items:
Basic................................................. $ (.05)
Diluted............................................... $ (.06)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED FISCAL YEAR ENDED
JANUARY 1, 2000 OCTOBER 2, 1999
------------------ -----------------
<S> <C> <C>
THERMO ECOTEK (HISTORICAL):
Book Value per Common Share.............................. $5.04 $ 5.31
Cash Dividends Declared Per Share........................ -- --
Basic and Diluted Earnings (Loss) per Share from
Continuing Operations.................................. $ .07 $(1.58)
</TABLE>
- ------------------------
(1) Pro forma combined per Thermo Electron share equivalent data has been
calculated based on the pro forma combined data for Thermo Electron common
stock, multiplied by the exchange ratio of 0.431. See "QUESTIONS AND ANSWERS
ABOUT THE MERGER, Questions 2 and 3" for a description of the exchange
ratio. The exchange ratio is the 0.431 shares of Thermo Electron common
stock you would have received for each share of Thermo Ecotek common stock
in the merger.
11
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE DATA
Thermo Electron's common stock is traded on the New York Stock Exchange
under the symbol "TMO." Thermo Ecotek's common stock is traded on the American
Stock Exchange under the symbol "TCK."
The following table presents the closing prices per share of Thermo Ecotek's
common stock and the closing prices per share of Thermo Electron's common stock
on the following dates;
- May 21, 1999, the last trading day before the May 24, 1999 public
announcement of Thermo Electron's proposal, with no price having been
determined, to take Thermo Ecotek private;
- January 28, 2000, the last trading day before the public announcement that
Thermo Electron would acquire the minority interest in Thermo Ecotek at an
exchange ratio of 0.431; and
- May 5, 2000.
The chart also presents, in the line entitled "Equivalent Per Share Price,"
the price per share of Thermo Ecotek common stock based upon the exchange ratio
of 0.431 shares of Thermo Electron common stock for each share of Thermo Ecotek
common stock.
<TABLE>
<CAPTION>
STOCK/DATE
----------
MAY 21, 1999 JANUARY 28, 2000 MAY 5, 2000
------------ ---------------- -----------
<S> <C> <C> <C>
Thermo Ecotek.......................................... $ 8.50 $ 6.25 $ 8.125
Thermo Electron........................................ 19.625 16.25 20.00
Equivalent Per Share Price............................. 8.46 7.00 8.62
</TABLE>
You should obtain current stock price quotations for Thermo Electron's
common stock and Thermo Ecotek's common stock.
12
<PAGE>
RISK FACTORS
As used in this information statement-prospectus, "we," "us" and "our" refer
to Thermo Electron. Thermo Ecotek has not reviewed or approved this information
statement-prospectus.
If you hold your shares of Thermo Ecotek common stock until the merger, you
will receive shares of Thermo Electron common stock in the proposed merger in
exchange for your Thermo Ecotek shares and will become a stockholder of Thermo
Electron. The following important factors, among others, in some cases have
affected, and in the future could affect, Thermo Electron's actual results and
could cause its actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, Thermo Electron. In
addition to the other information contained in or incorporated by reference into
this information statement-prospectus, you should carefully consider the
following risk factors in deciding whether to exercise appraisal rights.
RISK RELATED TO THE MERGER
BECAUSE WE WILL NOT ADJUST THE EXCHANGE RATIO TO REFLECT CHANGES IN OUR OR
THERMO ECOTEK'S STOCK PRICE, THE FIXED EXCHANGE RATIO USED IN THE MERGER MAY
PROVE UNFAVORABLE TO YOU.
We have fixed the exchange ratio at 0.431 shares of Thermo Electron common
stock for each share of Thermo Ecotek common stock. We will not adjust the
exchange ratio to reflect fluctuations in the market value of shares of Thermo
Electron common stock or Thermo Ecotek common stock. If you do not properly
exercise your appraisal rights in connection with the merger, you will be locked
into the exchange ratio and you will not be able to capture gains from possible
increases in the value of Thermo Ecotek common stock. You may incur losses from
possible decreases in the value of Thermo Electron common stock.
WHILE THERMO ELECTRON WILL RECEIVE AN OPINION OF COUNSEL THAT THE MERGER MORE
LIKELY THAN NOT WILL QUALIFY AS A TAX-FREE REORGANIZATION UNDER THE INTERNAL
REVENUE CODE, THE INTERNAL REVENUE SERVICE MAY TAKE A CONTRARY VIEW.
If the Internal Revenue Service succeeds in establishing that the merger
does not qualify as a tax-free reorganization, you will recognize taxable gain
or loss at the time of the merger based on the difference between the value of
the Thermo Electron shares you receive in the merger and the tax basis of the
Thermo Ecotek shares you exchange.
RISKS RELATED TO THERMO ELECTRON'S REORGANIZATION
BECAUSE THERMO ELECTRON'S REORGANIZATION IS VERY COMPLEX AND WILL REQUIRE THIRD
PARTY AND GOVERNMENTAL CONSENTS AND APPROVALS, IT MAY NOT BE ABLE TO
SUCCESSFULLY COMPLETE THIS REORGANIZATION OR TO DO SO ON THE TIME SCHEDULE IT
CONTEMPLATES.
Thermo Electron's reorganization consists of:
- the acquisition of the public minority interest in most of its
subsidiaries that have minority investors;
- the spin-off to its stockholders of two of its businesses; and
- the sale of a variety of non-core businesses.
In order to accomplish these objectives, Thermo Electron will need to obtain a
variety of third party and governmental consents and approvals. In particular,
in addition to the Internal Revenue Service ruling discussed below, Thermo
Electron will need to obtain:
- approval of the spin-offs and some of the other transactions by its board
of directors;
13
<PAGE>
- when Thermo Electron makes a tender or exchange offer, the tender by
minority stockholders of enough shares to allow it to own at least 90% of
the target subsidiary's outstanding shares;
- the satisfactory resolution of any comments raised by the SEC on various
registration statements, tender offer documents and other filings; and
- the receipt of any necessary third party contractual consents.
If Thermo Electron does not receive these consents and approvals, it may not
be able to effect some aspects of its reorganization. If Thermo Electron is not
able to effect all aspects of its reorganization, it may not be able to achieve
some or all of the anticipated benefits of the reorganization. Until Thermo
Electron completes the entire reorganization, it will continue to own and
operate a diverse group of businesses, some of which may continue to have
minority stockholders.
Thermo Electron's reorganization is time-consuming and expensive, and
consumes management resources. The failure of Thermo Electron's management to
complete the proposed reorganization in a timely manner could negatively affect
the public market's confidence in its management, which in turn may adversely
affect the market price of Thermo Electron common stock.
THERMO ELECTRON DOES NOT EXPECT TO PROCEED WITH ITS TWO PLANNED SPIN-OFFS UNTIL
IT RECEIVES A FAVORABLE RULING FROM THE INTERNAL REVENUE SERVICE, WHICH THE
INTERNAL REVENUE SERVICE MAY NOT ISSUE OR MAY TAKE A SUBSTANTIAL PERIOD OF TIME
TO ISSUE.
Thermo Electron does not expect to spin off its paper recycling and paper
making equipment business and its business that serves the health care industry
with a range of medical products for diagnosis and monitoring unless it obtains
a favorable ruling from the Internal Revenue Service. The Internal Revenue
Service may not grant the necessary ruling or may seek to impose conditions to
the granting of the ruling that are not acceptable to Thermo Electron. Thermo
Electron does not expect the Internal Revenue Service to issue a tax ruling
before the end of 2000, and additional delays are possible.
AS PART OF THERMO ELECTRON'S REORGANIZATION, IT SEEKS TO DIVEST A SIGNIFICANT
NUMBER OF BUSINESSES; THERMO ELECTRON MAY NOT SUCCEED IN SELLING ALL OF THESE
BUSINESSES IN A TIMELY MANNER OR AT PRICES IT CONSIDERS ACCEPTABLE.
Thermo Electron plans to sell a significant number of businesses as part of
its reorganization. This process will entail a number of risks:
- Thermo Electron may not find buyers for all of these businesses.
- The timing of these dispositions is uncertain.
- Thermo Electron cannot be certain that the terms, including price, for the
sale of these businesses will be acceptable to it.
- Each of these sales will be subject to various conditions, including
conditions in the agreements governing the transaction and the receipt of
necessary governmental approvals.
EVEN IF THERMO ELECTRON SUCCEEDS IN COMPLETING ITS REORGANIZATION, IT WILL FACE
A NUMBER OF CHALLENGES IN INTEGRATING ITS INSTRUMENT BUSINESS.
Currently Thermo Electron operates its instrument business directly and
through its Thermo Instrument Systems Inc. and Thermedics Inc. subsidiaries.
Thermo Electron has conducted these operations largely as autonomous,
unaffiliated businesses. As part of its reorganization, Thermo
14
<PAGE>
Electron plans to manage these operations in a more coordinated manner. The
following factors may make it difficult to successfully integrate and
consolidate Thermo Electron's instrument operations:
- Thermo Electron's success in integrating these businesses will depend on
its ability to coordinate geographically separate organizations and
integrate personnel with different business backgrounds and corporate
cultures.
- Thermo Electron's ability to combine these businesses will require
coordination of administrative, sales and marketing, distribution and
accounting and finance functions and expansion of information and
management systems.
- The integration process could disrupt Thermo Electron's instrument
business.
- Retaining key employees of these businesses may be difficult.
THERMO ELECTRON'S REORGANIZATION CONTEMPLATES THE ISSUANCE OF A SIGNIFICANT
NUMBER OF ADDITIONAL SHARES OF ITS COMMON STOCK, WHICH MAY DEPRESS THE MARKET
PRICE OF ITS SHARES.
Thermo Electron expects to issue a substantial number of shares of its
common stock or securities exercisable for shares of its common stock in
connection with its reorganization. At March 31, 2000, 156,904,025 shares of
Thermo Electron common stock were outstanding. The number of shares of Thermo
Electron common stock outstanding may increase by as many as 58.1 million shares
because, as part of Thermo Electron's reorganization:
- Thermo Electron plans to exchange shares of its common stock for the
common stock held by minority stockholders in a number of its public
subsidiaries, including Thermo Ecotek. Thermo Electron expects to issue a
total of approximately 22.3 million shares of its common stock in these
transactions.
- Thermo Electron plans to assume employee stock options in these
transactions, including the merger with Thermo Ecotek, covering
approximately 17.9 million shares of its common stock. In addition, Thermo
Electron may be required to issue additional stock options to retain its
key employees.
- The debentures issued by some of Thermo Electron's subsidiaries, including
Thermo Ecotek, will become convertible into shares of Thermo Electron
common stock. Based on the total principal amounts outstanding of these
debentures and the conversion prices at March 31, 2000, Thermo Electron
expects these debentures to be convertible into approximately
17.9 million shares of its common stock.
The increase in the number of outstanding shares of Thermo Electron common
stock, as well as the potential future issuance of shares of Thermo Electron
common stock upon conversion of debentures or exercise of employee stock
options, may depress the market price of Thermo Electron common stock.
AS A RESULT OF THE SPIN-OFF OF THERMO FIBERTEK AND ITS SUBSIDIARIES, THERMO
ELECTRON WILL REMAIN AS THE GUARANTOR OF INDEBTEDNESS AND STOCK REDEMPTION
RIGHTS OF THESE COMPANIES EVEN THOUGH IT WILL NO LONGER CONTROL THEIR BUSINESS
OR OPERATIONS.
Thermo Electron has guaranteed the payment of principal and interest on
$153 million principal amount of debentures issued by Thermo Fibertek Inc. These
debentures mature in July 2004. Thermo Electron has also guaranteed the
financial obligations of Thermo Fibergen Inc., a subsidiary of Thermo Fibertek,
under stock redemption rights granted by Thermo Fibergen. Thermo Electron is
contingently liable for $60.1 million under these stock redemption rights, which
terminate in September 2000 and the remainder of which terminate in
September 2001. Thermo Electron will remain liable as a guarantor for these
obligations following the spin-offs, although it will no longer control the
business or operations of Thermo Fibertek or its subsidiaries.
15
<PAGE>
THERMO ELECTRON IS UNABLE TO PREDICT THE LIQUIDITY OR PROSPECTIVE PERFORMANCE OF
THE COMMON STOCK OF THE COMPANIES THAT IT INTENDS TO SPIN OFF.
Thermo Electron is unable to predict the liquidity or market performance of
the shares of the businesses it plans to spin off. Although Thermo Fibertek, the
company that conducts its paper recycling and paper making equipment business,
has publicly traded shares, the historic prices of these shares may not be
representative of the trading price of Thermo Fibertek's common stock after the
number of shares held by its stockholders other than Thermo Electron increases
as a result of the spin-off. Thermo Electron currently conducts its business
that serves the health care industry with a range of medical products for
diagnosis and monitoring both directly and through some of its subsidiaries.
There is currently no public trading market for the shares of the company that
will conduct this business following the proposed spin-off. The businesses that
Thermo Electron is spinning off may not have the financial resources and
management skills necessary to succeed as independent entities.
RISKS RELATED TO THERMO ELECTRON'S BUSINESS AND FINANCIAL CONDITION
THERMO ELECTRON'S STOCK PRICE MAY BE VOLATILE, WHICH COULD CAUSE YOU TO LOSE
PART OR ALL OF YOUR INVESTMENT.
The market price for Thermo Electron common stock can be very volatile. The
market price for Thermo Electron common stock may be affected by a number of
factors, including:
- the risks described in this information statement-prospectus;
- Thermo Electron's financial results; and
- general market conditions.
In addition, the stock market has experienced extreme price and volume
fluctuations. This volatility has significantly affected the market prices of
securities for reasons frequently unrelated to or disproportionate to the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of Thermo Electron common stock.
THERMO ELECTRON MAY NOT BE ABLE TO COMPLETE PENDING OR FUTURE ACQUISITIONS AND
IT MAY NOT BE ABLE TO INTEGRATE ANY ACQUIRED BUSINESSES INTO ITS EXISTING
BUSINESS OR MAKE THE ACQUIRED BUSINESSES PROFITABLE.
One of Thermo Electron's strategies is to supplement its internal growth by
acquiring businesses and technologies that complement or augment Thermo
Electron's existing product lines. Some of the businesses acquired by Thermo
Electron have had low levels of profitability. In addition, businesses Thermo
Electron may seek to acquire may be marginally profitable or unprofitable. For
these acquired businesses to achieve acceptable levels of profitability, Thermo
Electron must change their operations and improve their market penetration.
Thermo Electron may not be successful in this regard.
Promising acquisitions are difficult to identify and complete for many
reasons, including:
- competition among buyers;
- the need for regulatory approvals, including antitrust approvals; and
- the high valuations of businesses resulting from historically high stock
prices.
Thermo Electron may have to pay, and has paid, substantial premiums over the
fair value of the net assets of the companies it acquires. Thermo Electron has
acquired significant intangible assets, including approximately $1.2 billion of
cost in excess of net assets of acquired companies, or goodwill, recorded on its
balance sheet as of January 1, 2000. Thermo Electron expects to record
additional goodwill as a result of its plans to acquire the minority interests
in most of its publicly traded subsidiaries. The realization of the value of
this asset will depend on the future cash flows of the acquired businesses.
These cash flows in turn depend on how well Thermo Electron has identified these
16
<PAGE>
acquired businesses as desirable acquisition candidates and how well Thermo
Electron can integrate these acquired businesses.
To finance its acquisitions, Thermo Electron may have to raise additional
funds, either through public or private financings. Any financing, if available
at all, may be on unfavorable terms.
IT MAY BE DIFFICULT FOR THERMO ELECTRON TO EXPAND BECAUSE SOME OF THE MARKETS
FOR ITS PRODUCTS ARE NOT GROWING.
Some of the markets in which Thermo Electron competes have been flat or
declining over the past several years. To address this issue, Thermo Electron
has pursued a number of potential growth strategies, including:
- acquiring complementary businesses;
- developing new applications for its technologies; and
- strengthening its presence in selected geographic markets.
Thermo Electron may not be able to successfully implement these strategies,
and these strategies may not result in growth of Thermo Electron's business.
THERMO ELECTRON'S SIGNIFICANT INTERNATIONAL OPERATIONS CAN ENTAIL ADDITIONAL
RISKS.
Thermo Electron is a global company with substantial operations outside the
United States. Thermo Electron intends to continue expanding its presence in
international markets. In 1999, Thermo Electron's international revenues from
continuing operations (including export revenues from the U.S.) accounted for
approximately 63% of its total revenues. International revenues are subject to
many risks, including the following:
- changes in exchange rates may adversely affect demand for products and the
profitability in U.S. dollars of products and services provided by Thermo
Electron in foreign markets, where payment for Thermo Electron's products
and services is made in the local currency;
- Thermo Electron may find it hard to enforce agreements and collect
receivables using a foreign country's legal system;
- foreign customers may have longer payment cycles;
- foreign countries may impose additional withholding taxes or otherwise tax
Thermo Electron's foreign income, impose tariffs, or adopt other
restrictions on foreign trade;
- U.S. export licenses may be difficult to obtain;
- intellectual property rights may be harder to enforce in foreign
countries;
- foreign countries may have unexpected changes in regulatory requirements;
- Thermo Electron may have difficulty managing and staffing its foreign
operations because of, among other factors, language and cultural
differences;
- foreign countries in which Thermo Electron operates may be characterized
by unpredictable political instability; and
- Thermo Electron's revenues could be affected by seasonal reductions in
business activity in some foreign countries.
Of these factors, exchange rate fluctuations, in particular, have had and may in
the future have an adverse impact on Thermo Electron's business and results of
operations.
17
<PAGE>
A portion of Thermo Electron's revenues comes from exports to Asia. Some
Asian countries experienced a severe economic crisis in the late 1990s,
involving sharply reduced economic activity and liquidity, volatile
foreign-currency-exchange and interest rates, and unstable stock markets.
Unstable economic conditions in Asia depressed our export sales to Asia in 1998
and early 1999. Unstable economic conditions in this region and other parts of
the world may adversely affect our future export sales.
THERMO ELECTRON MUST DEVELOP NEW PRODUCTS, ADAPT TO RAPID AND SIGNIFICANT
TECHNOLOGICAL CHANGE AND RESPOND TO INTRODUCTIONS OF NEW PRODUCTS IN ORDER TO
REMAIN COMPETITIVE.
Our growth strategy includes significant investment in product development.
We intend to increase our investment in research and development. We sell our
products in several industries that are characterized by rapid and significant
technological changes, frequent new product and service introductions and
enhancements and evolving industry standards. Without the timely introduction of
new products, services and enhancements, our products and services will likely
become technologically obsolete over time, in which case our revenue and
operating results would suffer.
Our customers use many of our products to develop, test and manufacture
their new products. As a result, we must anticipate industry trends and develop
products in advance of the commercialization of our customers' products. If we
fail to adequately predict our customers' needs and future activities, we may
invest heavily in research and development of products and services that do not
lead to significant revenue.
Many of our products and products under development are technologically
innovative and require significant planning, design, development and testing at
the technological, product and manufacturing-process levels. These activities
require us to make significant investments.
Products in our markets undergo rapid and significant technological change
because of quickly changing industry standards and the introduction of new
products and technologies that make existing products and technologies
uncompetitive or obsolete. Our competition may adapt more quickly to new
technologies and changes in our customers' requirements than we can. The
products we are currently developing, or those we will develop in the future,
may not be technologically feasible or accepted by the marketplace, and our
products or technologies could become uncompetitive or obsolete.
CHANGES IN GOVERNMENTAL REGULATIONS MAY REDUCE DEMAND FOR THERMO ELECTRON'S
PRODUCTS OR INCREASE ITS EXPENSES.
Thermo Electron competes in many markets in which it and its customers must
comply with federal, state, local, and foreign regulations, such as
environmental, health and safety, and food and drug regulations. Thermo Electron
develops, configures, and markets its products to meet customer needs created by
those regulations. These regulations may change in response to new scientific
evidence or political or economic considerations. Any significant change in
regulations could reduce demand for Thermo Electron's products. For example,
demand for Thermo Electron's Thermo Voltek Corp. subsidiary's electromagnetic
compatibility test products decreased because of the declining influence of IEC
801, the European Union directive on electromagnetic compatibility.
DEMAND FOR SOME OF THERMO ELECTRON'S PRODUCTS DEPENDS ON THE CAPITAL SPENDING
POLICIES OF ITS CUSTOMERS AND ON GOVERNMENT FUNDING POLICIES.
Thermo Electron's customers include manufacturers of semiconductors and
products incorporating semiconductors, pharmaceutical and chemical companies,
laboratories, universities, healthcare providers, government agencies, and
public and private research institutions. Many factors, including public policy
spending priorities, available resources, and economic cycles, have a
significant effect on the capital spending policies of these entities. These
policies in turn can have a significant effect on the demand for Thermo
Electron's products. For example, a reduction in discretionary capital spending
by
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<PAGE>
petrochemical, oil and gas, and mining companies, due to difficult market
conditions, has adversely affected Thermo Electron's businesses operating in the
process control industry. Similarly, softness in the semiconductor industry has
resulted in lower revenues at some of Thermo Electron's businesses. Also, Thermo
Electron's Thermedics Detection Inc. subsidiary has experienced lower demand for
its detection instruments as a result of a shift in the process of recycling
plastic containers in Europe, from sanitizing and reusing recyclables, to
melting and re-forming plastic containers.
OBTAINING AND ENFORCING PATENT PROTECTION FOR THERMO ELECTRON'S PROPRIETARY
PRODUCTS, PROCESSES AND TECHNOLOGIES MAY BE DIFFICULT AND EXPENSIVE.
Patent and trade secret protection is crucial to Thermo Electron, because
developing and marketing new technologies and products is time-consuming and
expensive. Thermo Electron depends on developing patentable products and
obtaining and enforcing patent protection for its products in the United States
and overseas. Thermo Electron owns many U.S. and foreign patents, and intends to
apply for additional patents as appropriate to cover its products. Thermo
Electron may not obtain issued patents from any pending or future patent
applications owned by or licensed to Thermo Electron. In addition, the claims
allowed under any issued patents may not be broad enough to protect Thermo
Electron's technology.
Thermo Electron may incur significant expense in any legal proceedings to
protect its proprietary rights. In addition, third parties may seek to
challenge, invalidate, or circumvent any issued patents owned by or licensed to
us, and the rights granted under those patents may not provide competitive
advantages to Thermo Electron. Defending infringement and/or invalidity claims
would be expensive and divert management's attention. In addition, those claims
could result in awards of substantial damages, which could have a significant
adverse impact on Thermo Electron's results of operations, or court orders that
could effectively prevent Thermo Electron from making, using or selling its
products and services in the United States or abroad.
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<PAGE>
THE MERGER
GENERAL
We are furnishing this information statement-prospectus to you in connection
with the proposed merger of Ecotek Acquisition, a wholly-owned subsidiary of
Thermo Electron, with and into Thermo Ecotek. As used in this information
statement-prospectus, "we," "us" and "our" refer to Thermo Electron. Thermo
Ecotek has not reviewed or approved this information statement-prospectus.
In the merger, each outstanding share of Thermo Ecotek common stock will be
converted into 0.431 shares of Thermo Electron common stock. If the shares of
Thermo Electron common stock that you would receive in the merger includes a
fraction of a share of Thermo Electron common stock, Thermo Electron will
instead pay you an amount in cash equal to that fractional interest rather than
give you a fractional share of Thermo Electron common stock.
This information statement-prospectus is to inform you of the merger. Your
vote is not required for the merger. At a meeting held on January 28, 2000, the
board of directors of Thermo Electron resolved to acquire, by merger, the
minority interest in Thermo Ecotek. Thermo Electron intends to acquire this
minority interest by merging Ecotek Acquisition, a wholly-owned subsidiary of
Thermo Electron, into Thermo Ecotek. As of March 31, 2000, Thermo Electron owned
approximately 93.6% of the outstanding voting stock of Thermo Ecotek. Prior to
the merger, Thermo Electron will transfer all of the shares of Thermo Ecotek
stock that it owns to Ecotek Acquisition. Thermo Electron will cause the board
of directors of Ecotek Acquisition to resolve that the merger will be effective
on the filing of a certificate of ownership and merger in Delaware, which is
expected to occur on the 20(th) business day following the mailing of this
information statement-prospectus. Because Ecotek Acquisition will own
approximately 93.6% of the outstanding voting stock of Thermo Ecotek, the
resolution will be sufficient to authorize the merger under Delaware law, Thermo
Ecotek's certificate of incorporation and Thermo Ecotek's bylaws.
This information statement-prospectus also constitutes a prospectus of
Thermo Electron, which is a part of the registration statement on Form S-4 filed
by Thermo Electron with the Securities and Exchange Commission under the
Securities Act of 1933 in order to register the shares of Thermo Electron common
stock to be issued to Thermo Ecotek's stockholders in the merger based on the
exchange ratio of 0.431. The total number of shares of Thermo Electron common
stock Thermo Electron will issue in the merger, based on the outstanding number
of shares of Thermo Ecotek common stock on March 31, 2000, is approximately
986,569.
BACKGROUND: THERMO ELECTRON SPIN-OUTS AND REORGANIZATION PLANS
Thermo Electron initially began the process of "spinning out" subsidiaries,
or selling a minority interest in its wholly-owned subsidiaries to the public,
with the spin-out of Thermedics Inc. in 1983. Over the next fifteen years,
Thermo Electron spun out twenty additional subsidiaries and acquired the
majority interest in two companies that were already publicly traded when they
were acquired. The purposes of the spin-out process included incentivizing
management and employees of the subsidiary with subsidiary-level stock options
and other stock-based compensation, and allowing greater access to the capital
markets at the subsidiary level. However, Thermo Electron ultimately determined
that the creation of its many subsidiaries had generated confusion among the
public as to its structure and the relationship among the various companies
involved.
In August 1998, Thermo Electron announced a comprehensive reorganization
plan, the goals of which included the following:
- reducing the complexity of Thermo Electron's corporate structure by taking
private certain of its publicly traded subsidiaries;
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- improving competitiveness and improving management coordination;
- retaining and growing businesses that Thermo Electron believed had the
most growth and are the most profitable.
In May 1999, Thermo Electron announced its plan to expand its reorganization
plan by taking private four additional public subsidiaries, including Thermo
Ecotek. The announcement indicated that the transaction involving Thermo Ecotek
would be effected through an exchange of Thermo Electron common stock for the
common stock of Thermo Ecotek.
On January 31, 2000, Thermo Electron announced a revised reorganization
plan, which was the result of a thorough re-evaluation of Thermo Electron's
businesses and corporate structure. The reorganization plan calls for Thermo
Electron to take the following steps:
- acquire the public minority interest in most of its subsidiaries that have
minority investors;
- spin off its business that serves the health care industry with a range of
medical products for diagnosis and monitoring and its paper recycling and
paper making equipment business as dividends to Thermo Electron
stockholders; and
- sell several non-core businesses.
The primary goal of the reorganization is for Thermo Electron and each of
its spun-off subsidiaries to focus on their core businesses. The revised
reorganization plan also includes the proposed sale of Thermo Ecotek's Thermo
Trilogy subsidiary.
The component of the reorganization plan that involves taking some
subsidiaries private will reduce Thermo Electron's working capital by
approximately $325 million (of $1.45 billion in working capital at January 1,
2000). The results of operations of the businesses to be sold or spun off as
part of the reorganization are classified as discontinued operations in Thermo
Electron's financial statements included in its Annual Report on Form 10-K for
the year ended January 1, 2000. Revenues and loss from discontinued operations
were $1.83 billion and $111.5 million, respectively, in 1999. In addition,
Thermo Electron recorded a provision in 1999 of $50 million for the loss on
disposal of discontinued operations.
BACKGROUND: THE MERGER
The purpose of the merger is to enable Thermo Electron to acquire the public
minority interest in Thermo Ecotek as part of its overall reorganization and to
provide the public stockholders of Thermo Ecotek other than Thermo Electron with
0.431 shares of Thermo Electron common stock for each share of Thermo Ecotek
common stock held by them, with a cash payment for fractional shares. Throughout
this information statement-prospectus, the term "public stockholders" refers to
all Thermo Ecotek stockholders other than Thermo Electron. Although we no longer
consider Thermo Ecotek a core business under our new strategy, we expect to
retain Thermo Ecotek after the merger while we continue to evaluate how to best
exit this business and create maximum value for our stockholders. Thermo
Electron expects to sell Thermo Ecotek's Thermo Trilogy subsidiary.
In August 1998, Thermo Electron announced a comprehensive reorganization
and, in May 1999, it expanded and modified the reorganization plan. In
connection with the modified reorganization plan, Thermo Electron announced it
intended to acquire the minority interest in Thermo Ecotek through a negotiated
long-form merger with Thermo Ecotek. In November 1999, the board of directors of
Thermo Ecotek decided that, because Thermo Electron controlled approximately
93.6% of the outstanding common stock of Thermo Ecotek, it wanted to appoint a
special committee to act on behalf of and in the interests of its public
stockholders to evaluate the merits of and negotiate the proposed transaction.
The special committee would also make a recommendation to the full board of
directors of Thermo Ecotek on whether or not to approve the transaction. The
board appointed
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William H. Keough to act as the sole member of the special committee. The board
authorized the special committee to retain a legal advisor, an investment bank
to provide a fairness opinion and any other professional advisors that the
special committee decided were necessary or appropriate to assist it in carrying
out its duties. In January 2000, prior to commencement of negotiations with the
Thermo Ecotek special committee, Thermo Electron decided to structure the merger
as a short-form merger rather than pursue a negotiated merger in order to
expedite the merger and to complete it within the same time frame as other
proposed reorganization transactions. As a result, Thermo Ecotek voted to
disband the special committee.
PURPOSE AND REASONS FOR THE MERGER
The purpose of the merger is to acquire all of the outstanding shares of
Thermo Ecotek common stock as part of Thermo Electron's reorganization. In
deciding to acquire all of the outstanding shares of Thermo Ecotek common stock
at this time, Thermo Electron considered the following factors:
- recent public capital market trends affecting small companies;
- the latest trends in Thermo Ecotek's markets;
- Thermo Ecotek's debt, including debt owed to Thermo Electron;
- reducing the public information available to competitors about Thermo
Ecotek's business, which would result from Thermo Ecotek no longer having
to file reports with the SEC;
- eliminating other burdens on management from public reporting and other
tasks required of public companies, including, for example, the dedication
of time and resources of management and of the board to stockholder and
analyst inquiries, and investor and public relations;
- the costs of being a public company, including elimination of fees
associated with SEC reporting and the related legal and accounting fees,
that Thermo Electron anticipates could result in savings of approximately
$450,000 per year; and
- the ability of Thermo Ecotek's management to focus on long-term business
goals, as opposed to quarterly earnings, as a private company.
CERTAIN PROJECTED FINANCIAL DATA
Thermo Ecotek does not, as a matter of course, make public forecasts or
projections as to future sales, earnings or other income statement data, cash
flows or balance sheet and financial position information. In connection with
the merger, however, we had access to Thermo Ecotek's projections for its fiscal
year ending September 30, 2000. These projections were prepared by management of
Thermo Ecotek in the course of its regular business planning.
We have included a summary of these Thermo Ecotek projections below. These
projections do not reflect any of the effects of the merger or other changes
that may in the future be appropriate concerning Thermo Ecotek and its assets,
business, operations, properties, policies, corporate structure, capitalization
and management in light of the circumstances then existing. Furthermore, these
projections include the results from Thermo Ecotek's Thermo Trilogy subsidiary.
We treat Thermo Trilogy as discontinued operations in Thermo Ecotek's financial
statements that are included in this information statement-prospectus because of
Thermo Ecotek's plan to sell this business. We and Thermo Ecotek believe that
the assumptions were reasonable at the time Thermo Ecotek prepared the
projections, given the information known by our and Thermo Ecotek's management.
Thermo Ecotek did not prepare its projections for fiscal 2000 with a view
toward public disclosure or compliance with published guidelines of the SEC or
the American Institute of Certified Public Accountants regarding forward-looking
information or generally accepted accounting principles. Neither
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Thermo Ecotek's independent auditors, nor any other independent accountants,
have compiled, examined or performed any procedures with respect to the
prospective financial information contained in these projections nor have they
expressed any opinion or given any form of assurance on this information or its
achievability. They assume no responsibility for, and disclaim any association
with, this prospective financial information.
In preparing its projections for fiscal 2000, Thermo Ecotek necessarily made
numerous assumptions, many of which are beyond our or Thermo Ecotek's control
and may prove not to have been, or may no longer be, accurate. Except as
otherwise indicated, this information does not reflect revised prospects for
Thermo Ecotek's business, changes in general business and economic conditions or
any other transaction or event that has occurred or that may occur and that
Thermo Ecotek did not anticipate at the time it prepared this information,
including the proposed sale of Thermo Trilogy. Accordingly, this information is
not necessarily indicative of current values or future performance, which may be
significantly more favorable or less favorable than as set forth below, and you
should not regard our including these projections in this information
statement-prospectus as a representation that they will be achieved.
THE THERMO ECOTEK PROJECTIONS FOR FISCAL 2000 ARE NOT GUARANTEES OF
PERFORMANCE. THEY INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS. THE FUTURE
FINANCIAL RESULTS AND STOCKHOLDER VALUE OF THERMO ECOTEK MAY DIFFER MATERIALLY
FROM THOSE EXPRESSED IN THESE PROJECTIONS. MANY OF THE FACTORS THAT WILL
DETERMINE THESE RESULTS AND VALUES ARE BEYOND THERMO ECOTEK'S ABILITY TO CONTROL
OR PREDICT. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE PROJECTIONS. THERMO
ECOTEK'S FUTURE FINANCIAL RESULTS MAY VARY MATERIALLY FROM THESE PROJECTIONS.
NEITHER THERMO ECOTEK NOR WE INTEND TO UPDATE OR REVISE THESE PROJECTIONS.
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THERMO ECOTEK PROJECTIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR
2000
--------
<S> <C>
SELECTED INCOME STATEMENT DATA:
Revenues.................................................... $166,951
--------
Costs and Operating Expenses:
Cost of revenues.......................................... 124,864
Operating expenses........................................ 28,015
--------
152,879
--------
Operating Income............................................ 14,072
Interest Income............................................. 3,650
Interest Expense............................................ (3,435)
Equity in Loss of Affiliates................................ 120
Gain on Sale of Investments................................. --
Other Expense, Net.......................................... 80
--------
Income Before Provision for Income Taxes and Minority
Interest.................................................. 14,487
Provision for Income Taxes.................................. 5,180
Minority Interest Expense................................... 1,500
--------
Net Income.................................................. $ 7,807
========
SELECTED BALANCE SHEET DATA:
Accounts Receivable, Net.................................... $ 57,898
Inventories................................................. 19,940
Prepaid Income Taxes and Other Current Assets............... 3,481
--------
Total Current Assets Excluding Cash and Investments......... 81,319
--------
Property, Plant and Equipment:
Balance, beginning of year................................ 203,606
Additions................................................. 47,591
Depreciation expense...................................... (16,533)
Sales and retirements..................................... (90,000)
--------
Balance, End of Year...................................... 144,664
--------
Cost in Excess of Net Assets of Acquired Companies.......... 762
</TABLE>
CONFLICTS OF INTEREST
THERMO ELECTRON. In setting the exchange ratio, Thermo Electron's financial
interest was adverse to the financial interest of the public stockholders of
Thermo Ecotek. Thermo Electron set the exchange ratio on its own and without any
negotiations with Thermo Ecoteck.
THERMO ELECTRON'S DIRECTORS. Certain members of Thermo Electron's board of
directors own, or hold options to purchase, shares of Thermo Electron common
stock and/or shares of common stock of Thermo Ecotek. These positions and equity
interests presented these directors with actual or potential conflicts of
interest in determining the exchange ratio and the other terms of the merger.
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Officers and directors of Thermo Ecotek who own shares of Thermo Ecotek
common stock will receive shares of Thermo Electron common stock on the same
terms as all of the Thermo Ecotek public stockholders.
Several members of the board of directors and executive officers of Thermo
Ecotek are directors or officers of Thermo Electron and its other affiliates, as
set forth below:
- Brian D. Holt, the president, chief executive officer and a director of
Thermo Ecotek, is also the chief operating officer, energy and
environment, of Thermo Electron and a director of Thermo TerraTech Inc.,
The Randers Killam Group Inc. and ThermoRetec Corporation.
- Theo Melas-Kyriazi is the chief financial officer of both Thermo Ecotek
and Thermo Electron.
- Frank Jungers, the chairman of Thermo Ecotek's board of directors, is also
a director of Thermo Electron and ThermoQuest Corporation.
- William A. Rainville, a director of Thermo Ecotek, is also the chief
operating officer, recycling and resource recovery, of Thermo Electron and
a director of Thermo Fibergen Inc., Thermo Fibertek, Thermo TerraTech and
ThermoRetec.
Consequently, these directors and officers receive or have received
compensation not only from Thermo Ecotek but also from Thermo Electron and/or
its other affiliates.
As of January 31, 2000, members of the board of directors and the executive
officers of Thermo Ecotek collectively owned a total of 192,258 shares of Thermo
Ecotek common stock. These individuals will receive approximately 82,863 shares
of Thermo Electron common stock in the merger, based on the exchange ratio of
0.431.
In addition, as of January 31, 2000, members of the board of directors and
the executive officers of Thermo Ecotek collectively held options to acquire a
total of 423,800 shares of Thermo Ecotek common stock, with exercise prices
ranging from $5.50 to $19.33 per share, which will be assumed by Thermo Electron
and be converted into options to acquire shares of Thermo Electron common stock
on the same terms as all the other holders of Thermo Ecotek stock options. See
"--Effect of the Merger on Thermo Ecotek Stock Options and Debentures."
As of January 1, 2000, deferred units equal to 3,961 shares of Thermo Ecotek
common stock have accumulated under Thermo Ecotek's deferred compensation plan
for directors, which units will be converted into the right to receive 1,707
shares of Thermo Electron common stock (assuming an exchange ratio of 0.431).
See "--Deferred Compensation Plan for Directors."
INDEMNIFICATION AGREEMENTS. Thermo Electron has entered into separate
indemnification agreements with each of the members of the board of directors of
Thermo Ecotek. These agreements provide for indemnification of and advancement
of expenses to Thermo Ecotek directors directly by Thermo Electron in the event
that a director, because of his or her status as a director or officer of Thermo
Ecotek, or service as a director, officer or fiduciary of another company at the
request of Thermo Electron, is made or threatened to be made a party to any
action, suit or other proceeding, whether civil, criminal, administrative or
investigative, if the director acted in good faith and in a manner the director
reasonably believed to be in or not opposed to the best interests of Thermo
Electron. In addition, with respect to any criminal action or proceeding,
indemnification shall be made only if the director also had no reasonable cause
to believe his or her conduct was unlawful. In the case of any threatened,
pending or completed action, suit or proceeding by or in the right of Thermo
Electron, indemnification shall be made to the maximum extent permitted under
Delaware law.
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EFFECTS OF THE MERGER
Upon completion of the merger, Thermo Electron will have complete control
over the conduct of Thermo Ecotek's business and will have a 100% interest in
the net book value and net earnings of Thermo Ecotek. In addition, Thermo
Electron will receive the benefit of complete control over any future increases
in the value of Thermo Ecotek and will bear the complete risk of any losses
incurred in the operation of Thermo Ecotek and any decrease in the value of
Thermo Ecotek.
Upon completion of the merger, the public stockholders will no longer have
any interest in, and will not be stockholders of, Thermo Ecotek and will not
participate in Thermo Ecotek's future earnings and potential growth and will no
longer bear the risk of any decreases in the value of Thermo Ecotek. Once the
merger is consummated, public trading of Thermo Ecotek common stock will cease.
Thermo Electron intends to have the shares of Thermo Ecotek common stock
delisted from the American Stock Exchange promptly following the effective date
of the merger. Thermo Electron also intends to deregister the shares of Thermo
Ecotek under the Exchange Act. As a result, Thermo Ecotek will no longer be
required under the federal securities laws to file reports with the SEC and will
no longer be subject to the proxy rules under the Exchange Act.
As a condition to the completion of the merger, Thermo Electron will receive
an opinion from Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding
tax matters relating to the merger, including that the merger, more likely than
not, will be treated for federal income tax purposes as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code. Provided that
the merger does qualify as a reorganization, no gain or loss will generally be
recognized for federal income tax purposes by Thermo Ecotek stockholders upon
their receipt of shares of Thermo Electron common stock in exchange for their
shares of Thermo Ecotek common stock, except to the extent of cash received in
lieu of fractional shares. The opinion of Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C. is subject to the limitations and qualifications set forth in
the opinion, a copy of which is filed as Exhibit 8.1 to the registration
statement of which this information statement-prospectus forms a part, and is
based upon factual assumptions made by Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C. and representations made by Thermo Electron, Thermo Ecotek and
Ecotek Acquisition. Furthermore, the tax opinion is not binding on the Internal
Revenue Service. If the Internal Revenue Service succeeds in establishing that
the merger does not qualify as a tax-free reorganization, you will recognize
taxable gain or loss at the time of the merger based on the difference between
the value of the Thermo Electron shares you receive in the merger and the tax
basis of the Thermo Ecotek shares you exchange. IN VIEW OF THE COMPLEXITIES OF
FEDERAL INCOME AND OTHER TAX LAWS, YOU SHOULD CONSULT WITH A TAX ADVISOR
REGARDING, AMONG OTHER THINGS, THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX
CONSEQUENCES OF THE MERGER APPLICABLE TO YOUR SPECIFIC CIRCUMSTANCES. See
"FEDERAL INCOME TAX CONSEQUENCES."
CONDUCT OF THERMO ECOTEK'S BUSINESS AFTER THE MERGER
Although we no longer consider Thermo Ecotek a core business under our new
strategy, we expect to retain Thermo Ecotek after the merger while we continue
to evaluate how to best exit this business and create maximum value for our
stockholders. Thermo Electron does not currently have any commitment or
agreement for the sale of any of Thermo Ecotek's businesses. Additionally,
Thermo Electron does not currently contemplate any material change in the
composition of Thermo Ecotek's current management, except that Thermo Electron
intends to appoint a Board of Directors of Thermo Ecotek comprised solely of
members of Thermo Ecotek's management after the merger.
In connection with its reorganization, Thermo Electron currently intends to
acquire all of the outstanding common stock of Thermo Ecotek that it does not
currently own. If such transaction is completed, Thermo Ecotek will become a
wholly-owned subsidiary of Thermo Electron.
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Except as otherwise described in this information statement-prospectus,
Thermo Electron does not have, as of the date of this information
statement-prospectus, any specific plans or proposals for:
- any extraordinary corporate transaction involving Thermo Ecotek after the
completion of the merger;
- any sale or transfer of a material amount of assets currently held by
Thermo Ecotek after the completion of the merger, other that the sale of
its Thermo Trilogy subsidiary;
- any change in the Board of Directors or management of Thermo Ecotek;
- any material change in Thermo Ecotek's dividend rate or policy; or
- any other material change in Thermo Ecotek's corporate structure or
business.
CONDUCT OF THE BUSINESS OF THERMO ECOTEK IF THE MERGER IS NOT CONSUMMATED
It the merger is not consummated, the board of directors expects that Thermo
Ecotek's current management will continue to operate Thermo Ecotek's business
substantially as currently operated, while we continue to evaluate how to best
exit this business and create maximum value for Thermo Electron's stockholders.
See "--Conduct of Thermo Ecotek's Business After the Merger." No other
alternatives are currently being considered.
CONVERSION OF SECURITIES
At the effective time of the merger, each share of Thermo Ecotek common
stock, other than shares held in treasury by Thermo Ecotek, shares held by
Thermo Electron and shares held by Thermo Ecotek's public stockholders, if any,
who are entitled and who properly exercise their dissenters' rights under the
Delaware General Corporation Law, as described below under "--Dissenters' and
Appraisal Rights," will be automatically converted into the right to receive
0.431 shares of Thermo Electron common stock, subject to adjustment as set forth
below. From and after the effective time, all shares of Thermo Ecotek common
stock will no longer be outstanding and will be canceled and retired and will
cease to exist. Each holder of a stock certificate formerly representing shares
of Thermo Ecotek common stock will after the effective time cease to have any
rights with respect to the shares, other than the right to receive shares of
Thermo Electron common stock for their shares of Thermo Ecotek common stock upon
surrender of the stock certificate or in the case of stockholders who are
entitled to and who properly exercise their dissenters' rights, the right to
receive payment of the fair value of their shares.
In the merger, Thermo Ecotek stockholders will receive 0.431 shares of
Thermo Electron common stock for each share of Thermo Ecotek common stock owned
by them, rounded down to the nearest whole share, without interest, plus cash
for any fractional share of Thermo Electron common stock. Holders of what would
have been a fractional share of Thermo Electron common stock will receive cash
equal to the closing price of Thermo Electron's common stock on the trading day
preceding the closing date, multiplied by the fraction of the share of Thermo
Electron common stock they would have received, rounded to the nearest whole
cent.
Based on the exchange ratio of 0.431 shares of Thermo Electron common stock
for every share of Thermo Ecotek common stock, Thermo Ecotek public stockholders
would hold approximately 0.6% of the outstanding Thermo Electron common stock
following the merger. Assuming both an exchange ratio of 0.431 and the exercise
of all outstanding Thermo Ecotek stock options and debentures, which will, after
the merger, be exercisable for or convertible into Thermo Electron common stock,
Thermo Ecotek public stockholders would hold approximately 1.7% of the
outstanding Thermo Electron common stock following the merger.
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<PAGE>
You will not receive interest on the consideration payable upon the
surrender of your stock certificates. Payment of the exchange ratio to a person
who is not the registered holder of a stock certificate is conditioned upon the
surrendered certificate being properly endorsed and otherwise in proper form for
transfer, as determined by the exchange agent. Further, the person requesting
payment will be required to pay any transfer or other taxes required because of
the payment to a person other than the registered holder of the stock
certificate, or establish to the satisfaction of the exchange agent that any
necessary tax has been paid or is not payable. Six months after the effective
time, Thermo Electron may require the exchange agent to deliver to it any shares
of Thermo Electron common stock and any cash in lieu of fractional shares made
available to the exchange agent which have not been disbursed to Thermo Ecotek
common stockholders. Neither the exchange agent nor any party to the merger will
be liable to any holder of stock certificates formerly representing shares for
any amount paid pursuant to any applicable abandoned property, escheat or
similar law.
At the effective time, each share of common stock of Ecotek Acquisition will
automatically be converted into one share of common stock of the surviving
corporation. All shares held in treasury by Thermo Ecotek will, at the effective
time, be canceled and cease to exist.
EFFECT OF THE MERGER ON THERMO ECOTEK STOCK OPTIONS AND DEBENTURES
Thermo Ecotek has, from time to time, issued options to acquire shares of
Thermo Ecotek common stock pursuant to Thermo Ecotek's Incentive Stock Option
Plan, Directors Stock Option Plan, Amended and Restated Equity Incentive Plan
and Amended and Restated Nonqualified Stock Option Plan. On the effective date
of the merger, each outstanding option to acquire Thermo Ecotek shares under
Thermo Ecotek's stock option plans, whether or not exercisable, will be assumed
by Thermo Electron. Each stock option will continue to have, and be subject to,
the same terms and conditions, including the vesting of shares issuable upon the
exercise thereof, as were applicable to the stock option immediately prior to
the effective date of the merger, except that:
- each Thermo Ecotek stock option will be exercisable (or will become
exercisable in accordance with its terms) for that number of whole shares
of Thermo Electron common stock equal to the product of the number of
shares of Thermo Ecotek common stock that were issuable upon exercise of
such stock option immediately prior to the effective date of the merger
multiplied by the exchange ratio, rounded down to the nearest whole number
of shares of Thermo Electron common stock, and
- the per share exercise price for the shares of Thermo Electron common
stock issuable upon exercise of such assumed stock option will be equal to
the quotient determined by dividing the exercise price per share of Thermo
Ecotek common stock at which such stock option was exercisable immediately
prior to the effective date of the merger by the exchange ratio, rounded
up to the nearest whole cent.
On the effective date of the merger, each outstanding option to purchase
shares of Thermo Ecotek common stock under Thermo Ecotek's employees' stock
purchase plan will also be assumed by Thermo Electron. Each employee stock
purchase plan stock option so assumed by Thermo Electron will continue to have,
and be subject to, the same terms and conditions as set forth in the employee
stock purchase plan immediately prior to the effective date of the merger,
except that:
- the assumed employee stock purchase plan stock option shall be exercisable
for shares of Thermo Electron;
- the purchase price per share of Thermo Electron common stock shall be the
lower of (a) 85% of (x) the per share market value of the shares of Thermo
Ecotek common stock on the grant date of the employee stock purchase plan
stock option divided by (y) the exchange ratio, with the resulting price
rounded up to the nearest whole cent, and (b) 85% of the market value of
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Thermo Electron common stock as of the exercise date of the employee stock
purchase plan stock option; and
- the $25,000 limit under Section 9.2(i) of the employee stock purchase plan
shall be applied by taking into account Thermo Electron's assumption of
the employee stock purchase plan stock options in accordance with
Section 423(b)(8) of the Internal Revenue Code of 1986, as amended, and
applicable regulations.
After the merger, Thermo Ecotek's non-interest bearing subordinated
convertible debentures due March 15, 2001 and its 4.875% subordinated
convertible debentures due April 15, 2004, will be convertible into shares of
Thermo Electron common stock, instead of Thermo Ecotek common stock. The
debentures are now convertible into Thermo Ecotek common stock at a price of
$13.56 and $16.50 per share, respectively. A total of $1,820,000 principal
amount of the non-interest bearing debentures and a total of $44,950,000
principal amount of the 4.875% debentures was outstanding as of January 1, 2000.
Holders of the debentures will not have the right to require Thermo Ecotek to
redeem the debentures as a result of the merger. With an exchange ratio of
0.431, the non-interest bearing debentures would be convertible into 57,852
shares of Thermo Electron common stock at a conversion price of $31.46 per share
and the 4.875% debentures would be convertible into 1,174,243 shares of Thermo
Electron common stock at a conversion price of $38.28 per share.
DEFERRED COMPENSATION PLAN FOR DIRECTORS
On the effective date of the merger, Thermo Ecotek's deferred compensation
plan for directors will terminate, and Thermo Ecotek will distribute to each
participant Thermo Electron common stock in an amount equal to the balance of
stock units credited as of the effective date of the merger multiplied by the
exchange ratio or the equivalent value of Thermo Electron common stock in cash.
Mr. Jungers currently has deferred units equal to 3,961 shares of Thermo Ecotek
common stock under the deferred compensation plan. As a result, based on the
exchange ratio of 0.431, he will receive 1,707 shares of Thermo Electron common
stock on the effective date of the merger.
TRANSFER OF SHARES
Shares of Thermo Ecotek common stock will not be transferred on the stock
transfer books at or after the effective time. If certificates representing such
shares are presented to Thermo Ecotek after the effective time, the shares will
be canceled and exchanged for shares of Thermo Electron common stock and cash in
lieu of fractional shares.
CONDITIONS TO THE MERGER
The completion of the merger depends upon meeting a number of conditions,
including the following:
- the absence of any statute, injunction or other order that has the effect
of making the merger illegal or otherwise prohibits consummation of the
merger;
- the effectiveness of the registration statement of which this information
statement-prospectus forms a part and the absence of an order suspending
the effectiveness of the registration statement;
- the authorization for issuance on the New York Stock Exchange of all
shares of Thermo Electron common stock issuable under the merger;
- the receipt by Thermo Electron of a tax opinion regarding certain tax
matters relating to the merger, including that the merger, more likely
than not, will be treated for federal income tax
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purposes as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code; and
- no event that would result in the issuance of the rights to purchase
Thermo Electron's Series B Junior Participating Preferred Stock shall have
occurred.
ACCOUNTING TREATMENT
The merger, if completed, will be accounted for as the acquisition of a
minority interest by Thermo Electron using the purchase method of accounting.
REGULATORY APPROVALS
There are no federal or state regulatory approvals required that have not
already been obtained, nor any regulatory requirements not already complied
with, in connection with the consummation of the merger by Thermo Electron,
Ecotek Acquisition or Thermo Ecotek, except for (1) the requirements of the
Delaware General Corporation Law relating to completion of the merger and
(2) the requirements of the federal and state securities laws.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF THERMO ECOTEK AND THERMO
ELECTRON
The shares of Thermo Electron common stock to be issued in the merger will
be registered under the Securities Act of 1933, as amended, and will be freely
transferable under the Securities Act, except for shares of Thermo Electron
common stock issued to any person who is deemed to be an "affiliate" of either
of Thermo Electron or Thermo Ecotek at the time of the merger. Persons who may
be deemed to be affiliates include individuals or entities that control, are
controlled by, or are under the common control of Thermo Electron or Thermo
Ecotek and may include some of Thermo Electron's and Thermo Ecotek's respective
officers and directors, as well as the principal stockholders of Thermo Electron
or Thermo Ecotek. Affiliates may not sell their shares of Thermo Electron common
stock acquired in the merger except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares;
- an exemption under paragraph (d) of Rule 145 under the Securities Act; or
- any other applicable exemption under the Securities Act.
Thermo Electron's registration statement on Form S-4, of which this
information statement-prospectus forms a part, does not cover the resale of
shares of Thermo Electron common stock to be received by affiliates in the
merger.
LISTING ON THE NEW YORK STOCK EXCHANGE OF THERMO ELECTRON COMMON STOCK TO BE
ISSUED IN THE MERGER
Thermo Electron will use its best efforts to cause the shares of its common
stock to be issued in connection with the merger to be approved for listing on
the New York Stock Exchange before the completion of the merger.
DISSENTERS' AND APPRAISAL RIGHTS
If the merger is consummated, a holder of record of Thermo Ecotek stock on
the date of making a demand for appraisal, as described below, will be entitled
to have those shares appraised by the Delaware Court of Chancery under
Section 262 of the Delaware corporation statute and to receive payment for the
"fair value" of those shares instead of the consideration provided for in the
merger. In order to be eligible to receive this payment, however, a stockholder
must (1) continue to hold his or
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her shares through the time of the merger and (2) strictly comply with the
procedures discussed under Section 262.
THE STATUTORY RIGHT OF APPRAISAL GRANTED BY SECTION 262 REQUIRES STRICT
COMPLIANCE WITH THE PROCEDURES IN SECTION 262. FAILURE TO FOLLOW ANY OF THESE
PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF DISSENTERS' RIGHTS UNDER
SECTION 262. THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL PROVISIONS OF
SECTION 262. The following summary is not a complete statement of Section 262 of
the Delaware corporation statute, and is qualified in its entirety by reference
to Section 262, which is incorporated herein by reference, together with any
amendments to the laws that may be adopted after the date of this information
statement-prospectus. A copy of Section 262 is attached as Appendix A to this
information statement-prospectus.
NOTICE REQUIREMENTS. Under Section 262, where a merger is accomplished
pursuant to Section 253 of the Delaware General Corporation Law, either before
or within ten days after the effective date of the merger, Thermo Ecotek, as the
surviving corporation, is required to notify each stockholder of Thermo Ecotek
entitled to appraisal rights of the merger and that appraisal rights are
available to the stockholder. Such notice must also include a copy of
Section 262 and, if given on or after the effective date of the merger, specify
the effective date of the merger.
DEMAND FOR APPRAISAL. In order to exercise appraisal rights, a stockholder
must, within twenty days after the date of mailing of the required notice,
demand in writing from the surviving corporation an appraisal of his, her or its
shares of Thermo Ecotek common stock. Such demand will be sufficient if it
reasonably informs Thermo Ecotek of the identity of the stockholder and that the
stockholder intends to demand an appraisal of the fair value of his, her or its
shares of Thermo Ecotek common stock. Failure to make such demand on or before
the expiration of such twenty day period will foreclose a stockholder's rights
to appraisal. All demands should be delivered to Thermo Ecotek Corporation, c/o
Thermo Electron Corporation, 81 Wyman Street, P.O. Box 9046, Waltham,
Massachusetts, 02454, Attention: Corporate Secretary.
Only a record holder of shares of Thermo Ecotek stock on the date of making
a written demand for appraisal who continuously holds those shares through the
time of the merger is entitled to seek appraisal. Demand for appraisal must be
executed by or for the holder of record, fully and correctly, as that holder's
name appears on the holder's stock certificates representing shares of Thermo
Ecotek stock. If Thermo Ecotek stock is owned of record in a fiduciary capacity
by a trustee, guardian or custodian, the demand should be made in that capacity.
If Thermo Ecotek stock is owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be made by or for all owners of
record.
An authorized agent, including an agent for one or more joint owners, may
execute the demand for appraisal for a holder of record; that agent, however,
must identify the record owner or owners and expressly disclose in the demand
that the agent is acting as agent for the record owner or owners of the shares.
If a stockholder holds shares of Thermo Ecotek stock through a broker who in
turn holds the shares through a central securities depository nominee such as
Cede & Co., a demand for appraisal of such shares must be made by or on behalf
of the depository nominee and must identify the depository nominee as record
holder.
A record holder such as a broker, fiduciary, depository or other nominee who
holds shares of Thermo Ecotek stock as a nominee for more than one beneficial
owner, some of whom desire to demand appraisal, may exercise appraisal rights on
behalf of those beneficial owners with respect to the shares of Thermo Ecotek
stock held for those beneficial owners. In that case, the written demand for
appraisal should state the number of shares of Thermo Ecotek stock covered by
it. Unless a demand for appraisal specifies a number of shares, the demand will
be presumed to cover all shares of Thermo Ecotek stock held in the name of the
record owner.
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BENEFICIAL OWNERS WHO ARE NOT RECORD OWNERS AND WHO INTEND TO EXERCISE
APPRAISAL RIGHTS SHOULD INSTRUCT THE RECORD OWNER TO COMPLY WITH THE STATUTORY
REQUIREMENTS WITH RESPECT TO THE EXERCISE OF APPRAISAL RIGHTS WITHIN
TWENTY DAYS OF THE MAILING OF THE REQUIRED NOTICE.
FILING OF PETITION. Within 120 days after the effective date of the merger,
any stockholder who has complied with the applicable provisions of Section 262
will be entitled, upon written request, to receive from Thermo Ecotek a
statement setting forth the aggregate number of shares of common stock with
respect to which demands for appraisal were received by Thermo Ecotek and the
number of holders of such shares. Thermo Ecotek must mail this statement within
ten days after it receives the written request or within ten days after the
expiration of the period for the delivery of demands as described above,
whichever is later.
Within 120 days after the effective date of the merger, the surviving
corporation or any stockholder who has complied with the requirements of
Section 262 may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of the shares of Thermo Ecotek stock held by all
stockholders seeking appraisal. A dissenting stockholder must serve a copy of
the petition on Thermo Electron. If no petition is filed by either Thermo Ecotek
or any dissenting shareholder within the 120-day period, the rights of all
dissenting stockholders to appraisal will cease.
Stockholders seeking to exercise appraisal rights should not assume that the
surviving corporation will file a petition with respect to the appraisal of the
fair value of their shares or that the surviving corporation will initiate any
negotiations with respect to the fair value of those shares. The surviving
corporation is under no obligation to, and has no present intention to, take any
action in this regard. Accordingly, stockholders who wish to seek appraisal of
their shares should initiate all necessary action with respect to the perfection
of their appraisal rights within the time periods and in the manner prescribed
in Section 262. FAILURE TO FILE THE PETITION ON A TIMELY BASIS WILL CAUSE THE
STOCKHOLDER'S RIGHT TO AN APPRAISAL TO CEASE.
HEARING IN CHANCERY COURT. If a petition for an appraisal is filed in a
timely manner, at the hearing on the petition, the Delaware Court of Chancery
will determine which stockholders are entitled to appraisal rights and will
appraise the shares of Thermo Ecotek stock owned by those stockholders. The
Delaware Court may require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Delaware Court may dismiss the proceedings as to such
stockholder. The court will determine the fair value of those shares, exclusive
of any element of value arising from the accomplishment or expectation of the
merger, together with a fair rate of interest, to be paid, if any, upon the fair
value. The Court of Chancery may determine the cost of the appraisal proceeding
and assess it against the parties as the Court deems equitable.
Although Thermo Ecotek believes that the consideration to be received by its
stockholders for their shares of Thermo Ecotek common stock is fair, no
representation is made as to the outcome of the appraisal of fair value as
determined by the court and stockholders should recognize that such an appraisal
could result in a determination of a value that is higher or lower than, or the
same as, the merger consideration. Moreover, Thermo Electron does not anticipate
offering more than the merger consideration to any stockholder exercising
appraisal rights and reserves the right to assert, in any appraisal proceeding,
that, for purposes of Section 262, the "fair value" of a share of Thermo Ecotek
common stock is less than the merger consideration.
DETERMINATION OF FAIR VALUE. In determining "fair value," the Delaware
Court is required to take into account all relevant factors. In WEINBERGER V.
UOP, INC., the Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating that
"proof of value by any techniques or methods which are generally considered
acceptable in the
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financial community and otherwise admissible in court" should be considered and
that "[f]air price obviously requires consideration of all relevant factors
involving the value of a company." The Delaware Supreme Court has stated that in
making this determination of fair value the court must consider market value,
asset value, dividends, earnings prospects, the nature of the enterprise and any
other facts which could be ascertained as of the date of the merger which throw
any light on future prospects of the merged corporation.
Section 262 provides that fair value is to be "exclusive of any element of
value arising from the accomplishment or expectation of the merger." In CEDE &
CO. V. TECHNICOLOR, INC., the Delaware Supreme Court stated that such exclusion
is a "narrow exclusion [that] does not encompass known elements of value," but
which rather applies only to the speculative elements of value arising from such
accomplishment or expectation. In WEINBERGER, the Delaware Supreme Court
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the date
of the merger and not the product of speculation, may be considered."
EXPENSES. Each dissenting stockholder is responsible for his or her
attorneys' and expert witness expenses, although upon application of a
dissenting stockholder, the Court may order that all or a portion of the
expenses incurred by any dissenting stockholder in connection with the appraisal
proceeding (including, without limitation, reasonable attorney's fees and the
fees and expenses of experts) be charged pro rata against the value of all
shares of Thermo Ecotek stock entitled to appraisal. In the absence of a court
determination or assessment, each party bears its own expenses.
NO RIGHT TO VOTE OR RECEIVE DIVIDENDS. Any stockholder who has demanded
appraisal in compliance with Section 262 will not, after the merger, be entitled
to vote such stock for any purpose or receive payment of dividends or other
distributions, if any, on Thermo Ecotek stock, except for dividends or
distributions, if any, payable to stockholders of record at a date prior to the
merger.
WITHDRAWAL. A stockholder may withdraw a demand for appraisal and accept
Thermo Electron common stock at any time within 60 days after the effective date
of the merger, or thereafter may withdraw a demand for appraisal with the
written approval of Thermo Ecotek. Notwithstanding the foregoing, if an
appraisal proceeding is properly instituted, it may not be dismissed as to any
stockholder without the approval of the Delaware Court of Chancery, and any such
approval may be conditioned on the Court of Chancery's deeming the terms to be
just. If, after the merger, a holder of Thermo Ecotek stock who had demanded
appraisal for his shares fails to perfect or loses his right to appraisal, those
shares will be treated as if they were converted into Thermo Electron common
stock at the time of the merger.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF THE DELAWARE CORPORATE LAW,
ANY THERMO ECOTEK STOCKHOLDER WHO IS CONSIDERING EXERCISING APPRAISAL RIGHTS
SHOULD CONSULT A LEGAL ADVISOR.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax considerations relevant to the merger that are applicable to holders
of Thermo Ecotek common stock. This discussion is based on currently existing
provisions of the Internal Revenue Code, existing Treasury Regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change. Any such change, which may or may not be retroactive,
could alter the tax consequences to Thermo Electron, Thermo Ecotek or Thermo
Ecotek stockholders as described herein.
Thermo Ecotek stockholders should be aware that this discussion does not
deal with all federal income tax considerations that may be relevant to
particular Thermo Ecotek stockholders in light of their particular
circumstances, including insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign persons, stockholders who own
their stock as part of a hedge, appreciated financial position, straddle or
conversion transaction, stockholders who do not own their stock as a capital
asset and stockholders who have acquired their stock upon the exercise of
employee options or otherwise as compensation. In addition, this discussion does
not address the following topics:
- the tax consequences of the merger under foreign, state or local tax laws;
- the tax consequences of the assumption by Thermo Electron of outstanding
options to acquire Thermo Ecotek common stock; or
- the tax consequences to holders of the debentures.
Accordingly, Thermo Ecotek stockholders are urged to consult their own tax
advisors as to the specific tax consequences of the merger, including the
applicable federal, state, local and foreign tax consequences to them of the
merger.
As a condition to the consummation of the merger, Thermo Electron will
receive an opinion from Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
regarding certain federal tax matters relating to the merger, including that the
merger, more likely than not, will be treated for federal income tax purposes as
a tax-free reorganization under Section 368(a) of the Internal Revenue Code. In
addition, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. has issued an
opinion in connection with the filing of this registration statement, attached
as Exhibit 8.1 to the registration statement of which this information
statement-prospectus forms a part. This opinion addresses the same federal tax
matters that will be the subject of the opinion to be delivered at the closing
of the merger, but is based upon the law as in effect on the date of the
registration statement and on the assumption that the merger will in fact be
completed. The opinion that is attached as an exhibit is, and the closing
opinion will be, subject to the assumptions, limitations and qualifications set
forth in the opinion, and is or will be based upon factual representations made
by the Thermo Electron, Ecotek Acquisition and Thermo Ecotek, including, without
limitation, the matters discussed below.
Regulations under Section 368 require, in order to obtain tax-free
reorganization status, that at least one historic business of Thermo Ecotek be
continued following the merger or, alternatively, that a significant portion of
Thermo Ecotek's historic business assets be used in a business following the
merger. The regulations contain an example in which, as part of the plan of
reorganization, the business of the acquired company is immediately sold,
resulting in failure to qualify for tax-free reorganization treatment.
Thermo Electron has indicated its intent to sell Thermo Ecotek's Thermo
Trilogy subsidiary, and in March 2000, Thermo Ecotek suspended operations at its
Delano, California electric power generation facilities. However, Thermo
Electron intends to continue to operate Thermo Ecotek's other businesses,
including its other electric power-generating facilities, while Thermo Electron
continues to evaluate how to best exit these businesses and obtain maximum value
for stockholders. There is no current plan or agreement to sell such other
businesses immediately or on any fixed timetable.
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The opinions of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. are
summarized as follows:
The merger, more likely than not, will be treated for federal income tax
purposes as a tax-free reorganization under Section 368(a) and will result in
the following federal income tax consequences, subject to the assumptions,
limitations and qualifications referred to in this section and in the tax
opinion:
- No gain or loss will be recognized by Thermo Electron, Ecotek Acquisition
or Thermo Ecotek as a result of the merger;
- No gain or loss will be recognized by Thermo Ecotek stockholders upon the
exchange of Thermo Ecotek common stock solely for Thermo Electron common
stock in the merger, except to the extent of cash received in lieu of a
fractional share of Thermo Electron common stock;
- A Thermo Ecotek stockholder receiving cash in lieu of a fractional share
of Thermo Electron common stock in the merger will recognize gain or loss
measured by the difference between the amount of cash received and the
basis in such fractional share;
- The tax basis of Thermo Electron common stock received by Thermo Ecotek
stockholders in the merger will be equal to the tax basis of Thermo Ecotek
common stock exchanged therefor in the merger, excluding any basis
allocable to a fractional share of Thermo Electron common stock for which
cash was received and gain recognized;
- The holding period for the shares of Thermo Electron common stock received
by each Thermo Ecotek stockholder in the merger will include the holding
period for the shares of Thermo Ecotek common stock exchanged therefor in
the merger, provided that the shares of Thermo Ecotek common stock are
held as capital assets at the effective time; and
- In general, a Thermo Ecotek stockholder who exercises statutory appraisal
rights will recognize gain or loss measured by the difference between the
amount of cash received and the basis in the Thermo Ecotek common stock
exchanged therefor. Any such stockholder should consult with its tax
advisor for a full understanding of the tax consequences of the receipt of
cash in respect of appraisal rights pursuant to the merger.
The parties will not request a ruling from the Internal Revenue Service in
connection with the merger. Thermo Ecotek stockholders should be aware that the
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. tax opinions described above
do not bind the Internal Revenue Service and the IRS is therefore not precluded
from successfully asserting a contrary opinion. A successful IRS challenge to
the reorganization status of the merger would result in Thermo Ecotek
stockholders recognizing taxable gain or loss with respect to each share of
Thermo Ecotek common stock surrendered equal to the difference between the
stockholder's basis in such share and the fair market value, as of the effective
time, of Thermo Electron common stock received in exchange therefor. In such
event, a stockholder's tax basis in Thermo Electron common stock so received
would equal its fair market value as of the effective time, and the
stockholder's holding period for such stock would begin the day after the
merger.
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INFORMATION ABOUT THERMO ELECTRON, THERMO ECOTEK
AND ECOTEK ACQUISITION
THERMO ELECTRON
Thermo Electron develops, manufactures and sells measurement and detection
instruments that its customers use to monitor, collect, and analyze data. Thermo
Electron, through its majority-owned subsidiary Thermo Ecotek, also operates
electric power generation facilities.
On January 31, 2000, Thermo Electron announced that its board of directors
had authorized management to proceed with a major reorganization of the
operations of Thermo Electron and its subsidiaries, including Thermo Ecotek. As
part of this reorganization, Thermo Electron plans to:
- acquire the minority interests in most of its public subsidiaries;
- spin off its business that serves the health care industry with a range of
medical products for diagnosis and monitoring, and its paper recycling and
papermaking equipment business; and
- sell various non-core businesses.
The primary goal of the reorganization plan is for Thermo Electron and each
of its spun-off subsidiaries to focus on their core businesses. The purpose of
the merger described in this information statement-prospectus is to allow Thermo
Electron to acquire the minority public interest in Thermo Ecotek as part of
Thermo Electron's reorganization.
Although we no longer consider Thermo Ecotek a core business under our new
strategy, we expect to retain Thermo Ecotek after the merger while we continue
to evaluate how to best exit that business and create maximum value for our
stockholders.
Thermo Electron's principal executive offices are located at 81 Wyman
Street, Waltham, Massachusetts 02454-9046, and its telephone number is
(781) 622-1000.
THERMO ECOTEK
Thermo Ecotek operates independent electric power-generating facilities
through joint ventures, limited partnerships, or wholly owned subsidiaries as
well as a natural gas gathering, processing, storage and marketing business. As
part of Thermo Electron's corporate reorganization, announced on January 31,
2000, Thermo Ecotek expects to sell its biopesticides subsidiary, Thermo Trilogy
Corporation.
Thermo Ecotek's principal executive offices are located at 245 Winter
Street, Waltham, Massachusetts 02451-8709, and its telephone number is
(781) 622-1000.
ECOTEK ACQUISITION
Ecotek Acquisition is a newly-formed Delaware corporation organized by
Thermo Electron for the sole purpose of effecting the merger. Ecotek Acquisition
has not conducted any prior business.
Ecotek Acquisition's principal executive offices are located at 81 Wyman
Street, Waltham, Massachusetts 02454-9046, and its telephone number is
(781) 622-1000.
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COMPARISON OF RIGHTS OF HOLDERS OF
THERMO ECOTEK AND THERMO ELECTRON COMMON STOCK
This section of the information statement-prospectus describes certain
differences between the rights of holders of Thermo Ecotek common stock and
Thermo Electron common stock. While we believe that the description covers the
material differences between the two, this summary may not contain all of the
information that is important to you. You should carefully read this entire
document and the other documents we refer to for a more complete understanding
of the differences between being a stockholder of Thermo Ecotek and being a
stockholder of Thermo Electron.
As a stockholder of Thermo Ecotek, your rights are governed by Thermo
Ecotek's Certificate of Incorporation and Thermo Ecotek's Bylaws. After
completion of the merger, you will become a stockholder of Thermo Electron. As a
Thermo Electron stockholder, your rights will be governed by Thermo Electron's
Certificate of Incorporation and Thermo Electron's Bylaws. Thermo Electron and
Thermo Ecotek are each incorporated under the laws of the State of Delaware and
accordingly, your rights as a stockholder will continue to be governed by the
Delaware General Corporation Law after completion of the merger.
CLASSES OF COMMON STOCK OF THERMO ECOTEK AND THERMO ELECTRON
Thermo Electron and Thermo Ecotek each has only one class of common stock
issued and outstanding. There are 350,000,000 shares of Thermo Electron common
stock authorized, and Thermo Ecotek currently has 50,000,000 shares of common
stock authorized. As of March 31, 2000, there were 156,904,025 outstanding
shares of Thermo Electron common stock, and an aggregate of 28,330,580 shares
reserved for issuance upon conversion of convertible debentures and exercise of
options. As of March 31, 2000, there were 35,982,954 outstanding shares of
Thermo Ecotek common stock, and an aggregate of 3,869,605 shares reserved for
issuance upon conversion of convertible debentures and exercise of options.
Thermo Electron and Thermo Ecotek each has a large number of shares
available for issuance that has been authorized but not yet issued. Each of
Thermo Electron and Thermo Ecotek can issue up to its authorized number of
shares of common stock without going to stockholders to ask for approval of an
increase in its authorized shares, except in the following circumstances. Each
of Thermo Electron and Thermo Ecotek is subject to the stockholder approval
requirements of the stock exchanges on which its common stock is traded relating
to issuance of common stock. The New York Stock Exchange, on which Thermo
Electron common stock is listed, requires that Thermo Electron obtain
stockholder approval for the listing of shares in the following cases:
- issuing more than 20% of its outstanding common stock in a transaction or
series of related transactions, other than a public offering for cash or a
private financing involving the sale of common stock for cash at a price
at least equal to the greater of book or market value of the common stock;
or
- issuing more than one percent of its common stock to a director, officer
or substantial securityholder of Thermo Electron, or any of their
affiliates, except that in the case of substantial securityholders only,
the limit is increased to five percent if the sale of stock is for cash at
a price at least equal to the greater of book or market value of the
common stock.
The American Stock Exchange, on which the Thermo Ecotek common stock is
listed, requires that Thermo Ecotek obtain stockholder approval for the listing
of shares in the following cases:
- issuing more than 20% of its common stock for cash for less than the
greater of book or market value of the common stock;
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- issuing more than five percent of its common stock in an acquisition if
any director, officer or substantial securityholder of Thermo Ecotek
individually has a five percent, or, collectively, a ten percent interest
in the company or assets being acquired or the consideration to be paid in
the acquisition; or
- issuing more than 20% of its common stock in an acquisition.
In addition, the Delaware General Corporation Law would require Thermo
Electron and Thermo Ecotek to obtain stockholder approval to authorize a merger
in which Thermo Electron or Thermo Ecotek, as the case may be, was (1) the
surviving corporation and (2) obligated under the merger agreement to issue more
than 20% of its shares outstanding immediately before the effective date of the
merger.
Accordingly, there are restrictions on the number of shares Thermo Electron
and Thermo Ecotek can issue without stockholder approval in these circumstances.
Thermo Electron has authorized a class of 50,000 shares of preferred stock,
of which Thermo Electron currently has 40,000 shares designated as Series B
junior participating preferred stock. The preferred stock is described below
under "Preferred Stock."
CLASSIFIED BOARD OF DIRECTORS
Delaware law provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. Thermo Electron's board of
directors is divided into three classes, as nearly equal in size as possible,
with one class elected annually. Thermo Electron directors are elected for a
term of three years. The term of each director is subject to the election and
qualification of the director's successor and to the director's earlier death,
resignation or removal. Thermo Electron's classified board of directors may make
it more difficult for a third party to gain control of Thermo Electron.
Thermo Ecotek's board of directors is not divided into different classes.
Members of Thermo Ecotek's board of directors are elected by a majority of the
votes cast at the annual meeting of the stockholders. Thermo Ecotek directors
are elected until the next annual meeting of the stockholders and until their
successors are elected and qualified or until their earlier resignation or
removal.
The classified structure of Thermo Electron's board of directors serves to
ensure continuity and stability in a corporation's leadership in part because,
at any time, at least two-thirds of the board has had prior experience on the
board. The structure also would moderate the pace of any change in control of
Thermo Electron because all directors' terms do not expire at the same time,
which extends the time required to elect a majority of the board.
NUMBER OF DIRECTORS
Thermo Electron's board of directors currently consists of nine directors.
The number of directors on Thermo Electron's board is determined by resolution
of the board, but cannot be less than three.
Thermo Ecotek's board of directors currently consists of five directors. The
number of directors on Thermo Ecotek's board cannot be less than three nor more
than thirteen. The exact number of directors is fixed from time to time by the
board of directors or by the stockholders at an annual meeting.
Because there are more directors on Thermo Electron's board than there are
on Thermo Ecotek's board, more votes must be obtained in order for a vote to be
approved or denied by Thermo Electron's board.
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REMOVAL OF DIRECTORS
Thermo Ecotek directors, or the entire Thermo Ecotek board, may be removed
with or without cause by the affirmative vote of the holders of a majority of
the shares of Thermo Ecotek common stock then entitled to vote at an election of
directors.
Neither the Certificate of Incorporation nor the Bylaws of Thermo Electron
contain an explicit procedure for the removal of a member of the board of
directors. Delaware law provides that unless otherwise provided in the
certificate of incorporation of a company, a director of a classified board such
as Thermo Electron's can be removed only for cause, by the holders of a majority
of the shares then entitled to vote at an election of directors of such company.
This means that, unlike for removal of a member of Thermo Ecotek's board, there
must be a good reason for removing a member of Thermo Electron's board, and that
members of Thermo Electron's board cannot simply be removed for no reason. This
may make it harder to remove a member of Thermo Electron's board than it would
be to remove a member of Thermo Ecotek's board.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Except as otherwise required by the Certificate of Incorporation or the
Delaware General Corporation Law, any vacancies in Thermo Electron's and Thermo
Ecotek's boards of directors, however occurring, or any newly-created
directorship resulting from an increase in the number of seats on the board of
directors, may be filled by vote of a majority of the directors then in office,
even if less than a quorum, or by the sole remaining director. Newly created
directorships for Thermo Ecotek may also be filled by stockholders at the annual
meeting or at a special meeting called for that purpose. Vacancies in Thermo
Electron's Board may not be filled by stockholders. Newly created directorships
or decreases in directorships in Thermo Electron's board of directors will be
apportioned among the classes of directors so as to make all classes as nearly
equal in number as practicable.
To the extent reasonably possible, any newly created Thermo Electron
directorship will be added to the class of directors whose term of office is to
expire at the latest date following the creation of that directorship, unless
otherwise provided for by resolution of the majority of the directors then in
office. Any newly eliminated Thermo Electron directorship will be subtracted
from the class whose office is to expire at the earliest date following the
elimination of the directorship, unless otherwise provided for by resolution of
the majority of the directors then in office.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Thermo Electron stockholders may take action at annual or special meetings
of stockholders, or by the written consent of stockholders having no less than
the minimum number of votes that would be necessary to take such action at a
meeting at which all shares entitled to vote on the matter were present and
voted.
Thermo Ecotek stockholders may take action at annual or special meetings of
stockholders, or by the written consent of stockholders having not less than 50%
of all of the stock entitled to vote on the action if a meeting were held
provided that no written consent shall have less than the minimum number of
votes required by law for approval of the proposed action and that prompt notice
be given to all stockholders of the taking of an action without a meeting if by
less than unanimous consent.
ABILITY TO CALL SPECIAL MEETINGS
Special meetings of Thermo Electron stockholders may be called only by
Thermo Electron's board of directors, the chairman of the board of directors, or
its chief executive officer. Special meetings of Thermo Ecotek stockholders may
be called only by Thermo Ecotek's board of directors, the chairman of the board
of directors, its president, or any vice president. This means that more people
are allowed
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to call a special stockholders' meeting for Thermo Ecotek stockholders than are
allowed to call a special stockholders' meeting for Thermo Electron
stockholders. This could mean that it would be easier to call a special
stockholders' meeting at Thermo Ecotek than at Thermo Electron, since more
people have the ability to make the decision to call the meeting.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND PROPOSALS
Thermo Electron's Bylaws allow stockholders to nominate candidates for
election to Thermo Electron's board of directors or to propose business to be
transacted at an annual stockholder meeting. However, such nominations and
proposals may only be made by a stockholder who has given timely written notice
to the secretary of Thermo Electron before the annual stockholder meeting in the
manner described below.
Under Thermo Electron's Bylaws, to be timely, notice of stockholder
nominations or proposals to be made at an annual stockholder meeting must be
delivered to the secretary of Thermo Electron not less than 60 days nor more
than 75 days before the first anniversary of the date on which Thermo Electron
first mailed its proxy materials for the preceding year's annual stockholder
meeting. However, if the date of the annual meeting is moved ahead more than
30 days before or delayed by more than 30 days after the anniversary of the
preceding year's annual stockholder meeting, notice to be timely must be
delivered not later than the close of business on the later of (1) the 90(th)
day prior to such annual meeting or (2) the tenth day following the day on which
public announcement of the date of such meeting is first made.
Stockholder nominations and proposals will not be brought before any Thermo
Electron stockholder meeting unless the nomination or proposal was brought
before the meeting in accordance with Thermo Electron's stockholder advance
notice procedure, as set forth in the Bylaws.
Thermo Ecotek does not have a provision in its Certificate of Incorporation
or Bylaws requiring advance notice or a specific procedural process for
stockholder nominations of candidates for election to the board of directors or
for stockholder proposals before Thermo Ecotek's annual stockholder meeting.
AMENDMENT OF CERTIFICATE OF INCORPORATION
Under Delaware law, a certificate of incorporation of a Delaware corporation
may be amended by approval of the board of directors of the corporation and the
affirmative vote of the holders of a majority of the outstanding shares entitled
to vote for the amendment, unless a higher vote is required by the corporation's
certificate of incorporation. Neither Thermo Electron nor Thermo Ecotek
currently has a higher vote required by its Certificate of Incorporation in
order to amend such documents.
AMENDMENT OF BYLAWS
Under Delaware law, stockholders entitled to vote have the power to adopt,
amend or repeal bylaws. In addition, a corporation may, in its certificate of
incorporation, confer that power upon the board of directors. The stockholders
always have the power to adopt, amend or repeal bylaws, even though the board
may also be delegated that power.
Thermo Electron's board of directors is authorized to alter, amend and
repeal Thermo Electron's Bylaws or to make new Bylaws. Thermo Electron's Bylaws
may also be altered, amended and repealed, or new Bylaws may be made, by the
affirmative vote of the holders of a majority of the shares of capital stock of
Thermo Electron issued and outstanding and entitled to vote, voting together as
a single class, except that the affirmative vote of the holders of at least
two-thirds of the shares of capital stock of Thermo Electron issued and
outstanding and entitled to vote is required to alter, amend or
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repeal, or make new Bylaws inconsistent with, Article II, on matters relating to
directors, or Article VI, on amendments to the Bylaws, of the Bylaws.
Thermo Ecotek's board of directors is authorized to alter, amend and repeal
Thermo Ecotek's Bylaws at any meeting of the board. Its Bylaws do not contain
any supermajority voting requirements for amendments. This means that a lower
vote is required to change certain sections of Thermo Ecotek's Bylaws than is
required to change certain sections of Thermo Electron's Bylaws. However, since
Thermo Electron controls the stockholder vote at Thermo Ecotek because of its
ownership of more than 50% of Thermo Ecotek's outstanding common stock, the fact
that a lower stockholder vote is required to change the Bylaws at Thermo Ecotek
than at Thermo Electron does not have any practical effect as far as
unaffiliated stockholders are concerned.
DELAWARE ANTI-TAKEOVER STATUTE
Thermo Electron and Thermo Ecotek are both subject to Section 203 of the
Delaware General Corporation Law which, under certain circumstances, may make it
more difficult for a person who would be an "interested stockholder," as defined
in Section 203, in each company to effect various business combinations with
either company for a three-year period after becoming an interested stockholder.
Under Delaware law, a corporation's certificate of incorporation or bylaws may
exclude a corporation from the restrictions imposed by Section 203. The
respective certificates of incorporation and bylaws of Thermo Electron and
Thermo Ecotek exclude neither company from the restrictions imposed by
Section 203.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware law permits a corporation to indemnify officers and directors for
actions taken in good faith and in a manner they reasonably believed to be in,
or not opposed to, the best interests of the corporation, and with respect to
any criminal action or proceeding, which they had no reasonable cause to believe
was unlawful.
Thermo Electron's Certificate of Incorporation and Thermo Ecotek's Bylaws
each provide for the indemnification of their respective officers and directors.
The indemnification provisions state that any person who was or is a party or is
threatened to be made a party to any action, suit, or proceeding, whether civil,
criminal, administrative or investigative, other than an action or suit brought
by Thermo Electron or Thermo Ecotek, because that person either:
- is or was a director or officer of Thermo Electron or Thermo Ecotek, or an
employee or agent of Thermo Ecotek; or
- is or was serving at the request of Thermo Electron or Thermo Ecotek, as a
director or officer, or employee or agent, in the case of Thermo Ecotek,
of another corporation, partnership, joint venture, trust or other
enterprise;
will be indemnified against expenses, including attorney's fees, judgments,
fines, and amounts paid in settlement actually and reasonably incurred by him or
her in connection with the action, suit or proceeding, to the fullest extent
permitted by Delaware law. These indemnification rights are not exclusive of any
other right to which persons seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
In the case of any action or suit by Thermo Electron or Thermo Ecotek to
procure a judgment in its favor, no indemnification will be made (1) except for
expenses, including attorneys' fees, or (2) relating to any claim, issue or
matter as to which the director or officer has been judged to be liable to
Thermo Electron or Thermo Ecotek, unless and only to the extent that the court
determines that, despite the adjudication of liability but in view of all of the
circumstances of the case, the director or officer is entitled to indemnity for
such expenses which the court finds proper.
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Additionally, each of Thermo Electron and Thermo Ecotek may pay expenses
incurred by its directors or officers in defending a civil or criminal action,
suit or proceeding in advance of the final disposition of that action, suit or
proceeding. However, those payments will be made only if the company receives an
undertaking by or on behalf of the director or officer to repay all amounts
advanced if it is ultimately determined that he or she is not entitled to be
indemnified by the company.
PREFERRED STOCK
Thermo Electron's board of directors may, without further action of Thermo
Electron's stockholders, issue up to 50,000 shares of preferred stock, in one or
more classes and one or more series and fix the number of shares in any class or
series. In a certificate of designation filed on January 31, 1996, 40,000 shares
of the preferred stock were designated as Series B junior participating
preferred stock. The terms of the Series B junior participating preferred stock
are described in "Stockholder Rights Plan," below. Thermo Electron's board may
fix the rights and preferences of any class or series of the remaining 10,000
shares of preferred stock, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, including sinking fund provisions,
maturity dates, redemption prices and liquidation preferences. The rights of the
holders of Thermo Electron's common stock will be subject to, and may be
adversely affected by, the rights of holders of any preferred stock that may be
issued in the future. Also, any issuance of preferred stock could make it more
difficult for a third party to acquire, or discourage a third party from
acquiring, a majority of the outstanding voting stock of Thermo Electron.
Thermo Ecotek does not have any shares of preferred stock authorized. This
means that, if Thermo Ecotek ever wanted to issue any shares of preferred stock,
it would have to hold a stockholder meeting in order to get approval for the
amendment to its certificate of incorporation that would be required in order to
create a class of preferred stock.
STOCKHOLDER RIGHTS PLAN
Under Delaware law, every corporation may create and issue rights entitling
the holders of the rights to purchase from the corporation shares of its capital
stock of any class or classes, subject to any provisions in its certificate of
incorporation. The price and terms of the shares must be stated in the
certificate of incorporation or in a resolution adopted by the board of
directors for the creation or issuance of such rights.
Thermo Electron has entered into a rights agreement dated as of January 19,
1996 between Thermo Electron and BankBoston, N.A. as rights agent. As with most
stockholder rights agreements, the terms of Thermo Electron's rights agreement
are complex and not easily summarized, particularly as they relate to the
acquisition of Thermo Electron's common stock and to exercisability. The purpose
of Thermo Electron's stockholder rights agreement is to encourage potential
acquirors of a large percentage of Thermo Electron's common stock to initiate
negotiations with the board of directors relating to the acquisition, rather
than to proceed without the approval of the board. As described in more detail
below, the rights would cause substantial dilution to any party attempting to
acquire Thermo Electron unless the board of directors has found the transaction
to be fair and in the best interests of stockholders.
On January 19, 1996, Thermo Electron's board declared a dividend
distribution of one right for each outstanding share of Thermo Electron common
stock to stockholders of record at the close of business on January 29, 1996.
Each right entitles the registered holder to purchase from Thermo Electron a
unit consisting of one ten-thousandth of a share of Series B junior
participating preferred stock at a purchase price of $250.00 in cash per unit,
subject to adjustment. The following is a summary description of the terms of
the rights. Please read the rights agreement for the complete description of the
terms of the rights.
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Initially, the rights attach to all outstanding Thermo Electron common stock
certificates and no separate rights certificates will be distributed. The rights
will separate from Thermo Electron common stock, and a distribution date will
occur, upon the earlier of the following events:
- ten days after a public announcement that a person or group of affiliated
or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of Thermo
Electron common stock; or
- ten business days following the start of a tender offer or exchange offer
that would result in a person or group beneficially owning 15% or more of
the outstanding shares of Thermo Electron common stock.
Until the distribution date:
- the rights will be evidenced by Thermo Electron common stock certificates
and will be transferred only with Thermo Electron common stock
certificates;
- new Thermo Electron common stock certificates will incorporate the rights
agreement by reference; and
- the surrender for transfer of any certificates of Thermo Electron common
stock will also transfer the rights associated with Thermo Electron common
stock represented by the certificate.
The rights are not exercisable until the distribution date and will expire
at the close of business on January 29, 2006, unless earlier redeemed or
exchanged by Thermo Electron as described below.
If a person acquires 15% or more of the shares of Thermo Electron common
stock, except as part of an offer for all of the outstanding shares of Thermo
Electron common stock that the board of directors has approved, if, each holder
of a right will thereafter have the right to exercise the right for a number of
shares of Thermo Electron common stock or, in some circumstances, cash, property
or other securities of Thermo Electron, equal to the exercise price of the right
divided by one-half of the current market price of Thermo Electron common stock
on the date of the acquisition. However, rights are not exercisable following
the acquisition until the rights are no longer redeemable by Thermo Electron as
described below. Notwithstanding any of the foregoing, after the acquisition,
all rights that are, or, as described in the rights agreement, were,
beneficially owned by any acquiring person will be null and void. The event set
forth in this paragraph is referred to as a "section 11(a)(ii) event."
For example, at an exercise price of $250.00 per right, each holder of
rights, other than acquiring persons or parties related to them, would be able
to purchase, for $250.00, a number of shares of Thermo Electron common stock, or
other consideration, as noted above, equal to $250.00 divided by one-half of the
current market price of Thermo Electron common stock. Assuming that Thermo
Electron common stock had a per share value of $50.00 at that time, holders of
each valid right would be entitled to purchase ten shares of Thermo Electron
common stock for $250.00.
If, at any time after a person has become an acquiring person:
- Thermo Electron is acquired in a merger or other transaction in which
Thermo Electron is not the surviving corporation, or its common stock is
changed or exchanged, other than a merger which follows an offer that is
approved by the board of directors; or
- 50% or more of Thermo Electron's assets or earning power is sold or
transferred;
each holder of a valid right shall thereafter have the right to receive, upon
exercise, a number of shares of common stock of the acquiring company equal to
the exercise price of the right divided by one-half of the current market price
of that company's common stock at the date the event occurs.
For example, at an exercise price of $250.00 per right, each holder of
rights, following an event described in the last paragraph, would be able to
purchase, for $250.00, a number of shares of common
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stock of the acquiring company equal to $250.00 divided by one-half of the
current market price of that company's common stock. Assuming that the common
stock had a per share value of $100.00 at that time, holders of each valid right
would be entitled to purchase five shares of common stock of the acquiring
company for $250.00.
At any time after a section 11(a)(ii) event, Thermo Electron's board may
exchange all or a part of the rights, other than rights owned by the acquiring
person that have become void, at an exchange ratio of one share of Thermo
Electron common stock, or one ten-thousandth of a share of preferred stock, per
right, subject to adjustment.
The preferred stock purchasable upon exercise of the rights will not be
redeemable. The rights of the preferred stock are protected by customary
antidilution provisions and, in light of Thermo Electron's stock dividend in
1996, currently provide for the following:
- a minimum preferential quarterly dividend payment of $100 per share and an
aggregate dividend per share of preferred stock of 15,000 times the
dividend declared per share of Thermo Electron common stock;
- an aggregate payment per share of preferred stock, in the event of
liquidation, of 15,000 times the payment made per share of Thermo
Electron's common stock, with a minimum preferential liquidating payment
of $100 per share;
- 15,000 votes per share of preferred stock, voting together with Thermo
Electron common stock; and
- in the event of any merger, consolidation or other transaction in which
Thermo Electron common stock is changed or exchanged, each share of
preferred stock will be entitled to 15,000 times the amount received per
share of Thermo Electron common stock.
Because of the nature of the preferred stock's dividend, liquidation and
voting rights, the value of one ten-thousandth of a share of preferred stock
purchasable upon exercise of each right should approximate the value of one
share of Thermo Electron common stock.
At any time until ten days after the stock acquisition date, Thermo Electron
may redeem the rights in whole, but not in part, at a price of $.01 per right,
payable in cash or stock. Immediately upon the decision of the board of
directors to redeem the rights, the rights will terminate and the only right of
the holders of rights will be to receive the $.01 redemption price.
Until a right is exercised, holders of rights, as such, will have no rights
as a stockholder of Thermo Electron, including the right to vote or to receive
dividends. While the distribution of the rights will not be taxable to
stockholders or to Thermo Electron, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the rights become
exercisable for Thermo Electron common stock or other consideration or for
common stock of the acquiring company as set forth above.
The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire Thermo
Electron without conditioning the offer on a substantial number of rights being
acquired. The rights, however, should not affect any prospective offeror willing
to make an offer at a fair price and otherwise in the best interests of Thermo
Electron and its stockholders, as determined by a majority of the board of
directors. The rights should not interfere with any merger or other business
combination that is approved by the board of directors of Thermo Electron since
the board of directors can decide, at any time prior to the close of business on
the earlier of (1) the tenth day following the stock acquisition date or
(2) January 29, 2006, and in certain other circumstances, redeem all of the then
outstanding rights at the redemption price.
Thermo Ecotek has not entered into a stockholder's rights agreement.
Accordingly, it does not have the protections against takeovers that are given
by stockholder rights agreements. However, as noted above in this section under
"Delaware Anti-Takeover Statute," Thermo Ecotek is subject to Section 203 of the
Delaware General Corporation Law, which may inhibit unsolicited takeover
attempts.
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MATERIAL CONTRACTS
Except as set forth in, or incorporated by reference in, this information
statement-prospectus, since October 4, 1998, there have been no material
contracts, arrangements, understandings, relationships, negotiations or
transactions between us, on the one hand, and Thermo Ecotek or any of its
officers, directors or affiliates, on the other hand, concerning a merger,
consolidation or acquisition, a tender offer or other acquisition of securities,
an election of directors or a sale or other transfer of a material amount of
assets.
RECENT DEVELOPMENTS
In May 1999, Thermo Ecotek entered into an agreement, effective
December 31, 1999, to terminate the power-sales agreement at its biomass
facility in Delano, California. The terms of the agreement called for Thermo
Ecotek to receive a stream of payments in lieu of continuing operations under
its original power-sales agreement. On May 4, 2000, Thermo Ecotek sold to
several institutional investors its right to receive a portion of the stream of
payments from the May 1999 agreement for a lump sum cash payment of
approximately $53 million.
Thermo Ecotek, through a subsidiary, owns a 95% interest in KFx Fuel
Partners, L.P., which owns a K-Fuel coal processing plant located in Gillette,
Wyoming. KFx Fuel Partners is the primary obligor of an approximately
$3.9 million reclamation obligation to the State of Wyoming relating to the
K-Fuel plant. Thermo Ecotek guaranteed to the State of Wyoming the performance
of this reclamation obligation. On May 1, 2000, KFx Fuel Partners sold the
K-Fuel plant to a buyer who agreed to assume the reclamation obligation, as well
as obligations of certain contracts and permits related to the K-Fuel plant. In
connection with this transaction, Thermo Ecotek sold to the buyer two million
shares of common stock of KFx Inc., Thermo Ecotek's partner in KFx Fuel
Partners, that it owned in exchange for the State of Wyoming's release of Thermo
Ecotek from its guarantee of the reclamation obligation.
LEGAL OPINION
The validity of the shares of Thermo Electron common stock offered by this
information statement-prospectus will be passed upon for Thermo Electron by Seth
H. Hoogasian, Esq. Mr. Hoogasian is a full-time employee of Thermo Electron, is
an officer of Thermo Ecotek and Thermo Electron, and owns or has the right to
acquire 386,647 shares of Thermo Electron common stock, and 132,700 shares of
the common stock of Thermo Electron's subsidiaries.
EXPERTS
The financial statements of Thermo Electron and Thermo Ecotek included in or
incorporated by reference in this information statement-prospectus and the
financial statement schedules included in or incorporated by reference in the
registration statement of which this information statement-prospectus forms a
part have been audited by Arthur Andersen LLP, independent public accountants,
to the extent and for the periods as indicated in their reports with respect
thereto, and are included in or incorporated by reference in reliance upon the
authority of said firm as experts in giving said reports.
STOCKHOLDER PROPOSALS
If the merger is not completed, Thermo Ecotek will set a date for its 2000
annual meeting of stockholders. Pursuant to Rule 14a-8 under the Exchange Act,
Thermo Ecotek stockholders may present proper proposals for inclusion in Thermo
Ecotek's proxy statement and for consideration at its 2000 annual meeting of
stockholders, in the event the merger is not completed, by submitting the
proposals to Thermo Ecotek in a timely manner. In order to be included for the
2000 annual meeting, stockholder proposals must be received by Thermo Ecotek
within a reasonable time before the meeting, and must otherwise comply with the
requirements of Rule 14a-8.
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WHERE YOU CAN FIND MORE INFORMATION
THIS INFORMATION STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE,
INCLUDING IMPORTANT BUSINESS AND FINANCIAL INFORMATION, WHICH ARE NOT PRESENTED
IN OR DELIVERED WITH THIS INFORMATION STATEMENT-PROSPECTUS.
All documents filed by Thermo Electron pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this information
statement-prospectus and before the effective date of the merger are
incorporated by reference into and are deemed to be a part of this information
statement-prospectus from the date of filing of those documents.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT
TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
ANY INFORMATION THAT IS DIFFERENT.
THERMO ECOTEK
The following documents, filed by Thermo Ecotek (File No. 1-13572) with the
SEC, are hereby incorporated by reference into this information
statement-prospectus:
- Annual Report on Form 10-K for the fiscal year ended October 2, 1999, as
amended;
- Current Report on Form 8-K filed on February 1, 2000 regarding the
announcement that Thermo Ecotek will be merged into Thermo Electron;
- Quarterly Report on Form 10-Q for the fiscal quarter ended January 1,
2000; and
- Current Report on Form 8-K filed on May 2, 2000 regarding financial
results for the quarter ended April 1, 2000.
THERMO ELECTRON
The following documents, filed by Thermo Electron (File No. 1-8002) with the
SEC, are hereby incorporated by reference into this information
statement-prospectus:
- Annual Report on Form 10-K for the fiscal year ended January 1, 2000;
- Current Report on Form 8-K filed on February 1, 2000 regarding Thermo
Electron's proposed reorganization plan;
- Proxy Statement dated April 19, 2000;
- Current Report on Form 8-K filed on May 2, 2000 regarding financial
results for the quarter ended April 1, 2000;
- The description of Thermo Electron common stock which is contained in
Thermo Electron's Registration Statement on Form 8-A filed under the
Exchange Act on September 9, 1999; and
- The description of Thermo Electron's preferred stock purchase rights which
is contained in Thermo Electron's Registration Statement on Form 8-A filed
under the Exchange Act on June 21, 1999.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this information statement-prospectus will be
deemed to be modified or superseded for purposes of this information
statement-prospectus to the extent that a statement contained in this
information statement-prospectus or any other subsequently filed document that
is deemed to be incorporated by reference into this information
statement-prospectus modifies or supersedes the statement. Any statement so
modified or superseded will not be deemed, except as so modified or superseded,
to constitute a part of this information statement-prospectus.
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The documents incorporated by reference into this information
statement-prospectus are available from us upon request. We will provide a copy
of any and all of the information that is incorporated by reference in this
information statement-prospectus to any person, without charge, upon written or
oral request. If exhibits to the documents incorporated by reference in this
information statement-prospectus are not themselves specifically incorporated by
reference in this information statement-prospectus, then such exhibits will not
be provided. ANY REQUEST FOR DOCUMENTS SHOULD BE MADE BY , 2000 TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS.
Requests for documents relating to Thermo Ecotek or Thermo Electron should
be directed to: Sandra L. Lambert, Corporate Secretary, Thermo Electron
Corporation, 81 Wyman Street, Waltham, Massachusetts 02454 (telephone:
(781) 622-1000; facsimile: (781) 768-6620).
Thermo Electron and Thermo Ecotek file reports, proxy statements and other
information with the SEC. Copies of these reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
Reports, proxy statements and other information concerning Thermo Ecotek may
be inspected at:
The American Stock Exchange
86 Trinity Place
New York, New York 10006-1881
Reports, proxy statements and other information concerning Thermo Electron
may be inspected at:
The New York Stock Exchange
20 Broad Street
New York, New York 10005
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Room at the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at (800) SEC-0330. The SEC maintains an Internet site
that contains reports, proxy statements and other information regarding each of
us. The address of the SEC website is http://www.sec.gov.
Thermo Electron has filed a registration statement on Form S-4 under the
Securities Act with the SEC with respect to Thermo Electron common stock to be
issued to Thermo Ecotek stockholders in the merger. This information
statement-prospectus constitutes the prospectus of Thermo Electron filed as part
of the registration statement. This information statement-prospectus does not
contain all of the information set forth in the registration statement because
certain parts of the registration statement are omitted in accordance with the
rules and regulations of the SEC. The registration statement and its exhibits
are available for inspection and copying as set forth above.
Copies of Thermo Ecotek's Annual Report on Form 10-K for the fiscal year
ended October 2, 1999 (including the Exhibit 13 filed with Amendment No. 1 to
its Annual Report on Form 10-K for the fiscal year ended October 2, 1999) and
its Quarterly Report on Form 10-Q for the quarter ended January 1, 2000 are
attached to this information statement-prospectus as Appendices B and C,
respectively. Please read each of such documents in their entirety for the
important information they contain regarding the business of Thermo Ecotek.
47
<PAGE>
If you have any questions about the merger, you should call our information
agent, D.F. King & Co., Inc. If you are a banker or broker, call collect at
(212) 269-5550. All others should call toll-free at (800) 290-6433.
THIS INFORMATION STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS
INFORMATION STATEMENT-PROSPECTUS, IN ANY JURISDICTION TO OR FROM ANY PERSON TO
WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS INFORMATION
STATEMENT-PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES PURSUANT TO THIS
INFORMATION STATEMENT-PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH OR
INCORPORATED INTO THIS INFORMATION STATEMENT-PROSPECTUS BY REFERENCE OR IN THE
AFFAIRS OF THERMO ELECTRON OR THERMO ECOTEK SINCE THE DATE OF THIS INFORMATION
STATEMENT-PROSPECTUS.
48
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This information statement-prospectus and the documents incorporated by
reference into this information statement-prospectus (see "WHERE YOU CAN FIND
MORE INFORMATION") include forward-looking statements about Thermo Electron and
Thermo Ecotek within the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. These statements relate to expectations
concerning matters that are not historical facts, such as future financial
performance, anticipated developments, business strategy, projected costs and
plans and objectives of Thermo Electron and Thermo Ecotek. Many of these
statements are preceded by, followed by or otherwise include the words
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
or similar expressions. These statements may be made expressly in this document
or may be incorporated by reference to other documents Thermo Electron and
Thermo Ecotek have filed with the SEC.
Although each of Thermo Electron and Thermo Ecotek believes that such
forward-looking statements are reasonable, neither can assure you that such
expectations will prove to be correct. Forward looking statements are not
guarantees of future performance and are subject to risks and uncertainties that
may cause actual results of Thermo Electron or Thermo Ecotek to be materially
different from any future results expressed or implied by either Thermo Electron
or Thermo Ecotek. The risks and uncertainties include those risks, uncertainties
and risk factors identified, among other places, under "RISK FACTORS" in this
document.
The most important facts that could prevent Thermo Electron from achieving
its stated goals include, but are not limited to, the following:
- Thermo Electron's corporate reorganization, which includes taking several
subsidiaries private, spinning off some subsidiaries and selling several
businesses, is very complex, expensive and time-consuming.
- Thermo Electron may not be able to complete pending or future
acquisitions, and it may not be able to integrate any acquired businesses
into its existing business or make the acquired businesses profitable.
- Thermo Electron has significant international operations, which involve
many risks.
- Thermo Electron may not be able to develop new products, adapt to rapid
technological change, and introduce new products in order to remain
competitive.
- Changes in governmental regulations may adversely affect demand for Thermo
Electron's product.
- Demand for some Thermo Electron products depends on capital spending
policies of its customers and on government funding policies.
- Obtaining and enforcing patent protection for Thermo Electron's
proprietary products, processes and technologies can be difficult and
expensive.
These cautionary statements should not be construed by you as an exhaustive
list or as any admission by Thermo Electron or Thermo Ecotek regarding the
adequacy of disclosures made by either company. Neither we nor Thermo Ecotek can
always predict or determine after the fact what factors would cause actual
results to differ materially from those indicated by the forward-looking
statements or other statements. All cautionary statements should be read as
being applicable to all forward-looking statements wherever they appear. Thermo
Electron and Thermo Ecotek do not undertake any obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed herein might not occur.
49
<PAGE>
THERMO ELECTRON CORPORATION
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Pro Forma Consolidated Condensed Financial Information of
Thermo Electron Corporation (Unaudited)................... F-2
Pro Forma Consolidated Condensed Statement of Continuing
Operations for the
year ended January 1, 2000................................ F-3
Pro Forma Consolidated Condensed Balance Sheet as of
January 1, 2000........................................... F-4
Notes to Pro Forma Consolidated Condensed Financial
Statements................................................ F-5
</TABLE>
F-1
<PAGE>
THERMO ELECTRON CORPORATION
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma consolidated condensed statement of
continuing operations sets forth the results of continuing operations for the
year ended January 1, 2000, as if the merger had become effective at the
beginning of calendar 1999. The following unaudited pro forma consolidated
condensed balance sheet sets forth the financial position as of January 1, 2000,
as if the merger had become effective on January 1, 2000. For purposes of
determining the number of shares of Thermo Electron that will be issued in the
merger, an exchange ratio of .431 shares of Thermo Electron common stock for
each share of Thermo Ecotek common stock not already owned by Thermo Electron
has been used. The pro forma results of continuing operations are not
necessarily indicative of future operations or the actual results that would
have occurred had the merger become effective at the beginning of calendar 1999.
F-2
<PAGE>
THERMO ELECTRON CORPORATION
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF CONTINUING OPERATIONS
YEAR ENDED JANUARY 1, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues $2,471,193 $ -- $2,471,193
---------- ------- ----------
Costs and Operating Expenses:
Cost of revenues........................................ 1,378,494 -- 1,378,494
Selling, general, and administrative expenses........... 673,004 232 673,236
Research and development expenses....................... 171,100 -- 171,100
Restructuring and other unusual costs, net.............. 149,589 -- 149,589
---------- ------- ----------
2,372,187 232 2,372,419
---------- ------- ----------
Operating Income.......................................... 99,006 (232) 98,774
Other Expense, Net........................................ (61,520) -- (61,520)
---------- ------- ----------
Income from Continuing Operations Before Income Taxes,
Minority Interest, and Extraordinary Items.............. 37,486 (232) 37,254
Income Tax Provision...................................... 33,073 -- 33,073
Minority Interest Expense................................. 18,993 3,759 22,752
---------- ------- ----------
Loss from Continuing Operations Before Extraordinary
Items................................................... $ (14,580) $(3,991) $ (18,571)
========== ======= ==========
Loss per Share from Continuing Operations Before
Extraordinary Items:
Basic................................................... $ (.09) $ -- $ (.12)
========== ======= ==========
Diluted................................................. $ (.11) $ -- $ (.14)
========== ======= ==========
Basic and Diluted Weighted Average Shares................. 157,987 987 158,974
========== ======= ==========
</TABLE>
F-3
<PAGE>
THERMO ELECTRON CORPORATION
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
JANUARY 1, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 281,760 $ -- $ 281,760
Short-term available-for-sale investments, at quoted
market value.......................................... 555,501 -- 555,501
Accounts receivable, net................................ 574,126 -- 574,126
Other current assets.................................... 588,470 -- 588,470
Net assets of discontinued operations................... 517,350 -- 517,350
---------- -------- ----------
2,517,207 -- 2,517,207
---------- -------- ----------
Property, Plant, and Equipment, at Cost, Net.............. 510,647 -- 510,647
---------- -------- ----------
Other Assets.............................................. 247,897 -- 247,897
---------- -------- ----------
Cost in Excess of Net Assets of Acquired Companies........ 1,227,335 9,281 1,236,616
---------- -------- ----------
Long-term Net Assets of Discontinued Operations........... 678,756 -- 678,756
---------- -------- ----------
$5,181,842 $ 9,281 $5,191,123
========== ======== ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities....................................... $1,066,349 $ -- $1,066,349
---------- -------- ----------
Deferred Income Taxes and Other Deferred Items............ 163,063 -- 163,063
---------- -------- ----------
Long-term Obligations:
Subordinated convertible obligations.................... 1,209,305 -- 1,209,305
Other................................................... 356,669 -- 356,669
---------- -------- ----------
1,565,974 -- 1,565,974
---------- -------- ----------
Minority Interest......................................... 364,278 (12,253) 352,025
---------- -------- ----------
Common Stock of Subsidiary Subject to Redemption.......... 7,692 -- 7,692
---------- -------- ----------
Shareholders' Investment:
Common stock............................................ 167,433 987 168,420
Capital in excess of par value.......................... 1,052,837 20,547 1,073,384
Retained earnings....................................... 1,041,968 -- 1,041,968
Treasury stock at cost.................................. (189,646) -- (189,646)
Deferred compensation................................... (3,190) -- (3,190)
Accumulated other comprehensive items................... (54,916) -- (54,916)
---------- -------- ----------
2,014,486 21,534 2,036,020
---------- -------- ----------
$5,181,842 $ 9,281 $5,191,123
========== ======== ==========
</TABLE>
F-4
<PAGE>
THERMO ELECTRON CORPORATION
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1-- PRO FORMA ADJUSTMENTS TO PRO FORMA CONSOLIDATED CONDENSED STATEMENT
OF CONTINUING OPERATIONS (IN THOUSANDS EXCEPT IN TEXT)
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 1, 2000
---------------
DEBIT (CREDIT)
<S> <C>
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Amortization of cost in excess of net assets of acquired
companies created by the acquisition of additional shares
of Thermo Ecotek.......................................... $ 232
-------
MINORITY INTEREST EXPENSE
Reversal of minority interest income in Thermo Ecotek's net
loss as a result of Thermo Electron's increased ownership
of Thermo Ecotek.......................................... 3,759
-------
WEIGHTED AVERAGE SHARES
Increase in weighted average shares outstanding due to the
assumed issuance of 986,569 shares of Thermo Electron's
common stock for the acquisition of additional shares of
Thermo Ecotek as of the beginning of calendar 1999........ 987
-------
</TABLE>
NOTE 2-- PRO FORMA ADJUSTMENTS TO PRO FORMA CONSOLIDATED CONDENSED BALANCE
SHEET (IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 2000
----------------
DEBIT (CREDIT)
<S> <C>
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES
Increase in cost in excess of net assets of acquired
companies as a result of Thermo Electron's increased
ownership of Thermo Ecotek................................ $ 9,281
--------
MINORITY INTEREST
Decrease in minority interest as a result of Thermo
Electron's increased ownership of Thermo Ecotek........... 12,253
--------
COMMON STOCK
Increase in common stock due to the assumed issuance of
986,569 shares of Thermo Electron's common stock for the
acquisition of additional shares of Thermo Ecotek......... (987)
--------
CAPITAL IN EXCESS OF PAR VALUE
Increase in capital in excess of par value as a result of
Thermo Electron's increased ownership of Thermo Ecotek and
the conversion of outstanding stock options of Thermo
Ecotek into stock options of Thermo Electron.............. (20,547)
--------
</TABLE>
F-5
<PAGE>
APPENDIX A
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251 (g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
A-1
<PAGE>
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described
in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections
(d) and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the holders of any class or series of stock
of such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the effective
date of the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the effective
date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or series
of stock of such constituent
A-2
<PAGE>
corporation that are entitled to appraisal rights of the effective date of
the merger or consolidation or (ii) the surviving or resulting corporation
shall send such a second notice to all such holders on or within 10 days
after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such
second notice need only be sent to each stockholder who is entitled to
appraisal rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is required to
give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given, provided, that if
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day
on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger "or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed, by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by or more publications at least week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
A-3
<PAGE>
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 339, L.
98, eff. 7-1-98.)
A-4
<PAGE>
APPENDIX B
ANNUAL REPORT ON FORM 10-K OF THERMO ECOTEK
FOR THE FISCAL YEAR ENDED OCTOBER 2, 1999, AS AMENDED
The Amended Exhibit 13 included herein was filed as an exhibit to Amendment
No. 1 on Form 10-K/A and has been restated to reflect a decision by Thermo
Electron to sell Thermo Ecotek's Thermo Trilogy subsidiary, which has been
classified as discontinued operations. This amended information replaces the
corresponding information filed originally in Exhibit 13 to Form 10-K.
B-1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(MARK ONE)
<TABLE>
<C> <S>
/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
</TABLE>
Commission file number 1-13572
------------------------
THERMO ECOTEK CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3072335
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
245 WINTER STREET
Waltham, Massachusetts 02454-9046
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each class Name of exchange on which registered
- --------------------------------------------- ---------------------------------------------
Common Stock, $.10 par value American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
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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.
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PART I
Item 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Thermo Ecotek Corporation (the Company or the Registrant) is an
environmental company that operates in two segments: Energy and Biopesticides.
The Energy segment operates 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).
Until May 1999, the Energy segment also operated a subbituminous
coal-beneficiation facility (the K-Fuel Facility). The Biopesticides segment
manufactures and sells naturally derived pesticides through the Company's
majority-owned subsidiary, Thermo Trilogy Corporation.
Initially, the Company designed, developed, and acted as general contractor
for the construction of cogeneration plants fueled by natural gas and diesel.
These turnkey facilities were generally sold to third-party operators upon
completion and had a total generating capacity of approximately 60 megawatts. In
the mid-1980s, the Company began developing biomass-fueled power plants to take
advantage of a favorable regulatory environment and attractive power-sales
agreements. Biomass plants use environmentally responsible fuels, including wood
and agricultural wastes. The Company currently operates seven biomass facilities
in the U.S. with a total electric generating capacity of 140 megawatts.
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,
natural gas gathering and storage, and/or biopesticides. 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.
In May 1999, the Company entered into an agreement to terminate the
power-sales agreement for its Delano I and Delano II facilities in California,
effective December 31, 1999. The Company recorded a charge of $51.0 million as a
result of entering this agreement. In September 1999, the Company entered into
an agreement to terminate the power-sales agreement for its Gorbell facility in
Maine. The Company recorded nonrecurring income of $13.5 million as a result of
entering this agreement.
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.
During fiscal 1999*, the Company completed an expansion of the facility to
50-megawatt capacity.
In September 1999, the Company, through a wholly owned subsidiary's
participation in a joint venture, acquired a 58-megawatt energy center in
Premnitz, Germany, for $4.5 million, including the assumption of debt. The
Company is exploring the possibility of expanding the capacity of the facility.
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 acquired one gas
gathering 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.
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* References to fiscal 1999, 1998, and 1997 herein are for the years ended
October 2, 1999, October 3, 1998, and September 27, 1997.
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In August 1995, the Company, through two wholly owned subsidiaries, entered
into a Limited Partnership Agreement with KFx Wyoming, Inc., a subsidiary of
KFx, Inc., (the K-Fuel Partnership) to develop, construct, and operate a
subbituminous coal-beneficiation plant to be constructed near Gillette, Wyoming.
The K-Fuel Partnership was granted, in exchange for certain future contingent
royalty payments, a nonexclusive right and license to use certain patented clean
coal technology to create a low-moisture, high-energy fuel with reduced sulfur
that will help coal-burning utilities meet the SO(2) emission restrictions
contained in the Clean Air Act through fuel switching or blending. The K-Fuel
Partnership procured a 24-acre site for construction of the plant and began
construction in August 1995 under a third-party, turnkey construction contract.
In return for a 95% equity interest in the K-Fuel Partnership, the Company
provided approximately $68 million for the design, construction, and operation
of the plant. In May 1999, following significant investments of resources in
attempts to correct operational problems that arose during construction, the
Company made a decision to cease further efforts and hold the K-Fuel Facility
for sale. As a result, the Company recorded restructuring charges totaling
$68.0 million. See Note 10 to Consolidated Financial Statements in the
Registrant's 1999 Annual Report to Shareholders (Note 9 to Amended Exhibit 13
included herein), which information is incorporated herein by reference.
Through its Thermo Trilogy subsidiary, the Company develops, manufactures,
and markets environmentally friendly products used for pest control. Derived
from naturally occurring microorganisms, biopesticides safely and effectively
control insects, diseases, and mites on numerous crops. In fiscal 1998, Thermo
Trilogy issued shares of its common stock in private placements for net proceeds
of $14.9 million.
The Company operated as a division of Thermo Electron Corporation's Energy
Systems Division from 1979 until its incorporation as Thermo Energy Systems
Corporation in November 1989. At October 2, 1999, Thermo Electron owned
approximately 94% of the Company's outstanding common stock, giving Thermo
Electron the power to elect all Directors of the Company. Thermo Electron is a
leading provider of analytical and monitoring instruments, used in everything
from life sciences research to food and beverage production, and a recognized
leader in heart-assist devices, respiratory-care equipment, neurodiagnostics,
and mammography systems. In addition, Thermo Electron develops and operates
power plants, offers a range of environmental consulting and resource management
services, is a major producer of paper-recycling equipment, provides
water-clarification and fiber-recovery products and services, and conducts a
broad range of advanced technology R&D.
During fiscal 1999, Thermo Electron expanded its proposed reorganization
plan 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. The
public shareholders of the Company would receive common stock of Thermo Electron
in exchange for their shares. This proposal is subject to numerous conditions,
as outlined in Note 18 to Consolidated Financial Statements in the Registrant's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report on
Form 10-K. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," "seeks," "estimates," and similar expressions are intended to
identify forward-looking statements. There are a number of important factors
that could cause the results of the Company to differ materially from those
indicated by such forward-looking statements, including those detailed under the
heading "Forward-looking Statements" in the Registrant's Fiscal 1999 Annual
Report to Shareholders, which statements are incorporated herein by reference.
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(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial Information concerning the Company's industry segments is
summarized in Note 14 to Consolidated Financial Statements in the Registrant's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference. (This information is not included in the Amended Exhibit 13 included
herein since it has been restated to reflect the classification of the
Biopesticides segment as discontinued and, as a result, the Company operates in
one segment.)
(c) DESCRIPTION OF BUSINESS
(i) PRINCIPAL PRODUCTS AND SERVICES
ENERGY
OPERATING PROJECTS
The following table summarizes certain information relating to the Company's
projects currently in operation. With the exception of the Mendota plant, at the
end of each leased facility's applicable lease term, the Company has the option
to renew the lease for a specified period or purchase the facility at fair
market value. The Mendota plant may be purchased for a fixed amount on
December 31, 1999, the end of its lease term. The Company has notified the
lessor of its intent to purchase the facility for $4.8 million.
<TABLE>
<CAPTION>
OWNERSHIP
PLANT SIZE OF OPERATING
PROJECT LOCATION (NET MW) COMPANY INSERVICE DATE LEASE/OWN
- ------- --------------- ---------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C>
Hemphill................... New Hampshire 13.6 67% December 1987 Lease
Gorbell.................... Maine 13.6 100% December 1987 Own
Whitefield................. New Hampshire 13.6 100% July 1988 Own
Mendota.................... California 25 100% May 1990 Lease
Woodland................... California 25 100% May 1990 Lease
Delano I................... California 27 100% January 1991 Own
Delano II.................. California 22 100% January 1994 Own
Tabor...................... Czech Republic 50 87% January 1998* Own
Premnitz................... Germany 58 65% September 1999* Own
</TABLE>
* Represents date facility was acquired by the Company.
HEMPHILL. The Hemphill facility is a 13.6-megawatt wood waste plant located
on a 50-acre site in Springfield, New Hampshire. The Operating Company is a
joint venture in which the Company has a 67% interest. The generating equipment
at the Hemphill facility is owned by BankBoston Leasing Services Inc., which
leases the facility to the Operating Company through March 2003, with an option
to renew or purchase the facility at fair market value. Public Service of New
Hampshire (PSNH) purchases power produced by the plant at a fixed rate under a
rate order issued by the New Hampshire Public Utility Commission (NHPUC)
expiring in 2006. The Operating Company purchases wood waste pursuant to two
contracts with affiliates of the Company's joint venture partner, each of which
expires in 2003. The contracts provide for the supply of wood waste to the
Operating Company at market prices. 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 (discussed
below) 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
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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, 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.
GORBELL. The Gorbell facility is a 13.6-megawatt wood waste plant located
on a 56-acre site in Athens, Maine. The design of the facility is substantially
similar to the Hemphill plant. The Operating Company is a joint venture in which
the Company had a 60% interest until September 1999 and 100% thereafter. In
September 1999, the Company entered into an agreement to terminate the
facility's power-sales agreement. Under the terms of the agreement, the Company
received a payment in lieu of operating under the original agreement. The
Company obtained ownership of the Gorbell facility in this transaction and is
currently operating it under a short-term power-sales agreement, expiring
December 31, 1999, although it has not determined if it will be economically
beneficial to operate the plant after that time. See Note 10 to the Registrant's
Annual Report to Shareholders (Note 9 to Amended Exhibit 13 included herein),
which information is incorporated herein by reference.
WHITEFIELD. The Whitefield facility is a 13.6-megawatt wood waste plant
located on a 46-acre site in Whitefield, New Hampshire. The power produced by
the plant is sold to PSNH at established rates under a power-sales agreement
that expires in 2005. This plant is also subject to a dispute with PSNH (See
"Hemphill" above). Fuel is purchased at a fixed price pursuant to an agreement
expiring in 2001.
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The Whitefield facility was originally owned by Chrysler Capital Corp., and
leased to the Operating Company. The Company purchased the Whitefield facility
in August 1992.
MENDOTA. The Mendota facility is a 25-megawatt agricultural and urban wood
waste plant located on an 80-acre site in Mendota, California. The Operating
Company is a limited partnership, 100% of which is owned by the Company. The
generating equipment is owned by Chrysler Capital Corp., which leases the
equipment to the Operating Company through December 1999, at which point the
Company intends to exercise its option to purchase the equipment for
$4.8 million. In June 1995, the Operating Company amended the facility lease
which resulted in the agreement being treated as a capital lease. The power
generated by the plant is sold to Pacific Gas & Electric (PG&E) under a standard
offer #4 (SO#4) contract expiring in 2014. Under the contract, PG&E was required
to purchase the plant's electricity at predetermined prices for a fixed period,
and at a price equal to PG&E's avoided cost for the remainder of the contract.
Payments for capacity are fixed throughout the life of the contract. PG&E
stopped paying for power purchased under this contract at fixed cost rates in
July 1999, although the Company believes that this change from fixed cost rates
occurred six months earlier than the power-sales agreement provided. The Company
is considering its alternatives concerning this dispute. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated by reference into Item 7 herein. Approximately 9% of the fuel for
the plant is purchased pursuant to long-term contracts terminating between
calendar 1999 and 2002, under which prices increase in accordance with
prescribed schedules or market-based indices. The remainder of the plant's fuel
is purchased by the Operating Company on the spot market.
The power-sales agreements between the Mendota and Woodland (discussed
below) Operating Companies and PG&E allowed PG&E to curtail the quantity of
power purchased under 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 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 its power-sales agreements
with Mendota and Woodland. The Company experienced approximately 1,030, 1,560,
and 1,720 hours of aggregate utility-imposed curtailments at the two plants
during fiscal 1999, 1998, and 1997, respectively.
WOODLAND. The Woodland facility is a 25-megawatt agricultural and urban
wood waste plant located on a 38-acre site in Woodland, California. The design
of the plant is essentially the same as the Mendota plant. The Operating Company
is a limited partnership, 100% of which is owned by the Company. The generating
equipment is owned by BankBoston Leasing Services Inc., which leases the
equipment to the Operating Company through March 2010, with an option to renew
or purchase the equipment for fair value. The electricity generated by the plant
is sold to PG&E under an SO#4 contract expiring in 2014, at predetermined prices
for a fixed period. Payments for capacity are fixed throughout the life of the
contract. PG&E stopped paying for power purchased under this contract at fixed
cost rates in August 1999, although the Company believes that this change from
fixed cost rates occurred six months earlier than the power-sales agreement
provided (See "Mendota" above). Approximately 31% of the fuel for the plant is
purchased pursuant to long-term contracts terminating in 2000, under which
prices increase in accordance with prescribed schedules or market-based indices.
The remaining fuel is purchased by the Operating Company on the spot market.
The Operating Company has conditions in its nonrecourse lease agreement that
require the funding of a "power reserve" in years prior to 2000, based on
projections of operating cash flow shortfalls in 2000 and thereafter. The power
reserve represents funds available to make lease payments in the event that
revenues are not sufficient after the plant converts to avoided cost rates in
March 2000. This funding requirement will significantly limit future profit
distributions the Operating
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Company may make to the Company. Accordingly, beginning in the first quarter of
fiscal 1997, the Company has expensed the funding of reserves required under
Woodland's nonrecourse lease agreement to cover projected shortfalls in lease
payments beginning in 2000. Consequently, the results of the Woodland plant were
approximately breakeven in fiscal 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" incorporated by
reference into Item 7 herein.
DELANO I. The Delano I facility is a 27-megawatt agricultural andurban wood
waste plant located on a 124-acre site in Delano, California. Southern
California Edison (SCE) purchases power under an SO#4 contract which was to have
expired in 2020. Under the contract energy prices were predetermined until
September 2000, and then paid at avoided cost for the remainder of the contract.
Approximately 6% of the fuel supply is purchased pursuant to long-term contracts
with terms expiring at various dates through 2004 under which prices increase in
accordance with prescribed schedules or market-based indices. The remaining fuel
is purchased by the Operating Company on the spot market. The Delano I
generating equipment was originally owned by Westinghouse Credit Corporation and
leased to the Company. In December 1993, the Company purchased Delano I for
$21.5 million in cash and the assumption of $66.9 million original principal
amount of nonrecourse, long-term tax-exempt bonds issued by the California
Pollution Control Finance Authority (CPCFA). As of October 2, 1999,
$27.2 million principal amount was outstanding on these bonds. These bonds
effectively bear interest at a rate of 8.3%, with principal and interest payable
semi-annually until maturity in 2000. The cash portion of the purchase price was
funded by borrowings from Thermo Electron.
DELANO II. In January 1994, the Delano Operating Company commenced
operation of phase II of the Delano project, a 22-megawatt agricultural and
urban wood waste plant located on the same site as Delano I. The facility is
wholly owned by the Delano Operating Company. Power generated by the Delano II
facility is also purchased by SCE under the Delano I contract described above,
under which prices were to have been fixed until September 2000. Fuel is also
purchased pursuant to the same contracts as Delano I. The Delano II facility is
owned by the Company and is subject to $66 million principal amount of
nonrecourse, long-term tax-exempt bonds issued by CPCFA. As of October 2, 1999,
$6.5 million principal amount was outstanding on these bonds. These bonds
effectively bear interest at a rate of 6%, with principal and interest payable
semi-annually until maturity in 2000.
In May 1999, the Company entered into an agreement to terminate the Delano
facilities' power-sales agreement effective December 31, 1999. The terms of the
agreement call for the Company to receive payments in lieu of operating under
the current agreement. As a result of entering into the new agreement, the
Company recorded a charge of $51.0 million. See Note 10 to Consolidated
Financial Statements in the Registrant's Fiscal 1999 Annual Report to
Shareholders (Note 9 to Amended Exhibit 13 included herein), which information
is incorporated herein by reference. The Company is considering its options for
the Delano facilities, including continuing operations at the plant or disposal.
CZECH REPUBLIC. In January 1996, the Company, through a wholly owned
subsidiary, signed a joint development agreement with a Czech power-development
company, EMD Praha Spol s.r.o. The Company owns a 65% interest in this joint
venture. The initial focus is on expansion and environmental retrofit of
existing Czech energy centers. To support this effort, the Company has opened an
office in Prague. The development of projects through the joint venture will be
subject to a number of conditions including negotiation of definitive agreements
for power sale, fuel supply, construction, and other agreements with third
parties. In January 1998, the Company entered into a new joint venture
arrangement, superseding the original arrangement, and in connection therewith,
indirectly acquired a majority interest in two Czech energy centers near the
towns of Tabor and Pribram. At the time of acquisition, the Tabor facility
provided 12 megawatts of electrical output and 165 tons per hour of thermal
production. In fiscal 1999, the Company completed an expansion and modernization
of the energy center to provide approximately 50 megawatts of electrical output
to be sold to the local power
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distribution company and an adjacent industrial customer. At the Pribram
facility, the joint venture has purchased five auxiliary boilers that provide
thermal service during peak hours. In addition, the Company is exploring other
projects relating to expanding and retrofitting existing Czech energy centers
through the joint venture.
GERMANY. In September 1999, the Company, through a wholly owned
subsidiary's participation in a joint venture, acquired a heating plant and
steam distribution system in Premnitz, Germany. The Company owns a 65% interest
in this joint venture. The Company is researching opportunities to modernize the
facility and expand it from its current 58-megawatt capacity.
PROJECTS IN DEVELOPMENT
The State of California's Public Utility Commission (CPUC) mandated the
restructuring of California's electric utility industry beginning in
March 1998. Following that mandate, the electric power market in California
became more competitive, allowing the Company to acquire two power-generation
facilities and related sites in California for approximately $9.5 million in
cash and the assumption of certain liabilities. These natural gas-fired
facilities, built in the 1950s, had been designated "non must run" by the
California Independent System Operator, meaning they were not essential for
assuring the reliable operation of the California power grid. These
acquisitions--the 126-megawatt San Bernadino (Mountainview) facility and the
154-megawatt Highgrove (Riverside) facility--pose an opportunity for repowering
with new equipment and technology. The Company operated these facilities from
July to September 1999. The Company has begun development efforts associated
with the expansion of operating capacity at the Mountainview facility. The
Company intends to repower and expand the facility to approximately
1,100-megawatt capacity and expects that this project will cost approximately
$570 million, which the Company expects to finance principally through
nonrecourse debt. Expected completion is in fiscal 2003. No assurance can be
given that the Company will successfully complete such projects on a timely
basis or at all. In addition, to sell power from these facilities, the Company
must ensure that it will not be subject to regulation as a holding company under
PUHCA and that all necessary approvals from the Federal Energy Regulatory
Commission (FERC) and/or CPUC are obtained. In fiscal 1998, the Company obtained
Exempt Wholesale Generator status with respect to these facilities.
In January 1999, the Company received an exclusive opportunity to develop,
construct, and operate a gas turbine, combined-cycle, 210-megawatt
electricity-generating facility from the city of Lake Worth, Florida. The
estimated cost of this project is expected to be $105 million. The city has also
allowed the Company to provide steam to its existing 26.5-megawatt steam
turbine. The facility will be built on the site of a Florida municipal electric
utility, allowing the Company to connect to the region's natural gas and
electricity networks and use the pre-existing steam turbine infrastructure.
The Company had been exploring opportunities in Italy but in fiscal 1999
reached an agreement with a joint venture partner to sell the Company's interest
in projects there to the partner.
During fiscal 1999, the Company, through Star's 90% participation in a joint
venture, began development efforts for a gas storage facility in Adams County,
Colorado. This facility would have an operating capacity of approximately nine
billion cubic feet and is expected to cost approximately $35 million. The
Company expects to seek nonrecourse financing to fund this project.
BIOPESTICIDES
The Company's Thermo Trilogy subsidiary produces a broad range of
biopesticide products. Products produced by Thermo Trilogy include botanical
extracts from the seed of tropical neem trees, microbial-based pesticides
(fungal-based insecticides and fungicides, bacculovirus, beneficial nematodes,
and Bts), insect pheromone-based products such as traps and lures, and
disease-free sugarcane planting stock. As compared to conventional chemical
pesticides, most of Thermo Trilogy's products are derived
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from natural origins with minimal or no toxicity, and are environmentally
friendly as they have minimal or no residue and do not harm beneficial insects.
Thermo Trilogy's products are used primarily by agricultural farmers, consumers,
and pest-control operators and are sold through various distribution channels
worldwide.
Market acceptance of the Company's biopesticide products depends in part on
educating customers on the benefits of the Company's products compared to
conventional chemical pesticides. Although response from customers to date has
been positive, there is no assurance that the Company will be able to obtain
satisfactory levels of market acceptance. Thermo Trilogy's business was
adversely affected in fiscal 1999 by a downturn in agriculture prices and a
related decrease in industry spending.
REGULATORY MATTERS
The Company is subject to energy and environmental laws and regulations at
the federal, state, local, and international levels in connection with the
development, ownership, and operation of its plants. Federal laws and
regulations govern power purchase and sale transactions with regulated utility
companies, the types of fuel that may be used by a plant, the ownership of a
plant, the plant's efficiency, and the type and use of combustion and
pollution-control technology at a plant. State utility regulatory commissions
must establish the rates and, in some instances, other terms and conditions
under which public utilities purchase electric power from nonutility generators.
Under certain circumstances where specific exemptions are otherwise unavailable,
state utility regulatory commissions may have broad jurisdiction over nonutility
electric power plants. Energy-producing projects also are subject to federal,
state, local, and international laws, as well as administrative regulations
governing the emissions and other substances produced by a plant, and
geographical location, zoning, and land use. Further, the Company's natural gas
business activities are subject to regulation at the federal and state level. In
addition, the Company is subject to environmental and other laws and regulations
at the federal, state, and international level regarding the manufacture, use,
and sale of its biopesticide products.
PUBLIC UTILITY REGULATORY POLICIES ACT OF 1978, AS AMENDED (PURPA). The
U.S. market for nonutility generators selling electricity at wholesale rates
developed after the passage of PURPA. Prior to the passage of PURPA, regulated
utilities were the primary producers of electric power. PURPA was passed in the
wake of the energy crises of the 1970s as a means to increase energy efficiency
and foster the development of alternative power-generation technologies. The
1978 enactment of PURPA and the adoption of regulations thereunder by FERC
provided incentives for the development of cogeneration and small
power-production facilities.
A domestic electricity-generating project must be a Qualifying Facility
(QF), in order to take advantage of certain rate and regulatory incentives
provided by PURPA. To qualify as a QF, a plant must be a cogeneration facility
or small power producer (less than 80 megawatts) that burns waste or alternative
fuels, must satisfy certain engineering standards, and an electric utility, an
electric utility holding company, or its subsidiary must not own more than 50%
of the economic interest in the plant. PURPA exempts QFs from the Public Utility
Holding Company Act of 1935 (PUHCA), most provisions of the Federal Power Act
(the FPA) and, except under certain limited circumstances, state laws concerning
rates or financial regulation of electric utilities. The Company believes that
each of the domestic operating plants that the Company currently owns and/or
operates meets the requirements under PURPA necessary for QF status.
PURPA provides two primary benefits to QFs. First, most QFs are relieved of
compliance with certain extensive federal, state, and local regulations that
control the development, financial structure, and operation of any
energy-producing plant and the prices and terms on which energy may be sold by
the plant. Second, FERC's regulations promulgated under PURPA require that
electric utilities purchase electricity generated by QFs at a price based on the
purchasing utility's full "avoided cost."
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This is defined as the incremental cost to an electric utility of electric
energy or capacity that the utility would have to generate itself or purchase
from another source if it did not have power available from the QF. FERC
regulations also permit QFs and utilities to negotiate agreements for utility
purchases of power at rates lower than the utility's avoided costs. While all of
the Company's existing domestic operating projects initially had long-term
power-sales agreements at rates equal to or greater than the utilities' current
avoided costs, the majority of these contracts have recently either transitioned
to avoided cost rates or have been terminated. Further, the current practice is
for most power-sales agreements to be awarded at a rate below avoided cost, due
to increasing competition for utility contracts. Moreover, whereas in the 1980s
power-sales agreements were often entered into as a result of negotiations
between a nonutility generator and a utility, increasingly, these agreements are
the subject of competitive bidding, which tends to lower the price that a
nonutility generator may receive for power. Currently, the demand for the
construction of cogeneration plants has significantly diminished in the U.S.;
therefore, the Company does not anticipate entering into any new construction
projects of this type in the near future.
The Company and its operating plants must continue to comply with certain
regulatory requirements in order to maintain QF status; therefore, the Company
endeavors to design its projects, monitor its compliance with applicable
regulations, and choose its customers in a manner that minimizes the risks of
losing QF status for its projects. If an Operating Company were unable to
qualify as a QF or lost its QF status, the facility could be subject to
regulation as a public utility under the FPA and state laws and the Company
could become a public utility holding company by owning or controlling 10% or
more of a facility that would no longer be exempt from PUHCA, unless the
Operating Company qualified as an EWG under the National Energy Policy Act of
1992 (see "National Energy Policy Act" below). A loss of QF status could result
in defaults under the Operating Company leases, power-sales agreements, and
other contracts, which could have a material adverse effect on the Company.
PUHCA. Under the PUHCA, any corporation, partnership, or other legal entity
that directly or indirectly owns, or controls the power to vote, 10% or more of
the outstanding voting securities of a "public utility company," or a company
that is a "holding company" of a public utility company, is subject to
registration with the Securities and Exchange Commission and regulation under
PUHCA, unless eligible for an exemption. PURPA provides that companies that only
own QFs are not public utility holding companies under PUHCA. A holding company
of a public utility company that is subject to registration is required by PUHCA
to limit its utility operations to a single integrated utility system and to
such other businesses as are reasonably incidental or economically necessary or
appropriate to the operation of such integrated public utility system. Approval
by the Securities and Exchange Commission is required for nearly all important
financial and business dealings of a registered holding company.
FPA. The FPA grants FERC exclusive rate-making jurisdiction over wholesale
sales of electricity in interstate commerce. FERC has jurisdiction to establish
rates, to amend, revoke, or modify previously approved rates, and has
jurisdiction over certain corporate-related transactions. These rates may be
based on a cost-of-service approach or may be determined through competitive
bidding or negotiation, or, lastly, may be based on other criteria as long as
FERC finds the rates are "just and reasonable" and in the public interest. While
QFs under PURPA are exempt from the rate-making and certain other provisions of
the FPA, projects not qualifying for QF status would be subject to the FPA and
to FERC rate-making jurisdiction which may limit their flexibility in
negotiations with power purchasers.
NATIONAL ENERGY POLICY ACT. In 1992, Congress enacted comprehensive new
energy policy legislation in its passage of the National Energy Policy Act. This
law is primarily designed to foster competition in energy production and provide
competitive access to the transmission grid. To achieve
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these goals, the National Energy Policy Act amended PUHCA to create EWGs, a new
class of generating facility that is exempt from public utility regulation under
PUHCA. An EWG is an entity determined by FERC to be exclusively engaged,
directly or indirectly, in the business of owning and/or operating certain
eligible facilities and selling energy wholesale. EWGs may own generating
facilities of any size, use any fuel source, and may be owned by utilities or
nonutilities. EWGs generally may not own transmission facilities. Domestic EWGs
may not make retail sales of electric energy. The National Energy Policy Act
also provides new authority to FERC to mandate that owners of electric
transmission lines provide wheeling access to nonutility generators at just and
reasonable rates. Previously limited, wheeling rights enhance the ability of
nonutility generators to negotiate transmission access and encourage development
of facilities whose most feasible siting lies outside the purchasing utility's
service area. In 1996, FERC enhanced this transmission access by issuing its
Order Nos. 888 and 889. Order No. 888 required utilities to provide third
parties wholesale open access to transmission facilities on terms comparable to
those that apply when utilities use their own systems. Order No. 889 required
transmission-owning utilities to adopt procedures for an open access, same time
information system regarding their services. The Company believes that the
National Energy Policy Act could benefit the Company by expanding its ability to
own and operate facilities that do not qualify for QF status. However, this
legislation may also result in increased competition by allowing utilities and
others to develop such facilities without being subject to the constraints of
PUHCA.
STATE REGULATION. State public utility commissions (PUCs) have broad
authority to regulate the rates, expenses, financings, and power-sale
transactions of regulated electric utilities. Since a power-sales agreement will
become a part of a utility's expenses (and therefore will be reflected in its
rates), sale agreements with nonutility generators typically fall under the
regulatory purview of PUCs. Recognizing the competitive nature of the
acquisition process, most PUCs will permit utilities to "pass through" expenses
associated with an independent power contract to the utility's retail customers.
Nonutility generators (including EWGs) that are not QFs under PURPA are
considered to be public utilities in many states, and are subject to broad
regulation by PUCs, ranging from the requirement of certificates of public
convenience and necessity to regulation of organizational, accounting,
financial, and other corporate matters. Although FERC generally has exclusive
jurisdiction over the rates charged by such a producer to its wholesale
customers, PUCs have the ability, in practice, to influence the establishment of
such rates by asserting jurisdiction over the purchasing utility's ability to
pass through the resulting cost of the purchased power to its retail customers.
In addition, states may assert jurisdiction over the siting and construction of
facilities, and over the issuance of securities and the sale or other transfer
of assets by these facilities.
Certain states have adopted or are considering legislation that will remove
many of the restrictions that currently limit the ability of nonutility
generators to sell electrical power directly to industrial and commercial
customers. The Company believes that the removal of these restrictions will
result in greater competition and greater opportunities to negotiate power-sale
agreements with industrial and commercial customers and may result in state PUCs
attempting to reduce, or forcing the renegotiation of, fixed rates or contracts.
Although the Company believes that the trend in the power market is toward
deregulation, to date, only a few states have passed any such legislation, and
there can be no assurance that any further similar legislation will ultimately
be passed.
OTHER REGULATORY MATTERS. Different aspects of the Company's natural gas
business activities are subject to regulation at the federal and state level.
FERC has jurisdiction over, among other things, the construction and operation
of pipeline and related facilities used in the transportation and sale of
natural gas in interstate commerce, including the construction, extension,
expansion, or abandonment of such facilities. FERC also has jurisdiction over
the rates and charges for the transportation of natural gas in interstate
commerce and the sale by a natural gas company of natural gas in interstate
commerce for resale. FERC thus would regulate any interstate transportation
business in which the Company engages. The Company does not anticipate engaging
in interstate pipeline transportation subject to
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FERC jurisdiction. Natural gas marketers and brokers generally are not subject
to federal or state regulation. Natural gas storage activities that are in
interstate commerce also fall within FERC's transportation jurisdiction. FERC
must grant prior approval for the construction or abandonment of interstate
storage facilities, and also regulates the rates and charges of interstate
storage services. If storage facilities are not engaged in interstate commerce,
FERC has no jurisdiction. Various states do, however, regulate such intrastate
storage activities. Furthermore, FERC generally does not have jurisdiction over
gas gathering activities, and the Company will attempt to obtain, and maintain,
FERC nonjurisdiction status for any gas gathering activities. However, various
states regulate the rates and terms of service of gas gathering companies.
EPA AND RELATED-STATE REGULATION. No pesticide may be manufactured, used,
or sold without federal and state approvals. Such approvals, called
registrations, must be obtained for each individual product formulation for use
on specific pests for specific crops. Adding new uses, pests, crops, or
formulations requires submission of additional applications or data for
approval.
The U.S. Environmental Protection Agency (EPA) regulates pesticides under
the Federal Insecticide, Fungicide, and Rodenticide Act and implementing EPA
regulations. To obtain a pesticide registration from the EPA, the applicant must
submit extensive field test data evidencing product effectiveness, nontargeted
organism testing, environmental impact studies, residue chemistry, and toxicity
studies on plants and animals. Initial product registrations can take many years
to obtain, and an applicant may incur considerable additional delay and expense
if the EPA requests further testing and data. To promote the development and use
of biopesticides, the EPA has established special guidelines for their
registration which are set out in subdivision M of the EPA's Pesticide
Assessment Guidelines which generally require less time and expense than that
required for synthetic pesticides.
As a part of the pesticide registration process, the applicant must submit
labeling data describing the chemical composition of the pesticide,
concentrations, manufacturer directions for application, pest and crop use, and
cautionary and warning statements to be put on all packaging of the pesticides.
All pesticide packages must contain the approved label and no changes can be
made to the label without EPA approval.
Pesticide registrations must also be obtained from each state where the
pesticide will be sold. Some states, such as California, which represents an
important market for the Company's products, have their own extensive testing
and pesticide registration procedures and may impose additional restrictions on
the use of the pesticide in such state beyond those imposed by the EPA
regulations. Other states simply follow the EPA registration and labeling
guidelines.
Foreign countries may also require extensive testing and data submission
before pesticides can be manufactured or sold in such foreign country. The
relevant regulations vary from country to country and may be stricter and more
difficult and costly to comply with than EPA's regulations. A number of the
Company's products are registered for sale in foreign countries.
The Company's activities may also be subject to regulation under other
state, federal, and foreign government laws and regulations governing employee
and public health and safety, environmental pollution, clean water, disposal of
hazardous wastes, manufacture of chemicals, product liability, food and
agriculture applications, and public disclosure of the use of chemicals.
(ii) NEW PRODUCTS
Not applicable.
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(iii) RAW MATERIALS
ENERGY
Fuel and operating supplies purchased by the Company's independent power
projects are either available from a number of different suppliers or from
alternative sources that could be developed without a material adverse effect on
the Company. To date, the Company has experienced no difficulties in obtaining
these materials.
BIOPESTICIDES
Thermo Trilogy relies on overseas producers of the raw materials for its
neem-based products and on third parties to manufacture some of its products. In
particular, Thermo Trilogy's sole supplier of neem products is P.J. Margo
Pvt. Ltd., a joint venture in India in which Thermo Trilogy holds a 50%
interest, pursuant to an exclusive supply contract that expires in 2001. To
date, Thermo Trilogy has experienced no difficulties in obtaining these raw
materials; however, there is no assurance that Thermo Trilogy will have an
uninterrupted supply of raw materials or that third-party manufacturers will
produce the products at competitive prices.
(iv) PATENTS, LICENSES, AND TRADEMARKS
BIOPESTICIDES
The Company has numerous U.S. patents and corresponding foreign patents in
various areas related to process development, fermentation, formulation, or
applications of current commercial products. Additionally, various patent
applications are pending in the U.S. and foreign countries. The Company also
relies on trade secrets and proprietary know-how which it seeks to protect
through confidentiality agreements with employees, collaborators, and
consultants. The Company's patent portfolio includes several patents related to
Bt technology. The Company has obtained licenses or sublicenses for a number of
patent families in areas related to Bt strain construction and formulation
development. The Company also relies on trade secret protection for its
extensive know-how in quality control.
The Company also has additional patents that have been granted for neem oil
and azadirachtin technologies. The Company also has patent positions covering
nematode and fungi technologies.
The Company has an exclusive license for the fungus PFR-97. Additionally,
the Company has a sublicense agreement for a unique strain of a bacculovirus
from Novartis.
(v) SEASONAL INFLUENCES
ENERGY
The Energy segment earns a disproportionately high share of its income in
May through October due to rate structures under the power-sale agreements
relating to its California plants, which provide strong incentives to operate
during this period of high demand. Conversely, the Energy segment historically
has operated at a marginal profit during its second fiscal quarter due to the
rate structure under these agreements.
BIOPESTICIDES
The Biopesticide segment currently markets its products predominantly for
use in the northern hemisphere, where the growing season generally runs from
March to October. Therefore, the seasonal nature of agriculture will cause the
Biopesticide segment's product sales to be concentrated during such period and
will result in substantial variations in quarter-to-quarter results.
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<PAGE>
(vi) WORKING CAPITAL REQUIREMENTS
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii) DEPENDENCY ON A SINGLE CUSTOMER
ENERGY
The Company derived 10% or more of its revenues during the past three years
from its three most significant electric utility customers: PSNH, SCE, and PG&E.
Revenues from these three customers as a percentage of total revenues were
approximately 16%, 30%, and 26%, respectively, in fiscal 1999.
(viii) BACKLOG
BIOPESTICIDES
The Company maintains minimal backlog. Most orders for its biopesticide
products are shipped out of inventory within a short period of time.
(ix) GOVERNMENT CONTRACTS
Not applicable.
(x) COMPETITION
ENERGY
The worldwide independent power market now consists of numerous companies,
ranging from small startups to multinational industrial companies. In addition,
a number of regulated utilities have created subsidiaries that compete as
nonutility generators. Nonutility generators often specialize in market
"niches," such as a specific technology or fuel (i.e., gas-fired cogeneration,
refuse-to-energy, hydropower, geothermal, wind, solar, wood, or coal) or a
specific region of the country where they believe they have a market advantage.
However, many nonutility generators seek to develop projects powered by the best
fuel available. Many companies in this market have substantially greater
financial, technical, and operational resources than the Company. The Company
competes primarily on the basis of project experience, technical expertise,
capital resources, and power pricing.
BIOPESTICIDES
The Company currently has virtually no competition in the neem- and
azadirachtin-based product market in the U.S. In the microbial pesticides market
(Bts, viruses, fungi) the Company has a number of competitors, including major
chemical companies. The pheromone market is fragmented and is comprised of
dozens of small operating companies. The Company has a significant share of the
nematode market. The Company's products compete primarily based on performance,
quality, and price.
(xi) RESEARCH AND DEVELOPMENT
Research and development expenses for the Company were $2,671,000,
$2,398,000, and $1,638,000 in fiscal 1999, 1998, and 1997, respectively.
(xii) ENVIRONMENTAL PROTECTION REGULATION
The construction and operation of power projects are subject to extensive
federal, state, and local laws and regulations adopted for the protection of
health, safety, and the environment, and to regulate land use. The laws and
regulations applicable to the Company primarily involve discharges and emissions
into the water and air, and the use of water, but can also include wetlands
preservation,
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endangered species, waste disposal, and noise regulation. These laws and
regulations in many cases require a lengthy and complex process of obtaining
licenses, permits, and approvals from federal, state, and local agencies. If
such laws and regulations are changed and the Company's facilities are not
grandfathered, extensive modifications to project technologies and facilities
could be required.
The Company does not believe that it will be required to make material
capital expenditures to comply with existing environmental regulations.
(xiii) NUMBER OF EMPLOYEES
As of October 2, 1999, the Company employed, directly and through its
Operating Companies and subsidiary, a total of 533 employees. None of the
employees of the Company or the Operating Companies is represented by a labor
union, and the Company considers its relations with its employees to be good.
(d) FINANCIAL INFORMATION ABOUT EXPORTS BY DOMESTIC OPERATIONS AND ABOUT FOREIGN
OPERATIONS
Not applicable.
(e) EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE PRESENT TITLE (FISCAL YEAR FIRST BECAME EXECUTIVE OFFICER)
---- -------- ----------------------------------------------------------
<S> <C> <C>
Brian D. Holt............... 50 Chief Executive Officer and President (1994)
Theo Melas-Kyriazi.......... 40 Chief Financial Officer (1999)
Parimal S. Patel............ 56 Executive Vice President (1989)
Floyd M. Gent............... 50 Vice President; President, Clean Fuels Division (1994)
John T. Miller.............. 53 Vice President; President, Clean Power Division (1998)
Randall W. Miselis.......... 46 Vice President, Accounting and Administration (1996)
Paul F. Kelleher............ 57 Chief Accounting Officer (1989)
</TABLE>
All of the Company's executive officers are elected annually by the Board of
Directors and serve until their successors are elected and qualified. All
executive officers, except Messrs. Melas-Kyriazi, Miller, and Miselis have held
comparable positions for at least five years either with the Company or Thermo
Electron. Mr. Melas-Kyriazi was appointed Chief Financial Officer of the Company
and Thermo Electron on January 1, 1999. Mr. Melas-Kyriazi joined Thermo Electron
in 1986 as Assistant Treasurer, and became Treasurer in 1988. In 1994, he was
named President and Chief Executive Officer of ThermoSpectra Corporation, a
public subsidiary of Thermo Instrument Systems Inc. In 1998, he became Vice
President of Corporate Strategy for Thermo Electron. Mr. Miller has been a Vice
President of the Company since March 1998. Prior to joining the Company, he
served as President and Chief Executive Officer of Pacific Generation Company
from 1994 to 1998, overseeing its expansion into international generation
projects. From 1990 to 1994, he served as Vice President of Business Development
of Pacific Generation Company, and from 1987 to 1990, he served as its Vice
President of Operations. Mr. Miselis has been Vice President of Accounting and
Administration since January 1996 and has worked for the Company in various
accounting capacities since November 1988. Messrs. Melas-Kyriazi and Kelleher
are full-time employees of Thermo Electron, but devote such time to the affairs
of the Company as the Company's needs reasonably require.
Item 2. PROPERTIES
ENERGY
The Company's corporate headquarters are located in Waltham, Massachusetts,
and consist of approximately 15,000 square feet that are occupied pursuant to a
lease expiring in 2003. The Company also leases office space in Prague, Czech
Republic; Roseville, California; Houston, Texas; and Dallas, Texas. The
Company's other properties consist of the power plants described under
"Operating Projects" and "Projects in Development." The Company owns all of the
land on which the plants are
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built. The K-Fuel Facility is located on approximately 80 acres of land inside
the rail loop in Fort Union Mine, in Campbell County, Wyoming, approximately
five miles northeast of Gillette, Wyoming. The K-Fuel Facility is comprised of
three buildings totaling approximately 7,100 square feet.
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.
BIOPESTICIDES
Thermo Trilogy's corporate headquarters are located in Columbia, Maryland,
where it leases 25,000 square feet of space for office, laboratory, and
warehouse use. Thermo Trilogy also leases a 26,000 square foot building, in
which it has built a fermentation/formulation facility, in Decatur, Illinois.
Thermo Trilogy owns an 80,000 square foot fermentation/formulation facility in
Wasco, California. Thermo Trilogy's wholly owned subsidiary in the U.K. leases a
20,000 square foot pheromone trap and lure manufacturing facility.
Item 3. LEGAL PROCEEDINGS
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information concerning the market and market price for the Registrant's
Common Stock, $.10 par value, and dividend policy is included under the sections
labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's Fiscal 1999 Annual Report to Shareholders and is incorporated
herein by reference.
Item 6. SELECTED FINANCIAL DATA
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's Fiscal 1999 Annual Report to Shareholders and is incorporated
herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1999 Annual Report to Shareholders and is
incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1999 Annual Report to Shareholders and is
incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's Consolidated Financial Statements and Supplementary Data
are included in the Registrant's Fiscal 1999 Annual Report to Shareholders and
are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Set forth below are the names of the directors; their ages; their offices in
the Company, if any; their principal occupation or employment for the past five
years; the length of their tenure as directors; and the names of other public
companies in which such persons hold directorships. Information regarding their
beneficial ownership of the Company's Common Stock; the common stock of Thermo
Electron, a provider of products and services in measurement instrumentation,
biomedical devices, energy, resource recovery, and emerging technologies; and
the common stock of its majority-owned subsidiary, Thermo Trilogy, is reported
in Item 12--Security Ownership of Certain Beneficial Owners and Management.
<TABLE>
<S> <C>
JERRY P. DAVIS................ Mr. Davis, 66, has been a director of the Company since its
inception in 1989. He also served as the chairman of the
board of the Company from February 1994 to January 1997, and
as the Company's president and chief executive officer from
1989 to February 1994. Mr. Davis was also a vice president
of Thermo Electron from January 1986 to December 1996.
GEORGE N. HATSOPOULOS......... Dr. Hatsopoulos, 72, has been a director of the Company
since its inception in 1989. He was the chairman of the
board and chief executive officer of Thermo Electron from
1956 to June 1, 1999. He also served as the president of
Thermo Electron from 1956 to January 1997. He currently
serves as non-executive chairman of the board of Thermo
Electron. Dr. Hatsopoulos is also a director of
Photoelectron Corporation, Thermedics Inc., Thermo Electron,
Thermo Fibertek Inc., Thermo Instrument Systems Inc., and
ThermoTrex Corporation.
BRIAN D. HOLT................. Mr. Holt, 50, has been a director of the Company since
January 1995 and president and chief executive officer of
the Company since February 1994. He has been the chief
operating officer, energy and environment, of Thermo
Electron since September 1998. From March 1996 to September
1998, he was a vice president of Thermo Electron. For more
than five years prior to his appointment as an officer of
the Company, he was president and chief executive officer of
Pacific Generation Company, a financier, builder, owner, and
operator of independent power facilities. Mr. Holt is also a
director of Thermo TerraTech Inc., The Randers Killam Group
Inc., and ThermoRetec Corporation.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
FRANK JUNGERS................. Mr. Jungers, 73, has been a director of the Company since
its inception in 1989 and its chairman of the board since
January 1997. He has been a self-employed consultant on
business and energy matters since 1977. He was employed by
the Arabian American Oil Company from 1974 to 1977 as
chairman and chief executive officer. Mr. Jungers is also a
director of The AES Corporation, Donaldson, Lufkin &
Jenrette, Thermo Electron, ThermoQuest Corporation, ONIX
Systems Inc., and Statia Terminals Corp.
WILLIAM H. KEOUGH............. Mr. Keough, 62, has been a director of the Company since
November 1999. He was the senior vice president, chief
financial officer, and treasurer of the Pioneer Group, Inc.
from 1986 to November 1998. The Pioneer Group Inc. operates
various financial services businesses, including global
asset management, mutual fund distribution and servicing,
venture capital investing, and the natural resources
industry.
WILLIAM A. RAINVILLE.......... Mr. Rainville, 57, has been a director of the Company since
November 1995. He has been president and chief executive
officer of Thermo Fibertek, a majority-owned subsidiary of
Thermo Electron that develops and manufactures equipment and
products for the papermaking and paper-recycling industries,
since its inception in 1991. He has been chief operating
officer, recycling and resource recovery systems, of Thermo
Electron since September 1998. Prior to that time, Mr.
Rainville had been a senior vice president of Thermo
Electron from March 1993 to September 1998 and a vice
president of Thermo Electron from 1986 to 1993. From 1984 to
January 1993, Mr. Rainville was the president and chief
executive officer of Thermo Electron Web Systems Inc., a
subsidiary of Thermo Fibertek. Mr. Rainville is also a
director of Thermo Fibergen Inc., Thermo Fibertek, Thermo
TerraTech, and ThermoRetec.
</TABLE>
EXECUTIVE OFFICERS
Reference is made to Item 1(e) of this report for information regarding the
Executive Officers of the Company.
Item 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
CASH COMPENSATION
Outside directors receive an annual retainer of $4,000 and a fee of $1,000
per day for attending regular meetings of the board of directors and $500 per
day for participating in meetings of the board of directors held by means of
conference telephone and for participating in certain meetings of committees of
the board of directors. Payment of directors' fees is made quarterly.
Dr. Hatsopoulos, Mr. Holt, and Mr. Rainville are all employees of Thermo
Electron or its subsidiaries and do not receive any cash compensation from the
Company for their services as directors. Directors are also reimbursed for
out-of-pocket expenses incurred in attending such meetings.
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<PAGE>
In November 1999, the board of directors established a special committee
(the Special Committee) for the purpose of evaluating the merits and negotiating
the terms of the proposed transaction with Thermo Electron pursuant to which the
Company would be taken private. Mr. Keough was appointed the sole member of the
Special Committee.
Mr. Keough, as a member of the Special Committee, receives a one-time
retainer of $20,000, a fee of $1,000 per day for attending regular meetings of
the Special Committee, and $500 per day for participating in meetings of the
Special Committee held by means of conference telephone.
DEFERRED COMPENSATION PLAN FOR DIRECTORS
Under the Company's deferred compensation plan for directors (the Deferred
Compensation Plan), a director has the right to defer receipt of his cash fees
until he ceases to serve as a director, dies, or retires from his principal
occupation. In the event of a change in control or proposed change in control of
the Company that is not approved by the board of directors, deferred amounts
become payable immediately. Any of the following is deemed to be a change of
control: (i) the acquisition by any person of 40% or more of the outstanding
common stock or voting securities of Thermo Electron; (ii) the failure of the
Thermo Electron board of directors to include a majority of directors who are
"continuing directors", which term is defined to include directors who were
members of Thermo Electron's board on July 1, 1999, or who subsequent to that
date were nominated or elected by a majority of directors who were "continuing
directors" at the time of such nomination or election; (iii) the consummation of
a merger, consolidation, reorganization, recapitalization, or statutory share
exchange involving Thermo Electron or the sale or other disposition of all or
substantially all of the assets of Thermo Electron unless immediately after such
transaction all holders of Thermo Electron common stock immediately prior to
such transaction own more than 60% of the outstanding voting securities of the
resulting or acquiring corporation in substantially the same proportions as
their ownership immediately prior to such transaction and no person after the
transaction owns 40% or more of the outstanding voting securities of the
resulting or acquiring corporation; or (iv) approval by stockholders of a
complete liquidation or dissolution of Thermo Electron. Amounts deferred
pursuant to the Deferred Compensation Plan are valued at the end of each quarter
as units of the Company's Common Stock. When payable, amounts deferred may be
disbursed solely in shares of Common Stock accumulated under the Deferred
Compensation Plan. A total of 37,500 shares of Common Stock have been reserved
for issuance under the Deferred Compensation Plan. As of October 2, 1999,
deferred units equal to approximately 5,847 full shares of Common Stock were
accumulated for current directors under the Deferred Compensation Plan.
DIRECTORS STOCK OPTION PLAN
The Company's directors stock option plan (the Directors Plan) provides for
the grant of stock options to purchase shares of Common Stock of the Company and
its majority-owned subsidiaries to outside directors as additional compensation
for their service as directors. Under the Directors Plan, outside directors are
automatically granted options to purchase 1,000 shares of Common Stock annually.
The annual grant is made at the close of business on the date of each Annual
Meeting of the Stockholders of the Company to each outside director then holding
office. Options evidencing annual grants are immediately exercisable at any time
from and after the grant date of the option and prior to the earliest to occur
of (i) the expiration of the option on the third anniversary of the grant date;
(ii) two years after the director ceases to serve as a director of the Company;
or (iii) the date of dissolution or liquidation of the Company. Shares acquired
upon exercise of the options are subject to repurchase by the Company at the
exercise price if the recipient ceases to serve as a director of the Company or
another Thermo Electron company prior to the first anniversary of the grant
date.
The exercise price for options granted under the Directors Plan is the
average of the closing prices of the Common Stock as reported on the American
Stock Exchange (or other principal market on
B-20
<PAGE>
which the Common Stock is then traded) for the five trading days immediately
preceding and including the date of grant, or, if the shares are not then
traded, at the last price per share paid by third parties in an arms-length
transaction prior to the option grant. As of October 2, 1999, options to
purchase 90,200 shares of Common Stock had been granted and were outstanding
under the Directors Plan, 3,000 options had lapsed, 73,000 options had been
exercised, and options to purchase 137,800 shares of Common Stock were reserved
and available for grant.
COMPENSATION OF THE CHAIRMAN OF THE BOARD
Mr. Jungers was appointed the chairman of the board of the Company in
January 1997. Mr. Jungers is not an employee of the Company or of any other
company affiliated with Thermo Electron. For his service as chairman of the
board, Mr. Jungers receives an additional meeting fee equal to $1,000 per day
for attending regular meetings of the board of directors and $500 per day for
participating in meetings of the board of directors held by means of conference
telephone. He also receives an additional option to purchase 1,000 shares of the
Common Stock at an exercise price equal to the average closing price for the
five days preceding and including the date of grant, which is awarded at the
first regular meeting of the board of directors following the Annual Meeting of
the Stockholders in conjunction with his reappointment as chairman of the board.
STOCK OWNERSHIP POLICIES FOR DIRECTORS
The human resources committee of the board of directors (the Committee) has
established a stock holding policy for directors. The stock holding policy
requires each director to hold a minimum of 1,000 shares of Common Stock.
Directors are requested to achieve this ownership level within a three-year
period. The chief executive officer of the Company is required to comply with a
separate stock holding policy established by the Committee, which is described
below.
In addition, the Committee has adopted a policy requiring directors to hold
shares of the Company's Common Stock equal to one-half of their net option
exercises over a period of five years. The net option exercise is determined by
calculating the number of shares acquired upon exercise of a stock option, after
deducting the number of shares that could have been traded to exercise the
option and the number of shares that could have been surrendered to satisfy tax
withholding obligations attributable to the exercise of the option. This policy
is also applicable to executive officers and is described below.
SUMMARY COMPENSATION TABLE
The following table summarizes compensation during the last three fiscal
years for services to the Company in all capacities, except as otherwise
indicated below, awarded to, earned by, or paid to the Company's chief executive
officer and its four other most highly compensated executive officers who were
employed by the Company as of the end of the fiscal year. These executive
officers are together referred to as the "named executive officers."
The Company is required to appoint certain executive officers and full-time
employees of Thermo Electron as executive officers of the Company, in accordance
with the Thermo Electron Corporate Charter. The compensation for these executive
officers is determined and paid entirely by Thermo Electron. The time and effort
devoted by these individuals to the Company's affairs is provided to the Company
under the Corporate Services Agreement between the Company and Thermo Electron.
See
B-21
<PAGE>
Item 13--Certain Relationships and Related Transactions. Accordingly, the
compensation for these individuals is not reported in the following table.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
ANNUAL ----------------------------
COMPENSATION RESTRICTED SECURITIES
-------------------- ---------- -----------
FISCAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) AWARD (2) OPTIONS (3) COMPENSATION (4)
- --------------------------- -------- -------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Brian D. Holt (5)........................ 1999 $159,115 n/a $58,800(TCK) -- $ 7,200
Chief Executive Officer and President 1998 $198,000 $108,000 -- $ 6,429
1997 $182,250 $189,000 60,000(TCK) $ 6,107
40,000(TRIL)
Parimal S. Patel......................... 1999 $173,400 $ 78,000 $21,470(TMO) 8,000(TCK) $ 7,200
Executive Vice President 2,500(TMO)
1998 $170,000 $ 68,400 2,700(TCK) $ 6,850
5,300(TMO)
1997 $167,000 $ 51,500 15,800(TCK) $ 6,993
2,400(TMO)
2,500(TRIL)
John T. Miller (6)....................... 1999 $165,000 $ 65,000 $14,313(TMO) 10,000(TCK) $34,401(7)
Vice President; President, 1998 $ 76,154 $ 65,000 38,000(TCK) $19,500(7)
Clean Power Division 16,300(TMO)
5,000(TRIL)
Floyd M. Gent............................ 1999 $150,000 $ 56,300 $ 8,588(TMO) 2,700(TCK) $ 7,550
Vice President; President, 1998 $138,700 $ 55,800 600(TCK) $ 5,847
Clean Fuels Division 3,000(TMO)
1997 $133,000 $ 10,500 100(TMO) $ 7,359
2,500(TRIL)
Randall W. Miselis....................... 1999 $110,700 $ 33,200 $ 4,294(TMO) 400(TCK) $ 6,710
Vice President, Accounting & 1998 $100,600 $ 38,400 400(TCK) $ 7,200
Administration 100(TMO)
1997 $ 93,000 $ 29,100 100(TCK) $ 5,643
2,500(TRIL)
</TABLE>
- ------------------------
(1) Beginning with fiscal 1997, the Company changed its compensation practices
to determine bonuses for the named executive officers, other than the chief
executive officer, based on fiscal year performance rather than calendar
year performance. Accordingly, for all named executive officers other than
Mr. Holt, the bonuses for fiscal 1997 represent the prorated bonus paid for
performance during the nine-month period from January 1, 1997, through
September 27, 1997. Due to Mr. Holt's position as chief operating officer,
environmental and energy, of Thermo Electron, his bonus will continue to be
determined and paid based on performance for the calendar year. Mr. Holt's
bonus for 1999 has not been determined as of the date hereof.
(2) In fiscal 1999, Mr. Holt was awarded 5,600 shares of restricted stock of the
Company with a value of $58,800 on the grant date, and Messrs. Patel,
Miller, Gent, and Miselis were granted 1,500, 1,000, 600, and 300 shares,
respectively, of restricted stock of Thermo Electron with a value of
$21,470, $14,313, $8,588, and $4,294, respectively, on the grant date.
Mr. Holt's restricted stock awards vest in their entirety on January 27,
2002. The restricted stock awarded to Messrs. Patel, Miller, Gent, and
Miselis vest in their entirety on September 22, 2002. Holders of restricted
stock are eligible for dividend payments. At the end of fiscal 1999,
Mr. Holt held 5,600 shares of restricted stock with an aggregate value of
$51,800 and Messrs. Patel, Miller, Gent, and Miselis held 1,500, 1,000, 600,
and 300 shares, respectively, of restricted stock with an aggregate value of
$20,344, $13,563, $8,138, and $4,069, respectively.
B-22
<PAGE>
(3) Options granted by the Company are designated in the table as "TCK." In
addition, the named executive officers have also been granted options to
purchase common stock of the Thermo Electron and its majority-owned
subsidiaries from time to time as part of Thermo Electron's stock option
program. Options have been granted during the last three fiscal years in the
following Thermo Electron companies: Thermo Electron (designated in the
table as TMO) and Thermo Trilogy Corporation (designated in the table as
TRIL). Mr. Holt was appointed an officer of Thermo Electron in March 1996
and has been granted options to purchase common stock of Thermo Electron
since that date. These options are not reported in the table as they were
granted as compensation for service in a capacity other than in his capacity
as the chief executive officer of the Company.
(4) Except as indicated in footnote (7) below, represents the amount of matching
contributions made by the individual's employer on behalf of executive
officers participating in the Thermo Electron 401(k) plan.
(5) Mr. Holt was appointed chief executive officer of the Company in
February 1994, vice president of Thermo Electron in March 1996, and chief
operating officer, energy and environmental, of Thermo Electron in
September 1998. Mr. Holt has also been responsible for certain operations of
Thermo Electron since the commencement of his employment in February 1994,
and a portion of his annual cash compensation (salary and bonus) has been
allocated to and paid by Thermo Electron in each of the fiscal years
reported for the time he devoted to these responsibilities. The annual cash
compensation (salary and bonus) reported in the table for Mr. Holt
represents the amount paid by the Company for Mr. Holt's services as its
chief executive officer. For calendar 1999, 1998, and 1997, approximately
60%, 90%, and 90%, respectively, of Mr. Holt's salary earned in all
capacities throughout the Thermo Electron organization was paid by the
Company for his services as its chief executive officer. For calendar 1999,
1998, and 1997, approximately 60%, 90%, and 82%, respectively, of
Mr. Holt's total bonus earned in all capacities throughout the Thermo
Electron organization was or will be paid by the Company for his performance
as the Company's chief executive officer. Mr. Holt's bonus is determined and
paid based upon performance for the calendar year.
(6) Mr. Miller was appointed vice president; president, clean power division of
the Company, effective as of March 23, 1998.
(7) In addition to the matching contributions set forth in footnote (4) above,
this amount includes $4,500 of temporary living expenses and $15,000 of
travel and relocation expenses for fiscal 1998 and $13,500 of temporary
living expenses and $20,901 of relocation expenses for fiscal 1999.
B-23
<PAGE>
STOCK OPTIONS GRANTED DURING FISCAL 1999
The following table sets forth information concerning individual grants of
stock options made during fiscal 1999 to the Company's named executive officers.
It has not been the Company's policy in the past to grant stock appreciation
rights, and no such rights were granted during fiscal 1999.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1999
- ---------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OPTION TERM (2)
GRANTED AND EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME COMPANY (1) FISCAL YEAR SHARE DATE 5% 10%
- ---- ------------------ ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Brian D. Holt.............. -- -- -- -- -- --
Parimal S. Patel........... 3,000(TCK) 3.6% $10.54 12/03/01 $ 4,980 $10,466
5,000(TCK) 6.0% $10.54 12/03/03 $14,560 $32,174
2,500(TMO) 0.05%(3) $14.81 09/22/04 $10,230 $22,604
John T. Miller............. 10,000(TCK) 12.0% $10.54 12/03/03 $29,120 $64,348
Floyd M. Gent.............. 700(TCK) 0.8% $10.54 12/03/01 $ 1,160 $ 2,442
2,000(TCK) 2.4% $10.54 12/03/03 $ 5,820 $12,870
Randall W. Miselis......... 400(TCK) 0.5% $10.54 12/03/01 $ 660 $ 1,395
</TABLE>
- ------------------------
(1) As part of Thermo Electron's stock option program, options have been granted
during fiscal 1999 to the named executive officers to purchase the common
stock of the Company and Thermo Electron. All of the options granted during
the fiscal year are immediately exercisable at the date of grant. In all
cases, the shares acquired upon exercise are subject to repurchase by the
granting company at the exercise price if the optionee ceases to be employed
by such company or any other Thermo Electron company. The granting company
may exercise its repurchase rights within six months after the termination
of the optionee's employment. The repurchase rights generally lapse ratably
over a three- to seven-year period, depending on the option term, which may
vary from three to seven years, provided the optionee continues to be
employed by the granting company or any other Thermo Electron company. The
granting company may permit the holder of options to exercise options and to
satisfy tax withholding obligations by surrendering shares equal in fair
market value to the exercise price or withholding obligation. Please see
footnote (3) under Summary Compensation Table above for the company
abbreviations used in this table.
(2) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5% and
10% compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise price,
but do not include deductions for taxes or other expenses associated with
the exercise. Actual gains, if any, on stock option exercises will depend on
the future performance of the common stock of the applicable corporation,
the optionee's continued employment through the option period, and the date
on which the options are exercised.
(3) These options were granted under stock option plans maintained by Thermo
Electron or its subsidiaries other than the Company as part of Thermo
Electron's compensation program and accordingly are reported as a percentage
of total options granted to employees of Thermo Electron and its
subsidiaries.
B-24
<PAGE>
STOCK OPTIONS EXERCISED DURING FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
The following table reports certain information regarding stock option
exercises during fiscal 1999 and outstanding stock options held at the end of
fiscal 1999 by the Company's named executive officers. No stock appreciation
rights were exercised or were outstanding during fiscal 1999.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND FISCAL 1999 YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------
VALUE OF
UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-
SHARES YEAR-END END
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME COMPANY (1) EXERCISE REALIZED (2) UNEXERCISABLE) (1) UNEXERCISABLE)
- ---- ----------- ----------- ------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Brian D. Holt(3)............. TCK -- -- 210,000/0 $ 513,000/--
TMO -- -- 138,750/0(4) $ 0/--
TBA -- -- 2,000/0 $ 15,750/--
TFG -- -- 2,000/0 $ 2,500/--
TLZ -- -- 5,000/0 $ 0/--
TLT -- -- 0/2,000 --/$0(5)
TOC -- -- 6,000/0 $ 0/--
TMQ -- -- 6,000/0 $ 0/--
TSR -- -- 2,000/0 $ 0/--
TRIL -- -- 0/40,000 --/$0(5)
TXM -- -- 4,000/0 $ 0/--
Parimal S. Patel............. TCK -- -- 49,000/0 $ 84,375/--
TMO -- -- 29,362/0(4) $ 1,248/--
TFT 2,700 $12,320 --/-- --/--
TRIL -- -- 0/2,500 --/$0(5)
John T. Miller............... TCK -- -- 48,000/0 $ 0/--
TMO -- -- 16,300/0 $ 0/--
TRIL -- -- 0/5,000 --/$0(5)
Floyd M. Gent................ TCK -- -- 55,800/0 $ 170,625/--
TMO -- -- 33,100/0 $ 0/--
TRIL -- -- 0/2,500 --/$0(5)
Randall W. Miselis........... TCK -- -- 45,900/0 $ 52,500/--
TMO -- -- 15,100/0 $ 0/--
TRIL -- -- 0/2,500 --/$0(5)
</TABLE>
- ------------------------
(1) All of the options reported outstanding at the end of the fiscal year are
immediately exercisable as of fiscal year-end, except options to purchase
the common stock of ThermoLyte Corporation and Thermo Trilogy Corporation,
which are not exercisable until the earlier of (i) 90 days after the
effective date of the registration of that company's common stock under
Section 12 of the Exchange Act or (ii) nine years from the grant date. In
all cases, the shares acquired upon exercise of the options reported in the
table are subject to repurchase by the granting company at the exercise
price if the optionee ceases to be employed by such company or any other
Thermo Electron company. The granting company may exercise its repurchase
rights within six months after the termination of the optionee's employment.
For publicly-traded companies, the repurchase rights generally lapse ratably
over a one- to ten-year period, depending on the option term, which may vary
from five to twelve years, provided that the optionee continues to be
employed by the granting company or another Thermo Electron company. For
companies that are not publicly-traded, the repurchase rights lapse in their
entirety on the ninth anniversary of the grant date. The granting company
may permit the holder of options to exercise options and to satisfy tax
B-25
<PAGE>
withholding obligations by surrendering shares equal in fair market value to
the exercise price or withholding obligation. Please see footnote (3) under
Summary Compensation Table above for the company abbreviations used in this
table. In addition, company abbreviations used in this table and not defined
in footnote (3) are defined as follows: Thermo BioAnalysis Corporation
(designated in the table as TBA), Thermo Fibertek Inc. (designated in the
table as TFT), Thermo Fibergen Inc. (designated in the table as TFG),
ThermoLase Corporation (designated in the table as TLZ), ThermoLyte
(designated in the table as TLT), Thermo Optek Corporation (designated in
the table as TOC), ThermoQuest Corporation (designated in the table as TMQ),
Thermo Sentron Inc. (designated in the table as TSR), and Trex Medical
Corporation (designated in the table as TXM).
(2) Amounts shown in this column do not necessarily represent actual value
realized from the sale of the shares acquired upon exercise of the option
because in many cases the shares are not sold on exercise but continue to be
held by the named executive officer exercising the option. The amounts shown
represent the difference between the option exercise price and the market
price on the date of exercise, which is the amount that would have been
realized if the shares had been sold immediately upon exercise.
(3) As an officer of Thermo Electron, Mr. Holt also holds unexercised options to
purchase common stock of Thermo Electron and its subsidiaries other than the
Company. These options are not reported in the table as they were granted as
compensation for service to other Thermo Electron companies in capacities
other than his capacity as the chief executive officer of the Company.
(4) Options to purchase 67,500 and 15,000 shares of the common stock of Thermo
Electron granted to Mr. Holt and Mr. Patel, respectively, are subject to the
same terms described in footnote (1), except that the repurchase rights of
the granting corporation generally do not lapse until the tenth anniversary
of the grant date. In the event of the employee's death or involuntary
termination prior to the tenth anniversary of the grant date, the repurchase
rights of the granting corporation shall be deemed to have lapsed ratably
over a five-year period commencing with the fifth anniversary of the grant
date
(5) No public market existed for the shares underlying these options as of
October 2, 1999. Accordingly, no value in excess of exercise price has been
attributed to these options.
EXECUTIVE RETENTION AGREEMENTS
Thermo Electron has entered into agreements with certain executive officers
and key employees of Thermo Electron and its subsidiaries that provide severance
benefits if there is a change in control of Thermo Electron and their employment
is terminated by Thermo Electron "without cause" or by the individual for "good
reason," as those terms are defined therein, within 18 months thereafter. For
purposes of these agreements, a change in control exists upon (i) the
acquisition by any person of 40% or more of the outstanding common stock or
voting securities of Thermo Electron; (ii) the failure of the Thermo Electron
board of directors to include a majority of directors who are "continuing
directors," which term is defined to include directors who were members of
Thermo Electron's board on the date of the agreement or who subsequent to the
date of the agreement were nominated or elected by a majority of directors who
were "continuing directors" at the time of such nomination or election;
(iii) the consummation of a merger, consolidation, reorganization,
recapitalization, or statutory share exchange involving Thermo Electron or the
sale or other disposition of all or substantially all of the assets of Thermo
Electron unless immediately after such transaction (a) all holders of Thermo
Electron common stock immediately prior to such transaction own more than 60% of
the outstanding voting securities of the resulting or acquiring corporation in
substantially the same proportions as their ownership immediately prior to such
transaction and (b) no person after the transaction owns 40% or more of the
outstanding voting securities of the resulting or acquiring corporation; or
(iv) approval by stockholders of a complete liquidation or dissolution of Thermo
Electron.
B-26
<PAGE>
In 1998, Thermo Electron authorized an executive retention agreement with
each of Brian D. Holt, Floyd M. Gent, and John T. Miller. This agreement
provides that in the event the individual's employment is terminated under the
circumstances described above, the individual would be entitled to a lump sum
payment equal to the sum of (a) in the case of Mr. Holt, two times, and in the
case of Messrs. Gent and Miller, one times his highest annual base salary in any
12 month period during the prior five-year period, plus (b) in the case of
Mr. Holt, two times and in the case of Messrs. Gent and Miller, one times his
highest annual bonus in any 12-month period during the prior five-year period.
In addition, the individual would be provided benefits for a period of, in the
case of Mr. Holt, two years, and in the case of Messrs. Gent and Miller, one
year after such termination substantially equivalent to the benefits package the
individual would have been otherwise entitled to receive if he was not
terminated. Further, all repurchase rights of Thermo Electron and its
subsidiaries shall lapse in their entirety with respect to all options and
restricted stock that the individual holds in Thermo Electron and its
subsidiaries, including the Company, as of the date of the change in control.
Finally, the individual would be entitled to a cash payment equal to, in the
case of Mr. Holt, $20,000, and in the case of Messrs. Gent and Miller, $15,000,
to be used toward outplacement services.
Assuming that the severance benefits would have been payable as of
October 2, 1999, the lump sum salary and bonus payment under such agreement to
Messrs. Holt, Gent and Miller would have been approximately $1,040,000,
$234,500, and $230,000, respectively. In the event that payments under these
agreements are deemed to be so called "excess parachute payments" under the
applicable provisions of the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code), the individuals would be entitled to receive a gross-up
payment equal to the amount of any excise tax payable by such individual with
respect to such payment, plus the amount of all other additional taxes imposed
on such individual attributable to the receipt of such gross-up payment.
STOCK OWNERSHIP POLICIES
The Committee established a stock holding policy for executive officers of
the Company that required executive officers to own a multiple of their
compensation in shares of Common Stock. For the chief executive officer, the
multiple is one times his base salary and reference incentive compensation for
the fiscal year. For all other officers, the multiple was one times the
officer's base salary. The Committee deemed it appropriate to permit officers to
achieve these ownership levels over a three-year period. The policy has been
amended to apply only to the chief executive officer.
In order to assist executive officers in complying with the policy, the
Committee also adopted a stock holding assistance plan under which the Company
is authorized to make interest-free loans to executive officers to enable them
to purchase shares of Common Stock in the open market. This plan was also
amended to apply only to the chief executive officer. The loans are required to
be repaid upon the earlier of demand or the tenth anniversary of the date of the
loan, unless otherwise determined by the Committee.
The Committee also has a policy requiring its executive officers to hold
shares of Common Stock equal to one-half of their net option exercises over a
period of five years. The net option exercise is determined by calculating the
number of shares acquired upon exercise of a stock option, after deducting the
number of shares that could have been traded to exercise the option and the
number of shares that could have been surrendered to satisfy tax withholding
obligations attributable to the exercise of the option.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock, as
well as the common stock of Thermo Electron and each majority-owned subsidiary
of the Company, as of October 2, 1999, with respect to (i) each director,
(ii) each executive officer named in the summary compensation table set forth in
Item 11--Executive Compensation (the named executive officers) and (iii) all
directors and
B-27
<PAGE>
current executive officers as a group. In addition, the following table sets
forth the beneficial ownership of Common Stock, as of October 2, 1999, with
respect to each person who was known by the Company to own beneficially more
than 5% of the outstanding shares of Common Stock.
While certain directors or executive officers of the Company are also
directors and executive officers of Thermo Electron or its subsidiaries other
than the Company, all such persons disclaim beneficial ownership of the shares
of Common Stock beneficially owned by Thermo Electron.
<TABLE>
<CAPTION>
THERMO ECOTEK THERMO ELECTRON THERMO TRILOGY
NAME (1) CORPORATION (2) CORPORATION (3) CORPORATION (4)
- -------- --------------- --------------- ---------------
<S> <C> <C> <C>
Thermo Electron Corporation (5)................... 33,865,203 N/A N/A
Jerry P. Davis.................................... 101,426 32,670 0
Floyd M. Gent..................................... 60,380 33,100 0
George N. Hatsopoulos............................. 25,579 3,889,697 0
Brian D. Holt..................................... 215,600 287,941 0
Frank Jungers..................................... 49,706 176,302 3,000
William H. Keough................................. 0 0 0
John T. Miller.................................... 48,000 16,500 0
Randall W. Miselis................................ 47,706 15,855 0
Parimal S. Patel.................................. 88,868 58,874 0
William A. Rainville.............................. 4,467 360,752 0
All directors and current executive officers as a
group (12 persons).............................. 649,232 5,386,885 3,000
</TABLE>
- ------------------------
(1) Except as reflected in the footnotes to this table, shares of Common Stock
of the Company and of the common stock of Thermo Electron and Thermo Trilogy
beneficially owned consist of shares owned by the indicated person or by
that person for the benefit of minor children, and all share ownership
includes sole voting and investment power.
(2) Shares of the Common Stock beneficially owned by Mr. Davis, Mr. Gent,
Dr. Hatsopoulos, Mr. Holt, Mr. Jungers, Mr. Miller, Mr. Miselis, Mr. Patel,
and all directors and executive officers as a group include 10,000, 55,800,
15,000, 210,000, 6,000, 48,000, 45,900, 49,000, and 447,200 shares,
respectively, that such person or group has the right to acquire within
60 days of October 2, 1999, through the exercise of stock options. Shares of
the Common Stock beneficially owned by Mr. Jungers and all directors and
executive officers as a group include 3,156 shares allocated through
October 2, 1999, to his account maintained pursuant to the Company's
Deferred Compensation Plan for Directors. Shares beneficially owned by
Mr. Davis include 91,426 shares held by Mr. Davis' spouse. Shares
beneficially owned by Mr. Jungers include 500 shares held by Mr. Jungers'
spouse. No director or named executive officer beneficially owned more than
1% of the Common Stock as of October 2, 1999; all directors and current
executive officers as a group beneficially owned 1.80% of the Common Stock
outstanding as of such date.
(3) Shares of the common stock of Thermo Electron beneficially owned by
Mr. Davis, Mr. Gent, Dr. Hatsopoulos, Mr. Holt, Mr. Jungers, Mr. Miller,
Mr. Miselis, Mr. Patel, Mr. Rainville, and all directors and executive
officers as a group include 5,377, 33,100, 2,206,486, 284,948, 9,693,
16,300, 15,100, 29,362, 294,630, and 3,338,081 shares, respectively, that
such person or group has the right to acquire within 60 days of October 2,
1999, through the exercise of stock options. Shares of the common stock of
Thermo Electron beneficially owned by Mr. Davis, Dr. Hatsopoulos, and all
directors and executive officers as a group include 1,716, 2,266 and 6,479
full shares, respectively, allocated to accounts maintained pursuant to
Thermo Electron's employee stock ownership plan, of which the trustees, who
have investment power over its assets, were, as of October 2, 1999,
executive officers of Thermo Electron. Shares of the common stock of Thermo
Electron beneficially owned by Mr. Jungers and all directors and executive
officers as a group include
B-28
<PAGE>
80,427 full shares allocated through October 2, 1999, to Mr. Junger's
account maintained pursuant to Thermo Electron's deferred compensation plan
for Directors. Shares beneficially owned by Mr. Davis include 25,577 shares
held by Mr. Davis' spouse. Shares beneficially owned by Dr. Hatsopoulos
include 144,437 shares held by his spouse, 330,747 shares held by a family
trust of which his spouse is the trustee and 566,262 shares held by a family
limited partnership indirectly controlled by Dr. Hatsopoulos. Shares
beneficially owned by Dr. Hatsopoulos also include 50,000 shares that a
family trust, of which Dr. Hatsopoulos' spouse is the trustee, has the right
to acquire within 60 days of October 2, 1999, and 2,149,500 shares that a
family limited partnership indirectly controlled by Dr. Hatsopoulos has the
right to acquire within 60 days of October 2, 1999, through the exercise of
stock options. Dr. Hatsopoulos disclaims beneficial interest in the shares
owned by the family limited partnership except to the extent of his
pecuniary interest therein. Shares beneficially owned by Mr. Jungers include
4,500 shares held by Mr. Jungers' spouse. No director or named executive
officer beneficially owned more than 1% of the common stock of Thermo
Electron as of October 2, 1999, except for Dr. Hatsopoulos, who beneficially
owned 2.42% of such common stock; all directors and current executive
officers as a group beneficially owned 3.37% of the common stock of Thermo
Electron outstanding as of such date.
(4) The beneficial ownership of shares of the common stock of Thermo Trilogy is
presented as of October 2, 1999. As of October 2, 1999, no director or
executive officer beneficially owned more than 1% of the outstanding common
stock of Thermo Trilogy; all directors and current executive officers as a
group beneficially owned less than 1% of Thermo Trilogy common stock
outstanding as of such date.
(5) Thermo Electron beneficially owned 93.68% of the Common Stock as of
October 2, 1999. Shares beneficially owned by Thermo Electron include
171,272 shares issuable upon conversion of $2,826,000 in principal amount of
the Company's 4 7/8% Subordinated Convertible Debentures due 2004. Thermo
Electron's address is 81 Wyman Street, Waltham, Massachusetts 02454-9046. As
of October 2, 1999, Thermo Electron had the power to elect all of the
members of the Company's board of directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
Exchange Act) requires the Company's directors and executive officers, and
beneficial owners of more than 10% of the Common Stock, such as Thermo Electron,
to file with the Securities and Exchange Commission initial reports of ownership
and periodic reports of changes in ownership of the Company's securities. Based
upon a review of such filings, all Section 16(a) filing requirements applicable
to such persons were complied with during fiscal 1999, except in the following
instances: Mr. Jungers, a director of the Company, filed one transaction late,
reporting the exempt grant of stock options. Thermo Electron filed one Form 4
late, reporting a total of six transactions associated with the cancellation and
grant of options to purchase Common Stock granted to employees under its stock
option program.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Thermo Electron has, from time to time, caused its subsidiaries to sell
minority interests to investors, resulting in several majority-owned, private
and publicly-held subsidiaries. Thermo Electron has created the Company as a
majority-owned, publicly-held subsidiary. The Company and such other
majority-owned Thermo Electron subsidiaries are hereinafter referred to as the
"Thermo Subsidiaries."
Thermo Electron and each of the Thermo Subsidiaries recognize that the
benefits and support that derive from their affiliation are essential elements
of their individual performance. Accordingly, Thermo Electron and each of the
Thermo Subsidiaries, including the Company, have adopted the Thermo Electron
Corporate Charter (the Charter) to define the relationships and delineate the
nature of such cooperation among themselves. The purpose of the Charter is to
ensure that (1) all of the
B-29
<PAGE>
companies and their stockholders are treated consistently and fairly, (2) the
scope and nature of the cooperation among the companies, and each company's
responsibilities, are adequately defined, (3) each company has access to the
combined resources and financial, managerial and technological strengths of the
others, and (4) Thermo Electron and the Thermo Subsidiaries, in the aggregate,
are able to obtain the most favorable terms from outside parties.
To achieve these ends, the Charter identifies the general principles to be
followed by the companies, addresses the role and responsibilities of the
management of each company, provides for the sharing of group resources by the
companies and provides for centralized administrative, banking and credit
services to be performed by Thermo Electron. The services provided by Thermo
Electron include collecting and managing cash generated by members, coordinating
the access of Thermo Electron and the Thermo Subsidiaries (the Thermo Group) to
external financing sources, ensuring compliance with external financial
covenants and internal financial policies, assisting in the formulation of
long-range planning and providing other banking and credit services. Pursuant to
the Charter, Thermo Electron may also provide guarantees of debt or other
obligations of the Thermo Subsidiaries or may obtain external financing at the
parent level for the benefit of the Thermo Subsidiaries. In certain instances,
the Thermo Subsidiaries may provide credit support to, or on behalf of, the
consolidated entity or may obtain financing directly from external financing
sources. Under the Charter, Thermo Electron is responsible for determining that
the Thermo Group remains in compliance with all covenants imposed by external
financing sources, including covenants related to borrowings of Thermo Electron
or other members of the Thermo Group, and for apportioning such constraints
within the Thermo Group. In addition, Thermo Electron establishes certain
internal policies and procedures applicable to members of the Thermo Group. The
cost of the services provided by Thermo Electron to the Thermo Subsidiaries is
covered under existing corporate services agreements between Thermo Electron and
the Thermo Subsidiaries.
The Charter currently provides that it shall continue in effect so long as
Thermo Electron and at least one Thermo Subsidiary participate. The Charter may
be amended at any time by agreement of the participants. Any Thermo Subsidiary,
including the Company, can withdraw from participation in the Charter upon
30 days' prior notice. In addition, Thermo Electron may terminate a subsidiary's
participation in the Charter in the event the subsidiary ceases to be controlled
by Thermo Electron or ceases to comply with the Charter or the policies and
procedures applicable to the Thermo Group. A withdrawal from the Charter
automatically terminates the corporate services agreement and tax allocation
agreement (if any) in effect between the withdrawing company and Thermo
Electron. The withdrawal from participation does not terminate outstanding
commitments to third parties made by the withdrawing company, or by Thermo
Electron or other members of the Thermo Group, prior to the withdrawal. In
addition, a withdrawing company is required to continue to comply with all
policies and procedures applicable to the Thermo Group and to provide certain
administrative functions mandated by Thermo Electron so long as the withdrawing
company is controlled by or affiliated with Thermo Electron.
As provided in the Charter, the Company and Thermo Electron have entered
into a Corporate Services Agreement (the Services Agreement) under which Thermo
Electron's corporate staff provides certain administrative services, including
certain legal advice and services, risk management, employee benefit
administration, tax advice and preparation of tax returns, centralized cash
management, and financial and other services to the Company. The Company was
assessed an annual fee equal to 0.8% of the Company's revenues for these
services in fiscal 1999. The annual fee will remain at 0.8% of the Company's
revenues for fiscal 2000. The fee is reviewed annually and may be changed by
mutual agreement of the Company and Thermo Electron. During fiscal 1999, Thermo
Electron assessed the Company $1.6 million in fees under the Services Agreement.
Management believes that the charges under the Services Agreement are reasonable
and that the terms of the Services Agreement are fair to the Company. In fiscal
1999, the Company was billed an additional $18,100 by Thermo Electron for
B-30
<PAGE>
certain administrative services required by the Company that were not covered by
the Services Agreement. The Services Agreement automatically renews for
successive one-year terms, unless canceled by the Company upon 30 days' prior
notice. In addition, the Services Agreement terminates automatically in the
event the Company ceases to be a member of the Thermo Group or ceases to be a
participant in the Charter. In the event of a termination of the Services
Agreement, the Company will be required to pay a termination fee equal to the
fee that was paid by the Company for services under the Services Agreement for
the nine-month period prior to termination. Following termination, Thermo
Electron may provide certain administrative services on an as-requested basis by
the Company or as required in order to meet the Company's obligations under
Thermo Electron's policies and procedures. Thermo Electron will charge the
Company a fee equal to the market rate for comparable services if such services
are provided to the Company following termination.
The Company and Thermo Electron have a Tax Allocation Agreement (Tax
Allocation Agreement) under which the Company is included in the consolidated
federal and certain state income tax returns filed by Thermo Electron. The Tax
Allocation 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 in any year the Company incurs a loss or generates a tax credit,
Thermo Electron shall pay the Company the amount of such benefit realized by
Thermo Electron attributable to such loss or tax credit on the earlier of
(i) the year in which the Company would have obtained a tax benefit from such
loss or tax credit of the Company had filed separate federal income tax returns
or (ii) the year in which the applicable carry-forward period with respect to
such loss or tax credit expires. As of October 2, 1999, the aggregate net amount
due to the Company from Thermo Electron pursuant to the Tax Allocation Agreement
is approximately $5.6 million.
At October 2, 1999, the Company owed Thermo Electron and its other
subsidiaries an aggregate of approximately $0.7 million for amounts due under
the Services Agreement and related administrative charges and for miscellaneous
items, net of amounts owed to the Company for miscellaneous items. The largest
amount of net indebtedness owed by the Company to Thermo Electron and its other
subsidiaries since October 3, 1998, was approximately $2.8 million. These
amounts do not bear interest and are expected to be paid in the normal course of
business.
As of October 2, 1999, $17.8 million of the Company's cash equivalents were
invested in a cash management arrangement with Thermo Electron, which was
effective June 1999. Under the cash management arrangement, the Company lends
its excess cash to Thermo Electron and has the contractual right to withdraw its
invested funds 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 the funds invested under the
arrangement by all Thermo Electron subsidiaries other than wholly-owned
subsidiaries. The Company's funds invested in the cash management arrangement
earn a rate equal to the 30-day Dealer Commercial Paper Rate as reported in THE
WALL STREET JOURNAL plus 50 basis points, set at the beginning of each month.
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 Thermo Electron. As a result, the Company would
become a wholly owned subsidiary of Thermo Electron. The public shareholders of
the Company would receive common stock in Thermo Electron in exchange for their
shares. The completion of this transaction is subject to numerous conditions,
including the establishment of a price and exchange ratio; confirmation of
anticipated tax consequences; the negotiation and execution of a definitive
merger agreement; the receipt of a fairness opinion from an investment banking
firm that the transaction is fair to the Company's shareholders (other than
Thermo Electron) from a financial point of view; the approval of the Company's
Board of Directors, including its independent directors; and completion of
review by the Securities and Exchange Commission of any necessary documents
regarding the proposed transactions.
B-31
<PAGE>
STOCK HOLDING ASSISTANCE PLAN
The Committee established a stock holding policy that requires the chief
executive officer to acquire and hold a minimum number of shares of Common
Stock. In order to assist the chief executive officer in complying with the
policy, the Committee also adopted a stock holding assistance plan under which
the Company may make interest-free loans to the chief executive officer, to
enable him to purchase the Common Stock in the open market. No such loans are
currently outstanding under the plan.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a, d) FINANCIAL STATEMENTS AND SCHEDULE
(1) The consolidated financial statements set forth in the list below are
filed as part of this Report.
(2) The consolidated financial statement schedule set forth in the list
below is filed as part of this Report.
(3) Exhibits filed herewith or incorporated herein by reference are set
forth in Item 14(c) below.
LIST OF FINANCIAL STATEMENTS AND SCHEDULE REFERENCED IN THIS ITEM 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders'
Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule I: Condensed Financial Information of the Registrant
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
See Exhibit Index on the page immediately preceding exhibits.
B-32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: December 15, 1999 THERMO ECOTEK CORPORATION
By: /s/ BRIAN D. HOLT
-----------------------------------------
Brian D. Holt
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of December 15, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C> <C> <C>
By: /s/ BRIAN D. HOLT President, Chief Executive Officer,
--------------------------------- and Director
Brian D. Holt
By: /s/ THEO MELAS-KYRIAZI Chief Financial Officer
---------------------------------
Theo Melas-Kyriazi
By: /s/ PAUL F. KELLEHER Chief Accounting Officer
---------------------------------
Paul F. Kelleher
By: /s/ FRANK JUNGERS Chairman of the Board and Director
---------------------------------
Frank Jungers
By: /s/ JERRY P. DAVIS Director
---------------------------------
Jerry P. Davis
By: /s/ DR. GEORGE N. HATSOPOULOS Director
---------------------------------
Dr. George N. Hatsopoulos
By: /s/ WILLIAM H. KEOUGH Director
---------------------------------
William H. Keough
By: /s/ WILLIAM A. RAINVILLE Director
---------------------------------
William A. Rainville
</TABLE>
B-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Thermo Ecotek Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Thermo Ecotek Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated November 8, 1999. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in Item 14 on page B-32 herein is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
consolidated financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
November 8, 1999
B-34
<PAGE>
SCHEDULE I
THERMO ECOTEK CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNCONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ -- $ 22,732
Advance to affiliate...................................... 17,766 --
Accounts and notes receivable from subsidiaries........... 613 1,910
Prepaid income taxes and prepaid expenses................. 41,288 11,548
Current portion of note receivable and other current
assets.................................................. 2,732 330
-------- --------
62,399 36,520
-------- --------
Investment in Subsidiaries (on the equity method)........... 228,129 319,279
-------- --------
Office Equipment, at Cost................................... 448 322
Less: Accumulated Depreciation.............................. (149) (96)
-------- --------
299 226
-------- --------
Long-term Available-for-sale Investment, at Quoted Market
Value
(amortized cost of $6,379 and $8,504)..................... 6,111 8,502
-------- --------
Deferred Debt Expense....................................... 891 1,090
-------- --------
$297,829 $365,617
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable.......................................... $ 276 $ --
Accrued expenses.......................................... 3,761 9,366
Due to parent company..................................... 507 2,251
-------- --------
4,544 11,617
-------- --------
Long-term Obligations:
Noninterest-bearing subordinated convertible debentures... 1,820 2,450
4.875% Subordinated convertible debentures................ 44,950 44,950
-------- --------
46,770 47,400
-------- --------
Deferred Income Taxes....................................... 55,951 56,968
-------- --------
Shareholders' Investment:
Common stock.............................................. 3,787 3,782
Capital in excess of par value............................ 175,895 175,673
Retained earnings......................................... 39,382 98,802
Treasury stock............................................ (28,084) (28,735)
Deferred compensation..................................... (46) --
Accumulated other comprehensive items..................... (370) 110
-------- --------
190,564 249,632
-------- --------
$297,829 $365,617
======== ========
</TABLE>
B-35
<PAGE>
SCHEDULE I
THERMO ECOTEK CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF UNCONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES.................................................... $ -- $ 1,962 $ 8,200
Equity in Earnings (Loss) of Subsidiaries................... (83,019) 50,401 39,817
-------- -------- --------
(83,019) 52,363 48,017
-------- -------- --------
General and Administrative Expenses......................... 10,196 10,379 10,219
-------- -------- --------
Operating Income (Loss)..................................... (93,215) 41,984 37,798
Interest Expense, Net....................................... (1,021) (1,342) (838)
Gain on Issuance of Stock by Subsidiary..................... -- 6,269 --
-------- -------- --------
Income (Loss) Before Income Taxes........................... (94,236) 46,911 36,960
Income Tax (Provision) Benefit.............................. 34,816 (15,702) (14,415)
-------- -------- --------
NET INCOME (LOSS)........................................... $(59,420) $ 31,209 $ 22,545
======== ======== ========
</TABLE>
B-36
<PAGE>
SCHEDULE I
THERMO ECOTEK CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF UNCONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net income (loss)......................................... $(59,420) $ 31,209 $ 22,545
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 265 258 513
Deferred revenue........................................ -- -- (8,200)
Deferred income tax expense (benefit)................... (30,183) 7,315 10,715
Equity in (earnings) loss of subsidiaries............... 83,019 (50,401) (39,817)
Gain on issuance of stock by subsidiary................. -- (6,269) --
Changes in current accounts, excluding the
effect of acquisitions:
Accounts and notes receivable from subsidiaries....... 1,204 2,139 (906)
Other assets.......................................... (768) 94 55
Accounts payable...................................... 637 (551) 48
Accrued expenses...................................... (5,576) 101 99
Due (to) from parent company.......................... (1,744) (98) 3,471
-------- -------- --------
Net cash used in operating activities............... (12,566) (16,203) (11,477)
-------- -------- --------
Investing Activities:
Acquisitions, net of cash acquired........................ (12,615) (19,100) (10,865)
Purchase of available-for-sale investments................ -- -- (2,500)
Advances to affiliate, net................................ (17,766) -- --
Purchases of property, plant, and equipment............... (126) (219) (15)
Distribution from (investment in) subsidiaries............ 20,115 (16,361) 13,315
-------- -------- --------
Net cash used in investing activities............... (10,392) (35,680) (65)
-------- -------- --------
Financing Activities:
Net proceeds from issuance of subordinated
convertible debentures.................................. -- -- 48,470
Purchases of Company common stock......................... -- (10,248) (19,743)
Net proceeds from issuance of Company and
subsidiary common stock................................. 189 15,458 (417)
-------- -------- --------
Net cash provided by financing activities........... 189 5,210 28,310
-------- -------- --------
Exchange Rate Effect on Cash................................ 37 (60) (31)
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents............ (22,732) (46,733) 16,737
Cash and Cash Equivalents at Beginning of Year.............. 22,732 69,465 52,728
-------- -------- --------
Cash and Cash Equivalents at End of Year.................... $ -- $ 22,732 $ 69,465
======== ======== ========
</TABLE>
B-37
<PAGE>
SCHEDULE II
THERMO ECOTEK CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT PROVISION ACCOUNTS BALANCE
BEGINNING CHARGED TO WRITTEN AT END
DESCRIPTION OF YEAR EXPENSE OFF OF YEAR
- ----------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended October 2, 1999.................................. $50 $87 $(20) $117
Year Ended October 3, 1998.................................. $-- $50 $ -- $ 50
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT PROVISION COSTS ACTIVITY BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
DESCRIPTION OF YEAR EXPENSE (B) RESERVE OF YEAR
- ----------- ---------- --------------- ---------- --------
<S> <C> <C> <C> <C>
Accrued Restructuring Costs (a)
Year Ended October 2, 1999.................................. $ -- $7,914 $(157) $7,757
</TABLE>
- ------------------------
(a) The nature of activity in this account is described in Note 10 to
Consolidated Financial Statements in the Registrant's Fiscal 1999 Annual
Report to Shareholders (Note 9 to Amended Exhibit 13 included herein).
(b) Excludes noncash charges of $118.4 million, primarily for the write-off of
property, plant, and equipment.
B-38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ------------------------------------------------------------
<C> <S>
2.1 Asset Purchase Agreement among Thermo Trilogy Corporation,
Thermo Ecotek International Holdings, Inc., and W.R. Grace &
Co.--Conn. dated March 5, 1996 (filed as Exhibit 2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 30, 1996 [File No. 1-13572] and incorporated
herein by reference).
2.2 Asset Purchase Agreement among Thermo Trilogy Corporation,
biosys, inc., Crop Genetics International Corporation, and
AgriDyne Technologies, Inc. dated December 24, 1996 (filed
as Exhibit 2 to the Registrant's Current Report on Form 8-K
filed January 31, 1997 [File No. 1-3572] and incorporated
herein by reference).
3.1 Certificate of Incorporation, as amended, of the Registrant
(filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).
3.2 By-Laws of the Registrant (filed as Exhibit 3.2 to the
Registrant's Transition Report on Form 10-K for the nine
months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference).
4.1 Fiscal Agency Agreement dated as of March 14, 1996, among
the Registrant, Thermo Electron Corporation, and Chemical
Bank as fiscal agent, relating to $37 million principal
amount of noninterest-bearing subordinated convertible
debentures due 2001 (filed as Exhibit 4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
30, 1996 [File No. 1-13572] and incorporated herein by
reference).
4.2 Fiscal Agency Agreement dated as of April 15, 1997, among
the Registrant, Thermo Electron Corporation, and Bankers
Trust Company as fiscal agent, relating to $50 million
principal amount of 4 7/8% Convertible Subordinated
Debentures due 2004 (filed as Exhibit 4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
29, 1997 [File No. 1-13572] and incorporated herein by
reference).
10.1 Asset Transfer Agreement between Thermo Electron Corporation
and the Registrant dated January 2, 1990 (filed as Exhibit
10.1 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.2 Corporate Services Agreement dated January 3, 1993, between
Thermo Electron Corporation and the Registrant (filed as
Exhibit 10.2 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
10.3 Thermo Electron Corporate Charter as amended and restated
effective January 3, 1993 (filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682]and incorporated herein by reference).
10.4 Amended and Restated Tax Allocation Agreement dated as of
December 4, 1996, between Thermo Electron and the Registrant
(filed as Exhibit 10.4 to the Registrant's Report on Form
10-K for the fiscal year ended September 28, 1996 [File No.
1-13572] and incorporated herein by reference).
10.5 Purchase and sale of $38,500,000 principal amount 4%
subordinated convertible note due 2001 (filed as Exhibit
10.8 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
</TABLE>
B-39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ------------------------------------------------------------
<C> <S>
10.6 Purchase and sale of $30,000,000 principal amount 4%
subordinated convertible note due 2001 (filed as Exhibit
10.9 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.7 Power Purchase Agreement between Mendota Biomass Power, Ltd.
and Pacific Gas and Electric Company dated May 7, 1984
(filed as Exhibit 10.10 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).
10.8 Project Lease between Chrysler Capital Corporation and
Mendota Biomass Power, Ltd. dated October 30, 1989 (filed as
Exhibit 10.11 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
10.9 First Amendment to Project Lease between Chrysler Capital
Corporation and Mendota Biomass Power, Ltd., dated June 30,
1995 (filed as Exhibit 1 to the Registrant's Current Report
on Form 8-K dated June 30, 1995 and incorporated herein by
reference).
10.10 Mendota Biomass Power, Ltd. Limited Partnership Agreement
dated December 10, 1986 (filed as Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).
10.11 Rate Order and Interconnection Agreement between Whitefield
Power and Light Company and Public Service Company of New
Hampshire dated September 4, 1986 (filed as Exhibit 10.13 to
the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-86682] and incorporated herein by reference).
10.12 Wood Supply Contract between North County Procurement, Inc.
and Whitefield Power and Light Company dated June 4, 1993
(filed as Exhibit 10.14 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).
10.13 Joint Venture Agreement establishing Gorbell Thermo Electron
Power Company dated September 13, 1985 (filed as Exhibit
10.19 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.14 Leasing Agreement between BankBoston Leasing Services, Inc.
and Hemphill Power and Light Company dated December 23, 1987
(filed as Exhibit 10.20 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).
10.15 Rate Order Support Agreement between Hemphill Power and
Light Company and Thermo Electron dated December 23, 1987
(filed as Exhibit 10.21 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).
10.16 Wood Supply Contract between Durgin & Crowell Lumber
Company, Inc. and Hemphill Power and Light Company dated
June 4, 1985 (filed as Exhibit 10.22 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.17 Fuel Supply Contract between Springfield Management Company
and Hemphill Power and Light Company dated June 4, 1985, as
amended (filed as Exhibit 10.23 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
</TABLE>
B-40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ------------------------------------------------------------
<C> <S>
10.18 Rate Order and Interconnection Agreement between Hemphill
Power and Light Company and Public Service Company of New
Hampshire dated June 26, 1986 (filed as Exhibit 10.24 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).
10.19 Joint Venture Agreement establishing Hemphill Power and
Light Company dated June 4, 1985 (filed as Exhibit 10.25 to
the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-86682]and incorporated herein by reference).
10.20 Letter Agreement dated July 15, 1988, among the partners of
Hemphill Power and Light Company amending various agreements
(filed as Exhibit 10.26 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).
10.21 Letter Agreement dated January 1, 1990, between the partners
of Hemphill Power and Light Company (filed as Exhibit 10.27
to the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-86682]and incorporated herein by reference).
10.22 Assignment and Assumption Agreement of Delano II plant by
Delano Energy Company, Inc. dated December 1, 1993 (filed as
Exhibit 10.28 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
10.23 Loan Agreement between California Pollution Control
Financing Authority ("CPCFA") and Delano Energy Company,
Inc. dated August 1, 1989, as supplemented on May 1, 1990
(Delano I; filed as Exhibit 10.29 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.24 Indenture of Trust between CPCFA and Bankers Trust Company
dated August 1, 1990, as supplemented on May 1, 1990 (Delano
I; filed as Exhibit 10.30 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).
10.25 Indenture of Trust between CPCFA and Bankers Trust Company
dated October, 1991 (Delano II; filed as Exhibit 10.31 to
the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-86682]and incorporated herein by reference).
10.26 Loan Agreement between CPCFA and Delano Energy Company, Inc.
dated October 1, 1991 (filed as Exhibit 10.32 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).
10.27 Power Purchase Contract between Southern California Edison
Co. and Signal Delano Energy Company, Inc. dated July 31,
1987 (filed as Exhibit 10.33 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.28 Amended Restated Reimbursement Agreement among Chemical
Trust Company of California ("CTCC"), Delano Energy Company,
Inc. and ABN AMRO Bank N.V. and other banks dated December
31, 1993 (filed as Exhibit 10.34 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.29 Amended and Restated Lease Agreement between CTCC and Delano
Energy Company, Inc. dated December 31, 1993 (filed as
Exhibit 10.35 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
10.30 Biomass Fuel Supply Contract between the Registrant and
Delano Energy Company, Inc. dated December 31, 1993 (filed
as Exhibit 10.36 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
</TABLE>
B-41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ------------------------------------------------------------
<C> <S>
10.31 Power Purchase Agreement between Woodland Biomass Power,
Ltd. and Pacific Gas & Electric Company dated May 7, 1987
(filed as Exhibit 10.38 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).
10.32 Stock Purchase Agreement dated as of August 18, 1995,
between the Registrant and KFx, Inc. (filed as Exhibit 10.40
to the Registrant's Transition Report on Form 10-K for the
nine months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference). Pursuant to Item
601(b)(2) of Regulation S-K, schedules to this Agreement
have been omitted. The Company hereby undertakes to furnish
supplementally a copy of such schedules to the commission
upon request.
10.33 Stock Purchase Warrant issued by KFx, Inc. to the Company
dated August 18, 1995 (filed as Exhibit 10.41 to the
Registrant's Transition Report on Form 10-K for the nine
months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference).
10.34 Stock Purchase Warrant issued by KFx, Inc. to the Company
dated August 18, 1995 (filed as Exhibit 10.42 to the
Registrant's Transition Report on Form 10-K for the nine
months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference).
10.35 Limited Partnership Agreement of KFx Fuel Partners, L.P.
dated as of August 18, 1995 (filed as Exhibit 10.43 to the
Registrant's Transition Report on Form 10-K for the nine
months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference). (Certain portions of this
Exhibit have been omitted subject to an application for
confidential treatment filed with the Commission pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.)
10.36 Turnkey Design and Construction Agreement dated as of August
18, 1995, between KFx Fuel Partners, L.P. and Walsh
Construction Company, a Division of Guy F. Atkinson Company
(filed as Exhibit 10.44 to the Registrant's Transition
Report on Form 10-K for the nine months ended September 30,
1995 [File No. 1-13572] and incorporated herein by
reference). (Certain portions of this Exhibit have been
omitted subject to an application for confidential treatment
filed with the Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.)
10.37 Lease Agreement between Manufacturers Hanover Trust Company
of California and Woodland Biomass Power, Ltd. dated
December 29, 1989 (filed as Exhibit 10.39 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).
10.38 First Amendment to Power Purchase Agreement dated November
6, 1997, between Woodland Biomass Power, Ltd. and Pacific
Gas and Electric Company (filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 3, 1998 [File No. 1-13572] and incorporated
herein by reference). (Certain portions of this Exhibit have
been omitted subject to an application for confidential
treatment filed with the Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934.)
10.39 Second Amendment to Power Purchase Agreement dated November
6, 1997, between Mendota Biomass Power, Ltd. and Pacific Gas
and Electric Company (filed as Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 3, 1998 [File No. 1-13572] and incorporated
herein by reference). (Certain portions of this Exhibit have
been omitted subject to an application for confidential
treatment filed with the Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934.)
</TABLE>
B-42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ------------------------------------------------------------
<C> <S>
10.40* Purchase Agreement dated October 25, 1999, between
Mountainview Power Company and General Electric Company for
four PG 7241 FA Combustion Turbine Generators for the
Mountainview Generation Project.
10.41* Contract Termination Agreement between Southern California
Edison Company and Delano Energy Co., Inc.
10.42 Incentive Stock Option Plan of the Registrant (filed as
Exhibit 10.44 to the Registrant's Registration Statement on
Form S-1 [Reg. No 33-86682] and incorporated herein by
reference). (Maximum number of shares issuable in the
aggregate under this plan and the Registrant's Nonqualified
Stock Option Plan is 1,350,000 shares, after adjustment to
reflect share increase approved in December 1993 and 3-for-2
stock split effected in October 1996.)
10.43 Amended and Restated Directors Stock Option Plan of the
Registrant (filed as Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 3,
1999 [File No. 1-13572] and incorporated herein by
reference).
10.44 Amended and Restated Deferred Compensation Plan for
Directors of the Registrant (filed as Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended July 3, 1999 [File No. 1-13572] and incorporated
herein by reference).
10.45 Amended and Restated Equity Incentive Plan of the Registrant
(filed as Exhibit 10.5 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended July 3, 1999 [File No.
1-13572] and incorporated herein by reference).
10.46 Amended and Restated Nonqualified Stock Option Plan of the
Registrant (filed as Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 3,
1999 [File No. 1-13572] and incorporated herein by
reference). (Maximum number of shares issuable in the
aggregate under this plan and the Registrant's Incentive
Stock Option Plan is 1,350,000 shares, after giving effect
to share increase approved in December 1993 and 3-for-2
stock split effected in October 1996.)
10.47 Amended and Restated Thermo Ecotek Corporation--Thermo
Trilogy Corporation Nonqualified Stock Option Plan (filed as
Exhibit 10.7 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 3, 1999 [File No. 1-13572]
and incorporated herein by reference).
10.48 Thermo Trilogy Corporation Equity Incentive Plan (filed as
Exhibit 10.52 to the Registrant's Report on Form 10-K for
the fiscal year ended September 28, 1996 [File No. 1-13572]
and incorporated herein by reference).
In addition to the stock-based compensation plans of the
Registrant, the executive officers of the Registrant may be
granted awards under stock-based compensation plans of
Thermo Electron Corporation, for services rendered to the
Registrant. The terms of such plans are substantially the
same as those of the Registrant's Equity Incentive Plan.
10.49 Form of Indemnification Agreement between the Registrant and
its officers and directors (filed as Exhibit 10.43 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682]and incorporated herein by reference).
10.50 Restated Stock Holding Assistance Plan and Form of
Promissory Note (filed as Exhibit 10.54 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
September 27, 1997 [File No. 1-13572] and incorporated
herein by reference).
</TABLE>
B-43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ------------------------------------------------------------
<C> <S>
10.51 Master Cash Management, Guarantee Reimbursement and Loan
Agreement dated as of June 1, 1999, between the Registrant
and Thermo Electron Corporation (filed as Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999 [File No. 1-13572] and
incorporated herein by reference).
10.52 Master Cash Management, Guarantee Reimbursement and Loan
Agreement dated as of June 1, 1999, between Thermo Trilogy
Corporation and Thermo Electron Corporation (filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 3, 1999 [File No. 1-13572]
and incorporated herein by reference).
13 Annual Report to Shareholders for the fiscal year ended
October 2, 1999 (only those portions incorporated herein by
reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
</TABLE>
- ------------------------
* Confidential treatment requested as to certain portions of the document,
which portions have been omitted and filed separately with the Securities
and Exchange Commission.
B-44
<PAGE>
AMENDED EXHIBIT 13
Thermo Ecotek Corporation
Consolidated Financial Statements
Fiscal Year 1999
B-45
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
---------- ---------- -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES (Notes 11 and 13)................................. $178,338 $175,943 $164,261
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues (includes $4,302, $4,668, and $4,545 to
related parties; Notes 7 and 8)........................ 133,119 116,275 106,827
Selling, general, and administrative expenses (includes
$1,427, $1,490, and $1,643 to related parties; Notes 7
and 8)................................................. 16,271 13,302 10,349
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 to
parent company).......................................... (7,252) (11,040) (13,926)
Other Expense (Note 9)..................................... (2,125) -- --
-------- -------- --------
Income (Loss) from Continuing Operations Before Income
Taxes and Minority Interest.............................. (89,950) 39,413 38,248
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 income
tax provision (benefit) and minority interest of
$(2,830), $1,480, and $6 in fiscal 1999 and 1998; Note
18)...................................................... (2,463) 7,699 40
-------- -------- --------
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
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
B-46
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (includes $21,207 under
repurchase agreement with parent company in fiscal
1998)................................................... $ 20,002 $ 40,569
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 (amortized cost of $6,379 and $8,504; Notes 2 and
9)........................................................ 6,111 8,502
-------- --------
Restricted Funds............................................ 30,205 26,051
-------- --------
Other Assets................................................ 7,990 8,908
-------- --------
$442,814 $488,077
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term obligations and current portion of long-term
obligations (includes advance from affiliate of $4,972
in fiscal 1999; Note 12)................................ $ 37,752 $ 28,032
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 parent company in fiscal 1999)....................... 46,770 47,400
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; 37,869,248 and 37,822,789 shares issued..... 3,787 3,782
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
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
B-47
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
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)
-------- -------- --------
</TABLE>
B-48
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net proceeds from issuance of subordinated convertible
debentures.............................................. $ -- $ -- $ 48,470
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
common stock............................................ 232 870 698
Payment of withholding taxes related to stock option
exercises............................................... (43) (319) (1,115)
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) continuing
operations........................................ (23,740) (43,895) 2,158
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 Operations at End
of Year................................................... (1,917) (802) (1,971)
-------- -------- --------
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
(includes $68,500 converted by parent company in fiscal
1998; Note 12).......................................... $ 630 $ 83,248 $ 19,579
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
B-49
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME AND SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
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 debentures
(Note 12)............................................... 5 1,183 145
Issuance of Company common stock under employees' and
directors' stock plans.................................. -- 1 27
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 debentures
(Note 12)............................................... 625 81,701 18,991
Issuance of Company common stock under employees' and
directors' stock plans.................................. (403) (1,601) 204
Tax benefit related to employees' and directors' stock
plans................................................... -- -- 2,447
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
-------- -------- --------
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' stock plans
(Note 5)................................................ (59) -- --
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
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
B-50
<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.
B-51
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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.
B-52
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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'
B-53
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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
B-54
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
total production over the life of the facility (Note 9). Property, plant, and
equipment consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>
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.
B-55
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
B-56
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND PROJECTS UNDER DEVELOPMENT (CONTINUED)
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.
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
B-57
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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>
B-58
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
A summary of the status of the Company's stock options at October 2, 1999,
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
--------------------------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE
OF REMAINING EXERCISE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE
- ------------------------ -------------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
$ 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
=====
</TABLE>
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.
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
B-59
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
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
</TABLE>
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
B-60
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.................................................... $(89,086) $39,005 $37,666
Foreign..................................................... (864) 408 582
-------- ------- -------
$(89,950) $39,413 $38,248
======== ======= =======
</TABLE>
The components of the income tax (provision) benefit for continuing
operations are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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)
======= ======== ========
</TABLE>
B-61
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The total income tax (provision) benefit included in the accompanying
statement of operations was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Continuing Operations....................................... $32,673 $(14,530) $(14,409)
Discontinued Operations..................................... 2,143 (1,172) (6)
------- -------- --------
$34,816 $(15,702) $(14,415)
======= ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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>
B-62
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Deferred income taxes in the accompanying balance sheet consist of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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
======== =======
</TABLE>
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
B-63
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS (CONTINUED)
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.
B-64
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
B-65
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED-PARTY TRANSACTIONS (CONTINUED)
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.
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
B-66
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING AND UNUSUAL COSTS, NET (CONTINUED)
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.
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.
B-67
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING AND UNUSUAL COSTS, NET (CONTINUED)
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>
<CAPTION>
LAND
RECLAMATION FUEL CONTRACT
COSTS CANCELLATION SEVERANCE OTHER TOTAL
----------- ------------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
====== ====== ==== ==== ======
</TABLE>
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
B-68
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CONTINGENCIES (CONTINUED)
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, 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
B-69
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. TERMINATION OF POWER-SALES AGREEMENT (CONTINUED)
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.
12. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
8.3% Tax-exempt Revenue Bonds, Series 1989 (payable in semi-
annual installments, with a final payment in December
2000)...................................................... $13,400 $17,400
8.3% Tax-exempt Revenue Bonds, Series 1990 (payable in semi-
annual installments, with a final payment in December
2000)...................................................... 13,800 18,200
6.0% Tax-exempt Revenue Bonds, Series 1991 (payable in semi-
annual installments, with a final payment in June 2000).... 6,500 16,200
Noninterest-bearing Subordinated Convertible Debentures, due
March 2001 (convertible at $13.56 per share)............... 1,820 2,450
4.875% Subordinated Convertible Debentures, due April 2004
(convertible at $16.50 per share).......................... 44,950 44,950
------- -------
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>
(IN THOUSANDS)
<S> <C>
2000........................................................ $19,200
2001........................................................ 16,320
2002........................................................ --
2003........................................................ --
2004........................................................ 44,950
-------
$80,470
=======
</TABLE>
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.
B-70
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LONG-TERM OBLIGATIONS (CONTINUED)
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.
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.
B-71
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amount and fair value of the Company's long-term obligations
and interest rate swaps are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
</TABLE>
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.
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.
B-72
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMPREHENSIVE INCOME (CONTINUED)
Accumulated other comprehensive items in the accompanying balance sheet
consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cumulative Translation Adjustment.......................... $ 211 $42
Net Unrealized Loss on Available-for-sale Investments...... (164) (2)
----- ---
$ 47 $40
===== ===
</TABLE>
16. EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share were calculated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
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
======== ======= =======
</TABLE>
B-73
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. EARNINGS (LOSS) PER SHARE (CONTINUED)
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
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.
17. UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
FIRST SECOND THIRD (A) FOURTH (B)
-------- -------- --------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
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
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH (C)
-------- -------- -------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
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
</TABLE>
- ------------------------
(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
B-74
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. UNAUDITED QUARTERLY INFORMATION (CONTINUED)
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.
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.
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>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues......................................... $27,155 $33,028 $15,930
Costs and Expenses............................... 32,448 23,849 15,884
------- ------- -------
Income (Loss) from Discontinued Operations Before
Income Tax Benefit and Minority Interest....... (5,293) 9,179 46
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
======= ======= =======
</TABLE>
The Company expects to complete the sale of the Biopesticides segment by the
end of the first quarter of fiscal 2001.
B-75
<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)
B-76
<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
B-77
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW (CONTINUED)
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).
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.
B-78
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL 1999 COMPARED WITH FISCAL 1998 (CONTINUED)
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 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
B-79
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL 1999 COMPARED WITH FISCAL 1998 (CONTINUED)
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.
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.
B-80
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL 1999 COMPARED WITH FISCAL 1998 (CONTINUED)
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.
B-81
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL 1998 COMPARED WITH FISCAL 1997 (CONTINUED)
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.
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
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1999 FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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
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
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THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARKET RISK (CONTINUED)
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.
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
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THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 (CONTINUED)
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.
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
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THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 (CONTINUED)
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.
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THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
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 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
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THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
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.
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
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THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
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.
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
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1999 FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
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.
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
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1999 FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
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.
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
B-92
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
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.
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
B-93
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
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 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
B-94
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
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,
B-95
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
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.
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.
B-96
<PAGE>
THERMO ECOTEK CORPORATION
1999 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED ENDED (E)
--------------------------------------------------------- ---------
OCT. 2, OCT. 3, SEPT. 27, SEPT. 28, SEPT. 30, SEPT. 30,
1999 (A) 1998 (B) 1997 (C) 1996 (D) 1995 1995
-------- -------- --------- --------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(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.
B-97
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
------------------------------ -----------------------------
QUARTER HIGH LOW HIGH LOW
- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
B-98
<PAGE>
APPENDIX C
QUARTERLY REPORT ON FORM 10-Q OF THERMO ECOTEK
FOR THE QUARTER ENDED JANUARY 1, 2000
C-1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(mark one)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarter Ended January 1,
2000
/ / 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)
<TABLE>
<S> <C>
DELAWARE 04-3072335
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
245 WINTER STREET, SUITE 300 02451
WALTHAM, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
<TABLE>
<S> <C>
Class Outstanding at January 28, 2000
-------------------------- ----------------------------
Common Stock, $.10 par value 35,973,009
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
C-2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
THERMO ECOTEK CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 1, OCTOBER 2,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 14,145 $ 20,002
Advance to affiliate...................................... 7,605 17,766
Restricted funds.......................................... 29,771 28,024
Accounts receivable and unbilled revenues................. 39,885 57,980
Inventories............................................... 7,266 7,292
Deferred tax asset........................................ 41,123 41,288
Other current assets...................................... 1,975 2,573
Net assets of discontinued operations (Note 4)............ 23,520 38,231
-------- --------
165,290 213,156
-------- --------
Property, Plant, and Equipment, at Cost..................... 263,367 251,470
Less: Accumulated depreciation and amortization........... 68,367 63,263
-------- --------
195,000 188,207
-------- --------
Long-term Available-for-sale Investments, at Quoted Market
Value (amortized cost of $6,379).......................... 7,174 6,111
-------- --------
Restricted Funds............................................ 26,847 30,205
-------- --------
Other Assets................................................ 8,464 7,990
-------- --------
$402,775 $445,669
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term obligations and current portion of long-term
obligations............................................. $ 31,074 $ 37,752
Accounts payable.......................................... 21,131 30,252
Accrued restructuring costs (Note 5)...................... 6,159 7,473
Lease obligations payable................................. 4,043 1,005
Other accrued expenses.................................... 12,550 15,758
Due to parent company..................................... 104 373
-------- --------
75,061 92,613
-------- --------
Long-term Obligations:
Nonrecourse tax-exempt obligations........................ -- 14,500
Subordinated convertible debentures (includes $2,826 due
to parent company)...................................... 46,770 46,770
-------- --------
46,770 61,270
-------- --------
Deferred Income Taxes....................................... 58,024 55,951
-------- --------
Other Deferred Items........................................ 37,940 40,419
-------- --------
Minority Interest........................................... 3,666 4,435
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 50,000,000 shares
authorized; 37,874,355 and 37,869,248 shares issued..... 3,787 3,787
Capital in excess of par value............................ 175,934 175,895
Retained earnings......................................... 28,707 39,382
Treasury stock at cost, 1,901,346 shares.................. (28,084) (28,084)
Deferred compensation..................................... (41) (46)
Accumulated other comprehensive items (Note 2)............ 1,011 47
-------- --------
181,314 190,981
-------- --------
$402,775 $445,669
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-3
<PAGE>
THERMO ECOTEK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $ 38,610 $40,375
-------- -------
Costs and Operating Expenses:
Cost of revenues (includes $833 and $1,401 to related
parties)................................................ 30,101 30,499
Selling, general, and administrative expenses (includes
$345 and $360 to related parties)....................... 3,817 4,164
-------- -------
33,918 34,663
-------- -------
Operating Income............................................ 4,692 5,712
Interest Income............................................. 857 763
Interest Expense (includes $34 to parent company in fiscal
2000)..................................................... (1,373) (1,891)
-------- -------
Income from Continuing Operations Before Income Taxes and
Minority Interest......................................... 4,176 4,584
Provision for Income Taxes.................................. 1,718 1,503
Minority Interest Expense................................... 38 14
-------- -------
Income from Continuing Operations........................... 2,420 3,067
Loss from Discontinued Operations (net of income tax benefit
of $461 and $435; Note 4)................................. (495) (557)
Provision for Loss on Disposal of Discontinued Operations
(net of income tax benefit of $2,700; Note 4)............. (12,600) --
-------- -------
Net Income (Loss)........................................... $(10,675) $ 2,510
======== =======
Earnings per Share from Continuing Operations (Note 3):
Basic..................................................... $ .07 $ .09
======== =======
Diluted................................................... $ .07 $ .08
======== =======
Basic and Diluted Earnings (Loss) per Share (Note 3)........ $ (.30) $ .07
======== =======
Weighted Average Shares (Note 3):
Basic..................................................... 35,971 35,925
======== =======
Diluted................................................... 36,167 36,247
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-4
<PAGE>
THERMO ECOTEK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Operating Activities:
Net income (loss)......................................... $(10,675) $ 2,510
Adjustments to reconcile net income (loss) to income from
continuing operations:
Loss from discontinued operations....................... 495 557
Provision for loss on disposal of discontinued
operations............................................ 12,600 --
-------- --------
Income from continuing operations......................... 2,420 3,067
Adjustments to reconcile income from continuing operations
to net cash
provided by operating activities of continuing
operations:
Depreciation and amortization........................... 5,447 5,773
Increase in deferred income taxes....................... 1,659 2,513
Minority interest expense............................... 38 14
Other noncash items..................................... 5 --
Changes in current accounts, excluding the effect of
discontinued operations:
Restricted funds...................................... (1,747) 4,595
Accounts receivable and unbilled revenues............. 18,095 6,751
Inventories........................................... 838 (1,217)
Other current assets.................................. 763 (1,654)
Accounts payable...................................... (9,121) (1,311)
Other current liabilities............................. (1,852) (1,805)
-------- --------
Net cash provided by continuing operations.......... 16,545 16,726
Net cash provided by discontinued operations........ 2,065 784
-------- --------
Net cash provided by operating activities........... 18,610 17,510
-------- --------
Investing Activities:
Purchases of property, plant, and equipment............... (12,431) (8,147)
Advances to affiliate, net................................ 10,161 --
Use (funding) of long-term restricted funds............... 3,358 (4,293)
Increase (decrease) in other deferred items............... (2,380) 2,954
Increase in other assets.................................. (754) (1,406)
-------- --------
Net cash used in continuing operations.............. (2,046) (10,892)
Net cash used in discontinued operations............ (412) (494)
-------- --------
Net cash used in investing activities............... $ (2,458) $(11,386)
-------- --------
</TABLE>
C-5
<PAGE>
THERMO ECOTEK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Financing Activities:
Repayment of long-term obligations........................ $(14,000) $(14,200)
Payments under capital lease obligations.................. (5,454) (5,240)
Increase (decrease) in short-term borrowings.............. (1,724) 505
Net proceeds from issuance of Company and subsidiary
common stock............................................ 39 48
Distribution to minority partner.......................... (826) (753)
Contribution from minority partner........................ -- 162
-------- --------
Net cash used in financing activities............... (21,965) (19,478)
-------- --------
Exchange Rate Effect on Cash................................ (26) (12)
-------- --------
Decrease in Cash and Cash Equivalents....................... (5,839) (13,366)
Cash and Cash Equivalents at Beginning of Period............ 20,002 42,157
-------- --------
14,163 28,791
Cash of Discontinued Operations at End of Period............ (18) (761)
-------- --------
Cash and Cash Equivalents at End of Period.................. $ 14,145 $ 28,030
======== ========
Noncash Activities:
Conversion of subordinated convertible debentures......... $ -- $ 630
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-6
<PAGE>
THERMO ECOTEK CORPORATION
1. GENERAL
The interim consolidated financial statements presented have been prepared
by Thermo Ecotek Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at January 1, 2000, the results of
operations for the three-month periods ended January 1, 2000, and January 2,
1999, and the cash flows for the three-month periods ended January 1, 2000, and
January 2, 1999. Interim results are not necessarily indicative of results for a
full year.
Historical financial results have been restated to reflect a decision to
sell the Company's majority-owned Thermo Trilogy Corporation subsidiary, which
has been presented as discontinued operations in the accompanying financial
statements (Note 4). The consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain information
included in the annual financial statements and notes of the Company. The
consolidated financial statements and notes included herein should be read in
conjunction with the financial statements and notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended October 2, 1999, filed with
the Securities and Exchange Commission.
2. COMPREHENSIVE INCOME
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. The Company had a comprehensive loss of
$9.8 million in the first quarter of fiscal 2000 and comprehensive income of
$1.2 million in the first quarter of fiscal 1999.
3. EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share were calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
BASIC
Income from Continuing Operations........................... $ 2,420 $ 3,067
Loss from Discontinued Operations........................... (495) (557)
Provision for Loss on Disposal of Discontinued Operations... (12,600) --
-------- -------
Net Income (Loss)........................................... $(10,675) $ 2,510
-------- -------
Weighted Average Shares..................................... 35,971 35,925
-------- -------
Basic Earnings (Loss) per Share:
Continuing operations..................................... $ .07 $ .09
Discontinued operations................................... (.37) (.02)
-------- -------
$ (.30) $ .07
======== =======
</TABLE>
C-7
<PAGE>
THERMO ECOTEK CORPORATION
3. EARNINGS (LOSS) PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
DILUTED
Income from Continuing Operations........................... $ 2,420 $ 3,067
Loss from Discontinued Operations........................... (495) (557)
Provision for Loss on Disposal of Discontinued Operations... (12,600) --
-------- -------
Net Income (Loss)........................................... $(10,675) $ 2,510
-------- -------
Weighted Average Shares..................................... 35,971 35,925
Effect of:
Convertible obligations................................... 134 142
Stock options............................................. 62 180
-------- -------
Weighted Average Shares, as Adjusted........................ 36,167 36,247
-------- -------
Diluted Earnings (Loss) per Share:
Continuing operations..................................... $ .07 $ .08
Discontinued operations................................... (.37) (.01)
-------- -------
$ (.30) $ .07
======== =======
</TABLE>
Options to purchase 540,000 and 313,000 shares of common stock were not
included in the computation of diluted earnings (loss) per share for the first
quarter of fiscal 2000 and 1999, respectively, because the options' exercise
prices were greater than the average market price for the common stock and their
effect would have been antidilutive.
In addition, the computation of diluted earnings (loss) per share for the
three-month periods ended January 1, 2000, and January 2, 1999, excludes the
effect of assuming the conversion of the Company's $45.0 million principal
amount of 4.875% subordinated convertible debentures, convertible at $16.50 per
share, because the effect would be antidilutive.
4. PROPOSED REORGANIZATION AND DISCONTINUED OPERATIONS
In January 2000, Thermo Electron Corporation 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 Securities and Exchange Commission clearance 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.
In addition, on January 31, 2000, Thermo Electron announced a plan under
which the Company will divest its Thermo Trilogy subsidiary, which represents
its Biopesticides segment. 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 Company classified the results of operations of the
Biopesticides segment as discontinued in the accompanying statement of
operations. In addition, the
C-8
<PAGE>
THERMO ECOTEK CORPORATION
4. PROPOSED REORGANIZATION AND DISCONTINUED OPERATIONS (CONTINUED)
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>
THREE MONTHS ENDED
-----------------------
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues................................................ $4,510 $4,686
Costs and Expenses...................................... 5,610 5,826
------ ------
Loss from Discontinued Operations Before Income Tax
Benefit and Minority Interest......................... (1,100) (1,140)
Income Tax Benefit...................................... 461 435
Minority Interest Income................................ 144 148
------ ------
Loss from Discontinued Operations....................... $ (495) $ (557)
====== ======
</TABLE>
In the first quarter of fiscal 2000, the Company provided $12.6 million, net
of a tax benefit of $2.7 million, for the estimated loss on disposal of
discontinued operations. The Company expects to complete the sale of its
Biopesticides segment by the end of the first quarter of fiscal 2001.
5. RESTRUCTURING AND RELATED COSTS
During fiscal 1999, the Company recorded cash restructuring costs, primarily
for land reclamation costs at its subbituminous coal-beneficiation facility, a
loss on the cancellation of a fuel contract at its Delano, California, facility,
and severance for 3 employees, all of whom were terminated during the first
quarter of fiscal 2000.
A summary of the changes in accrued restructuring costs is as follows:
<TABLE>
<CAPTION>
LAND
RECLAMATION FUEL CONTRACT
COSTS CANCELLATION SEVERANCE OTHER TOTAL
----------- ------------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 2, 1999.................. $4,394 $ 2,444 $189 $446 $ 7,473
Usage..................................... -- (1,222) (92) -- (1,314)
------ ------- ---- ---- -------
BALANCE AT JANUARY 1, 2000.................. $4,394 $ 1,222 $ 97 $446 $ 6,159
====== ======= ==== ==== =======
</TABLE>
The Company expects accrued restructuring costs to be paid primarily during
the remainder of fiscal 2000.
C-9
<PAGE>
THERMO ECOTEK CORPORATION
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 2, 1999, filed with the Securities and Exchange
Commission.
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).
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.
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 joint venture established by a wholly
owned subsidiary, 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,
also through a joint venture, a 58-megawatt electricity-generating facility in
Premnitz, Germany. 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.
The Company's Star Natural Gas subsidiary pursues opportunities in the
natural gas gathering, processing, storage, and marketing business. In
May 1999, Star Natural Gas purchased one gas gathering system and two gas
processing plants (the gas facilities).
Through May 1999, the Energy segment 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.
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
C-10
<PAGE>
THERMO ECOTEK CORPORATION
OVERVIEW (CONTINUED)
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 throughout 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 it 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 its business, financial condition, and results of operations.
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 represents its
Biopesticides segment.
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 2000 COMPARED WITH FIRST QUARTER FISCAL 1999
Revenues were $38.6 million in the first quarter of fiscal 2000, compared
with $40.4 million in the first quarter of fiscal 1999. Revenues decreased by an
aggregate $8.2 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. Revenues decreased by $1.4 million due to the termination of
the power-sales agreement at the Company's Gorbell facility during the fourth
quarter of fiscal 1999. These decreases were offset by the inclusion of
$5.2 million in revenues from the Company's electricity-generating facility in
Premnitz, Germany, which was acquired in September 1999, and a $1.5 million
increase in revenues from the Company's Star Natural Gas subsidiary, primarily
due to the acquisition of the gas facilities in May 1999. Revenues also
increased $1.1 million at the Czech Republic operations due to a plant expansion
that was completed in March 1999.
The gross profit margin decreased to 22% in the first quarter of fiscal 2000
from 24% in the first quarter of fiscal 1999, primarily due to the transition to
avoided cost rates at the Mendota and Woodland facilities.
The power-sales agreements for the Company's Mendota, Woodland, and Delano
facilities 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
Southern California Electric, 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 cost). Avoided cost
rates are currently substantially lower than the rates the Company has
C-11
<PAGE>
THERMO ECOTEK CORPORATION
FIRST QUARTER FISCAL 2000 COMPARED WITH FIRST QUARTER FISCAL 1999 (Continued)
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 facility will operate at breakeven or nominal operating losses,
primarily as a result of nonrecourse lease obligations that have been partially
funded from the Woodland facility'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 facility
or forfeit its interest in the facility. Revenues from the Woodland facility
were $28.9 million in fiscal 1999 and its results were approximately breakeven.
As a result of the transition from fixed contract rates to avoided costs
rates, the Mendota facility operated at a loss through the first quarter of
fiscal 2000. However, based on current avoided cost rates, the Mendota facility
is expected to operate at a profit subsequent to the first quarter of fiscal
2000. The Mendota facility'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 facilities'
aggregate revenues and operating income before restructuring charges were
approximately $63.6 million and $33.4 million, respectively, in fiscal 1999. If
Thermo Ecotek had been paid avoided cost rates at each of its California
facilities, revenues in the first quarter of fiscal 2000 and fiscal 1999 would
have been lower by $10.1 million and $18.4 million, respectively. 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
were 10% in the first quarter of fiscal 2000 and 1999.
Interest income increased to $0.9 million in the first quarter of fiscal
2000 from $0.8 million in the first quarter of fiscal 1999, primarily due to
higher interest rates.
Interest expense decreased to $1.4 million in the first quarter of fiscal
2000 from $1.9 million in the first quarter of fiscal 1999, primarily due to
lower outstanding debt related to the Company's Delano and Mendota facilities.
The effective tax rate was 41% and 33% in the first quarter of fiscal 2000
and 1999, respectively. The effective tax rate in fiscal 2000 exceeded the
statutory federal income tax rate primarily due to the effect of state income
taxes. The effective tax rate in fiscal 1999 was below the statutory federal
income tax rate primarily due to tax credits earned from the production of
K-Fuel prior to the closure of the K-Fuel Facility.
Minority interest expense 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 have been classified as
discontinued operations in the accompanying statement of operations (Note 4).
The loss from discontinued operations was $0.5 million in the first quarter of
fiscal 2000,
C-12
<PAGE>
THERMO ECOTEK CORPORATION
FIRST QUARTER FISCAL 2000 COMPARED WITH FIRST QUARTER FISCAL 1999 (Continued)
compared with $0.6 million in the first quarter of fiscal 1999. In addition, in
the first quarter of fiscal 2000, the Company provided $12.6 million, net of
tax, for the estimated loss on disposal of the Biopesticides segment.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $96.3 million at January 1, 2000, compared with
$120.5 million at October 2, 1999. The Company had cash, cash equivalents, and
current restricted funds of $43.9 million at January 1, 2000, compared with
$48.0 million at October 2, 1999. In addition, the Company had $7.6 million
invested in an advance to affiliate at January 1, 2000, compared with
$17.8 million at October 2, 1999. Current restricted funds, which consists of
funds held in trust pursuant to certain lease and debt agreements, totaled
$29.8 million and $28.0 million at January 1, 2000, and October 2, 1999,
respectively. In addition, cash and cash equivalents in the accompanying balance
sheet includes $8.5 million and $12.5 million of cash at January 1, 2000, and
October 2, 1999, 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. During the first quarter of fiscal 2000, the
Company's continuing operations provided cash and restricted funds from
operating activities of $18.3 million. Cash of $18.1 million provided by a
seasonal decrease in accounts receivable was offset in part by $9.1 million of
cash used to fund a seasonal decrease in accounts payable at Star Natural Gas.
The Company expects to pay accrued restructuring costs of $6.2 million primarily
during the remainder of fiscal 2000.
Excluding advance to affiliate activity, the Company's investing activities
used $12.2 million of cash during the first quarter of fiscal 2000. The Company
expended $12.4 million for capital expenditures, including $11.6 million related
to the repowering of the Company's Mountainview, California, facility. The
Company expects to make capital expenditures of approximately $30 million during
the remainder of fiscal 2000, primarily related to the Mountainview facility.
During the first quarter of fiscal 2000, the Company's financing activities
used cash of $22.0 million, primarily for the repayment of long-term obligations
and payments under capital lease obligations related to three of its California
facilities.
In January 2000, the Company sold its interest in its Gorbell
electricity-generating facility for $2 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 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.
C-13
<PAGE>
THERMO ECOTEK CORPORATION
YEAR 2000
As of the date of this report, the Company has completed its year 2000
initiatives which included: (i) testing and upgrading significant information
technology systems and facilities; (ii) assessing the year 2000 readiness of its
key suppliers, vendors, and customers; and (iii) developing contingency plans.
As a result of completing these initiatives, the Company believes that all
of its material information technology systems and critical non-information
technology systems are year 2000 compliant. In addition, the Company is not
aware of any significant supplier or vendor that has experienced material
disruption due to year 2000 issues. The Company has also developed a contingency
plan to allow its primary business operations to continue despite disruptions
due to year 2000 problems, if any, that might yet arise in the future. The costs
incurred to date by the Company in connection with the year 2000 issue have not
been material.
While the Company to date has been successful in minimizing negative
consequences arising from year 2000 issues, there can be no assurance that in
the future the Company's business operations or financial condition may not be
impacted by year 2000 problems, such as increased warranty claims, vendor and
supplier disruptions, or litigation relating to year 2000 issues.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk from changes in equity prices, foreign
currency exchange rates, and interest rates has not changed materially from its
exposure at fiscal year-end 1999.
PART II--OTHER INFORMATION
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On February 1, 2000, the Company filed a Current Report on Form 8-K dated
January 31, 2000, with respect to a proposed reorganization plan at Thermo
Electron Corporation, as well as a decision to hold for sale the Company's
Thermo Trilogy Corporation subsidiary.
C-14
<PAGE>
THERMO ECOTEK CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 15th day of February 2000.
<TABLE>
<S> <C> <C>
THERMO ECOTEK CORPORATION
By: /s/ PAUL F. KELLEHER
-----------------------------------------
Paul F. Kelleher
CHIEF ACCOUNTING OFFICER
By: /s/ THEO MELAS-KYRIAZI
-----------------------------------------
Theo Melas-Kyriazi
CHIEF FINANCIAL OFFICER
</TABLE>
C-15
<PAGE>
THERMO ECOTEK CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule for the period ended January 1,
2000.
27.2 Restated Financial Data Schedule for the period ended
January 2, 1999.
</TABLE>
C-16
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and Thermo Electron's Certificate of
Incorporation and Bylaws limit the monetary liability of directors to Thermo
Electron and to its stockholders and provide for indemnification of Thermo
Electron's officers and directors for liabilities and expenses that they may
incur in such capacities. In general, officers and directors are indemnified
with respect to actions taken in good faith in a manner reasonably believed to
be in, or not opposed to, the best interests of Thermo Electron and, with
respect to any criminal action or proceeding, actions that the indemnitee had no
reasonable cause to believe were unlawful. Thermo Electron also has
indemnification agreements with its directors and officers that provide for the
maximum indemnification allowed by law.
Thermo Electron has an insurance policy which insures its directors and
officers against certain liabilities which might be incurred in connection with
the performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed herewith or incorporated herein by
reference:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of Thermo
Electron (filed as Exhibit 1 to Thermo Electron's Amendment
No. 3 to Registration Statement on Form 8-A/A
[File No. 1-8002] and incorporated herein by reference).
3.2 Bylaws of Thermo Electron (filed as Exhibit 3 to Thermo
Electron's Quarterly Report on Form 10-Q for the quarter
ended July 3, 1999 [File No. 1-8002] and incorporated herein
by reference).
4.1 Fiscal Agency Agreement dated as of January 3, 1996, between
the Registrant and Chemical Bank pertaining to the
Registrant's 4 1/4% Subordinated Convertible Debentures due
2003 (filed as Exhibit 4.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 30, 1995
[File No. 1-8002] and incorporated herein by reference).
</TABLE>
The Registrant agrees, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K,
to furnish to the Commission upon request, a copy of each instrument with
respect to other long-term debt of the Registrant or its consolidated
subsidiaries.
<TABLE>
<C> <S>
4.2 Rights Agreement, dated as of January 19, 1996, between the
Registrant and The First National Bank of Boston, as Rights
Agent, which includes as Exhibit A the Form of Certificate
of Designations, as Exhibit B the Form of Rights
Certificate, and as Exhibit C the Summary of Rights to
Purchase Preferred Stock (filed as Exhibit 1 to the
Registrant's Registration Statement on Form 8-A filed on
January 26, 1996, as amended by Amendment No. 1 to the
Registrant's Registration Statement on Form 8-A/A filed on
May 30, 1997 and incorporated herein by reference).
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
4.3 Amendment No. 1 to Rights Agreement, dated as of June 11,
1999, between the Registrant and BankBoston, N.A. (formerly,
The First National Bank of Boston), as Rights Agent, which
includes as Exhibit B the amended and restated Form of
Rights Certificate and as Exhibit C the amended and restated
Summary of Rights to Purchase Preferred Stock (filed as
Exhibit 2 to the Registrant's Amendment No. 2 to
Registration Statement on Form 8-A/ A filed on June 21, 1999
and incorporated herein by reference).
4.4 Indenture dated as of October 29, 1998, by and between the
Registrant and Bankers Trust Company, as Trustee, relating
to the issuance of senior debt securities by the Registrant
(filed as Exhibit 4.1 to the Registrant's Current Report on
Form 8-K dated October 29, 1998, filed with the Securities
and Exchange Commission on October 30, 1998, and
incorporated herein by reference).
4.5 First Supplemental Indenture dated as of October 29, 1998,
by and between the Registrant and Bankers Trust Company, as
Trustee, relating to the issuance by the Registrant of
$150,000,000 aggregate principal amount of its 7.625% Notes
due 2008 (filed as Exhibit 4.2 to the Registrant's Current
Report on Form 8-K dated October 29, 1998, filed with the
Securities and Exchange Commission on October 30, 1998, and
incorporated herein by reference).
5.1 Opinion and consent of Seth H. Hoogasian, Esq. as to the
validity of the Securities.
8.1 Opinion and consent of Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C. as to tax matters.
10.1 Form of Indemnification Agreement between the Registrant and
the directors and officers of its majority-owned
subsidiaries (filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form S-4 [Reg. No. 333-90661] and
incorporated herein by reference).
10.2 Form of Amended and Restated Indemnification Agreement
between the Registrant and its directors and officers (filed
as Exhibit 10.2 to the Registrant's Registration Statement
on Form S-4 [Reg. No. 333-90661] and incorporated herein by
reference).
23.1 Consent of Arthur Andersen LLP to the Registrant.
23.2 Consent of Arthur Andersen LLP to Thermo Ecotek Corporation.
23.3 Consent of Seth H. Hoogasian, Esq. (included as part of
Exhibit 5.1).
23.4 Power of Attorney (see signature pages to this Registration
Statement).
23.5 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (included as part of Exhibit 8.1).
</TABLE>
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed
II-2
<PAGE>
that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(5) That before any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
(6) That every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means,
including information contained in documents filed after the effective date
of this registration statement through the date of responding to such
request; and
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in this registration statement when
it became effective.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
II-3
<PAGE>
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. If a claim of
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in a successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waltham, Commonwealth of
Massachusetts, on May 8, 2000.
<TABLE>
<S> <C> <C>
THERMO ELECTRON CORPORATION
By: /s/ RICHARD F. SYRON
-----------------------------------------
Richard F. Syron
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
</TABLE>
POWER OF ATTORNEY AND SIGNATURES
Each of the undersigned Directors and Officers of Thermo Electron
Corporation hereby appoints Theo Melas-Kyriazi, Seth H. Hoogasian and Sandra L.
Lambert, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD F. SYRON President, Chief Executive
------------------------------------------- Officer and Chairman of May 8, 2000
Richard F. Syron the Board
Vice President and Chief
/s/ THEO MELAS-KYRIAZI Financial Officer
------------------------------------------- (Principal Financial May 8, 2000
Theo Melas-Kyriazi Officer and Principal
Accounting Officer)
/s/ SAMUEL W. BODMAN Director
------------------------------------------- May 8, 2000
Samuel W. Bodman
/s/ PETER O. CRISP Director
------------------------------------------- May 8, 2000
Peter O. Crisp
/s/ ELIAS P. GYFTOPOULOS Director
------------------------------------------- May 8, 2000
Elias P. Gyftopoulos
/s/ FRANK JUNGERS Director
------------------------------------------- May 8, 2000
Frank Jungers
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT A. MCCABE Director
------------------------------------------- May 8, 2000
Robert A. Mccabe
/s/ HUTHAM S. OLAYAN Director
------------------------------------------- May 8, 2000
Hutham S. Olayan
/s/ ROBERT W. O'LEARY Director
------------------------------------------- May 8, 2000
Robert W. O'Leary
/s/ ROGER D. WELLINGTON Director
------------------------------------------- May 8, 2000
Roger D. Wellington
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of Thermo
Electron (filed as Exhibit 1 to Thermo Electron's Amendment
No. 3 to Registration Statement on Form 8-A/A [File No.
1-8002] and incorporated herein by reference).
3.2 Bylaws of Thermo Electron (filed as Exhibit 3 to Thermo
Electron's Quarterly Report on Form 10-Q for the quarter
ended July 3, 1999 [File No. 1-8002] and incorporated herein
by reference).
4.1 Fiscal Agency Agreement dated as of January 3, 1996, between
the Registrant and Chemical Bank pertaining to the
Registrant's 4 1/4% Subordinated Convertible Debentures due
2003 (filed as Exhibit 4.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 30, 1995
[File No. 1-8002] and incorporated herein by reference).
</TABLE>
The Registrant agrees, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K,
to furnish to the Commission upon request, a copy of each instrument with
respect to other long-term debt of the Registrant or its consolidated
subsidiaries.
<TABLE>
<C> <S>
4.2 Rights Agreement, dated as of January 19, 1996, between the
Registrant and The First National Bank of Boston, as Rights
Agent, which includes as Exhibit A the Form of Certificate
of Designations, as Exhibit B the Form of Rights
Certificate, and as Exhibit C the Summary of Rights to
Purchase Preferred Stock (filed as Exhibit 1 to the
Registrant's Registration Statement on Form 8-A filed on
January 26, 1996, as amended by Amendment No. 1 to
Registration Statement on Form 8-A/A filed on May 30, 1997
and incorporated herein by reference).
4.3 Amendment No. 1 to Rights Agreement, dated as of June 11,
1999, between the Registrant and BankBoston, N.A. (formerly,
The First National Bank of Boston), as Rights Agent, which
includes as Exhibit B the amended and restated Form of
Rights Certificate and as Exhibit C the amended and restated
Summary of Rights to Purchase Preferred Stock (filed as
Exhibit 2 to the Registrant's Amendment No. 2 to
Registration Statement on Form 8-A/ A filed on June 21,
1999 and incorporated herein by reference).
4.4 Indenture dated as of October 29, 1998, by and between the
Registrant and Bankers Trust Company, as Trustee, relating
to the issuance of senior debt securities by the Registrant
(filed as Exhibit 4.1 to the Registrant's Current Report on
Form 8-K dated October 29, 1998, filed with the Securities
and Exchange Commission on October 30, 1998, and
incorporated herein by reference).
4.5 First Supplemental Indenture dated as of October 29, 1998,
by and between the Registrant and Bankers Trust Company, as
Trustee, relating to the issuance by the Registrant of
$150,000,000 aggregate principal amount of its 7.625% Notes
due 2008 (filed as Exhibit 4.2 to the Registrant's Current
Report on Form 8-K dated October 29, 1998, filed with the
Securities and Exchange Commission on October 30, 1998, and
incorporated herein by reference).
5.1 Opinion and consent of Seth H. Hoogasian, Esq. as to the
validity of the Securities.
8.1 Opinion and consent of Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C. as to tax matters.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.1 Form of Indemnification Agreement between the Registrant and
the directors and officers of its majority-owned
subsidiaries (filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form S-4 [Reg. No. 333-90661] and
incorporated herein by reference).
10.2 Form of Amended and Restated Indemnification Agreement
between the Registrant and its directors and officers (filed
as Exhibit 10.2 to the Registrant's Registration Statement
on Form S-4 [Reg. No. 333-90661] and incorporated herein by
reference).
23.1 Consent of Arthur Andersen LLP to the Registrant.
23.2 Consent of Arthur Andersen LLP to Thermo Ecotek Corporation.
23.3 Consent of Seth H. Hoogasian, Esq. (included as part of
Exhibit 5.1).
23.4 Power of Attorney (see signature pages to this Registration
Statement).
23.5 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (included as part of Exhibit 8.1).
</TABLE>
<PAGE>
EXHIBIT 5.1
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02454-9046
May 8, 2000
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02454-9046
Re: Registration Statement on Form S-4
RELATING TO COMMON STOCK, $1.00 PAR VALUE, OF THERMO ELECTRON CORPORATION
Dear Sirs:
I am General Counsel to Thermo Electron Corporation, a Delaware corporation
(the "Company"), and have acted as its counsel in connection with the exchange
offer by the Company for all issued and outstanding shares of Thermo Ecotek
Corporation, a majority-owned subsidiary of the Company ("Thermo Ecotek"), and
the filing of a Registration Statement on Form S-4 (the "Registration
Statement") in order to register, under the Securities Act of 1933, as amended,
the shares of the Company's Common Stock, $1.00 par value per share (the
"Shares"), to be issued in exchange for the issued and outstanding shares of
Thermo Ecotek.
I or a member of my legal staff have reviewed the corporate proceedings
taken by the Company with respect to the authorization of the issuance of the
Shares. I or a member of my legal staff have also examined and relied upon
originals or copies, certified or otherwise authenticated to my satisfaction, of
all corporate records, documents, agreements or other instruments of the Company
and have made all investigations of law and have discussed with the Company's
representatives all questions of fact that I have deemed necessary or
appropriate.
Based upon and subject to the foregoing, I am of the opinion that:
1. The Company is a corporation validly existing and in corporate good
standing under the laws of the State of Delaware.
2. The issuance of the Shares as contemplated in the Registration
Statement has been duly authorized by the Company.
<PAGE>
3. The Shares, when issued in accordance with the terms of the merger
described in the Registration Statement, will be validly issued, fully paid and
nonassessable.
This opinion is limited to the applicable provisions of the Delaware
Constitution and the General Corporation Law of the State of Delaware ("Delaware
Law") and reported judicial decisions interpreting Delaware Law.
I hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to being named in the Registration Statement under
the caption "LEGAL OPINION".
Very truly yours,
/s/ Seth H. Hoogasian
----------------------
Seth H. Hoogasian
General Counsel
<PAGE>
Exhibit 8.1
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.
One Financial Center
Boston, Massachusetts 02111
617 542 6000
617 542 2241 FAX
May 8, 2000
Thermo Ecotek Corporation
245 Winter Street
Waltham, Massachusetts 02451
Re: Merger of Ecotek Acquisition Inc. with and into
Thermo Ecotek Corporation
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the merger (the "Merger") of Ecotek Acquisition Inc. ("Merger
Sub"), a Delaware corporation and a wholly-owned subsidiary of Thermo Electron
Corporation ("Parent"), with and into Thermo Ecotek Corporation, a Delaware
corporation (the "Company"). After the Merger, the separate corporate existence
of Merger Sub will cease and the Company will become a wholly-owned subsidiary
of Parent.
This opinion is being delivered to you in connection with the filing by
Parent of a registration statement on Form S-4 (the "Registration Statement"),
which includes the Information Statement-Prospectus relating to the Merger.
Unless otherwise defined, capitalized terms referred to herein have the
meanings set forth in the Registration Statement or the certificate of officers
of Parent, Merger Sub and the Company (the "Officers' Tax Certificate"). All
section references, unless otherwise indicated, are to the Internal Revenue Code
of 1986, as amended (the "Code").
In delivering our opinion regarding certain United States federal
income tax consequences of the Merger, we have reviewed and relied upon (without
any independent investigation) the truth and accuracy, at all relevant times, of
the facts, statements, covenants, descriptions, representations, and warranties
contained in the following documents (including all exhibits and schedules
attached thereto):
1. The Registration Statement;
2. The Officers' Tax Certificate; and
3. Such other instruments and documents related to the formation,
organization, and operation of Parent, Merger Sub, and the
Company and related to the Merger, as we have deemed necessary or
appropriate.
<PAGE>
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.
May 8, 2000
Page 2
In connection with rendering this opinion, we also have assumed
(without any independent investigation) that:
1. Original documents (including signatures thereto) submitted to us
are authentic, documents submitted to us as copies conform to the
original documents, and that all such documents have been (or
will be by the Effective Time) duly and validly executed and
delivered where due execution and delivery are prerequisites to
effectiveness thereof;
2. All representations, warranties, and statements made or agreed to
by Parent, Merger Sub, the Company, their managements, employees,
officers, directors, and stockholders in connection with the
Merger, including, but not limited to, those set forth in the
Officers' Tax Certificate are true and accurate at all relevant
times and no actions have been (or will be) taken which are
inconsistent with such representations;
3. All covenants contained in the Officers' Tax Certificate are
performed without waiver or breach of any material provision
thereof;
4. The Merger will be reported by Parent, Merger Sub and the Company
on their respective federal income tax returns in a manner
consistent with the opinion set forth below;
5. Any representation or statement made in any of the documents
referred to herein "to the knowledge" of any person or party or
similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we
are of the opinion that, if the Merger is consummated in accordance with the
statements set forth in the Registration Statement and if the Officers' Tax
Certificate is true and correct as of the Effective Time, then, for United
States federal income tax purposes, the Merger, more likely than not, will
qualify as a "reorganization" within the meaning of Section 368(a) of the
Code.
This opinion represents and is based upon our best judgment regarding
the application of United States federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, either prior to the
Effective Time, or at any other time, on either a prospective or retroactive
basis, will not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the United States federal
income tax laws.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
federal, state, local or foreign tax consequences that may result from the
Merger or any other transaction (including any transaction undertaken in
connection with the Merger).
<PAGE>
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.
May 8, 2000
Page 3
No opinion is expressed as to any transaction other than the Merger as
described in the Registration Statement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Registration
Statement are not consummated in accordance with the terms of such Registration
Statement and without waiver or breach of any material provision thereof or if
all of the representations, warranties, statements and assumptions upon which we
relied are not true and accurate through the Effective Time and at all relevant
times thereafter. In the event any one of the statements, representations,
warranties or assumptions upon which we have relied to issue this opinion is
incorrect, our opinion might be adversely affected and may not be relied upon.
This opinion is intended solely for the purpose of inclusion as an
exhibit to the Registration Statement. It may not be relied upon or utilized for
any other purpose or by any other person or entity and may not be made available
to any other person or entity without our prior written consent. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name in the Registration
Statement in connection with references to this opinion and the tax consequences
of the Merger. In giving this consent, however, we do not hereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
MINTZ, LEVIN, COHN, FERRIS,
GLOVSKY and POPEO, P.C.
<PAGE>
EXHIBIT 23.1
Consent of Independent Public Accountants
To Thermo Electron Corporation:
As independent public accountants, we hereby consent to the
incorporation by reference in this Registration Statement and related
Prospectus of Thermo Electron Corporation on Form S-4 of our reports dated
February 17, 2000 (except with respect to the matters discussed in Note 17,
as to which the date is March 7, 2000) included or incorporated by reference
in Thermo Electron Corporation's Annual Report on Form 10-K for the year
ended January 1, 2000, and to all references to our Firm included in this
Registration Statement and related Prospectus.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
May 2, 2000
<PAGE>
EXHIBIT 23.2
Consent of Independent Public Accountants
To Thermo Ecotek Corporation
As independent public accountants, we hereby consent to the use of
our reports dated November 8, 1999, (except with respect to the matters
discussed in Note 18, as to which the date is January 31, 2000) included or
incorporated by reference in Thermo Ecotek Corporation's Annual Report on
Form 10-K for the year ended October 2, 1999 in this Registration Statement
and related Prospectus of Thermo Electron Corporation on Form S-4, and to all
references to our Firm included in this Registration Statement and related
Prospectus.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
May 2, 2000
