Exhibit 13
THERMO POWER CORPORATION
Consolidated Financial Statements
Fiscal Year 1996
PAGE
Thermo Power Corporation
Consolidated Statement of Income
Year Ended
----------------------------------------
(In thousands except September 28, September 30, October 1,
per share amounts) 1996 1995 1994
------------------------------------------------------------------------
Revenues (Note 12) $120,736 $103,255 $ 89,334
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues 100,379 79,823 70,026
Selling, general and administrative
expenses (Note 8) 16,739 15,886 14,203
Research and development expenses 3,214 3,065 1,622
-------- -------- --------
120,332 98,774 85,851
-------- -------- --------
Operating Income 404 4,481 3,483
Interest Income 1,714 1,919 1,278
Interest Expense (26) (23) (61)
Gain on Sale of Investments, Net
(includes $469, $768 and $616 on
sale of related party investments)
(Note 8) 208 730 582
-------- -------- --------
Income Before Provision for Income
Taxes and Minority Interest 2,300 7,107 5,282
Provision for Income Taxes (Note 7) 1,103 2,737 2,034
Minority Interest Expense 312 182 -
-------- -------- --------
Net Income $ 885 $ 4,188 $ 3,248
======== ======== ========
Earnings per Share $ .07 $ .34 $ .26
======== ======== ========
Weighted Average Shares 12,466 12,372 12,291
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2PAGE
Thermo Power Corporation
Consolidated Balance Sheet
September 28, September 30,
(In thousands) 1996 1995
------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 29,852 $ 23,504
Available-for-sale investments, at quoted
market value (amortized cost of $6,022 and
$10,624) (includes $429 of related party
investments in 1995) (Notes 2 and 8) 6,028 10,666
Accounts receivable, less allowances of $589
and $530 18,054 18,203
Unbilled contract costs and fees 7,110 6,228
Inventories 18,637 22,249
Prepaid income taxes (Note 7) 2,921 3,213
Other current assets 324 752
-------- --------
82,926 84,815
-------- --------
Rental Assets, at Cost, Net 9,980 6,406
-------- --------
Property, Plant and Equipment, at Cost, Net 9,767 8,467
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost of $210
and $471) (includes $339 invested in parent
company common stock in 1995)
(Notes 2 and 8) 184 733
-------- --------
Other Assets 345 223
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Note 3) 7,509 7,773
-------- --------
$110,711 $108,417
======== ========
3PAGE
Thermo Power Corporation
Consolidated Balance Sheet (continued)
September 28, September 30,
(In thousands except share amounts) 1996 1995
------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 14,005 $ 13,262
Accrued payroll and employee benefits 2,832 2,732
Customer advances 1,096 971
Accrued warranty costs 2,323 2,100
Accrued income taxes 713 1,368
Other accrued expenses 3,727 4,242
Due to Thermo Electron Corporation and
affiliated companies 511 -
-------- --------
25,207 24,675
-------- --------
Deferred Income Taxes (Note 7) 84 118
-------- --------
Long-term Obligations (Notes 10 and 11) 305 364
-------- --------
Commitments (Notes 8 and 9)
Common Stock of Subsidiary Subject to Redemption
($18,450 redemption value) 17,747 17,435
-------- --------
Shareholders' Investment (Notes 4 and 5):
Common stock, $.10 par value, 30,000,000
shares authorized; 12,487,149 and 12,478,544
shares issued 1,249 1,248
Capital in excess of par value 54,448 53,898
Retained earnings 11,707 10,822
Treasury stock at cost, 2,724 and 49,758
shares (23) (341)
Net unrealized gain (loss) on available-for-
sale investments (Note 2) (13) 198
-------- --------
67,368 65,825
-------- --------
$110,711 $108,417
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4PAGE
Thermo Power Corporation
Consolidated Statement of Cash Flows
Year Ended
----------------------------------------
September 28, September 30, October 1,
(In thousands) 1996 1995 1994
---------------------------------------------------------------------------
Operating Activities:
Net income $ 885 $ 4,188 $ 3,248
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,033 2,082 1,867
Provision for losses on
accounts receivable 191 3 (2)
Gain on sale of investments,
net (Note 8) (208) (730) (582)
Minority interest expense 312 182 -
Deferred income tax expense
(benefit) 372 62 (392)
Other noncash items - (191) 85
Changes in current accounts,
excluding the effects of
acquisitions:
Accounts receivable 216 (4,568) (1,236)
Inventories and unbilled
contract costs and fees 1,003 (8,881) 693
Other current assets 428 (786) 758
Accounts payable 740 3,333 767
Other current liabilities 238 196 (677)
-------- -------- --------
Net cash provided by
(used in) operating
activities 7,210 (5,110) 4,529
-------- -------- --------
Investing Activities:
Acquisitions, net of cash
acquired (Note 3) (860) (2,500) (7,947)
Purchases of available-for-sale
investments (5,000) (365) -
Proceeds from sale and maturities
of available-for-sale investments 8,982 9,074 -
Proceeds from sale of related party
investments (Note 8) 852 1,599 1,462
Decrease in short-term investments - - 9,326
Purchases of long-term investments - - (453)
Increase in rental assets (2,581) (2,848) (1,856)
Purchases of property, plant and
equipment (2,713) (2,101) (875)
Other 140 273 66
-------- -------- --------
Net cash provided by
(used in) investing
activities $ (1,180) $ 3,132 $ (277)
-------- -------- --------
5PAGE
Thermo Power Corporation
Consolidated Statement of Cash Flows (continued)
Year Ended
-----------------------------------------
September 28, September 30, October 1,
(In thousands) 1996 1995 1994
--------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of
Company and subsidiary common
stock $ 377 $ 18,064 $ 266
Repayment of obligations to
parent company - - (3,000)
Repayment of long-term obligations (59) (56) (198)
-------- -------- --------
Net cash provided by
(used in) financing
activities 318 18,008 (2,932)
-------- -------- --------
Increase in Cash and Cash Equivalents 6,348 16,030 1,320
Cash and Cash Equivalents at
Beginning of Year 23,504 7,474 6,154
-------- -------- --------
Cash and Cash Equivalents at
End of Year $ 29,852 $ 23,504 $ 7,474
======== ======== ========
Cash Paid For:
Interest $ 26 $ 23 $ 61
Income taxes $ 894 $ 2,796 $ 1,575
Noncash Investing Activities:
Fair value of assets of acquired
companies $ 860 $ 2,500 $ 10,571
Cash paid for acquired companies (860) (2,500) (7,947)
-------- -------- --------
Liabilities assumed of acquired
companies $ - $ - $ 2,624
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6PAGE
Thermo Power Corporation
Consolidated Statement of Shareholders' Investment
Net
Unrealized
Gain
Common (Loss) on
Stock, Capital in Available-
$.10 Par Excess of Retained Treasury for-sale
(In thousands) Value Par Value Earnings Stock Investments
- --------------------------------------------------------------------------------
Balance October 2, 1993 $ 1,242 $52,727 $ 3,386 $ (756) $ -
Net income - - 3,248 - -
Issuance of stock under
employees' and directors'
stock plans 1 122 - 143 -
Tax benefit related to
employees' and directors'
stock plans - 362 - - -
------- ------- ------- ------- ---------
Balance October 1, 1994 1,243 53,211 6,634 (613) -
Net income - - 4,188 - -
Issuance of stock under
employees' and directors'
stock plans 5 534 - 272 -
Tax benefit related to
employees' and directors'
stock plans - 153 - - -
Effect of change in
accounting principle
(Note 2) - - - - 268
Change in net unrealized
gain (loss) on available-
for-sale investments
(Note 2) - - - - (70)
------- ------- ------- ------- ---------
Balance September 30, 1995 1,248 53,898 10,822 (341) (198)
Net income - - 885 - -
Issuance of stock under
employees' and directors'
stock plans 1 58 - 318 -
Tax benefit related to
employees' and directors'
stock plans - 492 - - -
Change in net unrealized
gain (loss) on available-
for-sale investments
(Note 2) - - - - (211)
------- ------- ------- ------- ---------
Balance September 28, 1996 $ 1,249 $54,448 $11,707 $ (23) $ (13)
======= ======= ======= ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
7PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Power Corporation (the Company) manufactures, markets, and
services industrial refrigeration equipment, natural gas engines for
vehicular and stationary applications, marine engines, fork-lift engines,
and natural gas-fueled commercial cooling and cogeneration systems. The
Company also conducts research and development on applications of thermal
energy and rents commercial cooling and industrial refrigeration
equipment. In addition, the Company develops gas-powered lighting
products for commercialization.
Relationship with Thermo Electron Corporation
The Company was incorporated on June 6, 1985, as a wholly owned
subsidiary of Thermo Electron Corporation (Thermo Electron). As of
September 28, 1996, Thermo Electron owned 7,915,306 shares of the
Company's common stock, representing 63% of such stock outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the
Company, its wholly owned subsidiaries, and its 78%-owned privately held
subsidiary, ThermoLyte Corporation (ThermoLyte). All material
intercompany accounts and transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
September 30. References to fiscal 1996, 1995, and 1994 are for the
fiscal years ended September 28, 1996, September 30, 1995, and October 1,
1994, respectively.
Revenue Recognition
The Company recognizes revenues upon shipment of its products or
upon completion of services it renders, and recognizes rental revenues on
a straight-line basis over the term of the rental contract. The Company
provides a reserve for its estimate of warranty costs at the time of
shipment. Revenues and profits on contracts are recognized using the
percentage-of-completion method. Revenues recorded under the percentage-
of-completion method, including revenues from research and development
contracts, were $57,842,000 in fiscal 1996, $53,045,000 in fiscal 1995,
and $51,862,000 in fiscal 1994. The percentage of completion is
determined by relating the actual costs incurred to date to management's
estimate of total costs to be incurred on each contract. If a loss is
indicated on any contract in process, a provision is made currently for
the entire loss. Contracts at the Company's FES division generally
provide for the billing of customers on a fixed-price basis upon contract
completion. Contracts at the Company's Tecogen division generally provide
for the billing of customers on a cost-plus-fixed-fee basis as costs are
incurred. Revenues earned on contracts in process in excess of billings
are classified as unbilled contract costs and fees in the accompanying
8PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
balance sheet. There are no significant amounts included in the
accompanying balance sheet that are not expected to be recovered from
existing contracts at current contract values, or that are not expected
to be collected within one year, including amounts that are billed but
not paid under retainage provisions.
Research and Development Arrangements
The Company has research and development arrangements with the
natural gas industry and various governmental agencies. Revenues in the
accompanying statement of income include $5,836,000, $4,917,000, and
$5,209,000 and cost of revenues include $4,475,000, $3,548,000, and
$4,197,000 related to these arrangements in fiscal 1996, 1995, and 1994,
respectively. The Company is required to pay royalties for any
technologies developed or products commercialized under several of these
arrangements. Selling, general and administrative expenses in the
accompanying statement of income include royalty expense related to these
arrangements of $71,000, $51,000, and $75,000 in fiscal 1996, 1995, and
1994, respectively.
Income Taxes
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes," the Company recognizes
deferred income taxes based on the expected future tax consequences of
differences between the financial statement basis and the tax basis of
assets and liabilities calculated using enacted tax rates in effect for
the year in which the differences are expected to be reflected in the tax
return.
Earnings per Share
Earnings per share have been computed based on the weighted average
number of shares outstanding during the year. Because the effect of the
assumed exercise of stock options would be immaterial, they have been
excluded from the earnings per share calculation.
Cash and Cash Equivalents
As of September 28, 1996, $28,399,000 of the Company's cash
equivalents were invested in a repurchase agreement with Thermo Electron.
Under this agreement, the Company in effect lends excess cash to Thermo
Electron, which Thermo Electron collateralizes with investments
principally consisting of U.S. government agency securities, corporate
notes, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The
Company's funds subject to the repurchase agreement are readily
convertible into cash by the Company. The repurchase agreement earns a
rate based on the 90-day Commercial Paper Composite Rate plus 25 basis
points, set at the beginning of each quarter. Cash equivalents are
carried at cost, which approximates market value.
9PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Available-for-sale Investments
Pursuant to SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective October 2, 1994, the Company's
debt and marketable equity securities are accounted for at market value
(Note 2). Prior to fiscal 1995, these investments were carried at the
lower of cost or market value.
Inventories
Inventories are stated at the lower of cost (on a first-in,
first-out basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are as follows:
(In thousands) 1996 1995
------------------------------------------------------------------------
Raw materials and supplies $16,233 $17,453
Work in process and finished goods 2,404 4,796
------- -------
$18,637 $22,249
======= =======
Rental Assets
The costs of additions and improvements are capitalized, while
maintenance and repairs are charged to expense as incurred. The Company
provides for depreciation over the estimated useful lives of the rental
assets, which range from five to seven years. Accumulated depreciation
was $2,378,000 and $985,000 at fiscal year-end 1996 and 1995,
respectively.
Property, Plant and Equipment
The costs of additions and improvements are capitalized, while
maintenance and repairs are charged to expense as incurred. The Company
provides for depreciation and amortization using the straight-line method
over the estimated useful lives of the property as follows: buildings -
40 years; machinery and equipment - 3 to 12 years; and leasehold
improvements - the shorter of the term of the lease or the life of the
asset. Property, plant and equipment consist of the following:
(In thousands) 1996 1995
------------------------------------------------------------------------
Land and buildings $ 5,810 $ 4,993
Machinery, equipment and leasehold improvements 11,770 10,239
------- -------
17,580 15,232
Less: Accumulated depreciation and amortization 7,813 6,765
------- -------
$ 9,767 $ 8,467
======= =======
10PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired
companies is amortized using the straight-line method over 40 years.
Accumulated amortization was $512,000 and $300,000 at fiscal year-end
1996 and 1995, respectively. The Company assesses the future useful life
of this asset whenever events or changes in circumstances indicate that
the current useful life has diminished. The Company considers the future
undiscounted cash flows of the acquired companies in assessing the
recoverability of this asset.
Common Stock of Subsidiary Subject to Redemption
In March 1995, ThermoLyte sold 1,845,000 units, each unit consisting
of one share of ThermoLyte common stock, $.001 par value, and one
redemption right, at $10.00 per unit, for net proceeds of $17,253,000.
Holders of the common stock purchased in the offering will have the
option to require ThermoLyte to redeem in December 1998 or 1999 any or
all of their shares at $10.00 per share. The redemption rights are
guaranteed on a subordinated basis by Thermo Electron. The Company has
agreed to reimburse Thermo Electron in the event Thermo Electron is
required to make a payment under the guarantee. The difference between
the redemption value and the original carrying amount of common stock of
subsidiary subject to redemption is accreted using the straight-line
method over the period ending December 1998, which corresponds to the
first redemption period. The accretion is charged to minority interest
expense in the accompanying statement of income. ThermoLyte is developing
a line of gas-powered lighting products for commercialization. Following
the offering, the Company owned 78% of ThermoLyte's outstanding common
stock.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Presentation
Certain amounts in fiscal 1995 and 1994 have been reclassified to
conform to the presentation in the fiscal 1996 financial statements.
2. Available-for-sale Investments
Effective October 2, 1994, the Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, the Company's debt and marketable equity
11PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
2. Available-for-sale Investments (continued)
securities are considered available-for-sale investments in the
accompanying balance sheet and are carried at market value, with the
difference between cost and market value, net of related tax effects,
recorded currently as a component of shareholders' investment titled "Net
unrealized gain (loss) on available-for-sale investments." Effect of
change in accounting principle in the accompanying fiscal 1995 statement
of shareholders' investment represents the unrealized gain, net of
related tax effects, pertaining to available-for-sale investments held by
the Company on October 2, 1994.
The aggregate market value, cost basis, and gross unrealized gains
and losses of short- and long-term available-for-sale investments by
major security type, as of fiscal year-end 1996 and 1995, are as follows:
1996
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
------------------------------------------------------------------------
Government agency securities $ 5,992 $ 5,986 $ 6 $ -
Other 220 246 - (26)
------- ------- ------- -------
$ 6,212 $ 6,232 $ 6 $ (26)
======= ======= ======= =======
1995
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
------------------------------------------------------------------------
Tax-exempt securities $ 5,002 $ 5,000 $ 2 $ -
Government agency securities 5,082 5,106 - (24)
Corporate bonds 429 365 64 -
Other 886 624 322 (60)
------- ------- ------- -------
$11,399 $11,095 $ 388 $ (84)
======= ======= ======= =======
Short- and long-term available-for-sale investments in the
accompanying fiscal 1996 balance sheet have contractual maturities of one
year or less. Actual maturities may differ from contractual maturities as
a result of the Company's intent to sell these securities prior to
maturity and as a result of put and call options that enable either the
Company and/or the issuer to redeem these securities at an earlier date.
The cost of available-for-sale investments that were sold was based
on specific identification in determining realized gains and losses
recorded in the accompanying statement of income. Gain on sale of
investments, net, in the accompanying fiscal 1996 statement of income
resulted from gross realized gains of $469,000 and gross realized losses
of $18,000 relating to the sale of available-for-sale investments, and
12PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
2. Available-for-sale Investments (continued)
a write-down of other investments of $243,000. Gain on sale of
investments, net, in the accompanying fiscal 1995 statement of income
resulted from gross realized gains of $768,000 and gross realized losses
of $38,000 relating to the sale of available-for-sale investments.
3. Acquisitions
In the first quarter of fiscal 1996, the Company acquired the
thermoelectric cooling module business of ThermoTrex Corporation
(ThermoTrex) for $860,000, which was the net book value of the business
acquired. ThermoTrex is a majority-owned subsidiary of Thermo Electron.
Because the Company and the thermoelectric cooling module business were
deemed for accounting purposes to be under control of their common
majority owner, Thermo Electron, the transaction has been accounted for
at historical cost in a manner similar to the pooling-of-interests
method. The results of the thermoelectric cooling module business were
not material to the Company's results, and therefore the Company's
historical financial information for periods prior to fiscal 1996 has not
been restated. The results of the thermoelectric cooling module business
have been included in the accompanying financial statements from the date
of acquisition.
Effective May 1, 1994, the Company acquired NuTemp, Inc. (NuTemp)
for $7,947,000 in cash. In fiscal 1995, the Company paid an additional
$2,500,000 as a result of NuTemp having achieved certain previously
agreed upon performance goals through the period ending May 1, 1995.
NuTemp is a supplier of both remanufactured and new industrial
refrigeration and commercial cooling equipment for sale or rental.
The acquisition of NuTemp has been accounted for using the purchase
method of accounting, and its results have been included in the
accompanying financial statements from the effective date of acquisition.
The cost of this acquisition exceeded the estimated fair value of the
acquired net assets by $6,465,000, which is being amortized over 40
years. Allocation of the purchase price for this acquisition was based on
an estimate of the fair value of the net assets acquired. Pro forma data
is not presented since the acquisition of NuTemp was not material to the
Company's financial condition or results of operations.
4. Stock-based Compensation Plans
The Company has stock-based compensation plans for its key
employees, directors, and others. The Company's equity incentive plan,
adopted in fiscal 1994, permits the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted
stock, stock options, stock bonus shares, or performance-based shares. To
date, only nonqualified stock options have been awarded under these
plans. The option recipients and the terms of options granted under these
plans are determined by the Board Committee. Generally, options granted
13PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
4. Stock-based Compensation Plans (continued)
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 periods
ranging from three to ten years after the first anniversary of the grant
date, depending on the term of the option, which may range from five to
twelve years. Nonqualified stock options may be granted at any price
determined by the Board Committee, although incentive stock options must be
granted at not less than the fair market value of the Company's stock on
the date of grant. To date, all options have been granted at fair market
value. The Company also has a directors' stock option plan, adopted in 1991
and amended in fiscal 1995, that provides for the grant of stock options in
the Company and its majority-owned subsidiary to outside directors pursuant
to a formula approved by the Company's shareholders. Options in the Company
awarded under this plan are exercisable six months after the date of grant
and expire three or seven years after the date of grant. In addition to the
Company's stock-based compensation plans, certain officers and key
employees may also participate in the stock-based compensation plans of
Thermo Electron or its majority-owned subsidiaries.
No accounting recognition is given to options granted at fair market
value until they are exercised. Upon exercise, net proceeds, including tax
benefits realized, are credited to equity. A summary of the Company's stock
option information is as follows:
1996 1995 1994
---------------- --------------- ---------------
Range of Range of Range of
Option Option Option
(In thousands Number Prices Number Prices Number Prices
except per of per of per of per
share amounts) Shares Share Shares Share Shares Share
--------------------------------------------------------------------------
Options outstanding, $ 4.20- $ 4.20- $ 2.92-
beginning of year 1,406 $17.53 1,259 $10.15 536 $10.15
11.90- 8.95- 7.90-
Granted 12 14.15 296 17.53 788 9.18
4.20- 4.20- 2.92-
Exercised (40) 9.58 (111) 9.58 (64) 7.58
7.58- 7.45- 4.20-
Lapsed or cancelled (36) 9.58 (38) 9.58 (1) 8.33
----- ----- -----
Options outstanding, $ 5.45- $ 4.20- $ 4.20-
end of year 1,342 $17.53 1,406 $17.53 1,259 $10.15
===== ===== =====
$ 5.45- $ 4.20- $ 4.20-
Options exercisable 1,342 $17.53 1,406 $17.53 1,258 $10.15
===== ===== =====
Options available
for grant 75 97 355
===== ===== =====
14PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
5. Common Stock
At September 28, 1996, the Company had reserved 1,674,059 unissued
shares of its common stock for possible issuance under stock-based
compensation plans.
6. Employee Benefit Plans
Employee Stock Purchase Plan
Substantially all of the Company's full-time employees are eligible
to participate in an employee stock purchase plan sponsored by the
Company. Under this plan, shares of the Company's and Thermo Electron's
common stock can be purchased at the end of a 12-month plan year at 95%
of the fair market value at the beginning of the plan year, and the
shares purchased are subject to a six-month resale restriction. Prior to
November 1, 1995, the applicable shares of common stock could be
purchased at 85% of the fair market value at the beginning of the plan
year, and the shares purchased were subject to a one-year resale
restriction. Shares are purchased through payroll deductions of up to 10%
of each participating employee's gross wages. During fiscal 1996, 1995,
and 1994, the Company issued 18,012 shares, 25,859 shares, and 40,219
shares, respectively, of its common stock under this plan.
401(k) Savings Plan and Employee Stock Ownership Plan
The majority of the Company's employees are eligible to participate
in Thermo Electron's 401(k) savings plan and, prior to January 1, 1995,
certain employees were eligible to participate in Thermo Electron's
employee stock ownership plan (ESOP). Contributions to the 401(k) savings
plan are made by both the employee and the Company. Company contributions
are based upon the level of employee contributions. For these plans, the
Company contributed and charged to expense $674,000, $653,000, and
$656,000 in fiscal 1996, 1995, and 1994, respectively. Effective December
31, 1994, the ESOP was split into two plans: ESOP I, covering employees
of Thermo Electron's corporate office and its wholly owned subsidiaries,
and ESOP II, covering employees of certain of Thermo Electron's
majority-owned subsidiaries, including the Company. Also, effective
December 31, 1994, the ESOP II plan was terminated, and as a result, the
Company's employees are no longer eligible to participate in an ESOP.
15PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
7. Income Taxes
The components of the provision for income taxes are as follows:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Currently payable:
Federal $ 599 $2,150 $1,933
State 132 525 493
------ ------ ------
731 2,675 2,426
------ ------ ------
Deferred (prepaid), net:
Federal 305 54 (333)
State 67 8 (59)
------ ------ ------
372 62 (392)
------ ------ ------
$1,103 $2,737 $2,034
====== ====== ======
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 $492,000, $153,000, and $362,000 of such benefits that have
been allocated to capital in excess of par value in fiscal 1996, 1995,
and 1994, respectively.
The provision for income taxes in the accompanying statement of
income differs from the provision calculated by applying the statutory
federal income tax rate of 34% to income before provision for income
taxes and minority interest due to the following:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Provision for income taxes at
statutory rate $ 782 $2,416 $1,796
Increases (decreases) resulting from:
State income taxes, net of
federal benefit 131 353 286
Increase in valuation allowance 214 - -
Income from tax-preferred securities (46) (122) (213)
Nondeductible expenses 100 83 73
Other (78) 7 92
------ ------ ------
$1,103 $2,737 $2,034
====== ====== ======
16PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
7. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1996 1995
-------------------------------------------------------------
Prepaid income taxes:
Inventory basis difference $ 730 $1,031
Accrued warranty costs 906 819
Accrued compensation 596 590
Reserves and accruals 459 496
Allowance for doubtful accounts 230 207
Federal and state loss carryforwards 214 -
Other - 70
------ ------
3,135 3,213
Less: Valuation allowance (214) -
------ ------
$2,921 $3,213
====== ======
Deferred income taxes:
Available-for-sale investments $ (7) $ 107
Other 91 11
------ ------
$ 84 $ 118
====== ======
The valuation allowance relates to the uncertainty surrounding the
realization of net operating loss carryforwards and other tax assets of
the Company's ThermoLyte subsidiary.
8. Related Party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement
under which Thermo Electron's corporate staff provides certain
administrative services, including certain legal advice and services,
risk management, certain employee benefit administration, tax advice and
preparation of tax returns, centralized cash management, and certain
financial and other services, for which the Company pays Thermo Electron
annually an amount equal to 1.0% of the Company's revenues. The Company
paid an annual fee equal to 1.20% and 1.25% of the Company's revenues in
calendar year 1995 and 1994, respectively. The annual fee is reviewed and
adjusted annually by mutual agreement of the parties. For these services,
the Company was charged $1,262,000, $1,250,000, and $1,117,000 in fiscal
1996, 1995, and 1994, respectively. 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).
17PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
8. Related Party Transactions (continued)
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. 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.
Other Related Party Services
The Company provides contract administration and other services and
data processing services to certain companies affiliated with Thermo
Electron. The Company is reimbursed for costs incurred based on actual
usage. For these services, the Company was reimbursed $167,000, $209,000,
and $107,000 in fiscal 1996, 1995, and 1994, respectively. Prior to
January 1995, the Company used contract administration and other services
of a company affiliated with Thermo Electron which were charged based on
actual usage. For these services, the Company was charged $31,000 and
$117,000 in fiscal 1995 and 1994, respectively.
Leases
The Company leases an office and laboratory facility from Thermo
Electron under an agreement expiring in September 1997. The accompanying
statement of income includes expenses from this operating lease of
$170,000 in fiscal 1996, 1995, and 1994. The future minimum payment due
under this operating lease as of September 28, 1996, is $170,000 in
fiscal 1997.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with
Thermo Electron as discussed in Note 1.
Sale of Related Party Investments
In February 1996, the Company sold $365,000 principal amount of 6.5%
subordinated convertible debentures to an unrelated party for net
proceeds of $490,000, which resulted in a gain of $125,000. The
debentures were issued by Thermo TerraTech Inc., a majority-owned
subsidiary of Thermo Electron.
In December 1995, the Company sold 10,969 shares of its Thermo
Electron common stock to an unrelated party for net proceeds of $362,000,
which resulted in a gain of $344,000. Share information for Thermo
Electron has been restated to reflect a three-for-two stock split,
effected in the form of a 50% stock dividend, distributed in June 1996.
18PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
9. Commitments
In addition to the lease described in Note 8, the Company leases
equipment and manufacturing, engine testing, service, and office
facilities under operating leases expiring at various dates through
fiscal 2004. The accompanying statement of income includes expenses from
these operating leases of $1,166,000, $1,044,000, and $711,000 in fiscal
1996, 1995, and 1994, respectively. Future minimum payments due under
these operating leases as of September 28, 1996, are $956,000 in fiscal
1997; $874,000 in fiscal 1998; $853,000 in fiscal 1999; $853,000 in
fiscal 2000; $839,000 in fiscal 2001; and $3,340,000 in fiscal 2002 and
thereafter. Total future minimum lease payments are $7,715,000.
10. Long-term Obligations
At September 28, 1996, the Company's long-term obligations included
a $263,000 mortgage loan, which is secured by property at the Company's
FES division with a net book value of $4,688,000. The loan is payable in
equal monthly installments with the final payment in fiscal 2002. The
interest rate on this loan is 75% of the prime rate, and averaged 6.39%
and 6.42% in fiscal 1996 and 1995, respectively.
The annual requirements for long-term obligations as of September
28, 1996, are $57,000 in fiscal 1997; $58,000 in fiscal 1998; $60,000 in
fiscal 1999; $59,000 in fiscal 2000; $51,000 in fiscal 2001; and $77,000
in fiscal 2002 and thereafter. Total requirements of long-term
obligations are $362,000.
11. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and
cash equivalents, available-for-sale investments, accounts receivable,
accounts payable, due to Thermo Electron and affiliated companies, and
long-term obligations. The carrying amounts of these financial
instruments, with the exception of available-for-sale investments and
long-term obligations, approximate fair value due to their short-term
nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on
quoted market prices. See Note 2 for fair value information pertaining to
these financial instruments.
The carrying amounts of the Company's long-term obligations, which
approximate fair value, were $305,000 and $364,000 as of September 28,
1996 and September 30, 1995, respectively. The fair value of the
Company's long-term obligations was determined based on borrowing rates
available to the Company at the respective year-ends.
19PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
12. Segment Data, Export Sales and Concentrations of Risk
The Company's business is divided into three segments. The
Industrial Refrigeration Systems segment develops, manufactures, markets,
and services industrial refrigeration and commercial cooling equipment,
and rents commercial cooling and industrial refrigeration equipment. The
Engines segment develops, manufactures, markets, and services gasoline
engines for recreational boats, propane and gasoline engines for lift
trucks, and natural gas engines for fleet vehicles and industrial
applications. The Cooling and Cogeneration Systems segment develops,
manufactures, markets, and services natural gas cooling and cogeneration
systems, conducts research and development on applications of thermal
energy, and develops gas-powered lighting products for commercialization.
Export revenues to Asia accounted for 7%, 10%, and 10% of the
Company's total revenues in fiscal 1996, 1995, and 1994, respectively.
Other export revenues accounted for 6%, 5%, and 6% of the Company's total
revenues in fiscal 1996, 1995, and 1994, respectively. In general, export
sales are denominated in U.S. dollars.
The Company purchases engine blocks for its marine and certain
other engines, as well as engines for certain of its smaller cooling and
cogeneration products, from one supplier. While the Company believes that
it has adequate supplies of materials to meet its needs for a three-month
period, no assurance can be given that the Company will not experience
shortages of engine blocks in the future that could delay shipments of
the Company's marine and certain other engines and its cooling and
cogeneration products.
Information for fiscal 1996, 1995, and 1994, with respect to the
Company's business segments, is shown in the following table.
20PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
12. Segment Data and Export Sales (continued)
(In thousands) 1996 1995 1994
--------------------------------------------------------------------------
Revenues:
Industrial Refrigeration Systems $ 73,312 $ 64,708 $ 57,372
Engines 28,857 24,848 20,204
Cooling and Cogeneration Systems 20,477 15,873 13,192
Intersegment sales elimination (a) (1,910) (2,174) (1,434)
-------- -------- --------
$120,736 $103,255 $ 89,334
======== ======== ========
Income before provision for income
taxes and minority interest:
Industrial Refrigeration Systems $ 4,403 $ 6,689 $ 5,206
Engines (1,584) (120) 188
Cooling and Cogeneration Systems 122 961 820
Corporate (b) (2,537) (3,049) (2,731)
-------- -------- --------
Total operating income 404 4,481 3,483
Interest and other income, net 1,896 2,626 1,799
-------- -------- --------
$ 2,300 $ 7,107 $ 5,282
======== ======== ========
Identifiable assets:
Industrial Refrigeration Systems $ 52,707 $ 48,249 $ 36,980
Engines 13,917 17,193 10,402
Cooling and Cogeneration Systems (c) 22,953 23,549 5,691
Corporate (d) 21,134 19,426 29,548
-------- -------- --------
$110,711 $108,417 $ 82,621
======== ======== ========
Depreciation and amortization:
Industrial Refrigeration Systems $ 2,501 $ 1,551 $ 1,350
Engines 295 329 314
Cooling and Cogeneration Systems 214 192 203
Corporate 23 10 -
-------- -------- --------
$ 3,033 $ 2,082 $ 1,867
======== ======== ========
Capital expenditures:
Industrial Refrigeration Systems $ 4,691 $ 4,393 $ 2,396
Engines 329 344 223
Cooling and Cogeneration Systems 240 150 112
Corporate 34 62 -
-------- -------- --------
$ 5,294 $ 4,949 $ 2,731
======== ======== ========
(a) Intersegment sales are accounted for at prices that are representative
of transactions with unaffiliated parties.
(b) Primarily corporate general and administrative expenses and other
expenses for new lines of business.
(c) Includes $17.3 million in fiscal 1995 of net proceeds from the private
placement of shares of ThermoLyte.
(d) Primarily cash, cash equivalents, and short-term investments.
21PAGE
Thermo Power Corporation
Notes to Consolidated Financial Statements
13. Quarterly Information (Unaudited)
(In thousands except per share amounts)
1996 First Second Third Fourth
-------------------------------------------------------------------------
Revenues $ 27,452 $ 29,756 $ 32,429 $ 31,099
Gross profit 4,787 4,661 5,323 5,586
Net income (loss) 577 43 448 (183)
Earnings (loss) per share .05 - .04 (.01)
1995 First Second Third Fourth
-------------------------------------------------------------------------
Revenues $ 22,314 $ 24,912 $ 27,514 $ 28,515
Gross profit 5,266 5,493 5,868 6,805
Net income 787 805 1,106 1,490
Earnings per share .06 .07 .09 .12
22PAGE
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Power Corporation:
We have audited the accompanying consolidated balance sheet of
Thermo Power Corporation (a Massachusetts corporation and 63%-owned
subsidiary of Thermo Electron Corporation) and subsidiaries as of
September 28, 1996 and September 30, 1995, and the related consolidated
statements of income, shareholders' investment, and cash flows for each
of the three years in the period ended September 28, 1996. These
consolidated 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 consolidated
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 Power Corporation and subsidiaries as of September 28, 1996 and
September 30, 1995, and the results of their operations and their cash
flows for each of the three years in the period ended September 28, 1996,
in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements,
effective October 2, 1994, the Company changed its method of accounting
for investments in debt and marketable equity securities.
Arthur Andersen LLP
Boston, Massachusetts
November 1, 1996
23PAGE
Thermo Power Corporation
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.
These statements involve a number of risks and uncertainties, including
those detailed immediately after this Management's Discussion and
Analysis of Financial Condition and Results of Operations under the
caption "Forward-looking Statements."
Overview
The Company's business is divided into three segments: Industrial
Refrigeration Systems, Engines, and Cooling and Cogeneration Systems.
Through the Company's FES division, the Industrial Refrigeration Systems
segment supplies standard and custom-designed industrial refrigeration
systems used primarily by the food-processing, petrochemical, and
pharmaceutical industries. NuTemp, Inc. (NuTemp), which was acquired in
May 1994, is a supplier of both remanufactured and new industrial
refrigeration and commercial cooling equipment for sale or rental.
NuTemp's industrial refrigeration equipment is used primarily in the
food-processing, petrochemical, and pharmaceutical industries, and its
commercial cooling equipment is used primarily in institutions and
commercial buildings, as well as by service contractors. The demand for
NuTemp's equipment is typically highest in the summer period. Cool summer
weather can adversely affect the Company's NuTemp business since the
Company's cooling systems are used primarily to reduce temperatures below
ambient air temperatures.
Within the Engines segment, the Company's Crusader Engines division
(Crusader) manufactures gasoline engines for recreational boats; propane
and gasoline engines for lift trucks; and natural gas engines for
vehicular, cooling, pumping, refrigeration, and other industrial
applications.
The Cooling and Cogeneration Systems segment consists of the
Company's Tecogen division and the Company's ThermoLyte Corporation
(ThermoLyte) subsidiary, formed in March 1995. Tecogen designs, develops,
markets, and services packaged cooling and cogeneration systems fueled
principally by natural gas for sale to a wide range of commercial,
institutional, industrial, and multi-unit residential users. Certain
large-capacity cooling systems are manufactured by FES, and the
cogeneration systems are manufactured by Crusader. Tecogen also conducts
research and development of natural gas-engine technology and on
applications of thermal energy. ThermoLyte is developing and
commercializing a family of gas-powered lighting products, including area
lights, flashlights, emergency lights, and other lighting products.
Results of Operations
Fiscal 1996 Compared With Fiscal 1995
Total revenues increased 17% to $120,736,000 in fiscal 1996 from
$103,255,000 in fiscal 1995. Industrial Refrigeration Systems segment
24PAGE
Thermo Power Corporation
Fiscal 1996 Compared With Fiscal 1995 (continued)
revenues increased 13% to $73,312,000 in 1996 from $64,708,000 in 1995.
Revenues at FES increased $7,717,000 in 1996 primarily due to greater
demand for custom-designed industrial refrigeration packages, offset in
part by lower sales of standard refrigeration systems. Revenues at NuTemp
increased $887,000 primarily due to increased demand for remanufactured
commercial cooling equipment, offset in part by lower demand for rental
equipment resulting from generally milder summer temperatures in 1996
compared with 1995. Engines segment revenues increased 16% to $28,857,000
in 1996 from $24,848,000 in 1995 primarily due to the inclusion of
revenues from lift-truck engines and increased demand for gasoline and
TecoDrive(R) natural gas engines, offset in part by a decrease of
$2,877,000 in revenues from marine-engine related products. Revenues from
marine-engine related products declined primarily due to increased
competition and a decrease in demand. These trends are expected to
continue. Cooling and Cogeneration Systems segment revenues increased 29%
to $20,477,000 in 1996 from $15,873,000 in 1995 primarily due to an
increase in revenues from gas-fueled cooling systems. Results for the
Cooling and Cogeneration Systems segment in 1995 include a fee of
$1,187,000 received from one of the Company's distributors of packaged
cogeneration systems to satisfy the financial obligations under a minimum
purchase contract.
The gross profit margin decreased to 17% in fiscal 1996 from 23% in
fiscal 1995. The gross profit margin for the Industrial Refrigeration
Systems segment decreased to 20% in 1996 from 25% in 1995 primarily due
to lower margins at FES resulting from a change in sales mix. FES' sales
to the petrochemical industry, which have inherently lower margins,
increased in 1996 from 1995. To a lesser extent, the gross profit margin
decreased due to an increase in depreciation expense at NuTemp resulting
from an increase in rental assets, lower manufacturing efficiencies at
FES, and higher warranty expenses at NuTemp in 1996 compared with 1995.
The Company has experienced a cost increase in one of the major
components of its industrial refrigeration packages which is expected to
adversely affect the gross profit margin in fiscal 1997. The gross profit
margin for the Engines segment decreased to 5% in 1996 from 11% in 1995
primarily due to unusually high warranty expenses and, to a lesser
extent, startup costs associated with the introduction of lift-truck
engines. The gross profit margin for the Cooling and Cogeneration Systems
segment decreased to 22% in 1996 from 29% in 1995 primarily due to the
inclusion in 1995 of a fee received from one of the Company's
distributors of packaged cogeneration systems discussed above.
Selling, general and administrative expenses as a percentage of
revenues decreased to 14% in fiscal 1996 from 15% in fiscal 1995
primarily due to an increase in total revenues. Research and development
expenses as a percentage of revenues remained unchanged at 3% in 1996 and
1995. An increase in research and development expenses for gas-fueled
lighting products was offset by a decrease in spending on research and
development of natural gas-engine products.
Interest income decreased to $1,714,000 in fiscal 1996 from
$1,919,000 in fiscal 1995. Interest income earned on invested proceeds
from ThermoLyte's March 1995 private placement was more than offset by a
25PAGE
Thermo Power Corporation
Fiscal 1996 Compared With Fiscal 1995 (continued)
decrease in interest income earned on the Company's other investments due
to lower average invested balances. Gain on sale of investments, net, in
1996 primarily represents a gain of $344,000 relating to the sale of the
Company's remaining investment in Thermo Electron Corporation (Thermo
Electron) common stock and a gain of $125,000 relating to the sale of the
Company's remaining investment in 6.5% subordinated convertible
debentures, which were issued by Thermo TerraTech Inc., a majority-owned
subsidiary of Thermo Electron (Note 8). These gains were largely offset
by a write-down of other investments.
The effective tax rate was 48% in fiscal 1996, compared with 39% in
fiscal 1995. These rates exceeded the statutory federal income tax rate
primarily due to the impact of state income taxes and, in fiscal 1996, a
valuation allowance established for net operating loss carryforwards and
other tax assets of the Company's ThermoLyte subsidiary.
Fiscal 1995 Compared With Fiscal 1994
Total revenues increased 16% to $103,255,000 in fiscal 1995 from
$89,334,000 in fiscal 1994. Industrial Refrigeration Systems segment
revenues increased 13% to $64,708,000 in 1995 from $57,372,000 in 1994.
Industrial Refrigeration Systems segment revenues increased $5,577,000
due to the inclusion of sales for a full year from NuTemp, which was
acquired in May 1994. Engines segment revenues increased 23% to
$24,848,000 in 1995 from $20,204,000 in 1994 primarily due to increased
demand for Crusader's inboard marine-engine related products and, to a
lesser extent, natural gas-fueled TecoDrive engines. Results for 1994
included $1,632,000 of revenues from sterndrive marine engine-related
products. The Company's sterndrive customer exited that market in fiscal
1994. Cooling and Cogeneration Systems segment revenues increased 20% to
$15,873,000 in 1995 from $13,192,000 in 1994 due to the inclusion of a
fee of $1,187,000 received from one of the Company's distributors of
packaged cogeneration systems to satisfy the financial obligations under
a minimum purchase contract and an increase of $1,184,000 in revenues
from gas-fueled cooling systems. These increases were offset in part by a
decrease in revenues from packaged cogeneration systems.
The gross profit margin increased to 23% in fiscal 1995 from 22% in
fiscal 1994. The gross profit margin for the Industrial Refrigeration
Systems segment increased to 25% in 1995 from 24% in 1994 primarily due
to the inclusion of higher-margin NuTemp revenues for the full year of
1995 compared with five months in 1994. The gross profit margin for the
Engines segment decreased to 11% in 1995 from 12% in 1994 primarily due
to startup costs associated with new products and, to a lesser extent,
higher warranty expenses in 1995 compared with 1994. The gross profit
margin for the Cooling and Cogeneration Systems segment increased to 29%
in 1995 from 25% in 1994 primarily due to the fee received from one of
the Company's distributors of packaged cogeneration systems discussed
above.
Selling, general and administrative expenses as a percentage of
revenues decreased to 15% in fiscal 1995 from 16% in fiscal 1994
26PAGE
Thermo Power Corporation
Fiscal 1995 Compared With Fiscal 1994 (continued)
primarily due to an increase in total revenues. Research and development
expenses as a percentage of revenues increased to 3% in 1995 from 2% in
1994 primarily due to development costs associated with natural
gas-engine products and, to a lesser extent, gas-fueled lighting
products.
Interest income increased to $1,919,000 in fiscal 1995 from
$1,278,000 in fiscal 1994, reflecting interest income earned on invested
proceeds from ThermoLyte's March 1995 private placement and, to a lesser
extent, higher prevailing interest rates in 1995. The increase was offset
in part by lower average invested amounts as a result of the cash
expended for the acquisition of NuTemp in May 1994. Interest expense
decreased to $23,000 in 1995 from $61,000 in 1994 due to the repayment of
a $3,000,000 principal amount 6.2% subordinated convertible note to
Thermo Electron in the first quarter of fiscal 1994. Gain on sale of
investments, net, primarily represents a gain of $768,000 in 1995 and
$616,000 in 1994 relating to the sale of the Company's investment in
subordinated convertible debentures issued by Thermedics Inc., a
majority-owned subsidiary of Thermo Electron.
The effective tax rate was 39% in fiscal 1995 and 1994. This rate
exceeded the statutory federal income tax rate primarily due to the
impact of state income taxes.
Liquidity and Capital Resources
Working capital was $57,719,000 at September 28, 1996, compared with
$60,140,000 at September 30, 1995. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $35,880,000 at
September 28, 1996, compared with $34,170,000 at September 30, 1995. Of
the $35,880,000 balance at September 28, 1996, $16,474,000 was held by
ThermoLyte and the remainder was held by the Company and its wholly owned
subsidiaries. During fiscal 1996, $7,210,000 of cash was provided by
operating activities.
During the first quarter of fiscal 1996, the Company acquired the
thermoelectric cooling module business of ThermoTrex Corporation
(ThermoTrex) for $860,000, which was the net book value of the business
acquired (Note 3). ThermoTrex is a majority-owned subsidiary of Thermo
Electron.
In March 1995, ThermoLyte sold 1,845,000 units, each unit consisting
of one share of ThermoLyte common stock and one redemption right, in a
private placement. Holders of the common stock purchased in the offering
will have the option to require ThermoLyte to redeem in December 1998 or
1999 any or all of their shares at $10.00 per share. The redemption
rights are guaranteed on a subordinated basis by Thermo Electron. The
Company has agreed to reimburse Thermo Electron in the event Thermo
Electron is required to make a payment under the guarantee.
During fiscal 1996, the Company expended an aggregate of $5,294,000
for purchases of rental assets and property, plant and equipment. In
27PAGE
Thermo Power Corporation
Liquidity and Capital Resources (continued)
fiscal 1997, the Company expects to make capital expenditures of
approximately $5,200,000. The Company believes its existing resources are
sufficient to meet the capital requirements of its existing operations
for the foreseeable future.
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution
readers that the following important factors, among others, in some cases
have affected, and in the future could affect, the Company's actual
results and could cause its actual results in fiscal 1997 and beyond to
differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company.
Competition. The Company encounters and expects to continue to
encounter intense competition in the sale of its products. Although the
Company has a proprietary position with respect to certain features of
its products, the core technologies relating to its cooling and
cogeneration products are mature and available to other companies. A
number of companies, including companies with greater financial resources
than those of the Company, offer products that compete with those offered
by the Company, and there can be no assurance that other companies will
not develop competitive products. In addition, electric utility pricing
programs provide competition for the Company's cooling and cogeneration
products.
The Company's sale of industrial refrigeration systems is subject
to intense competition. The industrial refrigeration market is mature,
highly fragmented, and extremely dependent on close customer contacts.
Competition in the compressed natural gas (CNG) vehicle and
alternative-fuel engine markets is intense, and current and potential
competitors in some or all segments of these markets include major
automotive and natural gas companies and other companies that have
greater financial resources than the Company. If the CNG vehicle business
is to succeed, natural gas will need to be economically attractive
compared with other alternative fuels, such as ethanol and methanol, and
compared with improved gasoline formulas.
Several companies offer marine engines that compete with those
manufactured by Crusader. In addition, in recent years, certain large
manufacturers of marine engines have vertically integrated their
respective businesses by acquiring boat manufacturers that previously had
been independent purchasers of engines from Crusader and other engine
manufacturers. The number of potential buyers of Crusader's engines has
decreased accordingly.
Dependence of Markets on Government Regulation. The natural gas
vehicle market is in its formative stage. The use of CNG engines in
vehicles in the United States results primarily from governmental
regulations mandating or encouraging the use of alternative fuels. The
Company's CNG engine business is subject to the demand driven by various
28PAGE
Thermo Power Corporation
Forward-looking Statements (continued)
provisions of the 1990 Clean Air Act, as well as energy and environmental
legislation that has been or may be enacted at state and local levels,
which may be more stringent than federal laws. Natural gas is one of many
alternative fuels that are addressed by the regulations. Others include
methanol, ethanol, propane, hydrogen, electricity, and reformulated
gasoline. There can be no assurance that natural gas will become a
preferred alternative fuel for vehicles or that existing and future
regulations or their enforcement will create material long-term demand
for natural gas-powered vehicles.
The Public Utility Regulatory Policies Act of 1978 (PURPA) and
state laws and regulations implementing PURPA prohibit discrimination by
electric utilities against cogeneration providers and require utilities
to purchase cogenerated electricity under certain conditions. Under these
regulations, certain classes of facilities are exempt from the provisions
of the Public Utility Holding Company Act, as well as many state laws and
regulations regarding the setting of electricity rates and the financial
and organizational regulation of electric utilities, and certain
provisions of the Federal Power Act. Because the Company's current
customers typically do not sell power to electric utilities, the Company
does not rely to a significant extent on the provisions of PURPA that
require utilities to purchase electricity from cogeneration providers.
However, recent bills in Congress have proposed amendments to, and in
some cases, the repeal of, certain of these laws or regulations. Any such
amendment or repeal could have a material adverse effect on the Company's
cogeneration business.
Importance of Energy Prices. The cost savings that result from use
of the Company's packaged cooling and cogeneration systems are directly
related to the retail price of electricity. In the past several years,
electricity prices have declined in many areas and rates remain
relatively low on a historical basis in many regions. Given prevailing
rate structures, demand for the Company's cooling and cogeneration
systems has been less than anticipated. Although the Company believes
that increases in demand, as well as potential increases in the cost of
fuel, will lead to eventual increases in electricity rates, there can be
no assurance that electricity prices will increase in the future. The
economic benefits of the Company's natural gas engine products and
packaged cooling and cogeneration systems are also affected by the cost
of natural gas. A significant increase in the relative cost of natural
gas could also have a material adverse effect on the sale of certain of
the Company's products.
Incentives for Cooling Systems. Purchasers of the Company's
Tecochill(R) cooling systems often receive investment incentives for the
purchase of Tecochill equipment from gas utilities or state or municipal
governments. Although the Company has no reason to believe these
incentives will be discontinued, elimination of these incentives could
have a material adverse effect on sales of the Company's Tecochill
systems.
29PAGE
Thermo Power Corporation
Forward-looking Statements (continued)
Risks Associated with Acquisition Strategy; No Assurance of a
Successful Acquisition Strategy. The Company's growth strategy is to
supplement its internal growth with the acquisition of businesses and
technologies that complement or augment the Company's existing product
lines. Businesses that the Company may seek to acquire in the future may
be marginally profitable or unprofitable. In order for any acquired
businesses to achieve the level of profitability desired by the Company,
the Company must successfully reduce expenses and improve market
penetration. No assurance can be given that the Company will be
successful in this regard. In addition, 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. There can be no assurance that
the Company will be able to complete pending or future acquisitions. In
order to finance any such acquisitions, it may be necessary for the
Company to raise additional funds either through public or private
financings. Any equity or debt financing, if available at all, may be on
terms which are not favorable to the Company.
Risks Associated with Protection, Defense and Use of Intellectual
Property and Ownership of Technology Rights. The Company holds several
patents relating to various aspects of its products, and believes that
proprietary technical know-how is critical to many of its products.
Proprietary rights relating to the Company's products are 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. There can be no assurance that patents will be issued
from any pending or future patent applications owned by or licensed to
the Company or that the claims allowed under any issued patents will be
sufficiently broad to protect the Company's technology and, in the
absence of patent protection, the Company may be vulnerable to
competitors who attempt to copy the Company's products or gain access to
its trade secrets and know-how. 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 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. 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. The Company may
need to acquire licenses to, or contest the validity of, any such
patents. There can be no assurance that any license required under any
such patent would be made available on acceptable terms or that the
Company would prevail in any such contest. The Company could incur
substantial costs in defending itself in suits brought against it or in
suits in which the Company may assert its patent rights against others.
If the outcome of any such litigation is unfavorable to the Company, the
Company's business and results of operations could be materially
adversely affected. In addition, 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
30PAGE
Thermo Power Corporation
Forward-looking Statements (continued)
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.
In addition, a significant percentage of the Company's research and
development is sponsored by third parties. Sponsors of these programs
generally own the rights to technology that is developed as a result of
the Company's work under the programs. These rights could limit the
Company's ability to commercialize any technological breakthroughs made
in the course of such work.
No Assurance of Development and Commercialization of ThermoLyte
Products; Uncertain Market Acceptance; Potential Product Liability. The
Company's ThermoLyte subsidiary is developing propane-fueled lighting
products. Product development involves a high degree of risk, and returns
to investors are dependent upon successful development and
commercialization of the ThermoLyte products. There can be no assurance
that the Company will be able to build the sales and marketing
organization necessary for the successful commercialization of its
products. In addition, as with any new technology, there is substantial
risk that the marketplace may not accept or be receptive to the potential
benefits of such technology. Market acceptance of the Company's proposed
products will depend, in large part, upon the ability of the Company to
demonstrate the safety of such products and their advantages over
commercially available alternatives. There can be no assurance that the
ThermoLyte products will be accepted by the public. Finally, because the
ThermoLyte products will be powered by propane or a similar fuel that is
combustible, the Company may be subject to potential product liability
damages. The Company intends to design the ThermoLyte products to
minimize these effects and believes that it will be able to obtain
insurance against such liabilities on terms acceptable to the Company.
However, no assurance can be given that damages from product liability
will not have a material adverse impact on the results of operations,
financial condition, or reputation of the Company.
31PAGE
Thermo Power Corporation
Selected Financial Information
(In thousands except
per share amounts) 1996 1995(a) 1994(b) 1993(c) 1992
---------------------------------------------------------------------------
Statement of Income Data:
Revenues $120,736 $103,255 $ 89,334 $ 75,429 $ 34,137
Net income 885 4,188 3,248 1,923 355
Earnings per share .07 .34 .26 .18 .04
Balance Sheet Data:
Working capital $ 57,719 $ 60,140 $ 43,143 $ 50,467 $ 19,173
Total assets 110,711 108,417 82,621 79,513 28,675
Long-term
obligations 305 364 344 3,395 3,000
Common stock of
subsidiary subject
to redemption 17,747 17,435 - - -
Shareholders'
investment 67,368 65,825 60,475 56,599 18,302
(a) Reflects the net proceeds from the private placement of shares of
ThermoLyte Corporation in March 1995.
(b) Reflects the May 1994 acquisition of NuTemp, Inc.
(c) Reflects the October 1992 acquisition of FES and the net proceeds of
the Company's February 1993 public offering of common stock.
32PAGE
Thermo Power Corporation
Common Stock Market Information
The following table shows the market range for the Company's common
stock based on reported sales prices on the American Stock Exchange
(symbol THP) for fiscal 1996 and 1995.
1996 1995
----------------- -----------------
Quarter High Low High Low
--------------------------------------------------------------------
First $16 1/4 $12 1/4 $ 9 7/8 $ 8 5/8
Second 16 1/8 11 3/8 10 3/8 8 7/8
Third 17 3/8 11 3/4 18 7/8 9 3/4
Fourth 12 5/8 9 5/16 19 1/2 15 1/8
As of November 22, 1996, the Company had 481 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 November 22, 1996, was $8 3/4 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 issuances of stock certificates, changes of ownership, lost
stock certificates, and changes of address. For these and similar
matters, please direct inquiries to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Shareholder Services
Shareholders of Thermo Power Corporation who desire information
about the Company are invited to contact John N. Hatsopoulos, Vice
President and Chief Financial Officer, Thermo Power Corporation, 81 Wyman
Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046, (617) 622-1111.
A mailing list is maintained to enable shareholders whose stock is held
in street name, and other interested individuals, to receive quarterly
reports, annual reports, and press releases as quickly as possible.
Beginning with the fiscal 1997 fiscal year, quarterly distribution will
be limited to the second quarter report only. All quarterly reports and
press releases are also available through the Internet at the Company's
home page on the World Wide Web (http://www.thermo.com/subsid/thp.html).
Dividend Policy
The Company has never paid cash dividends and does not expect to pay
cash dividends in the foreseeable future 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.
33PAGE
Thermo Power Corporation
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended
September 28, 1996, as filed with the Securities and Exchange Commission,
may be obtained at no charge by writing to John N. Hatsopoulos, Vice
President and Chief Financial Officer, Thermo Power Corporation, 81 Wyman
Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Friday, March 21,
1997, at 10:00 a.m. at Thermo Electron Corporation, 81 Wyman Street,
Waltham, Massachusetts.
34PAGE