Exhibit 13
Thermo Fibertek Inc.
Consolidated Financial Statements
1999
Thermo Fibertek Inc. 1999 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1999 1998 1997
------------------------------------------------------------------------ ----------- ---------- ---------
Revenues (Notes 9 and 13) $228,036 $247,426 $239,642
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues (Note 9) 134,893 147,262 145,159
Selling, general, and administrative expenses (Note 9) 61,345 63,381 60,675
Research and development expenses 7,278 6,971 6,814
Gain on sale of business (Note 3) and property (11,154) (536) -
Restructuring costs and unusual items (Note 11) 6,152 - 1,063
-------- -------- --------
198,514 217,078 213,711
-------- -------- --------
Operating Income 29,522 30,348 25,931
Interest Income 8,478 7,956 7,325
Interest Expense (includes $1,411 to related party in 1997; Note 8) (7,449) (7,408) (4,830)
-------- -------- --------
Income Before Provision for Income Taxes and Minority Interest 30,551 30,896 28,426
Provision for Income Taxes (Note 7) 11,852 11,902 11,011
Minority Interest Expense 921 999 989
-------- -------- --------
Net Income $ 17,778 $ 17,995 $ 16,426
======== ======== ========
Earnings per Share (Note 14)
Basic $ .29 $ .29 $ .27
======== ======== ========
Diluted $ .29 $ .29 $ .26
======== ======== ========
Weighted Average Shares (Note 14)
Basic 61,186 61,612 61,384
======== ======== ========
Diluted 61,559 62,353 63,613
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
Thermo Fibertek Inc. 1999 Financial Statements
Consolidated Balance Sheet
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Assets
Current Assets:
Cash and cash equivalents (includes $74,447 under repurchase $ 39,254 $115,472
agreement with parent company in 1998)
Advance to affiliate 93,780 -
Available-for-sale investments, at quoted market value (amortized cost 46,405 48,206
of $46,470 and $48,210; Note 2)
Accounts receivable, less allowances of $1,659 and $2,231 49,323 50,281
Unbilled contract costs and fees 9,570 2,968
Inventories 28,907 30,624
Deferred tax asset (Note 7) 4,896 6,806
Other current assets 1,034 1,935
-------- --------
273,169 256,292
-------- --------
Property, Plant, and Equipment, at Cost, Net 30,494 31,736
-------- --------
Other Assets (Note 4) 17,044 12,309
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 3) 121,870 126,763
-------- --------
$442,577 $427,100
======== ========
3
Thermo Fibertek Inc. 1999 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Liabilities and Shareholders' Investment
Current Liabilities:
Current maturity of long-term obligation (Note 8) $ 380 $ -
Accounts payable 21,957 21,548
Accrued payroll and employee benefits 8,659 10,273
Billings in excess of contract costs and fees 4,730 5,846
Accrued warranty costs 5,005 5,830
Customer deposits 3,242 3,154
Other accrued expenses (Notes 3 and 11) 20,322 14,916
Common stock of subsidiary subject to redemption ($49,788 49,160 -
redemption value; Note 1)
Due to parent company and affiliated companies 1,003 1,279
--------- ---------
114,458 62,846
-------- --------
Deferred Income Taxes and Other Deferred Items (Note 7) 6,365 6,202
--------- ---------
Long-term Obligations:
Subordinated convertible debentures (Note 8) 153,000 153,000
Note payable (Note 8) 1,350 -
--------- ---------
154,350 153,000
--------- ---------
Minority Interest (Note 3) 3,334 303
--------- ---------
Commitments and Contingencies (Note 10)
Common Stock of Subsidiary Subject to Redemption ($54,762 - 53,801
redemption value; Note 1) --------- ---------
Shareholders' Investment (Notes 5 and 6):
Common stock, $.01 par value, 150,000,000 shares authorized; 635 634
63,537,556 and 63,379,337 shares issued
Capital in excess of par value 77,411 78,731
Retained earnings 118,380 100,602
Treasury stock at cost, 2,327,521 and 2,238,830 shares (21,239) (21,286)
Deferred compensation (66) -
Accumulated other comprehensive items (Note 15) (11,051) (7,733)
--------- ---------
164,070 150,948
--------- ---------
$ 442,577 $ 427,100
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Thermo Fibertek Inc. 1999 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------ ---------- ----------- ---------
Operating Activities
Net income $ 17,778 $ 17,995 $ 16,426
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,928 8,492 7,258
Provision for losses on accounts receivable 234 248 362
Minority interest expense 921 999 989
Gain on sale of business (Note 3) and property (11,154) (536) -
Noncash restructuring costs and unusual items (Note 11) 3,239 - -
Deferred income tax expense 1,572 2,090 1,976
Other noncash items (105) 314 (192)
Changes in current accounts, excluding the effects of acquisitions
and disposition:
Accounts receivable (4,448) 3,702 (1,878)
Inventories and unbilled contract costs and fees (7,445) 3,277 (1,183)
Other current assets 448 836 (625)
Accounts payable 3,039 (5,787) (3,344)
Other current liabilities 4,198 307 1,131
--------- ---------- ---------
Net cash provided by operating activities 17,205 31,937 20,920
--------- ---------- ---------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (2,607) (964) (103,403)
Acquisition of capital equipment and technology (Note 3) (500) - -
Proceeds from sale of business, net of cash divested (Note 3) 13,592 - -
Refund of acquisition purchase price (Note 3) 377 - -
Advances to affiliate, net (93,780) - -
Purchases of available-for-sale investments (61,825) (70,882) (48,050)
Proceeds from sale of available-for-sale investments - 7,730 -
Proceeds from maturities of available-for-sale investments 63,565 51,470 12,256
Purchases of property, plant, and equipment (3,903) (7,773) (3,793)
Proceeds from sale of property, plant, and equipment 414 1,586 60
Advances under notes receivable (Note 4) - (2,910) (3,000)
Repayment of notes receivable (Note 4) - 1,250 3,000
Other (160) (458) 57
--------- ---------- ---------
Net cash used in investing activities $ (84,827) $ (20,951) $(142,873)
--------- ---------- ---------
5
Thermo Fibertek Inc. 1999 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Financing Activities
Purchases of Company and subsidiary common stock $ (5,804) $ (6,598) $ (23,951)
Purchases of subsidiary common stock from Thermo Electron (2,227) - -
Net proceeds from issuance of Company and subsidiary common 551 405 1,069
stock (Note 1)
Net proceeds from issuance of subordinated convertible - - 149,768
debentures (Note 8)
Issuance of obligations to parent company (Note 8) - - 110,000
Repayment of obligations to parent company (Note 8) - - (110,000)
Repayment of long-term obligations - - (32)
--------- ---------- ---------
Net cash provided by (used in) financing activities (7,480) (6,193) 126,854
--------- ---------- ---------
Exchange Rate Effect on Cash (1,116) (969) (3,058)
--------- ---------- ---------
Increase (Decrease) in Cash and Cash Equivalents (76,218) 3,824 1,843
Cash and Cash Equivalents at Beginning of Year 115,472 111,648 109,805
--------- ---------- ---------
Cash and Cash Equivalents at End of Year $ 39,254 $ 115,472 $ 111,648
========= ========== =========
Cash Paid For
Interest $ 6,913 $ 6,917 $ 1,741
Income taxes $ 6,559 $ 5,431 $ 10,593
Noncash Activities
Fair value of assets of acquired companies, capital equipment, $ 10,135 $ 1,161 $ 127,649
and technology (Note 3)
Cash paid for acquired companies, capital equipment, and technology (3,160) (964) (103,415)
Payable for acquired company, capital equipment, and technology (3,430) - -
Equity interest in subsidiary transferred for capital equipment (3,075) - -
and technology --------- ---------- ---------
Liabilities assumed of acquired companies $ 470 $ 197 $ 24,234
========= ========== =========
Conversion of subordinated convertible note by parent company (Note 8) $ - $ - $ 15,000
========= ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
Thermo Fibertek Inc. 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Comprehensive Income
Net Income $ 17,778 $ 17,995 $ 16,426
--------- --------- ---------
Other Comprehensive Items (Note 15):
Foreign currency translation adjustment (3,279) (185) (6,011)
Unrealized gain (loss) on available-for-sale investments, net of (39) (32) 29
reclassification adjustment --------- --------- ---------
(3,318) (217) (5,982)
--------- --------- ---------
$ 14,460 $ 17,778 $ 10,444
========= ========= =========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 634 $ 633 $ 612
Activity under employees' and directors' stock plans 1 1 2
Conversion of subordinated convertible note by parent company (Note 8) - - 19
--------- --------- ---------
Balance at end of year 635 634 633
--------- --------- ---------
Capital in Excess of Par Value:
Balance at beginning of year 78,731 81,865 65,951
Activity under employees' and directors' stock plans (1,916) (4,401) 42
Tax benefit related to employees' and directors' stock plans 513 1,267 363
Conversion of subordinated convertible note by parent company (Note 8) - - 14,981
Effect of purchases of subsidiary common stock (Note 1) 83 - 528
--------- --------- ---------
Balance at end of year 77,411 78,731 81,865
--------- --------- ---------
Retained Earnings:
Balance at beginning of year 100,602 82,607 66,181
Net income 17,778 17,995 16,426
--------- --------- ---------
Balance at end of year 118,380 100,602 82,607
--------- --------- ---------
Treasury Stock:
Balance at beginning of year (21,286) (19,494) (360)
Purchases of Company common stock (2,511) (6,598) (20,159)
Activity under employees' and directors' stock plans 2,558 4,806 1,025
--------- --------- ---------
Balance at end of year (21,239) (21,286) (19,494)
--------- --------- ---------
Deferred Compensation:
Balance at beginning of year - - -
Issuance of restricted stock under employees' stock plans (Note 5) (91) - -
Amortization of deferred compensation 25 - -
--------- --------- ---------
Balance at end of year $ (66) $ - $ -
--------- --------- ---------
7
Thermo Fibertek Inc. 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Accumulated Other Comprehensive Items (Note 15):
Balance at beginning of year $ (7,733) $ (7,516) $ (1,534)
Other comprehensive items (3,318) (217) (5,982)
--------- --------- ---------
Balance at end of year (11,051) (7,733) (7,516)
--------- --------- ---------
$ 164,070 $ 150,948 $ 138,095
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
8
Thermo Fibertek Inc. 1999 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Fibertek Inc. (the Company) designs and manufactures processing
machinery, accessories, and water-management systems for the paper and paper
recycling industries. The Company's principal products include custom-engineered
systems and equipment for the preparation of wastepaper for conversion into
recycled paper; accessory equipment and related consumables important to the
efficient operation of papermaking machines; and water-management systems
essential for draining, purifying, and recycling process water. In addition, the
Company develops and commercializes products derived from cellulose fiber.
Relationship with Thermo Electron Corporation
The Company was incorporated in November 1991 as a wholly owned subsidiary
of Thermo Electron. As of January 1, 2000, Thermo Electron owned 55,773,057
shares of the Company's common stock, representing 91% of such stock
outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
its wholly owned subsidiaries, its 74%-owned public subsidiary Thermo Fibergen
Inc., and its 95%-owned Fiberprep, Inc. subsidiary. All material intercompany
accounts and transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1999, 1998, and 1997 are for the fiscal years ended January 1,
2000, January 2, 1999, and January 3, 1998, respectively. The Company's E. & M.
Lamort, S.A. and Thermo Black Clawson, S.A. subsidiaries, based in France, have
fiscal years ending on November 30 to allow sufficient time for the Company to
receive their financial statements. Fiscal years 1999 and 1998 each included 52
weeks; fiscal 1997 included 53 weeks.
Revenue Recognition
The Company recognizes the majority of its revenues upon shipment of its
products. The Company provides a reserve for its estimate of warranty costs at
the time of shipment. In addition, revenues and profits on large contracts are
recognized using the percentage-of-completion method. Revenues recorded under
the percentage-of-completion method were $40,689,000 in 1999, $45,114,000 in
1998, and $37,733,000 in 1997. 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. The Company's
contracts generally provide for billing of customers upon the attainment of
certain milestones specified in each contract. Revenues earned on contracts in
process in excess of billings are classified as unbilled contract costs and
fees, and amounts billed in excess of revenues are classified as billings in
excess of contract costs and fees in the accompanying 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.
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.
9
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company and Thermo Electron have a tax allocation agreement under
which the Company and its subsidiaries, exclusive of its foreign operations and
its Fiberprep and Thermo Fibergen subsidiaries, are included in the consolidated
federal and certain state income tax returns filed by Thermo Electron. The
agreement provides that in years in which these entities have taxable income,
the Company will pay to Thermo Electron amounts comparable to the taxes it would
have paid if the Company had filed separate tax returns. If Thermo Electron's
equity ownership of the Company were to drop below 80%, the Company would be
required to file its own federal income 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 per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Except where the
effect would be antidilutive, diluted earnings per share have been computed
assuming the conversion of the Company's convertible obligations and the
elimination of the related interest expense, and the exercise of stock options,
as well as their related income tax effects.
Cash and Cash Equivalents
The Company, along with other European-based subsidiaries of Thermo
Electron, participates in a notional pool arrangement in the United Kingdom with
Barclays Bank. Under this arrangement, Barclays notionally combines the positive
and negative cash balances held by the participants to calculate the net
interest yield/expense for the group. The benefit derived from this arrangement
is then allocated based on balances attributable to the respective participants.
Thermo Electron guarantees all of the obligations of each participant in this
arrangement. The Company has access to a $1,779,000 line of credit under this
arrangement. At year-end 1999 and 1998, the Company had invested $6,732,000 and
$1,100,000, respectively, under this arrangement.
At year-end 1998, $74,447,000 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
Company's funds subject to the repurchase agreement were readily convertible
into cash by the Company. 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.
At year-end 1999 and 1998, the Company's cash equivalents also included
corporate notes, money market funds, and other marketable securities of the
Company's foreign subsidiaries, which had original maturities of three months or
less. Cash equivalents 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 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.
10
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
In addition, certain of the Company's European-based subsidiaries
participate in a new cash management arrangement with a wholly owned subsidiary
of Thermo Electron on terms similar to the domestic cash management arrangement.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out or
weighted average basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are as follows:
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------- ------- --------
Raw Materials and Supplies $12,088 $14,848
Work in Process 6,122 5,341
Finished Goods 10,697 10,435
------- -------
$28,907 $30,624
======= =======
The Company periodically reviews its quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. 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, 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: fiber-recovery and water-clarification
facility, the shorter of the term of the service contract or the life of the
asset; buildings, 15 to 40 years; machinery and equipment, 2 to 10 years; and
leasehold improvements, the shorter of the term of the lease or the life of the
asset. Property, plant, and equipment consists of the following:
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------- ------- --------
Land $ 2,886 $ 3,172
Fiber-recovery and Water-clarification Facility 3,573 3,500
Buildings 19,676 20,513
Machinery, Equipment, and Leasehold Improvements 41,669 41,476
------- -------
67,804 68,661
Less: Accumulated Depreciation and Amortization 37,310 36,925
------- -------
$30,494 $31,736
======= =======
Other Assets
Other assets in the accompanying balance sheet includes intangible assets,
a note receivable (Note 4), and deferred debt expense. Intangible assets
includes the costs of patents, acquired intellectual property, and a noncompete
agreement entered into in connection with the acquisition of the
stock-preparation business of Black Clawson Company and its affiliates, which
are amortized using the straight-line method over periods of up to 15, 7, and 10
years, respectively. The aggregate carrying value of these assets is $10,676,000
and $3,317,000, net of accumulated amortization of $1,328,000 and $683,000 at
year-end 1999 and 1998, respectively.
11
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 principally over 40 years.
Accumulated amortization was $12,642,000 and $9,193,000 at year-end 1999 and
1998, 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. Such events or circumstances generally would include the
occurrence of operating losses or a significant decline in earnings associated
with the acquired business or asset. The Company considers the future
undiscounted cash flows of the acquired companies in assessing the
recoverability of this asset. The Company assesses cash flows before interest
charges and when impairment is indicated, writes the asset down to fair value.
If quoted market values are not available, the Company estimates fair value by
calculating the present value of future cash flows. If impairment has occurred,
any excess of carrying value over fair value is recorded as a loss.
Common Stock of Subsidiary Subject to Redemption
In September 1996, Thermo Fibergen sold 4,715,000 units, each unit
consisting of one share of Thermo Fibergen common stock and one redemption
right, in an initial public offering at $12.75 per unit for net proceeds of
$55,781,000. The common stock and redemption rights subsequently began trading
separately. Holders of a redemption right have the option to require Thermo
Fibergen to redeem one share of Thermo Fibergen common stock at $12.75 per share
in September 2000 or September 2001. A redemption right may only be exercised if
the holder owns a share of Thermo Fibergen common stock at that time. The
redemption rights carry terms that generally provide for their expiration if the
closing price of Thermo Fibergen's common stock exceeds $19 1/8 for 20 of any 30
consecutive trading days prior to September 2001. The difference between the
redemption value and the original carrying amount of common stock of subsidiary
subject to redemption is accreted over the period ending September 2000, which
corresponds with the first redemption period. The accretion is charged to
minority interest expense in the accompanying statement of income. 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.
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
(Note 15). Foreign currency transaction gains and losses are included in the
accompanying statement of income and are not material for the three years
presented.
Forward Contracts
The Company uses short-term forward foreign exchange contracts to manage
certain exposures to foreign currencies. The Company enters into forward
contracts to hedge firm purchase and sale commitments denominated in currencies
other than its subsidiaries' local currencies. These contracts principally hedge
transactions denominated in U.S. dollars, British pounds sterling, and Canadian
dollars. The purpose of the Company's foreign currency hedging activities is to
protect the Company's local currency cash flows related to these commitments
from fluctuations in foreign exchange rates. Gains and losses arising from
forward foreign exchange contracts are recognized as offsets to gains and losses
resulting from the transactions being hedged. The Company does not enter into
speculative foreign currency agreements.
12
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 includes requirements for when shipments may be recorded as revenue when
the terms of the sale include customer acceptance provisions or an obligation of
the seller to install the product. In such instances, SAB 101 generally requires
that revenue recognition occur at completion of installation and/or upon
customer acceptance. SAB 101 requires that companies conform their revenue
recognition practices to the requirements therein during the first quarter of
calendar 2000 through recording a cumulative net of tax effect of the change in
accounting. The Company has not completed the analysis to determine the effect
that SAB 101 will have on its financial statements.
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 Investments
The Company's debt 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. The aggregate market value, cost basis, and gross
unrealized gains and losses of available-for-sale investments by major security
type are as follows:
(In thousands) Gross Gross
Market Cost Unrealized Unrealized
Value Basis Gains Losses
- --------------------------------------------------- ------------ ------------- ------------- ------------
1999
Government-agency Securities $46,074 $46,139 $ - $ (65)
Other 331 331 - -
------- ------- ------- -------
$46,405 $46,470 $ - $ (65)
======= ======= ======= =======
1998
Government-agency Securities $47,494 $47,498 $ 6 $ (10)
Other 712 712 - -
------- ------- ------- -------
$48,206 $48,210 $ 6 $ (10)
======= ======= ======= =======
Available-for-sale investments in the accompanying 1999 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 features of the
securities that enable either the Company, the issuer, or both 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 the gross realized gains and losses in
the accompanying statement of income.
13
3. Composites Venture, Acquisitions, and Disposition
Composites Venture
In October 1999, Thermo Fibergen created a subsidiary, NEXT Fiber Products
Inc., to develop, produce, and market fiber-based composites primarily for the
building industry. Thermo Fibergen capitalized NEXT Fiber Products with
$3,200,000 in cash. NEXT Fiber Products then purchased capital equipment and
technology related to the development of fiber-based composites, valued at
$5,275,000, in exchange for shares of its common stock equal to 49% of its
equity and $2,200,000 in cash, payable in installments, if certain conditions
are met. The Company paid $500,000 of the purchase price in 1999. The $1,700,000
remaining obligation is included in other accrued liabilities in the
accompanying 1999 balance sheet. Subsequent to year end, Thermo Fibergen paid
$1,200,000 of this obligation. To the extent that NEXT Fiber Products does not
purchase $1,000,000 of capital equipment by April 2001, the remaining funds will
be remitted to the seller as additional consideration for the acquired assets.
As of January 1, 2000, Thermo Fibergen had committed $517,000 of such funds for
purchases of capital equipment. Thermo Fibergen has options to acquire the 49%
equity interest that it does not own, exercisable during the months of October
2001, 2002, or 2003, for pre-established multiples of NEXT Fiber Products'
pre-tax earnings.
Thermo Fibergen is currently finalizing development of the composites
material. Thermo Fibergen expects to complete construction of and begin
operating the composites manufacturing facility, located in Green Bay,
Wisconsin, during 2000.
Acquisitions
In May 1999, the Company acquired the outstanding stock of Arcline
Products, a manufacturer of shower and doctor oscillation systems, for
$2,660,000 in cash and $2,000,000 payable over five years (Note 8). The cost of
this acquisition approximated the fair value of the net assets acquired.
In July 1998, the Company acquired Goslin Birmingham, a division of Green
Bay Packaging Inc., for $1,296,000 in cash. During 1999, the Company received a
post-closing purchase price adjustment of $377,000 related to this acquisition.
The Company recorded this amount as a reduction of cost in excess of net assets
of acquired companies. The cost of this acquisition exceeded the estimated fair
value of the acquired net assets by $860,000 and is being amortized over 40
years. Goslin manufactures evaporators and recausticizing systems that
concentrate and recycle process chemicals used during pulping, and products that
remove condensate gases.
In May 1997, the Company acquired a majority of the assets, subject to
certain liabilities, of the stock-preparation business of Black Clawson Company
and affiliates. In August 1997, the Company acquired the remaining assets of the
stock-preparation business of Black Clawson Company and affiliates. This
business has been renamed Thermo Black Clawson. The aggregate purchase price was
approximately $103,100,000 in cash, which is net of a purchase price adjustment
of $332,000 in 1998. Pursuant to a promissory note, the Company borrowed
$110,000,000 from Thermo Electron to finance this acquisition (Note 8). The note
was repaid in July 1997 with the net proceeds from the sale of long-term
subordinated convertible debentures. The cost of this acquisition exceeded the
estimated fair value of the acquired net assets by $91,805,000 and is being
amortized over 40 years. Thermo Black Clawson is a leading supplier of recycling
equipment used in processing fiber for the production of "brown paper," such as
that used in the manufacture of corrugated boxes.
These acquisitions have been accounted for using the purchase method of
accounting and their results of operations have been included in the
accompanying financial statements from their respective dates of acquisition.
Allocation of the purchase price for these acquisitions was based on estimates
of the fair value of the net assets acquired.
14
3. Composites Venture, Acquisitions, and Disposition (continued)
In connection with these acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels. In connection with these restructuring activities, as part of the cost
of the acquisitions, the Company established reserves, primarily for severance
and acquired overmarket leases. In accordance with EITF 95-3, the Company
finalized its restructuring plans no later than one year from the respective
dates of the acquisitions. Accrued acquisition expenses are included in other
accrued expenses in the accompanying balance sheet.
A summary of the changes in accrued acquisition expenses follows:
Abandoned
Facilities Severance
---------- ----------------------------
Thermo Goslin Thermo
Black Black
(In thousands) Clawson Clawson Total
- ------------------------------------------------ ------------- -------------- ------------- -------------
Balance at December 28, 1996 $ - $ - $ - $ -
Reserves established 64 - 654 718
Usage (17) - (139) (156)
----- ----- ---- -----
Balance at January 3, 1998 47 - 515 562
Reserves established - 80 - 80
Usage (47) - (227) (274)
Decrease due to finalization of - - (219) (219)
restructuring plan, recorded as a
decrease to cost in excess of net
assets of acquired companies ----- ----- ---- -----
Balance at January 2, 1999 - 80 69 149
Usage - - (69) (69)
Decrease due to finalization of - (80) - (80)
restructuring plan, recorded as a
decrease to cost in excess of net
assets of acquired companies ----- ----- ---- -----
Balance at January 1, 2000 $ - $ - $ - $ -
===== ===== ==== =====
The reserves established in 1997 related to severance costs for 52
employees across all functions and costs to abandon a sales office, both at
Thermo Black Clawson.
15
3. Composites Venture, Acquisitions, and Disposition (continued)
Based on unaudited data, the following table presents selected financial
information for the Company and Thermo Black Clawson on a pro forma basis for
1997, assuming the companies had been combined since the beginning of 1997. The
effect of acquisitions not included in the pro forma data was not material to
the Company's results of operations.
(In thousands except per share amounts) 1997
- -------------------------------------------------------------------------- ---------- ---------- --------
Revenues $282,376
Net Income 16,093
Earnings per Share:
Basic .26
Diluted .25
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of Thermo
Black Clawson been made at the beginning of 1997.
Disposition
In February 1999, the Company sold its Thermo Wisconsin, Inc. subsidiary
for $13,631,000 in cash, resulting in a pretax gain of $11,154,000. The Company
decided to sell Thermo Wisconsin to divest of a non-strategic, cyclical
operating unit. Thermo Wisconsin, a manufacturer and marketer of dryers and
pollution-control equipment, had unaudited revenues to external customers and
net income in 1998 of $18,877,000 and $1,547,000, respectively.
4. Note Receivable
During 1996, the Company loaned $6,000,000 to Tree-Free Fiber Company LLC
(Tree-Free) in connection with a proposed engineering, procurement, and
construction project. This project was delayed due to weakness in pulp prices,
and will not proceed as a result of Tree-Free's insolvency. Tree-Free was unable
to repay the note upon its original maturity. The note is secured by pari-passu
liens on a tissue mill in Maine and related assets. In December 1997, the
Superior Court of Maine appointed a receiver to preserve and protect the
collateral for the loans made by the Company and other lenders to Tree-Free. In
May 1998, the Company purchased an assignment of Tree-Free's secured
indebtedness to the other pari-passu lender for $2,910,000. In June 1998, the
Company was the successful bidder at a foreclosure sale of the tissue mill and
executed a purchase and sale agreement. In October 1998, the stock of a mill
located in Mexico, which had also secured the note, was sold and the proceeds of
$1,250,000 were paid to the Company and recorded as a reduction of the carrying
amount of the notes. During the second quarter of 1999, the Company entered into
a nonbinding letter of intent with a third party to dispose of this asset for an
amount in excess of the carrying value. During the third quarter of 1999, the
third party elected to not proceed with the transaction. Accordingly, the
Company recorded a $2,834,000 write-down to reflect the asset at its estimated
recoverable value upon disposal. The Company had previously recorded impairment
on this note of $200,000 in the first quarter of 1999 (Note 11). In December
1999, the Company entered into a purchase and sale agreement, as amended, to
sell the mill, provided the purchaser received certain assurances by January 31,
2000 from the Maine Department of Environmental Protection that Tree-Free's
permits to operate the mill would be transferred to the Buyer. Those assurances
were not received by January 31, 2000, and the purchase agreement subsequently
lapsed. The Buyer continues to pursue an application to transfer the Tree-Free
permits and has indicated to the Company that it intends to purchase the mill if
the necessary permits are received.
16
5. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company maintains 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,
depending on the term of the option, which may range from five- to twelve years.
In addition, under certain options, shares acquired upon exercise are restricted
from resale until retirement or other events. Nonqualified 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 generally 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.
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 690,000 shares at a weighted average exercise price of $10.68 per share
elected to participate in this exchange and, as a result, received options to
purchase 345,000 shares of Company common stock at $5.63 per share, which are
included in the 1998 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 January 1999, the Company awarded 11,900 shares of restricted Company
common stock to certain key employees. The shares had an aggregate value of
$91,000 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.
17
5. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is as follows:
1999 1998 1997
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- -------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 3,489 $ 6.00 3,988 $ 6.24 3,570 $4.81
Granted 161 7.30 957 6.82 845 11.00
Exercised (539) 3.08 (646) 3.11 (396) 3.21
Forfeited (56) 6.55 (120) 9.23 (31) 9.85
Canceled due to exchange - - (690) 10.68 - -
----- ----- -----
Options Outstanding, End of Year 3,055 $ 6.57 3,489 $ 6.00 3,988 $6.24
===== ====== ===== ====== ===== =====
Options Exercisable 3,055 $ 6.57 3,486 $ 6.00 3,988 $6.24
===== ====== ===== ====== ===== =====
Options Available for Grant 1,332 1,449 1,596
===== ===== =====
A summary of the status of the Company's stock options at January 1, 2000,
is as follows:
Options Outstanding and Exercisable
---------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ---------------------------------------------- ------------------ ------------------- -----------------
$ 3.00 - $ 5.83 1,216 3.6 years $ 4.31
5.84 - 8.67 1,289 4.6 years 6.65
8.68 - 11.51 520 6.7 years 11.22
11.52 - 14.32 30 8.1 years 14.32
-----
$ 3.00 - $ 14.32 3,055 4.6 years $ 6.57
=======
Employee Stock Purchase Program
Substantially all of the Company's full-time U.S. employees are eligible
to participate in an employee stock purchase program sponsored by the Company
and Thermo Electron. Under this program, shares of the Company's and Thermo
Electron's common stock may be purchased at 85% of the lower of the fair market
value at the beginning or end of the period, and the shares purchased are
subject to a one-year resale restriction. Prior to the 1998 program year, 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 the
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. During 1999 and 1997, the Company issued 18,000 shares
and 29,000 shares, respectively, of its common stock under this program. No
shares of Company common stock were issued under this program during 1998.
18
5. Employee Benefit Plans (continued)
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after 1994 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income and earnings per
share would have been as follows:
(In thousands except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Net Income:
As reported $17,778 $17,995 $16,426
Pro forma 16,265 16,668 15,552
Basic Earnings per Share:
As reported .29 .29 .27
Pro forma .27 .27 .25
Diluted Earnings per Share:
As reported .29 .29 .26
Pro forma .26 .27 .25
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 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 $2.69,
$2.32, and $5.25 in 1999, 1998, and 1997, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Volatility 39% 35% 35%
Risk-free Interest Rate 5.6% 4.6% 6.6%
Expected Life of Options 3.8 years 4.2 years 6.4 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
The majority of the Company's domestic subsidiaries participate in Thermo
Electron's 401(k) savings plan. Contributions to the plan are made by both the
employee and the Company. Company contributions are based upon the level of
employee contributions. For this plan, the Company contributed and charged to
expense $761,000, $974,000, and $719,000 in 1999, 1998, and 1997, respectively.
19
5. Employee Benefit Plans (continued)
Profit-sharing Plans
One of the Company's domestic subsidiaries has adopted a profit-sharing
plan under which the Company annually contributes 10% of the subsidiary's net
income before profit-sharing expense. All contributions are immediately vested.
In addition, one of the Company's foreign subsidiaries maintains a
state-mandated profit-sharing plan. Under the state-mandated plan, the Company
contributes 0-11% of the subsidiary's net profit after taxes reduced by 5% of
its shareholders' investment. For these plans, the Company contributed and
charged to expense $959,000, $1,119,000, and $1,125,000 in 1999, 1998, and 1997,
respectively.
Other Retirement Plans
Certain of the Company's subsidiaries offer other retirement plans. The
majority of these subsidiaries offer defined contribution plans. Company
contributions to these plans are based on formulas determined by the Company.
For these plans, the Company contributed and charged to expense $779,000,
$1,285,000, and $1,636,000 in 1999, 1998, and 1997, respectively.
6. Common Stock
At January 1, 2000, the Company had reserved 17,747,978 unissued shares of
its common stock for possible issuance under stock-based compensation plans and
for issuance upon possible conversion of the Company's subordinated convertible
debentures.
7. Income Taxes
The components of income before provision for income taxes and minority
interest are as follows:
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------- -------- --------- -------
Domestic $21,802 $ 19,751 $17,017
Foreign 8,749 11,145 11,409
------- -------- -------
$30,551 $ 30,896 $28,426
======= ======== =======
20
7. Income Taxes (continued)
The components of the provision for income taxes are as follows:
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------- -------- --------- -------
Currently Payable:
Federal $ 5,870 $ 4,491 $ 3,624
Foreign 3,409 4,282 4,367
State 1,001 1,039 1,044
------- -------- -------
10,280 9,812 9,035
------- -------- -------
Net Deferred (Prepaid):
Federal 1,600 1,939 1,852
Foreign (353) (71) (338)
State 325 222 462
------- -------- -------
1,572 2,090 1,976
------- -------- -------
$11,852 $ 11,902 $11,011
======= ======== =======
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 $513,000,
$1,267,000, and $363,000 of such benefits from exercises of stock options that
have been allocated to capital in excess of par value in 1999, 1998, and 1997,
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 35% to income before provision for income taxes and minority
interest due to the following:
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------- -------- --------- -------
Provision for Income Taxes at Statutory Rate $10,693 $ 10,814 $ 9,949
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 805 820 980
Foreign tax rate and tax regulation differential (227) 310 36
Nondeductible expenses 253 178 163
Other 328 (220) (117)
------- -------- -------
$11,852 $ 11,902 $11,011
======= ======== =======
21
7. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of the following:
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------- --------- -------
Deferred Tax Asset:
Reserves and accruals $ 3,082 $5,076
Inventory basis difference 1,243 1,439
Accrued compensation 429 193
Allowance for doubtful accounts 128 77
Other 14 21
------- ------
$ 4,896 $6,806
======= ======
Deferred Income Taxes, Net:
Amortization of intangible assets $ 3,203 $3,183
Depreciation 980 663
Other 742 633
------- ------
$ 4,925 $4,479
======= ======
The Company has not recognized a deferred tax liability for the difference
between the book basis and the tax basis of its investment in the stock of its
domestic subsidiaries (such difference relates primarily to unremitted earnings
by subsidiaries) because it 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.
A provision has not been made for U.S. or additional foreign taxes on
$66.5 million of undistributed earnings of foreign subsidiaries that could be
subject to tax if remitted to the U.S. because the Company plans to keep these
amounts permanently reinvested overseas. The Company believes that any
additional U.S. tax liability due upon remittance of such earnings would be
immaterial due to available U.S. foreign tax credits.
8. Long-term Obligations
In connection with the May 1999 acquisition of Arcline Products, the
Company agreed to pay $2,000,000 in equal annual installments over five years.
The liability was initially recorded at its net present value of $1,730,000.
In connection with the acquisition of Thermo Black Clawson, the Company
borrowed $110,000,000 from Thermo Electron in May 1997. The promissory note bore
interest at the 90-day Commercial Paper Composite Rate plus 25 basis points. In
July 1997, the Company issued and sold at par $153,000,000 principal amount of 4
1/2% subordinated convertible debentures due 2004 for net proceeds of
approximately $149,800,000. The debentures are convertible into shares of the
Company's common stock at a conversion price of $12.10 per share and are
guaranteed on a subordinated basis by Thermo Electron. In July 1997, the Company
repaid the $110,000,000 promissory note due to Thermo Electron with a portion of
the net proceeds from the sale of subordinated convertible debentures.
See Note 12 for fair value information pertaining to the Company's
long-term obligations.
22
9. 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 0.8% of the
Company's revenues. The Company paid an amount equal to 0.8% and 1.0% of the
Company's revenues in 1998 and 1997, respectively. For these services, the
Company was charged $1,824,000, $1,979,000, and $2,396,000 in 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
relationship 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.
Cash Management
The Company invests excess cash in arrangements with Thermo Electron as
discussed in Note 1.
10. Commitments and Contingencies
Operating Leases
The Company occupies office and operating facilities under various
operating leases. The accompanying statement of income includes expenses from
operating leases of $1,767,000, $1,862,000, and $1,998,000 in 1999, 1998, and
1997, respectively. The future minimum payments due under noncancelable
operating leases as of January 1, 2000, are $1,095,000 in 2000; $669,000 in
2001; $386,000 in 2002; $177,000 in 2003; $147,000 in 2004; and $67,000 in 2005
and thereafter. Total future minimum lease payments are $2,541,000.
Long-term Contract
In December 1997, Thermo Fibergen entered into a ten-year contract with a
paper mill to provide fiber-recovery and water-clarification services to the
mill, and also entered into an engineering, procurement, and construction
contract for the construction of the facility to provide such services. In July
1998, Thermo Fibergen completed construction of, and began operating, the
fiber-recovery and water-clarification facility, providing clean water and long
fiber to the mill. In addition, Thermo Fibergen and the paper mill have entered
into lease and services agreements, under which it leases land from the paper
mill for a nominal fee and the paper mill provides certain utilities and
services. Thermo Fibergen provides the paper mill with fiber-recovery and
water-clarification services for established fixed fees, subject to certain
adjustments and increases upon the attainment of certain performance goals by
Thermo Fibergen. The contract may be canceled by either party within six months
after the end of the fourth year of the contract, or thereafter by the paper
mill with one year's notice, if certain benefits or profitability levels are not
achieved. If either party elects to terminate the agreement, the paper mill will
be required to purchase the facility from Thermo Fibergen at its net book value.
Contingencies
In the ordinary course of business, the Company is at times required to
issue limited performance guarantees relating to its equipment and systems. The
Company typically limits its liability under these guarantees to amounts that
would not exceed the cost of the equipment. The Company believes that it has
adequate reserves for any potential liability in connection with such
guarantees.
23
11. Restructuring Costs and Unusual Items
During 1999, the Company recorded restructuring costs and unusual items of
$6,152,000. Restructuring costs of $2,257,000, which were accounted for in
accordance with EITF 94-3, include severance costs of $1,283,000 for 24
employees across all functions at the Company's E. & M. Lamort, S.A. subsidiary,
all of whom were terminated as of January 1, 2000, and $974,000 to terminate
distributor agreements. These actions were taken in efforts to improve
profitability and were in response to a cyclical downturn in demand at this
business unit. Unusual items of $3,895,000 include $3,239,000 for asset
write-downs, consisting of $3,034,000 for the write-down of a note receivable
secured by a tissue mill (Note 4) and $205,000 for impairment of a building in
Ohio held for disposal, which was sold in July 1999; $526,000 for the expected
settlement of a contractual dispute; and $130,000 for facility-closure costs.
During 1997, the Company recorded restructuring costs of $1,063,000
relating to the consolidation of operations at its Fiberprep, Inc. subsidiary
and Lamort Paper Services Ltd. subsidiary (a subsidiary of E&M Lamort, S.A.
located in the United Kingdom) into the operations of Thermo Black Clawson. The
restructuring charges, which were accounted for in accordance with EITF 94-3,
related primarily to severance for 34 employees, whose employment was terminated
during 1997, and abandoned-facility payments for a sales and administration
office located in Massachusetts.
A summary of the changes in accrued restructuring costs, which are
included in other accrued expenses in the accompanying balance sheet, follows:
(In thousands) Severance Other Total
- ----------------------------------------------------------------- ------------- ------------- ------------
Balance at December 28, 1996 $ - $ - $ -
Provision charged to expense 523 540 1,063
Usage (523) (343) (866)
------- ------- -------
Balance at January 3, 1998 - 197 197
Usage - (163) (163)
------- ------- -------
Balance at January 2, 1999 - 34 34
Provision charged to expense 1,283 974 2,257
Usage (1,117) (239) (1,356)
Currency translation (151) (115) (266)
------- ------- -------
Balance at January 1, 2000 $ 15 $ 654 $ 669
======= ======= =======
The Company expects to pay the remaining accrued restructuring costs in
the first half of 2000.
12. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, advance to affiliate, available-for-sale investments, accounts
receivable, current maturity of note payable, accounts payable, common stock of
subsidiary subject to redemption, due to parent company and affiliated
companies, subordinated convertible debentures, note payable, and forward
foreign exchange contracts. The carrying amounts of accounts receivable, current
maturity of note payable, accounts payable, and due to parent company and
affiliated companies 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.
24
12. Fair Value of Financial Instruments (continued)
The carrying amount and fair value of the Company's subordinated
convertible debentures, common stock of subsidiary subject to redemption, and
off-balance-sheet financial instruments are as follows:
1999 1998
-------------------- --------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------------- ---------- ---------- ---------- ----------
Subordinated Convertible Debentures $153,000 $124,710 $153,000 $130,433
Common Stock of Subsidiary Subject to Redemption $ 49,160 $ 51,011 $ 53,801 $ 53,626
Off-balance-sheet Financial Instruments:
Forward foreign exchange contracts payable $ 35 $ 1
The fair value of the Company's subordinated convertible debentures and
common stock of subsidiary subject to redemption was determined based on quoted
market prices.
The notional amounts of forward foreign exchange contracts outstanding
totaled $4,080,000 and $3,284,000 at year-end 1999 and 1998, respectively. The
fair value of such contracts is the estimated amount that the Company would pay
upon termination of the contracts, taking into account the change in foreign
exchange rates.
13. Business Segment and Geographical Information
The Company organizes and manages its business by individual functional
operating entity. The Company has combined its operating entities into three
segments: Pulp and Papermaking Equipment and Systems, Dryers and
Pollution-control Equipment, and Water- and Fiber-recovery Services and
Products. In classifying operational entities into a particular segment, the
Company aggregated businesses with similar economic characteristics, products
and services, production processes, customers, and methods of distribution.
The Company's Pulp and Papermaking Equipment and Systems segment designs
and manufactures processing machinery, accessories, and water-management systems
for the paper and paper recycling industries. Principal products manufactured by
this segment include custom-engineered systems and equipment for the preparation
of wastepaper for conversion into recycled paper; accessory equipment and
related consumables important to the efficient operation of papermaking
machines; and water-management systems essential for draining, purifying, and
recycling process water. Revenues from the stock-preparation equipment product
line were $98,929,000, $107,518,000, and $88,848,000 in 1999, 1998, and 1997,
respectively. Revenues from the accessories product line were $74,839,000,
$77,817,000, and $82,970,000 in 1999, 1998, and 1997, respectively. Revenues
from the water-management product line were $42,611,000, $36,908,000, and
$44,106,000 in 1999, 1998, and 1997, respectively.
The Dryers and Pollution-control Equipment segment, which consisted of the
Company's Thermo Wisconsin, Inc. subsidiary, manufactured and marketed dryers
and pollution-control equipment for the printing, papermaking, and converting
industries. In February 1999, the Company sold its Thermo Wisconsin subsidiary
(Note 3).
The Water- and Fiber-recovery Services and Products segment, which
consists of the Company's Thermo Fibergen subsidiary, owns and operates a plant
that helps the host mill close the loop in its water and solids systems on a
long-term contract basis. The plant, which the Company began operating in July
1998 (Note 10), cleans and recycles water and long fiber for reuse in the
papermaking process. In addition, through its GranTek Inc. subsidiary, Thermo
Fibergen employs patented technology to produce biodegradable absorbing granules
from papermaking byproducts. These granules are used as agricultural carriers,
oil and grease absorbents, cat box fillers, and animal bedding. In addition,
Thermo Fibergen plans to develop, produce, and market fiber-based composites
through its majority-owned NEXT Fiber Products subsidiary (Note 3).
25
13. Business Segment and Geographical Information (continued)
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ---------- ----------
Business Segment Information
Revenues:
Pulp and Papermaking Equipment and Systems (a) $217,724 $223,799 $217,270
Dryers and Pollution-control Equipment (b) 1,802 19,513 19,724
Water- and Fiber-recovery Services and Products 8,579 5,276 4,836
Intersegment sales elimination (c) (69) (1,162) (2,188)
-------- -------- --------
$228,036 $247,426 $239,642
======== ======== ========
Income Before Provision for Income Taxes and Minority Interest:
Pulp and Papermaking Equipment and Systems (d) $ 27,061 $ 33,937 $ 30,060
Dryers and Pollution-control Equipment (b)(e) 11,609 2,736 1,594
Water- and Fiber-recovery Services and Products (1,010) (2,468) (2,424)
Corporate (f) (8,138) (3,857) (3,299)
-------- -------- --------
Total operating income 29,522 30,348 25,931
Interest income, net 1,029 548 2,495
-------- -------- --------
$ 30,551 $ 30,896 $ 28,426
======== ======== ========
Total Assets:
Pulp and Papermaking Equipment and Systems $282,837 $277,688 $276,784
Dryers and Pollution-control Equipment (b) - 5,390 7,155
Water- and Fiber-recovery Services and Products 72,438 71,116 70,164
Corporate (g) 87,302 72,906 64,835
-------- -------- --------
$442,577 $427,100 $418,938
======== ======== ========
Depreciation and Amortization:
Pulp and Papermaking Equipment and Systems $ 7,502 $ 7,188 $ 5,921
Dryers and Pollution-control Equipment (b) 16 153 133
Water- and Fiber-recovery Services and Products 1,410 1,151 1,204
-------- -------- --------
$ 8,928 $ 8,492 $ 7,258
======== ======== ========
Capital Expenditures:
Pulp and Papermaking Equipment and Systems $ 2,964 $ 3,442 $ 3,215
Dryers and Pollution-control Equipment (b) - 197 201
Water- and Fiber-recovery Services and Products 1,110 4,134 377
-------- -------- --------
$ 4,074 $ 7,773 $ 3,793
======== ======== ========
26
13. Business Segment and Geographical Information (continued)
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ----------- ---------- ---------
Geographical Information
Revenues (h):
United States $142,800 $153,658 $150,998
France 60,682 65,308 52,416
Other 33,477 39,636 47,266
Transfers among geographic areas (c) (8,923) (11,176) (11,038)
-------- -------- --------
$228,036 $247,426 $239,642
======== ======== ========
Long-lived Assets (i):
United States $ 23,948 $ 27,232 $ 23,119
France 4,483 5,381 6,139
Other 4,711 4,844 5,304
-------- -------- --------
$ 33,142 $ 37,457 $ 34,562
======== ======== ========
Export Revenues Included in United States Revenues Above (j) $ 23,366 $ 24,244 $ 20,140
======== ======== ========
(a) Includes intersegment sales of $0.5 million and $0.2 million in 1998 and 1997, respectively.
(b) Includes intersegment sales of $0.6 million and $2.0 million in 1998 and 1997, respectively.
The Company sold this segment in February 1999.
(c) Intersegment sales and transfers among geographic areas are accounted for at
prices that are representative of transactions with unaffiliated parties.
(d) Includes $3.1 million of restructuring costs and unusual items in 1999.
(e) Includes $11.2 million of gain on sale of business in 1999.
(f) Includes $3.0 million of unusual items in 1999 for the write-down of a note receivable.
Also includes related carrying costs of the note receivable and underlying
security of $1.4 million and $0.9 million in 1999 and 1998, respectively.
(g) Primarily amounts invested in cash management arrangements with Thermo Electron.
(h) Revenues are attributed to countries based on selling location.
(i) Includes property, plant, and equipment, net, and other long-term tangible assets.
(j) In general, export revenues are denominated in U.S. dollars.
27
14. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------- -------- --------- -------
Basic
Net Income $17,778 $ 17,995 $16,426
------- -------- -------
Weighted Average Shares 61,186 61,612 61,384
------- -------- -------
Basic Earnings per Share $ .29 $ .29 $ .27
======= ======== =======
Diluted
Net Income $17,778 $ 17,995 $16,426
Effect of:
Convertible obligations - - 188
Majority-owned subsidiary's dilutive securities (48) (33) (76)
------- -------- -------
Income Available to Common Shareholders, as Adjusted $17,730 $ 17,962 $16,538
------- -------- -------
Weighted Average Shares 61,186 61,612 61,384
Effect of:
Convertible obligations - - 1,126
Stock options 373 741 1,103
------- -------- -------
Weighted Average Shares, as Adjusted 61,559 62,353 63,613
------- -------- -------
Diluted Earnings per Share $ .29 $ .29 $ .26
======= ======== =======
Options to purchase 908,000, 601,000, and 663,000 shares of common stock
were not included in the computation of diluted earnings per share for 1999,
1998, and 1997, 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 per share for 1999 and
1998 excludes the effect of assuming the conversion of the Company's $153.0
million principal amount of 4 1/2% subordinated convertible debentures,
convertible at $12.10 per share, because the effect would be antidilutive.
15. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represent 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.
28
15. Comprehensive Income (continued)
Accumulated other comprehensive items in the accompanying consolidated
balance sheet consist of the following:
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Cumulative Translation Adjustment $(11,009) $ (7,730)
Net Unrealized Loss on Available-for-sale Investments (42) (3)
-------- --------
$(11,051) $ (7,733)
======== ========
16. Unaudited Quarterly Information
(In thousands except per share amounts)
1999 First (a) Second Third (b) Fourth
- -------------------------------------------------------------- ---------- ---------- ----------- ---------
Revenues $60,223 $53,549 $ 53,075 $61,189
Gross Profit 23,436 22,064 21,898 25,745
Net Income 8,228 3,011 1,568 4,971
Earnings per Share:
Basic .13 .05 .03 .08
Diluted .12 .05 .03 .08
1998 First Second Third Fourth
- -------------------------------------------------------------- ---------- ---------- ----------- ---------
Revenues $62,330 $63,583 $59,678 $61,835
Gross Profit 25,278 26,119 23,976 24,791
Net Income 4,251 5,328 4,157 4,259
Earnings per Share:
Basic .07 .09 .07 .07
Diluted .07 .08 .07 .07
(a) Reflects an $11.2 million gain on the February 1999 disposition of Thermo
Wisconsin, Inc. and restructuring costs and unusual items of $3.4 million.
(b) Reflects restructuring costs of $2.8 million.
17. Subsequent Event
On January 31, 2000, Thermo Electron announced that, as part of a major
reorganization plan, it plans to spin off its equity interest in the Company as
a dividend to Thermo Electron shareholders. The distribution is subject to
receipt of a favorable ruling from the Internal Revenue Service regarding the
tax treatment of the spin off, and other customary conditions. If these
conditions are met, the Company expects the transaction to occur in late 2000 or
in early 2001. Following the spin off, Thermo Electron will continue to
guarantee the Company's $153,000,000 principal amount of 4 1/2% subordinated
convertible debentures due 2004, on a subordinated basis, and Thermo Fibergen's
obligation under its redemption rights.
29
Thermo Fibertek Inc. 1999 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Fibertek Inc.:
We have audited the accompanying consolidated balance sheet of Thermo
Fibertek Inc. (a Delaware corporation and 91%-owned subsidiary of Thermo
Electron Corporation) and subsidiaries as of January 1, 2000, and January 2,
1999, and the related consolidated statements of income, comprehensive income
and shareholders' investment, and cash flows for each of the three years in the
period ended January 1, 2000. 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 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
Fibertek Inc. and subsidiaries as of January 1, 2000 and January 2, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended January 1, 2000, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 9, 2000
30
Thermo Fibertek Inc. 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 operates in two segments: Pulp and Papermaking Equipment and
Systems and Water- and Fiber-recovery Services and Products. The Company's Pulp
and Papermaking Equipment and Systems (Papermaking Equipment) segment designs
and manufactures stock-preparation equipment, accessories, and water-management
systems for the paper and paper recycling industries. Principal products
manufactured by this segment include custom-engineered systems and equipment for
the preparation of wastepaper for conversion into recycled paper; accessory
equipment and related consumables important to the efficient operation of
papermaking machines; and water-management systems essential for draining,
purifying, and recycling process water. In May 1999, this segment acquired the
outstanding stock of Arcline Products, a manufacturer of shower and doctor
oscillation systems (Note 3).
The Water- and Fiber-recovery Services and Products segment, which
consists of the Company's Thermo Fibergen subsidiary, owns and operates a plant
that helps the host mill close the loop in its water and solids systems on a
long-term contract basis. The plant, which the Company began operating in July
1998, cleans and recycles water and long fiber for reuse in the papermaking
process. In addition, through its GranTek subsidiary, Thermo Fibergen employs
patented technology to produce biodegradable absorbing granules from papermaking
byproducts. These granules are used as agricultural carriers, oil and grease
absorbents, cat box fillers, and animal bedding. In October 1999, Thermo
Fibergen established a subsidiary that plans to develop, produce, and market
fiber-based composites.
Prior to February 1999, the Company also operated in the Dryers and
Pollution-control Equipment segment, which consisted of the Company's Thermo
Wisconsin Inc. subsidiary and manufactured and marketed dryers and
pollution-control equipment for the printing, papermaking, and converting
industries. In February 1999, the Company sold its Thermo Wisconsin subsidiary
for $13.6 million in cash (Note 3). Thermo Wisconsin's unaudited revenues to
external customers and net income for fiscal 1998 were $18.9 million and $1.5
million, respectively.
The Company's manufacturing facilities are principally located in the
United States and France. The manufacturing facility in France is located at the
Company's E. & M. Lamort, S.A. subsidiary, which manufactures stock-preparation
equipment, accessories, and water-management systems.
During 1999, approximately 48% of the Company's sales were to customers
outside the United States, principally in Europe. The Company generally seeks to
charge its customers in the same currency as its operating costs. However, the
Company's financial performance and competitive position can be affected by
currency exchange rate fluctuations affecting the relationship between the U.S.
dollar and foreign currencies. The Company reduces its exposure to currency
fluctuations through the use of forward contracts. The Company may enter into
forward contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than its subsidiaries' local currencies. These
contracts principally hedge transactions denominated in U.S. and Canadian
dollars. The purpose of the Company's foreign currency hedging activities is to
protect the Company's local currency cash flows related to these commitments
from fluctuations in foreign exchange rates. Because the Company's forward
contracts are entered into as hedges against existing foreign currency
exposures, there generally is no effect on the income statement since gains or
losses on the customer contract offset gains or losses on the forward contract.
31
Overview (continued)
The Company's products are primarily sold to the paper industry.
Generally, the financial condition of the paper industry corresponds to changes
in the general economy and to a number of other factors, including paper and
pulp production capacity. In early 1996, the worldwide pulp and paper industry
entered a severe downcycle, which began adversely affecting the Company's
business in the second half of 1996. These adverse effects continued through the
first half of 1999. A number of recent signs suggest improvement beginning in
the second half of 1999, particularly in North America. In general, prices for
most paper grades are increasing, and operating rates for paper companies in
North America are at a relatively high percentage of capacity. The financial
condition of many pulp and paper companies appears to be improving steadily,
which could lead to increased expenditures in capital equipment. The timing of
the recovery of the financial condition of the paper industry cannot be
predicted, however.
Results of Operations
1999 Compared With 1998
Excluding the results of Thermo Wisconsin, which was sold in February
1999, revenues decreased to $226.3 million in 1999 from $228.5 million in 1998.
Thermo Wisconsin's revenues to external customers were $1.8 million and $18.9
million in 1999 and 1998, respectively. Arcline Products, which was acquired in
May 1999, added revenues of $1.0 million during the period. The inclusion for
the full 1999 period of results from Goslin Birmingham, which was acquired in
July 1998, added incremental revenues of $3.5 million. The unfavorable effects
of currency translation due to the strengthening in value of the U.S. dollar
relative to foreign currencies in countries in which the Company operates
decreased revenues at the Papermaking Equipment segment by $2.1 million in 1999.
Excluding the results of acquisitions and the effect of currency translation,
revenues in the Company's Papermaking Equipment segment decreased $7.9 million,
primarily due to a $10.8 million decrease in revenues from the stock-preparation
equipment product line, resulting principally from market weakness in Europe,
and a $2.1 million decrease in the accessories product line, principally in
North America. These decreases were offset in part by a $5.1 million increase in
revenues from that segment's water-management product line, principally in North
America. The Water- and Fiber-recovery Services and Products segment revenues
increased $3.3 million due to a $1.7 million increase in demand for
cellulose-based products, primarily from its two largest customers; a $0.8
million increase in sales of its cat box filler product, which was introduced in
the third quarter of 1998; and the inclusion of revenues for the full 1999
period from its fiber-recovery and water-clarification facility, which began
operations in July 1998 and added $0.8 million of additional revenues in 1999.
The gross profit margin was relatively unchanged at 40.8% in 1999,
compared with 40.5% in 1998.
Selling, general, and administrative expenses as a percentage of revenues
increased to 27% in 1999 from 26% in 1998, primarily due to the effect of the
sale of Thermo Wisconsin, for which such costs represented 15% of its revenues
in 1998.
Research and development expenses increased slightly to $7.3 million in
1999 from $7.0 million in 1998, primarily due to increased expenditures in the
Papermaking Equipment segment.
During the first quarter of 1999, the Company sold its Thermo Wisconsin
subsidiary for $13.6 million in cash, resulting in a pretax gain of $11.2
million (Note 3).
Restructuring costs and unusual items of $6.2 million in 1999 represents
write-downs for impairment of assets, severance costs, termination of
distributor agreements, the expected settlement of a contractual dispute, and
facility-closure costs (Note 11). The severance actions are expected to result
in aggregate annual cost savings of $1.2 million beginning in 2000.
Interest income increased to $8.5 million in 1999 from $8.0 million in
1998 due to higher average invested balances as a result of cash received from
the sale of Thermo Wisconsin. Interest expense was relatively unchanged in 1999
and 1998.
32
1999 Compared With 1998 (continued)
The effective tax rate was unchanged at 39% in 1999 and 1998. The
effective tax rate exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes.
Minority interest expense primarily represents accretion of Thermo
Fibergen's common stock subject to redemption.
In connection with a proposed engineering, procurement, and construction
project, the Company loaned $6.0 million to Tree-Free Fiber Company, LLC
(Tree-Free) during 1996. This project was delayed due to weakness in pulp
prices, and will not proceed as a result of Tree-Free's insolvency. Tree-Free
was unable to repay the note upon its original maturity. The note is secured by
pari-passu liens on a tissue mill in Maine and related assets. In December 1997,
the Superior Court of Maine appointed a receiver to preserve and protect the
collateral for the loans made by the Company and other lenders to Tree-Free. In
May 1998, the Company purchased an assignment of Tree-Free's secured
indebtedness to the other pari-passu lender for $2.9 million. In June 1998, the
Company was the successful bidder at a foreclosure sale of the tissue mill and
executed a purchase and sale agreement. In October 1998, the stock of a mill
located in Mexico, which had also secured the note, was sold and the proceeds of
$1.3 million were paid to the Company and recorded as a reduction of the
carrying amount of the notes. During 1999, the Company recorded a $3.0 million
write-down to reflect the asset at its estimated recoverable value (Note 4). In
December 1999, the Company entered into a purchase and sale agreement, as
amended, to sell the mill, provided the purchaser received certain assurances by
January 31, 2000, from the Maine Department of Environmental Protection that
Tree-Free's permits to operate the mill would be transferred to the Buyer. Those
assurances were not received by January 31, 2000, and the purchase agreement
subsequently lapsed. The Buyer continues to pursue an application to transfer
the Tree-Free permits and has indicated to the Company that it intends to
purchase the mill if the necessary permits are received.
1998 Compared With 1997
Revenues increased to $247.4 million in 1998 from $239.6 million in 1997,
primarily due to an increase in revenues of $6.5 million in the Papermaking
Equipment segment. The increase in revenues in the Papermaking Equipment segment
was primarily due to an $18.9 million increase in revenues from the
stock-preparation equipment product line, offset in part by decreases in
revenues from the accessories and water-management product lines, primarily due
to a decrease in demand, and the unfavorable effects of foreign currency
translation. Revenues from the stock-preparation equipment product line
increased principally due to a $14.0 million increase in revenues from Thermo
Black Clawson, acquired in May 1997, due to its inclusion for the full
twelve-month period in 1998, offset in part by a decrease in its revenues due to
a decrease in demand in Asia, North America, and Europe. Unstable economic
conditions in Asia during the year, and weakened currencies in that region,
resulted in increased low-cost imports of pulp and paper in North America and
Europe, resulting in reduced pricing. These factors also resulted in a decline
in paper and pulp exports from North America and Europe to Asia. The economic
conditions in Asia began to recover in 1999. The unfavorable effects of currency
translation due to the strengthening of the U.S. dollar relative to foreign
currencies in countries in which the Company operates decreased revenues by $2.4
million in 1998.
The gross profit margin increased to 40% in 1998 from 39% in 1997,
primarily due an increase in gross profit margin in the Papermaking Equipment
segment as a result of improvement at Thermo Black Clawson. Gross profit margins
improved at Thermo Black Clawson principally as a result of a relative increase
in sales of higher-margin spare parts.
Selling, general, and administrative expenses as a percentage of revenues
were relatively unchanged at 25.6% in 1998, compared with 25.3% in 1997.
Research and development expenses were relatively unchanged at $7.0
million in 1998, compared with $6.8 million in 1997.
In 1998, the Company recorded gains of $0.5 million relating to the sale of
real estate.
In 1997, restructuring costs of $1.1 million were recorded by the
Papermaking Equipment segment, primarily for severance costs relating to the
consolidation of the operations of two subsidiaries into the operations of
Thermo Black Clawson (Note 11).
33
1998 Compared With 1997 (continued)
Interest income increased to $8.0 million in 1998 from $7.3 million in
1997, primarily due to an increase in average invested balances, offset in part
by the effect of a decrease in interest rates in 1998. The increase in average
invested balances principally related to the net proceeds from the sale of
$153.0 million principal amount of 4 1/2% subordinated convertible debentures in
July 1997, of which $103.4 million was used to finance the acquisition of Thermo
Black Clawson (Note 8). Interest expense increased to $7.4 million in 1998 from
$4.8 million in 1997, principally as a result of the July 1997 issuance of
subordinated convertible debentures.
The effective tax rate was unchanged at 39% in 1998 and 1997. The
effective tax rate exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes.
Minority interest expense primarily represents accretion of Thermo
Fibergen's common stock subject to redemption.
Liquidity and Capital Resources
Consolidated working capital was $158.7 million at January 1, 2000,
compared with $193.4 million at January 2, 1999. Working capital decreased $49.2
million due to the reclassification of common stock of subsidiary subject to
redemption to current liabilities. Included in working capital are cash, cash
equivalents, and available-for-sale investments of $85.7 million at January 1,
2000, compared with $163.7 million at January 2, 1999. Also, as of January 1,
2000, the Company had $93.8 million invested in an advance to affiliate. Prior
to the use of new domestic cash management arrangements between the Company and
Thermo Electron Corporation, which became effective June 1999, amounts invested
with Thermo Electron were included in cash and cash equivalents. Of the total
cash, cash equivalents, and available-for-sale investments, $46.5 million was
held by Thermo Fibergen and the remainder was held by the Company and its wholly
owned subsidiaries. Of the total advance to affiliate, $5.1 million was advanced
by Thermo Fibergen, $7.1 million was advanced by the Company's Thermo Fiberprep
subsidiary, and the balance was advanced by the Company. At January 1, 2000,
$37.7 million of the Company's cash and cash equivalents was held by its foreign
subsidiaries.
During 1999, $17.2 million of cash was provided by operating activities.
The Company used $4.4 million of cash to fund an increase in accounts
receivable, primarily due to slower collections in international markets at the
Company's Lamort subsidiary and increased sales in the water management product
line in the fourth quarter of 1999 compared with the fourth quarter of 1998. In
addition, the Company used $7.1 million to fund an increase in unbilled contract
costs and fees, primarily due to the timing of billings for the
stock-preparation product line.
During 1999, the Company's investing activities, excluding
available-for-sale investments and advance to affiliate activity, provided $7.2
million of cash. The Company received proceeds of $13.6 million from the sale of
Thermo Wisconsin and used $3.1 million, net of cash acquired, to purchase the
assets of Arcline and certain capital equipment and technology (Note 3). In
addition, the Company purchased property, plant, and equipment for $3.9 million
and received a refund of $0.4 million related to the 1998 acquisition of Goslin
Birmingham (Note 3).
During 1999, the Company's financing activities used $7.5 million of cash.
The Company used $2.5 million to purchase Company common stock and Thermo
Fibergen used $5.5 million to purchase its common stock. These purchases were
made pursuant to authorizations by the Company's and Thermo Fibergen's Boards of
Directors. The Company's and Thermo Fibergen's authorizations to purchase
Company common stock, outstanding convertible debentures, or Thermo Fibergen
common stock have expired.
Thermo Fibergen's common stock is subject to redemption in September 2000
or September 2001, the redemption value of which is $49.8 million.
At January 1, 2000, the Company had $66.5 million of undistributed foreign
earnings that could be subject to tax if remitted to the U.S. The Company does
not intend to repatriate undistributed foreign earnings into the U.S., and does
not expect that this will have a material adverse effect on the Company's
current liquidity.
34
Liquidity and Capital Resources (continued)
During 2000, the Company plans to make expenditures for property, plant,
and equipment of approximately $7 million. In addition, Thermo Fibergen may, in
the future, make capital expenditures for the construction of additional
fiber-recovery and water-clarification facilities. Construction of such
facilities is dependent upon Thermo Fibergen entering into long-term contracts
with pulp and paper mills, under which Thermo Fibergen will charge fees to
process the mills' papermaking byproducts. There is no assurance that Thermo
Fibergen will be able to obtain such additional contracts. In addition, the
Company's liquidity may be adversely affected if the redemption of Thermo
Fibergen's common stock occurs in the third quarter of 2000. The Company
believes that its existing resources are sufficient to meet the capital
requirements of its existing operations for the foreseeable future.
Market Risk
The Company is exposed to market risk from changes in interest rates,
equity prices, and foreign currency exchange 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.
Additionally, the Company uses short-term forward contracts to manage certain
exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge firm purchase and sale commitments denominated in
currencies other than its subsidiaries' local currencies. The Company does not
engage in extensive foreign currency hedging activities; however, the purpose of
the Company's foreign currency hedging activities is to protect the Company's
local currency cash flows related to these commitments from fluctuations in
foreign exchange rates. The Company's forward foreign exchange contracts
principally hedge transactions denominated in U.S. dollars, British pounds
sterling, and Canadian dollars. Gains and losses arising from forward contracts
are recognized as offsets to gains and losses resulting from the transactions
being hedged. The Company does not enter into speculative foreign currency
agreements.
Interest Rates
The Company's available-for-sale investments and subordinated convertible
debentures 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 year-end
1999 and 1998 market interest rates would result in a negative impact of $4
million and $21 million, respectively, on the net fair value of the Company's
interest-sensitive financial instruments.
The Company's cash, cash equivalents, advance to affiliate, and
available-for-sale investments maturing within one year are sensitive to changes
in interest rates. Interest rate changes would result in a change in interest
income due to the difference between the current interest rates on cash and cash
equivalents and the variable rate that these financial instruments may adjust to
in the future. A 10% decrease in year-end 1999 and 1998 interest rates would
result in a negative impact of $0.6 million and $0.4 million, respectively, on
the Company's net income.
Equity Prices
The Company's subordinated 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 subordinated convertible debentures due to the difference
between the current market price and the market price at the date of issuance of
the debentures. A 10% increase in the year-end 1999 and 1998 market equity
prices would result in a negative impact of $3.0 million and $6.3 million,
respectively, on the net fair value of the Company's subordinated convertible
debentures.
35
Market Risk (continued)
The Company's common stock of subsidiary subject to redemption is
sensitive to fluctuations in the price of Thermo Fibergen common stock. The
holder of a Thermo Fibergen redemption right may require Thermo Fibergen to
redeem one share of Thermo Fibergen common stock at $12.75 per share in
September 2000 or September 2001. If Thermo Fibergen's common stock is trading
on the open market at a price which is less than $12.75 per share in September
2001, the holders of redemption rights would more likely than not exercise their
redemption rights. In the event all redemption rights are exercised, the Company
may use up to $49.8 million in cash to settle the redemption obligation.
In addition, changes in equity prices would result in changes in the fair
value of common stock of subsidiary subject to redemption due to the difference
between the current market price and the price at the date of issuance of the
underlying financial instruments, Thermo Fibergen common stock and redemption
rights. Since the market price of Thermo Fibergen's redemption rights generally
fluctuates in the opposite direction of fluctuations in the market price of
Thermo Fibergen's common stock, the effect of a 10% increase in the market price
of Thermo Fibergen common stock on the fair value of common stock of subsidiary
subject to redemption would be mitigated in part by a decrease in the market
price of the Thermo Fibergen redemption rights.
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 French francs, British
pounds sterling, and Canadian dollars. The effect of a change in foreign
exchange rates on the Company's net investment in foreign subsidiaries is
reflected in the "Accumulated other comprehensive items" component of
shareholders' investment. A 10% depreciation in year-end 1999 and 1998
functional currencies, relative to the U.S. dollar, would result in a $7.9
million reduction of shareholders' investment for each period.
The fair value of forward foreign exchange contracts is sensitive to
changes in foreign currency exchange rates. The fair value of forward foreign
exchange contracts is the estimated amount that the Company would pay or receive
upon termination of the contract, taking into account the change in foreign
currency exchange rates. A 10% depreciation in year-end 1999 and 1998 foreign
currency exchange rates related to the Company's contracts would result in an
increase in the unrealized loss on forward foreign exchange contracts of $0.2
million for each period. Since the Company uses forward foreign exchange
contracts as hedges of firm purchase and sale commitments, the unrealized gain
or loss on forward foreign currency exchange contracts resulting from changes in
foreign currency exchange rates would be offset by corresponding changes in the
fair value of the hedged items.
36
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) testing and developing upgrades, where
necessary, for the Company's current products and certain discontinued products;
(iii) assessing the year 2000 readiness of its key suppliers, vendors, and
customers; and (iv) 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. The Company believes that all of the
material products that it currently manufactures and sells are year 2000
compliant or are not date sensitive. 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.
37
Thermo Fibertek Inc. 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 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 2000 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Dependence on Paper Industry and Pulp and Paper Prices. The Company's
products are primarily sold to the paper industry. Generally, the financial
condition of the paper industry corresponds to the condition of the general
economy, as well as a number of other factors, including paper and pulp
production capacity. The paper industry entered a severe downcycle in early 1996
and has only recently begun to recover. This cyclical downturn has adversely
affected the Company's business. No assurance can be given that the financial
condition of the paper industry will continue to improve in the near future.
Risks Associated with International Operations. During 1999, approximately
48% of the Company's sales were to customers outside the United States,
principally in Europe. 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; U.S. export licenses may be
difficult to obtain; and the protection of intellectual property in foreign
countries may be more difficult to enforce. Although the Company seeks to charge
its customers in the same currency as its operating costs, fluctuations in
currency exchange rates may affect product demand and adversely affect the
profitability in U.S. dollars of products provided by the Company in foreign
markets where payment for the Company's products and services is made in the
local currency. 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.
Competition. The Company encounters and expects to continue to encounter
significant competition in each of its principal markets. The Company believes
that the principal competitive factors affecting the markets for its products
include quality, price, service, technical expertise, and product innovation.
The Company's competitors include a number of large multinational corporations.
Competition could increase if new companies enter the market or if existing
competitors expand their product lines or intensify efforts within existing
product lines. There can be no assurance that the Company's current products,
products under development, or ability to develop new technologies will be
sufficient to enable it to compete effectively.
Dependence on Patents and Proprietary Rights. The Company places
considerable emphasis on obtaining patent and trade secret protection for
significant new technologies, products, and processes because of the length of
time and expense associated with bringing new products through the development
process and to the marketplace. The Company's success depends in part on its
ability to develop patentable products and obtain and enforce patent protection
for its products both in the United States and in other countries. The Company
owns numerous U.S. and foreign patents, and intends to file additional
applications as appropriate for patents covering its products. No assurance can
be given that patents will issue 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. No
assurance can be given that any issued patents owned by or licensed to the
Company will not be challenged, invalidated, or circumvented, or that the rights
thereunder will provide competitive advantages to the Company. 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, there can be no assurance that third parties will not assert
claims against the Company to the effect that the Company is infringing the
intellectual property rights of such parties. The Company could incur
substantial costs and diversion of management resources with respect to the
defense of any such claims, which could have a
38
material adverse effect on the Company's business, financial condition, and
results of operations. Furthermore, parties making such claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief, which could effectively block the Company's ability to make, use, sell,
distribute, or market its products and services in the U.S. or abroad. In the
event that a claim relating to intellectual property is asserted against the
Company, the Company may seek licenses to such intellectual property. There can
be no assurance, however, that such licenses could be obtained on commercially
reasonable terms, if at all. The failure to obtain the necessary licenses or
other rights could preclude the sale, manufacture, or distribution of the
Company's products and, therefore, could have a material adverse effect on the
Company's business, financial condition, and results of operations.
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 Acquisition Strategy. The Company's acquisition
strategy includes the acquisition of businesses that complement or augment the
Company's existing products and services. Promising acquisitions are difficult
to identify and complete for a number of reasons, including competition among
prospective buyers and the need for regulatory, including antitrust, approvals.
Any acquisition completed by the Company may be made at a substantial premium
over the fair value of the net assets of the acquired company. 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 into
its existing businesses or make such businesses profitable.
Risks Associated with Cash Management Arrangement with Thermo Electron.
The Company participates in a cash management arrangement with 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.
39
Thermo Fibertek Inc. 1999 Financial Statements
Selected Financial Information
(In thousands except per share amounts) 1999 (a) 1998 1997 (b) 1996 (c) 1995
- --------------------------------------------------- ---------- ---------- ----------- ---------- ---------
Statement of Income Data
Revenues $228,036 $247,426 $ 239,642 $192,209 $206,743
Net Income 17,778 17,995 16,426 19,894 20,249
Earnings per Share:
Basic .29 .29 .27 .33 .33
Diluted .29 .29 .26 .31 .32
Balance Sheet Data
Working Capital $158,711 $193,446 $ 176,996 $115,609 $ 70,882
Total Assets 442,577 427,100 418,938 257,232 199,671
Long-term Obligations 154,350 153,000 153,000 34 15,041
Common Stock of Subsidiary Subject to - 53,801 52,812 56,087 -
Redemption
Shareholders' Investment 164,070 150,948 138,095 130,850 109,631
(a) Reflects an $11.2 million gain on the February 1999 disposition of Thermo
Wisconsin, Inc., restructuring costs and unusual items of $6.2 million, and
the reclassification of common stock of subsidiary subject to redemption to
current liabilities.
(b) Reflects the May 1997 acquisition of Thermo Black Clawson, the issuance of
$153.0 million principal amount of 4 1/2% subordinated convertible
debentures, and the conversion of a $15.0 million principal amount
subordinated convertible note by Thermo Electron.
(c) Reflects the July 1996 acquisition of GranTek, the net proceeds from Thermo
Fibergen's September 1996 initial public offering, and the repayment of a
$10.4 million promissory note to Thermo Electron.
40
Thermo Fibertek Inc. 1999 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TFT. The following table sets forth the high and low sale prices of
the Company's common stock for 1999 and 1998, as reported in the consolidated
transaction reporting system.
1999 1998
--------------------- -----------------
Quarter High Low High Low
- ------------------------------------------------------------- ----------- ---------- ----------- ---------
First $ 7 15/16 $ 7 $14 1/4 $11 1/4
Second 7 13/16 6 1/2 12 3/4 9 1/2
Third 7 7/16 6 1/8 10 5/8 7 7/16
Fourth 7 1/4 6 7/16 7 3/4 4 15/16
As of January 28, 2000, the Company had 751 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 January 28, 2000, was $7 3/8 per share.
Common stock and redemption rights of Thermo Fibergen Inc., the Company's
majority-owned public subsidiary, are traded on the American Stock Exchange
(symbols TFG and TFG_r).
Shareholder Services
Shareholders of Thermo Fibertek Inc. who desire information about the
Company are invited to contact the Investor Relations Department, Thermo
Fibertek Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046, (781) 622-1111. Distribution of printed quarterly reports is limited
to the second quarter only. Company information is available at
http://www.thermo.com/ subsid/tft1.html on Thermo Electron's Internet site.
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 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.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
1, 2000, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Thermo Fibertek
Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.