Exhibit 13
Thermo Fibertek Inc.
Consolidated Financial Statements
2000
Thermo Fibertek Inc. 2000 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 2000 1999 1998
---------------------------------------------------------------------------------------------------------
Revenues (Notes 13 and 16) $234,913 $228,036 $247,426
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues 145,111 134,893 147,262
Selling, general, and administrative expenses (Note 9) 60,901 61,345 63,381
Research and development expenses 7,687 7,278 6,971
Gain on sale of business (Note 4) and property (1,700) (11,154) (536)
Restructuring and unusual items (Note 11) (506) 6,152 -
-------- -------- --------
211,493 198,514 217,078
-------- -------- --------
Operating Income 23,420 29,522 30,348
Interest Income 10,466 8,478 7,956
Interest Expense (Note 8) (7,503) (7,449) (7,408)
-------- -------- --------
Income Before Provision for Income Taxes, Minority Interest,
and Cumulative Effect of Change in Accounting Principle 26,383 30,551 30,896
Provision for Income Taxes (Note 7) (10,947) (11,852) (11,902)
Minority Interest Income (Expense) 576 (921) (999)
-------- -------- --------
Income Before Cumulative Effect of Change in Accounting
Principle 16,012 17,778 17,995
Cumulative Effect of Change in Accounting Principle (net of
income taxes of $580; Note 16) (870) - -
-------- -------- --------
Net Income $ 15,142 $ 17,778 $ 17,995
======== ======== ========
Basic and Diluted Earnings per Share Before Cumulative Effect
of Change in Accounting Principle $ .26 $ .29 $ .29
======== ======== ========
Basic and Diluted Earnings per Share (Note 14) $ .25 $ .29 $ .29
======== ======== ========
Weighted Average Shares (Note 14)
Basic 61,298 61,186 61,612
======== ======== ========
Diluted 61,490 61,559 62,353
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
2
Thermo Fibertek Inc. 2000 Financial Statements
Consolidated Balance Sheet
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 62,461 $ 39,254
Advance to affiliate 5,704 93,780
Available-for-sale investments, at quoted market value (amortized cost
of $86,104 and $46,470; Note 2) 86,137 46,405
Accounts receivable, less allowances of $2,182 and $1,659 43,866 49,323
Unbilled contract costs and fees 8,029 9,570
Inventories 33,077 28,907
Deferred tax asset (Note 7) 8,879 4,896
Other current assets (Notes 3 and 4) 3,625 1,034
-------- --------
251,778 273,169
-------- --------
Property, Plant, and Equipment, at Cost, Net (Notes 3 and 4) 29,582 30,494
-------- --------
Other Assets (Notes 4 and 5) 13,755 17,044
-------- --------
Goodwill (Note 4) 119,100 121,870
-------- --------
$414,215 $442,577
======== ========
3
Thermo Fibertek Inc. 2000 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 2000 1999
- ----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Current maturities of long-term obligations (Notes 4 and 8) $ 562 $ 380
Accounts payable 21,921 21,957
Accrued payroll and employee benefits 7,727 8,659
Customer deposits 7,076 3,242
Accrued warranty costs 5,666 5,005
Billings in excess of contract costs and fees 1,241 4,730
Other accrued expenses (Notes 3 and 11) 16,178 20,322
Common stock of subsidiary subject to redemption ($17,026 and
$49,788 redemption value; Notes 1 and 12) 17,026 49,160
Due to parent company and affiliated companies 1,284 1,003
-------- --------
78,681 114,458
-------- --------
Deferred Income Taxes and Other Deferred Items (Note 7) 8,042 6,365
-------- --------
Long-term Obligations:
Subordinated convertible debentures (Notes 8 and 12) 153,000 153,000
Notes payable (Notes 4 and 8) 1,650 1,350
-------- --------
154,650 154,350
-------- --------
Minority Interest (Note 3) 2,209 3,334
-------- --------
Commitments and Contingencies (Note 10)
Shareholders' Investment (Notes 5 and 6):
Common stock, $.01 par value, 150,000,000 shares authorized;
63,662,276 and 63,537,556 shares issued 637 635
Capital in excess of par value 76,721 77,411
Retained earnings 133,522 118,380
Treasury stock at cost, 2,275,732 and 2,327,521 shares (20,758) (21,239)
Deferred compensation (36) (66)
Accumulated other comprehensive items (Note 15) (19,453) (11,051)
-------- --------
170,633 164,070
-------- --------
$414,215 $442,577
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
4
Thermo Fibertek Inc. 2000 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 15,142 $ 17,778 $ 17,995
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting principle, net of
income taxes (Note 16) 870 - -
Depreciation and amortization 9,540 8,928 8,492
Provision for losses on accounts receivable 1,197 234 248
Minority interest (income) expense (576) 921 999
Gain on sale of business (Note 4) and property (1,700) (11,154) (536)
Noncash restructuring and unusual items (Note 11) (506) 3,239 -
Deferred income tax expense 108 1,572 2,090
Other noncash items (246) (105) 314
Changes in current accounts, excluding the effects of acquisitions
and dispositions:
Accounts receivable 1,021 (4,448) 3,702
Inventories and unbilled contract costs and fees (1,436) (7,445) 3,277
Other current assets (3,791) 448 836
Accounts payable 1,049 3,039 (5,787)
Other current liabilities (2,234) 4,198 307
--------- --------- ---------
Net cash provided by operating activities 18,438 17,205 31,937
--------- --------- ---------
Investing Activities
Acquisitions, net of cash acquired (Note 4) (3,302) (2,607) (964)
Acquisition of capital equipment and technology (Note 3) (1,200) (500) -
Proceeds from sale of business and property, net of cash divested
(Note 4) 4,109 13,592 -
Advances to affiliate, net 88,076 (93,780) -
Purchases of available-for-sale investments (132,058) (61,825) (70,882)
Proceeds from maturities of available-for-sale investments 92,424 63,565 51,470
Proceeds from sale of available-for-sale investments - - 7,730
Purchases of property, plant, and equipment (6,355) (3,903) (7,773)
Proceeds from sale of property, plant, and equipment 252 414 1,586
Advances under notes receivable (Note 4) - - (2,910)
Proceeds from repayment of notes receivable (Note 4) 800 - 1,250
Refund of acquisition purchase price (Note 4) - 377 -
Other (295) (160) (458)
--------- --------- ---------
Net cash provided by (used in) investing activities $ 42,451 $ (84,827) $ (20,951)
--------- --------- ---------
5
Thermo Fibertek Inc. 2000 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Financing Activities
Redemption of subsidiary common stock (Note 1) $ (34,603) $ - $ -
Purchases of Company and subsidiary common stock - (5,804) (6,598)
Purchases of subsidiary common stock from Thermo Electron - (2,227) -
Net proceeds from issuance of Company and subsidiary common
stock (Note 1) 1,204 551 405
Repayment of long-term obligations (313) - -
--------- --------- ---------
Net cash used in financing activities (33,712) (7,480) (6,193)
--------- --------- ---------
Exchange Rate Effect on Cash (3,970) (1,116) (969)
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents 23,207 (76,218) 3,824
Cash and Cash Equivalents at Beginning of Year 39,254 115,472 111,648
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 62,461 $ 39,254 $ 115,472
========= ========= =========
Cash Paid For
Interest $ 7,041 $ 6,913 $ 6,917
Income taxes $ 11,779 $ 6,559 $ 5,431
Noncash Activities (Notes 3 and 4)
Fair value of assets of acquired companies, capital equipment,
and technology $ 6,345 $ 10,135 $ 1,161
Cash paid for acquired companies, capital equipment, and
technology (3,889) (3,160) (964)
Payable for acquired companies, capital equipment, and technology (795) (3,430) -
Equity interest in subsidiary transferred for capital equipment
and technology - (3,075) -
--------- --------- ---------
Liabilities assumed of acquired companies $ 1,661 $ 470 $ 197
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
6
Thermo Fibertek Inc. 2000 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Comprehensive Income
Net Income $ 15,142 $ 17,778 $ 17,995
-------- -------- --------
Other Comprehensive Items (Note 15):
Foreign currency translation adjustment (8,465) (3,279) (185)
Unrealized gain (loss) on available-for-sale investments, net of
taxes and reclassification adjustment 63 (39) (32)
-------- -------- --------
(8,402) (3,318) (217)
-------- -------- --------
$ 6,740 $ 14,460 $ 17,778
======== ======== ========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 635 $ 634 $ 633
Activity under employees' and directors' stock plans 2 1 1
-------- -------- --------
Balance at end of year 637 635 634
-------- -------- --------
Capital in Excess of Par Value:
Balance at beginning of year 77,411 78,731 81,865
Activity under employees' and directors' stock plans 165 (1,916) (4,401)
Tax benefit related to employees' and directors' stock plans 512 513 1,267
Effect of majority-owned subsidiary's equity transactions (1,367) 83 -
-------- -------- --------
Balance at end of year 76,721 77,411 78,731
-------- -------- --------
Retained Earnings:
Balance at beginning of year 118,380 100,602 82,607
Net income 15,142 17,778 17,995
-------- -------- --------
Balance at end of year 133,522 118,380 100,602
-------- -------- --------
Treasury Stock:
Balance at beginning of year (21,239) (21,286) (19,494)
Purchases of Company common stock - (2,511) (6,598)
Activity under employees' and directors' stock plans 481 2,558 4,806
-------- -------- --------
Balance at end of year (20,758) (21,239) (21,286)
-------- -------- --------
Deferred Compensation:
Balance at beginning of year (66) - -
Issuance of restricted stock under employees' stock plans (Note 5) - (91) -
Amortization of deferred compensation 30 25 -
-------- -------- --------
Balance at end of year (36) (66) -
-------- -------- --------
Accumulated Other Comprehensive Items (Note 15):
Balance at beginning of year (11,051) (7,733) (7,516)
Other comprehensive items (8,402) (3,318) (217)
-------- -------- --------
Balance at end of year (19,453) (11,051) (7,733)
-------- -------- --------
$170,633 $164,070 $150,948
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
7
Thermo Fibertek Inc. 2000 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) operates in two segments: (1) Pulp and
Papermaking Equipment and Systems and (2) Water- and Fiber-recovery Services and
Products. Through its Pulp and Papermaking Equipment and Systems segment, the
Company develops, manufactures, and markets a range of equipment and products
for the domestic and international papermaking 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. The Company's Thermo Fibergen Inc.
subsidiary comprises the Water- and Fiber-recovery Services and Products segment
and develops, manufactures, and markets fiber-based composite products for the
building industry. In addition, Thermo Fibergen also 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 December 30, 2000, Thermo Electron owned 55,627,480
shares of the Company's common stock, representing 91% of such stock
outstanding.
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. In February 2001, Thermo Electron
received a favorable ruling from the Internal Revenue Service regarding the spin
off. The IRS required that the spin off be completed within one year of the
ruling, and, subject to certain conditions, that the Company raise additional
equity capital in a public offering within one year of the spin off. The Company
plans to issue equity in the range of 10 to 20 percent of its outstanding shares
to support its current business plan, which includes the repayment of debt,
acquisitions, strategic partnerships, and investment in additional capacity for
its composites business. Thermo Electron has announced that it expects to
distribute the Thermo Fibertek dividend in the second half of 2001. The spin off
will require Thermo Electron Board of Director actions and other customary
conditions. Following the spin off, Thermo Electron will continue to guarantee,
in each case on a subordinated basis, the Company's $153,000,000 principal
amount of 4 1/2% subordinated convertible debentures due 2004 and Thermo
Fibergen's remaining obligation under its redemption rights.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
its wholly owned subsidiaries, its 91%-owned public subsidiary Thermo Fibergen,
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 2000, 1999, and 1998 are for the fiscal years ended December
30, 2000, January 1, 2000, and January 2, 1999, respectively. The Company's E. &
M. Lamort, S.A. subsidiary, based in France, has a fiscal year ending on
November 30 to allow sufficient time for the Company to receive their financial
statements.
Revenue Recognition
Prior to 2000, the Company generally recognized revenues upon shipment of
its products. During the fourth quarter of 2000, effective as of January 2,
2000, the Company adopted Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
Under SAB No. 101, revenues for products that are sold subject to customer
acceptance provisions for which compliance with those provisions cannot be
demonstrated until a point in time subsequent to delivery are recognized upon
customer acceptance. Revenues for products that are sold subject to installation
for which the installation is essential to
8
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
functionality or not deemed inconsequential or perfunctory are recognized upon
completion of installation. Revenues for products where installation is not
essential to functionality, and is deemed inconsequential, or perfunctory, are
recognized upon shipment with estimated installation costs accrued (Note 16).
The Company provides a reserve for its estimate of warranty and installation
costs at the time revenue is recognized.
In addition, revenues and profits on certain long-term contracts are
recognized using the percentage-of-completion method. Revenues recorded under
the percentage-of-completion method were $43,440,000 in 2000, $40,689,000 in
1999, and $45,114,000 in 1998. 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.
Income Taxes
The Company and Thermo Electron have a tax allocation agreement under
which the Company and its subsidiaries, exclusive of its foreign operations, its
Fiberprep subsidiary, and Thermo Fibergen's NEXT Fiber Products subsidiary, 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. Prior to
Thermo Fibergen's September 2000 redemption of common stock (Note 1), the
Company's ownership of outstanding shares of Thermo Fibergen's common stock was
less than 80% and Thermo Fibergen filed its own income tax return.
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.
9
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Cash and Cash Equivalents
The Company, along with certain 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 $1,637,000 line of credit under this
arrangement. At year-end 2000 and 1999, the Company had invested $10,356,000 and
$6,732,000, respectively, under this arrangement. In connection with the spin
off from Thermo Electron, this arrangement will cease.
At year-end 2000 and 1999, the Company's cash equivalents included
investments in commercial paper, U.S. government-agency and U.S. Treasury
securities, 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
From June 1999 to August 2000, the Company participated in a new domestic
cash management arrangement with Thermo Electron. Under the arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
earned interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points,
set at the beginning of each month. Thermo Electron was 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 had the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice.
Effective August 2000, the Company no longer participates in the domestic cash
management arrangement.
In addition, one of the Company's European-based subsidiaries continues to
participate in a cash management arrangement with a wholly owned subsidiary of
Thermo Electron on terms similar to the domestic cash management arrangement. In
connection with the spin off from Thermo Electron, this arrangement will cease.
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) 2000 1999
- ----------------------------------------------------------------------------------------------------------
Raw Materials and Supplies $13,218 $12,088
Work in Process 4,825 6,122
Finished Goods (includes $3,765 at customer locations in 2000) 15,034 10,697
------- -------
$33,077 $28,907
======= =======
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.
10
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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) 2000 1999
- ----------------------------------------------------------------------------------------------------------
Land $ 2,756 $ 2,886
Fiber-recovery and Water-clarification Facility - 3,573
Buildings 19,472 19,676
Machinery, Equipment, and Leasehold Improvements 45,418 41,669
------- -------
67,646 67,804
Less: Accumulated Depreciation and Amortization 38,064 37,310
------- -------
$29,582 $30,494
======= =======
Other Assets
Other assets in the accompanying balance sheet includes intangible assets,
notes receivable (Note 4), and deferred debt expense. Intangible assets includes
the costs of patents, acquired intellectual property, and noncompete agreements
entered into in connection with acquisitions, 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 $9,594,000 and $10,676,000, net
of accumulated amortization of $2,542,000 and $1,328,000 at year-end 2000 and
1999, respectively.
Goodwill
Goodwill is amortized using the straight-line method principally over 40
years. Accumulated amortization was $16,105,000 and $12,642,000 at year-end 2000
and 1999, respectively. The Company assesses the future useful life of this
asset and other noncurrent assets 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. During the month of September 2000, the initial redemption period,
holders of Thermo Fibergen's common stock and common stock redemption rights
surrendered 2,713,951 shares of Thermo Fibergen's common stock at a redemption
price of $12.75 per share, for a total of $34,603,000. Thermo Fibergen used
available working capital to fund the payment and retired these shares
immediately following the redemption. Holders of a redemption right have the
option to require Thermo
11
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Fibergen to redeem one share of Thermo Fibergen's common stock at $12.75 per
share in September 2001, the second and final redemption period. A redemption
right may only be exercised if the holder owns a share of Thermo Fibergen's
common stock at that time. As of December 30, 2000, there were 2,001,049
redemption rights outstanding and 1,075,749 shares of Thermo Fibergen's common
stock held by persons other than the Company or Thermo Electron. In addition,
Thermo Electron, the Company and/or Thermo Fibergen may acquire shares of Thermo
Fibergen's common stock in the open market. To the extent the number of
redemption rights exceeds the number of shares of common stock held by persons
other than Thermo Electron or the Company, the maximum redemption value that
Thermo Fibergen would be required to pay is an amount equal to the redemption
price of $12.75 per share times the total number of shares of Thermo Fibergen's
common stock outstanding held by persons other than Thermo Electron or the
Company at the time of the redemption. 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 was accreted
over the period ending September 2000, which corresponded with the first
redemption period. The accretion was 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. In addition, the Company has agreed to lend Thermo Fibergen up to
$5 million on commercially reasonable terms for the September 2001 redemption
obligation and for working capital needs.
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, French francs, 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.
Recent Accounting Pronouncement
During 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133, as amended, requires that all derivatives, including foreign currency
exchange contracts, be recognized on the balance sheet at fair value. Changes in
fair value of derivatives that are not hedges must be recorded through earnings.
If a derivative is a hedge, depending on the nature of the hedge, changes in
fair value of the derivative are either completely or partially offset by the
change in fair value of the hedged items through earnings or for anticipated
transactions recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company is required to adopt SFAS No. 133 in 2001.
The Company does not expect the adoption of SFAS No. 133 will materially affect
its financial statements.
12
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Available-for-sale Investments
Debt securities owned by the Company 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
- ---------------------------------------------------------------------------------------------------------
2000
Government-agency Securities $28,541 $28,531 $ 10 $ -
Corporate Bonds 57,596 57,573 23 -
------- ------- ------- -------
$86,137 $86,104 $ 33 $ -
======= ======= ======= =======
1999
Government-agency Securities $46,074 $46,139 $ - $ (65)
Other 331 331 - -
------- ------- ------- -------
$46,405 $46,470 $ - $ (65)
======= ======= ======= =======
Available-for-sale investments in the accompanying 2000 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.
3. 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, used for applications such as soundwalls, decking, privacy
fencing, and siding. 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. Thermo Fibergen paid $1,200,000 and $500,000 of the purchase price in
2000 and 1999, respectively. The $500,000 remaining obligation is expected to be
paid in 2001 and is included in other accrued liabilities in the accompanying
2000 balance sheet. In January 2001, Thermo Fibergen
13
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
3. Composites Venture (continued)
acquired the remaining 49% equity interest in NEXT Fiber Products. In exchange
for the 49% equity interest, Thermo Fibergen agreed to forgive certain amounts
due from the seller related to the seller's investment in NEXT Fiber Products
prior to the purchase of the remaining 49% equity interest.
Thermo Fibergen constructed a composites manufacturing facility in Green
Bay, Wisconsin, and began limited production at such facility in 2000.
4. Acquisitions and Dispositions
Acquisitions
In June 2000, the Company acquired Cyclotech AB-Stockholm, a Swedish
manufacturer of stock-preparation equipment, for $637,000 in cash, subject to a
post-closing adjustment. Of the total purchase price, $478,000 was paid at
closing and the remaining $159,000, which is included in other accrued expenses
in the accompanying 2000 balance sheet, will be paid one year from the date of
acquisition. The cost of this acquisition exceeded the estimated fair value of
the acquired net assets by $578,000, which is being amortized over 40 years.
In February 2000, the Company acquired the assets of Gauld Equipment
Manufacturing Company, Inc., a manufacturer of stock-preparation equipment, for
$3,411,000 in cash and a $923,000 noninterest bearing contract with a
controlling shareholder, payable in equal annual installments over four years.
The liability was initially recorded at its net present value of $795,000. The
cost of this acquisition exceeded the estimated fair value of the acquired net
assets by $2,128,000, which is being amortized over 40 years.
In May 1999, the Company acquired the outstanding stock of Arcline
Products, Inc., 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 Inc., 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 goodwill. 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.
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 and, for the 2000 acquisitions, is
subject to adjustment upon finalization of the purchase price allocations. To
date, no information has been gathered that would cause the Company to believe
that the final allocation of the purchase price will be materially different
from the preliminary estimates. Pro forma results have not been presented, as
the results of the acquired businesses were not material to the Company's
results of operations.
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 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.
14
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
4. Acquisitions and Dispositions (continued)
A summary of the changes in accrued acquisition expenses follows:
Abandoned
Facilities Severance
---------- --------------------
Thermo Thermo
Black Black
(In thousands) Clawson Goselin Clawson Total
- ---------------------------------------------------------------------------------------------------------
Balance at January 3, 1998 $ 47 $ - $ 515 $ 562
Reserves established - 80 - 80
Usage (47) - (227) (274)
Decrease due to finalization of restructuring
plan, recorded as a decrease to goodwill - - (219) (219)
----- ----- ----- -----
Balance at January 2, 1999 - 80 69 149
Usage - - (69) (69)
Decrease due to finalization of restructuring
plan, recorded as a decrease to goodwill - (80) - (80)
----- ----- ----- -----
Balance at January 1, 2000 $ - $ - $ - $ -
===== ===== ===== =====
Dispositions
In September 2000, Thermo Fibergen sold substantially all of the assets of
its fiber-recovery and water-clarification services plant to the host mill for
$3,600,000. The purchase price consisted of an initial payment of $200,000 at
the date of closing and a note receivable to be paid in seventeen monthly
payments of $200,000, plus interest at 9.5%, beginning September 28, 2000. The
note receivable is secured by an irrevocable letter of credit. Thermo Fibergen
recognized a pre-tax gain of $729,000 on the sale.
During 1996, the Company loaned $6,000,000 to Tree-Free Fiber Company, LLC
in connection with a proposed engineering, procurement, and construction
project. This project was delayed due to weakness in pulp prices, and did not
proceed as a result of Tree-Free's insolvency. Tree-Free was unable to repay the
note upon its original maturity. The note and loans by another lender were
secured by 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 another lender for $2,910,000. In June 1998, the Company
conducted a foreclosure sale of the tissue mill, at which it was the successful
bidder, 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 value of the note. 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
then-estimated recoverable value. 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. The Company sold its interest in the mill in June 2000 for
$3,909,000 in cash, resulting in a gain of $971,000.
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.
15
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
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 were not
able to 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.
16
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is as follows:
2000 1999 1998
----------------- ----------------- ----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------
Options Outstanding, Beginning of Year 3,055 $ 6.57 3,489 $ 6.00 3,988 $ 6.24
Granted 2 6.66 161 7.30 957 6.82
Exercised (149) 3.78 (539) 3.08 (646) 3.11
Forfeited (233) 6.13 (56) 6.55 (120) 9.23
Canceled due to exchange - - - - (690) 10.68
----- ----- -----
Options Outstanding, End of Year 2,675 $ 6.77 3,055 $ 6.57 3,489 $ 6.00
===== ====== ===== ====== ===== ======
Options Exercisable 2,675 $ 6.77 3,055 $ 6.57 3,486 $ 6.00
===== ====== ===== ====== ===== =====
Options Available for Grant 1,563 1,332 1,449
===== ===== =====
A summary of the status of the Company's stock options at December 30, 2000, is as follows:
Options Outstanding and Exercisable
-----------------------------------------------------
Number Weighted Weighted
of Average Average
Shares Remaining Exercise
Range of Exercise Prices (In thousands) Contractual Life Price
- --------------------------------------------------------------------------------------------------------
$ 3.00 - $ 5.83 1,050 2.6 years $ 4.38
5.84 - 8.67 1,078 4.2 years 6.75
8.68 - 11.51 517 5.7 years 11.22
11.52 - 14.35 30 7.1 years 14.32
-----
$ 3.00 - $14.35 2,675 3.9 years $ 6.77
=====
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.
Under this program, shares of the Company's and, prior to November 2000, shares
of 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. Effective November 2000,
employees may no longer purchase shares of Thermo Electron under this program.
During 2000 and 1999, the Company issued 31,520 and 18,000 shares, respectively,
of its common stock under this program. No shares of the Company's common stock
were issued under this program during 1998.
17
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
Pro Forma Stock-based Compensation Expense
In October 1995, the FASB 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) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Net Income:
As reported $15,142 $17,778 $17,995
Pro forma 14,198 16,265 16,668
Basic Earnings per Share:
As reported .25 .29 .29
Pro forma .23 .27 .27
Diluted Earnings per Share:
As reported .25 .29 .29
Pro forma .23 .26 .27
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 $1.10,
$2.69, and $2.32 in 2000, 1999, and 1998, 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:
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Volatility 42% 39% 35%
Risk-free Interest Rate 4.9% 5.6% 4.6%
Expected Life of Options 1.0 years 3.8 years 4.2 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
Effective November 2000, the majority of the Company's domestic
subsidiaries participate in the Company's 401(k) retirement savings plan and,
prior to November 2000, 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 $803,000, $761,000, and $974,000 in 2000,
1999, and 1998, respectively.
18
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
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 $812,000, $959,000, and $1,119,000 in 2000, 1999, and 1998,
respectively.
Defined Benefit Pension Plan
One of the Company's divisions has a noncontributory defined benefit
retirement plan. Benefits under the plan are based on years of service and
employees' compensation. Funds are contributed to a trustee as necessary to
provide for current service and for any unfunded projected benefit obligation
over a reasonable period.
Net periodic benefit income includes:
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Interest Cost $ 902 $ 823 $ 802
Service Cost 496 439 421
Expected Return on Plan Assets (1,884) (1,588) (1,375)
Amortization of Unrecognized Gain (380) (431) (328)
------- ------- -------
$ (866) $ (757) $ (480)
======= ======= =======
The Company's defined benefit pension plan activity is:
(In thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $11,797 $10,771
Interest cost 902 823
Service costs 496 439
Benefits paid (525) (458)
Actuarial gain - 222
------- -------
Benefit obligation, end of year 12,670 11,797
------- -------
Change in Plan Assets:
Fair value of plan assets, beginning of year 20,638 19,485
Actual return on plan assets (709) 1,611
Benefits paid (525) (458)
------- -------
Fair value of plan assets, end of year 19,404 20,638
------- -------
Funded Status 6,734 8,841
Unrecognized Net Gain (4,877) (7,850)
------- -------
Prepaid Benefit Costs $ 1,857 $ 991
======= =======
19
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
Plan assets are primarily invested in cash, cash equivalents, fixed income
securities, and equity securities. Prepaid benefit costs are included in other
assets in the accompanying balance sheet. The weighted average actuarial
assumptions used to determine the net periodic benefit costs were: discount rate
of 7.5% and rate of increase in salary levels of 5.5% in 2000, 1999, and 1998;
expected long-term rate of return on assets of 9.25% in 2000 and 8.25% in 1999
and 1998.
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 $1,195,000,
$779,000, and $1,285,000 in 2000, 1999, and 1998, respectively.
6. Common Stock
At December 30, 2000, the Company had reserved 18,317,758 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) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Domestic $13,914 $21,802 $19,751
Foreign 12,469 8,749 11,145
------- ------- -------
$26,383 $30,551 $30,896
======= ======= =======
The components of the provision for income taxes are as follows:
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Currently Payable:
Federal $ 5,594 $ 5,870 $ 4,491
Foreign 4,299 3,409 4,282
State 946 1,001 1,039
------- ------- -------
10,839 10,280 9,812
------- ------- -------
Net Deferred (Prepaid):
Federal 569 1,600 1,939
Foreign (177) (353) (71)
State (284) 325 222
------- ------- -------
108 1,572 2,090
------- ------- -------
$10,947 $11,852 $11,902
======= ======= =======
20
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
7. Income Taxes (continued)
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 $512,000,
$513,000, and $1,267,000 of such benefits from exercises of stock options that
have been allocated to capital in excess of par value in 2000, 1999, and 1998,
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, minority interest,
and cumulative effect of change in accounting principle due to the following:
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Provision for Income Taxes at Statutory Rate $ 9,234 $10,693 $10,814
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 577 805 820
Foreign tax rate and tax regulation differential (242) (227) 310
Nondeductible expenses 497 253 178
Change in valuation allowance 174 50 203
Other 707 278 (423)
------- ------- -------
$10,947 $11,852 $11,902
======= ======= =======
Net deferred income tax asset (liability) in the accompanying balance
sheet consist of the following:
(In thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------
Deferred Tax Asset (Liability):
Operating loss carryforwards $ 1,045 $ 253
Reserves and accruals 4,972 3,082
Inventory basis difference 2,168 1,243
Accrued compensation 175 429
Allowance for doubtful accounts 361 128
Amortization of intangible assets (4,839) (3,203)
Depreciation (1,360) (980)
Other (60) (728)
------- -------
2,462 224
Less: Valuation allowance 427 253
------- -------
$ 2,035 $ (29)
======= =======
The valuation allowance relates primarily to uncertainty surrounding the
realization of state operating loss carryforwards of $3,900,000 and $2,700,000
at year-end 2000 and 1999, respectively, which begin to expire in 2003. In
addition, the Company has federal operating loss carryforwards of $2,000,000 at
year-end 2000, which begin to expire in 2019.
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.
21
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
7. Income Taxes (continued)
A provision has not been made for U.S. or additional foreign taxes on
$72.3 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 February 2000 acquisition of Gauld Equipment, the
Company agreed to pay $923,000 in equal annual installments over four years. The
liability was initially recorded as its net present value of $795,000.
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 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.
See Note 12 for fair value information pertaining to the Company's
long-term obligations.
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. For these services, the Company was charged $1,879,000,
$1,824,000, and $1,979,000 in 2000, 1999, and 1998, 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 has, from time to time, invested 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 $2,257,000, $1,767,000, and $1,862,000 in 2000, 1999, and
1998, respectively. The future minimum payments due under noncancelable
operating leases as of December 30, 2000, are $935,000 in 2001; $590,000 in
2002; $270,000 in 2003; $194,000 in 2004; and $6,000 in 2005. Total future
minimum lease payments are $1,995,000.
22
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
10. Commitments and Contingencies (continued)
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.
11. Restructuring 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 2000, due to breach of an agreement by a third party distributor, the
Company is no longer obligated to pay amounts accrued in 1999 for this matter
and, therefore, reversed $506,000 of costs.
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 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
Usage (15) (18) (33)
Reversal - (506) (506)
Currency translation - (98) (98)
------- ------- -------
Balance at December 30, 2000 $ - $ 32 $ 32
======= ======= =======
The Company expects to pay the remaining accrued restructuring costs in 2001.
23
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
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 maturities of notes payable, accounts payable, common stock
of subsidiary subject to redemption, due to parent company and affiliated
companies, subordinated convertible debentures, notes payable, and forward
foreign exchange contracts. The carrying amounts of accounts receivable, current
maturities of notes 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.
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:
2000 1999
------------------- -------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------
Subordinated Convertible Debentures $153,000 $138,312 $153,000 $124,710
Common Stock of Subsidiary Subject to Redemption $ 17,026 $ 15,858 $ 49,160 $ 51,011
Off-balance-sheet Financial Instruments:
Forward foreign exchange contracts payable $ 348 $ 35
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 $12,474,000 and $4,080,000 at year-end 2000 and 1999, 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, one of which was sold in February 1999: 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 stock-preparation equipment, paper machine 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 $112,976,000, $98,929,000, and $107,518,000 in 2000,
1999, and 1998, respectively. Revenues from the accessories product line were
$70,306,000, $74,839,000, and $77,817,000 in 2000, 1999, and 1998, respectively.
Revenues from the water-management product line were $42,447,000, $42,611,000,
and $36,908,000 in 2000, 1999, and 1998, respectively.
The Dryers and Pollution-control Equipment segment, which consisted of the
Company's Thermo Wisconsin 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 4).
24
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
13. Business Segment and Geographical Information (continued)
The Water- and Fiber-recovery Services and Products segment consists of
the Company's Thermo Fibergen subsidiary. 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, and cat box fillers. In addition, through
its NEXT Fiber Products subsidiary (Note 3), Thermo Fibergen develops, produces,
and markets fiber-based composites primarily for the building industry, used for
applications such as soundwalls, decking, privacy fencing, and siding. Prior to
September 2000, this segment owned and operated a plant that provided
fiber-recovery and water-clarification services to a host mill on a long-term
contract basis. The plant, which the Company began operating in July 1998,
cleaned and recycled water and long fiber for reuse in the papermaking process.
Thermo Fibergen sold this plant to the host mill in September 2000 (Note 4),
although it intends to continue operating in this line of business and is
pursuing other fiber-recovery projects.
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Business Segment Information
Revenues:
Pulp and Papermaking Equipment and Systems (a) $227,133 $217,724 $223,799
Dryers and Pollution-control Equipment (b) - 1,802 19,513
Water- and Fiber-recovery Services and Products (c) 7,794 8,579 5,276
Intersegment sales elimination (d) (14) (69) (1,162)
-------- -------- --------
$234,913 $228,036 $247,426
======== ======== ========
Income Before Provision for Income Taxes, Minority Interest, and
Cumulative Effect of Change in Accounting Principle:
Pulp and Papermaking Equipment and Systems (e) $ 29,209 $ 27,061 $ 33,937
Dryers and Pollution-control Equipment (b)(f) - 11,609 2,736
Water- and Fiber-recovery Services and Products (c)(g) (3,116) (1,010) (2,468)
Corporate (h) (2,673) (8,138) (3,857)
-------- -------- --------
Total operating income 23,420 29,522 30,348
Interest income, net 2,963 1,029 548
-------- -------- --------
$ 26,383 $ 30,551 $ 30,896
======== ======== ========
Total Assets:
Pulp and Papermaking Equipment and Systems $280,655 $282,837 $277,688
Dryers and Pollution-control Equipment (b) - - 5,390
Water- and Fiber-recovery Services and Products (c) 38,465 72,438 71,116
Corporate (i) 95,095 87,302 72,906
-------- -------- --------
$414,215 $442,577 $427,100
======== ======== ========
Depreciation and Amortization:
Pulp and Papermaking Equipment and Systems $ 7,314 $ 7,502 $ 7,188
Dryers and Pollution-control Equipment (b) - 16 153
Water- and Fiber-recovery Services and Products (c) 2,226 1,410 1,151
-------- -------- --------
$ 9,540 $ 8,928 $ 8,492
======== ======== ========
25
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
13. Business Segment and Geographical Information (continued)
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Capital Expenditures:
Pulp and Papermaking Equipment and Systems $ 2,550 $ 2,964 $ 3,442
Dryers and Pollution-control Equipment (b) - - 197
Water- and Fiber-recovery Services and Products 3,805 939 4,134
-------- -------- --------
$ 6,355 $ 3,903 $ 7,773
======== ======== ========
Geographical Information
Revenues (j):
United States $157,904 $142,800 $153,658
France 52,895 60,682 65,308
Other 33,427 33,477 39,636
Transfers among geographic areas (d) (9,313) (8,923) (11,176)
-------- -------- --------
$234,913 $228,036 $247,426
======== ======== ========
Long-lived Assets (k):
United States $ 22,213 $ 23,948 $ 27,232
France 3,291 4,483 5,381
Other 4,422 4,711 4,844
-------- -------- --------
$ 29,926 $ 33,142 $ 37,457
======== ======== ========
Export Revenues Included in United States Revenues Above (l) $ 37,926 $ 23,366 $ 24,244
======== ======== ========
(a) Includes intersegment sales of $0.5 million in 1998.
(b) Includes intersegment sales of $0.6 million in 1998. The Company sold this segment in February 1999.
(c) Reflects Thermo Fibergen's September 2000 redemption of common stock for $34.6 million and the sale
of the Company's fiber-recovery and water-clarification services plant in September 2000.
(d) Intersegment sales and transfers among geographic areas are accounted for at prices that are
representative of transactions with unaffiliated parties.
(e) Includes $0.5 million of income related to restructuring and unusual items in 2000 and $3.1 million
of restructuring and unusual costs in 1999.
(f) Includes $11.2 million of gain on sale of business in 1999.
(g) Includes gain on sale of plant of $0.7 million in 2000.
(h) Includes gain on sale of property of $1.0 million in 2000. 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.
(i) Primarily available-for-sale investments.
(j) Revenues are attributed to countries based on selling location. (k) Includes property, plant, and
equipment, net, and other long-term tangible assets. (l) In general, export revenues are denominated
in U.S. dollars.
26
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
14. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Basic
Income Before Cumulative Effect of Change in Accounting Principle $16,012 $17,778 $17,995
Cumulative Effect of Change in Accounting Principle (net of income
taxes of $580) (870) - -
------- ------- -------
Net Income $15,142 $17,778 $17,995
------- ------- -------
Weighted Average Shares 61,298 61,186 61,612
------- ------- -------
Basic Earnings per Share:
Income Before Cumulative Effect of Change in Accounting Principle $ .26 $ .29 $ .29
Change in Accounting Principle (.01) - -
------- ------- -------
$ .25 $ .29 $ .29
======= ======= =======
Diluted
Income Before Cumulative Effect of Change in Accounting Principle $16,012 $17,778 $17,995
Cumulative Effect of Change in Accounting Principle (net of income
taxes of $580) (870) - -
------- ------- -------
Net Income 15,142 17,778 17,995
Effect of Majority-owned Subsidiary's Dilutive Securities (7) (48) (33)
------- ------- -------
Income Available to Common Shareholders, as Adjusted $15,135 $17,730 $17,962
------- ------- -------
Weighted Average Shares 61,298 61,186 61,612
Effect of Stock Options 192 373 741
------- ------- -------
Weighted Average Shares, as Adjusted 61,490 61,559 62,353
------- ------- -------
Diluted Earnings per Share:
Income Before Cumulative Effect of Change in Accounting Principle $ .26 $ .29 $ .29
Change in Accounting Principle (.01) - -
------- ------- -------
$ .25 $ .29 $ .29
======= ======= =======
Options to purchase 2,179,000, 908,000, and 601,000 shares of common stock
were not included in the computation of diluted earnings per share for 2000,
1999, and 1998, 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 excludes the
effect of assuming the conversion of the Company's $153,000,000 principal amount
of 4 1/2% subordinated convertible debentures, convertible at $12.10 per share,
because the effect would be antidilutive.
27
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
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.
Accumulated other comprehensive items in the accompanying consolidated
balance sheet consist of the following:
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------
Cumulative Translation Adjustment $(19,474) $(11,009)
Net Unrealized Gain (Loss) on Available-for-sale Investments 21 (42)
-------- --------
$(19,453) $(11,051)
======== ========
16. Adoption of SAB No. 101
In December 1999, the SEC issued SAB No. 101. SAB No. 101 establishes
criteria for recording revenue when the terms of the sale include customer
acceptance provisions or an obligation of the seller to install the product. In
instances where these terms exist and the Company is unable to demonstrate that
the customer's acceptance criteria has been met prior to customer use or when
the installation is essential to functionality or is not deemed inconsequential
or perfunctory, SAB No. 101 requires that revenue recognition occur at
completion of installation and/or upon customer acceptance. In accordance with
the requirements of SAB No. 101, the Company has adopted the pronouncement as of
January 2, 2000, and has recorded the cumulative effect of the change in
accounting principle in the restated results for the first quarter of 2000. The
cumulative effect on net income totaled $870,000, net of income taxes of
$580,000. Revenues of $3,004,000 in 2000 (as restated for the adoption of SAB
No. 101) relate to shipments that occurred in 1999 but for which installation
and/or acceptance did not occur until 2000. These revenues were recorded in 1999
prior to the adoption of SAB No. 101 and thus were a component in the
determination of the cumulative effect of the change in accounting principle for
periods prior to 2000. The Company has not provided pro forma data for 1999 and
1998 as the amounts are not readily determinable based on the nature of the
revenue adjustments required by SAB No. 101.
28
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
16. Adoption of SAB No. 101 (continued)
The Company's unaudited quarterly results for 2000 have been restated as
follows:
(In thousands except per share amounts) (Unaudited) First Second Third
- ----------------------------------------------------------------------------------------------------------
Revenues:
As previously reported $60,829 $61,647 $56,997
As adjusted 57,922 60,565 58,315
Gross Profit:
As previously reported 24,401 23,201 21,513
As adjusted 23,315 22,635 22,022
Income Before Cumulative Effect of Change in Accounting
Principle:
As previously reported 4,062 4,269 4,077
As adjusted 3,560 3,910 4,332
Net Income:
As previously reported 4,062 4,269 4,077
As adjusted 2,690 3,910 4,332
Basic and Diluted Earnings per Share Before Cumulative Effect
of Change in Accounting Principle:
As previously reported .07 .07 .07
As adjusted .06 .06 .07
Basic and Diluted Earnings per Share:
As previously reported .07 .07 .07
As adjusted .04 .06 .07
29
Thermo Fibertek Inc. 2000 Financial Statements
Notes to Consolidated Financial Statements
17. Unaudited Quarterly Information
(In thousands except per share amounts)
2000 First (a) Second (a,b) Third Fourth (d)
- ---------------------------------------------------------------------------------------------------------
Revenues $57,922 $60,565 $58,315 $58,111
Gross Profit 23,315 22,635 22,022 21,830
Net Income 2,690 3,910 4,332 4,210
Basic and Diluted Earnings per Share Before
Cumulative Effect of Change in Accounting Principle .06 .06 .07 .07
Basic and Diluted Earnings per Share .04 .06 .07 .07
1999 First (e) Second Third (f) 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
(a) Restated to reflect the adoption of SAB No. 101. The first quarter of 2000 reflects the cumulative
effect of change in accounting principle of $0.9 million, net of income taxes of $0.6 million.
(b) Reflects a pretax gain of $1.0 million on the June 2000 sale of property.
(c) Reflects a pretax gain of $0.7 million on the September 2000 sale of the Company's fiber-recovery
and water-clarification services plant.
(d) Reflects $0.5 million of pretax income related to restructuring and unusual items.
(e) Reflects a pretax gain of $11.2 million on the February 1999 disposition of Thermo Wisconsin, Inc.
and restructuring costs and unusual items of $3.4 million.
(f) Reflects pretax restructuring costs of $2.8 million.
30
Thermo Fibertek Inc. 2000 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 December 30, 2000, and January 1,
2000, 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 December 30, 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 auditing standards generally
accepted in the United States. 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 December 30, 2000 and January 1, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 30, 2000, in conformity with accounting principles
generally accepted in the United States.
As explained in Notes 1 and 16 to the consolidated financial statements,
effective January 2, 2000, the Company changed its method of accounting for
revenue recognition.
Arthur Andersen LLP
Boston, Massachusetts
February 12, 2001
31
Thermo Fibertek Inc. 2000 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
Industry Background
The Company operates in two segments: Pulp and Papermaking Equipment and
Systems and Water- and Fiber-recovery Services and Products. The Company's
products are primarily sold to the paper industry. The paper industry has been
in a severe down cycle since 1996 with falling pulp and paper prices and
decreased capital spending. As a consequence, the industry has gone through a
major consolidation. As paper companies continue to consolidate, they frequently
reduce capacity. This trend, along with the paper companies' actions to almost
immediately suspend operations and restrict capital spending programs when they
perceive weakness in their markets, has affected the Company's business and will
continue to do so in the short term. The Company expects that there will
continue to be a significant amount of downtime in the paper industry in the
first half of 2001. This, coupled with the strong U.S. dollar, will continue to
produce a weak market environment that will soften demand for the Company's
products in the near term. The Company's results for the first half of 2001 will
be affected by the ongoing weak market conditions in the paper industry. In the
longer term, however, the Company expects the impact of these developments to be
favorable both to the paper companies and their suppliers. Better capacity
management will allow paper companies to better match products with market
demand, which in turn will help the overall financial health of the Company's
customers. The Company believes that this will eventually result in stronger
markets for the Company's products and systems.
Pulp and Papermaking Equipment and Systems Segment
The Company's Pulp and Papermaking Equipment and Systems (Papermaking
Equipment) segment designs and manufactures stock-preparation equipment, paper
machine 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 for paper sheet and web formation. In 1999, this segment acquired
the outstanding stock of Arcline Products, a manufacturer of shower and doctor
oscillation systems (Note 4). In 2000, this segment acquired the assets of Gauld
Equipment Manufacturing Company, Inc., a manufacturer of stock-preparation
equipment, and Cyclotech AB-Stockholm, a Swedish manufacturer of
stock-preparation equipment (Note 4).
Water- and Fiber-recovery Services and Products Segment
The Water- and Fiber-recovery Services and Products segment consists of
the Company's Thermo Fibergen subsidiary. 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, and cat box fillers. Through Thermo Fibergen's NEXT
Fiber Products Inc. subsidiary, formed in October 1999, Thermo Fibergen
develops, produces, and markets fiber-based composite products primarily for the
building industry, used for applications such as soundwalls, decking, privacy
fencing, and siding. Thermo Fibergen is also developing composite roof tile
products. In January 2001, the Company acquired the remaining 49% equity
interest in
32
Thermo Fibertek Inc. 2000 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview (continued)
NEXT Fiber Products (Note 3). The Company constructed a composites manufacturing
facility in Green Bay, Wisconsin, and began limited production at such facility
in 2000. The Company is currently working to expand the capacity of the facility
and expects to have the capacity to support $20 million in annual revenues by
mid-2001. In addition, prior to September 2000, this segment owned and operated
a plant that provided water-clarification and fiber-recovery services to a host
mill on a long-term contract basis. The plant, which Thermo Fibergen began
operating in July 1998, cleaned and recycled water and long fiber for reuse in
the papermaking process. Thermo Fibergen sold this plant to the host mill in
September 2000 (Note 4), although it intends to continue operating in this line
of business and is pursuing other fiber-recovery projects.
Dryers and Pollution-control Equipment Segment
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. This segment 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 4).
Manufacturing Facilities
The Company's manufacturing facilities are principally located in North
America 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.
International Sales
During 2000, approximately 49% 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. dollars, French
francs, 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.
Results of Operations
2000 Compared With 1999
Revenues
Excluding the results of Thermo Wisconsin, which was sold in February
1999, revenues increased to $234.9 million in 2000 from $226.3 million in 1999.
Thermo Wisconsin's revenues to external customers were $1.8 million in 1999.
Gauld Equipment and Cyclotech, which were acquired in 2000 (Note 4), added
revenues of $4.6 million during 2000. The inclusion for the full 2000 period of
results from Arcline Products, which was acquired in May 1999, added incremental
revenues of $0.8 million. The unfavorable effects of currency translation due to
the strengthening in value of the U.S. dollar relative to other currencies in
countries in which the Company operates decreased revenues at the Papermaking
Equipment segment by $9.2 million in 2000. Excluding the results of
33
Thermo Fibertek Inc. 2000 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2000 Compared With 1999 (continued)
acquisitions and the effect of currency translation, revenues in the Company's
Papermaking Equipment segment increased $13.2 million, or 6%. Revenues from that
segment's stock-preparation equipment product line increased $15.2 million as a
result of a $15.7 million increase in sales by the Company's North American
operations, due principally to greater demand, offset slightly by a decrease in
sales in Europe, due to the general market weakness. The Company expects this
trend to reverse in 2001, with relatively little growth from North America due
to the stronger U.S. dollar and high energy costs, while Europe is expected to
be somewhat stronger. In addition, the Company expects developing markets such
as China to increase capacity for the next several years. Revenues from the
Papermaking Equipment segment's accessories product line decreased $1.9 million
as a result of decrease in demand in North America and Europe. Revenues from
that segment's water management product line increased $0.3 million related to
increased demand in Europe, largely offset by a decrease in demand in North
America. The Water- and Fiber-recovery Services and Products segment revenues
decreased $0.8 million, primarily due to decreased demand for cellulose-based
products from that segment's largest customer, as well as a $0.4 million
decrease as a result of the sale of the fiber-recovery and water-clarification
services plant in September 2000 (Note 4). The Company expects to have increased
sales of its recently introduced composite products in 2001.
Gross Profit Margin
The gross profit margin decreased to 38% in 2000 from 41% in 1999. The
gross profit margin decreased at the Papermaking Equipment segment, primarily
due to a change in product mix that resulted largely from a higher proportion of
lower-margin large system sales at its North American stock-preparation
equipment business. To a lesser extent, the gross profit margin decreased at the
Water- and Fiber-recovery Services and Products segment, primarily due to
decreased sales without a corresponding decrease in costs, an increase of
approximately $0.6 million in the cost of natural gas in 2000, and the inclusion
of $0.6 million of overhead costs at its new fiber-based composites business.
Other Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
decreased to 26% in 2000 from 27% in 1999, primarily due to increased revenues
from the stock-preparation equipment product line.
Research and development expenses increased slightly to $7.7 million in
2000, compared with $7.3 million in 1999, or 3% of revenues in both periods. The
increase in research and development expenses in 2000 primarily represents
increased expenditures in the Papermaking Equipment segment. The Company expects
to increase its research and development expenses as it develops new products at
its fiber-based composites business in 2001.
Gain on Sale of Business and Property
In September 2000, Thermo Fibergen sold its fiber-recovery and
water-clarification services plant for $3.6 million, resulting in a gain of $0.7
million (Note 4). In June 2000, the Company sold its interest in a mill for $3.9
million in cash, resulting in a gain of $1.0 million (Note 4). In February 1999,
the Company sold its Thermo Wisconsin subsidiary for $13.6 million in cash,
resulting in a pretax gain of $11.2 million (Note 4).
Restructuring and Unusual Items
Restructuring and unusual income of $0.5 million in 2000, represents the
reversal of a charge taken in 1999 related to the termination of a distributor
agreement, which the Company is no longer obligated to pay due to the breach of
the agreement by the third party distributor (Note 11). Restructuring and
unusual costs 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).
34
Thermo Fibertek Inc. 2000 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2000 Compared With 1999 (continued)
Interest Income and Expense
Interest income increased to $10.5 million in 2000 from $8.5 million in
1999, due to higher average invested balances and, to a lesser extent, higher
interest rates. The Company expects interest income to decrease in 2001 as a
result of lower cash balances due to the September 2000 redemption and the
anticipated September 2001 redemption of Thermo Fibergen common stock (Note 1),
as well as lower prevailing interest rates. Interest expense was relatively
unchanged at $7.5 million in 2000 and $7.4 million in 1999.
Income Taxes
The effective tax rate was 41% in 2000, compared with 39% in 1999. The
effective tax rate exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes and nondeductible expenses. The effective
tax rate increased in 2000 as a result of an increase in nondeductible and other
expenses.
Minority Interest
Minority interest income in 2000 primarily represents the minority
investor's share of losses in Thermo Fibergen's 51%-owned subsidiary for the
full year, offset in part by accretion of Thermo Fibergen's common stock subject
to redemption. As of September 30, 2000, Thermo Fibergen's common stock subject
to redemption was fully accreted. In January 2001, Thermo Fibergen purchased the
remaining 49% equity interest in NEXT Fiber Products from the minority
investors. Through Thermo Fibergen's redemption of common stock in September
2000 (Note 1), the Company's ownership in Thermo Fibergen increased to 91%.
Minority interest expense in 1999 primarily represents accretion of Thermo
Fibergen's common stock subject to redemption, offset in part by the minority
investor's share of losses in Thermo Fibergen's 51%-owned subsidiary.
1999 Compared With 1998
Revenues
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 other 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, related to demand for two recently introduced products. 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.
35
Thermo Fibertek Inc. 2000 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1999 Compared With 1998 (continued)
Gross Profit Margin
The gross profit margin was relatively unchanged at 40.8% in 1999,
compared with 40.5% in 1998.
Other Operating Expenses
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.
Gain on Sale of Business and Property
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 4). In 1998, the Company recorded gains of $0.5 million relating
to the sale of real estate.
Restructuring and Unusual Items
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).
Interest Income and Expense
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.
Income Taxes
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
Minority interest expense primarily represents accretion of Thermo
Fibergen's common stock subject to redemption.
Liquidity and Capital Resources
Consolidated working capital was $173.1 million at December 30, 2000,
compared with $158.7 million at January 1, 2000. Included in working capital are
cash, cash equivalents, and available-for-sale investments of $148.6 million at
December 30, 2000, compared with $85.7 million at January 1, 2000. In addition,
the Company had $5.7 million and $93.8 million invested in an advance to
affiliate as of December 30, 2000 and January 1, 2000, respectively. As of
August 2000, the Company no longer participates in the domestic cash management
arrangement with Thermo Electron. The net decrease in cash, cash equivalents,
and advance to affiliate in 2000, is primarily due to the September 2000
redemption of Thermo Fibergen's common stock for $34.6 million (Note 1). Of the
total cash, cash equivalents, and available-for-sale investments at December 30,
2000, $13.2 million and $7.2 million was held by the Company's majority-owned
Thermo Fibergen and Thermo Fiberprep subsidiaries, respectively, and the
remainder was held by the Company and its wholly owned subsidiaries. At December
30, 2000, $37.3 million of the Company's cash, cash equivalents, and
available-for-sale investments was held by its foreign subsidiaries.
36
Thermo Fibertek Inc. 2000 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
During 2000, $18.4 million of cash was provided by operating activities. A
decrease in accounts receivable provided $1.0 million of cash, primarily due to
improved collection efforts. Inventories and unbilled contract costs and fees
used cash of $1.4 million, including $2.5 million related to an increase in
inventories, primarily in the stock preparation product line due to several
large orders and at Thermo Fibergen, offset in part by a $1.1 million decrease
in unbilled contract costs and fees, primarily in the stock-preparation product
line due to the timing of billings and an increase in revenues. A decrease in
other current liabilities used $2.2 million of cash, consisting primarily of a
$3.3 million decrease in billings in excess of costs and fees related to the
timing of payments on long-term contracts.
During 2000, the Company's investing activities, excluding
available-for-sale investments and advance to affiliate activity, used $6.0
million of cash. The Company used $3.3 million, net of cash acquired, to
purchase the assets of Cyclotech and Gauld Equipment (Note 4) and $1.2 million
to purchase certain capital equipment and technology for Thermo Fibergen's
composites business. In addition, the Company purchased property, plant, and
equipment for $6.4 million, including $3.8 million at Thermo Fibergen. In June
2000, the Company sold its interest in the Tree-Free mill for $3.9 million in
cash (Note 4). In September 2000, Thermo Fibergen sold its fiber-recovery and
water-clarification systems plant for $3.6 million. Thermo Fibergen received
$0.2 million at the closing date and began receiving seventeen equal monthly
installments of $0.2 million beginning on September 28, 2000 (Note 4), amounting
to an additional $0.8 million as of year end 2000.
During 2000, the Company's financing activities used $33.7 million of
cash. During the month of September 2000, the initial redemption period, holders
of Thermo Fibergen's common stock and common stock redemption rights surrendered
2,713,951 shares of Thermo Fibergen's common stock at a redemption price of
$12.75 per share, for a total of $34.6 million (Note 1). Thermo Fibergen used
available working capital to fund the payment and retired these shares
immediately following the redemption. Holders of a redemption right have the
option to require Thermo Fibergen to redeem one share of Thermo Fibergen's
common stock at a redemption price of $12.75 per share in September 2001, the
next and final redemption period. A redemption right may only be exercised if
the holder owns a share of Thermo Fibergen's common stock at the same time. As
of December 30, 2000, there were 2,001,049 redemption rights outstanding and
1,075,749 shares of Thermo Fibergen's common stock held by persons other than
the Company or Thermo Electron. In addition, Thermo Electron, the Company,
and/or Thermo Fibergen may acquire additional shares of the Thermo Fibergen's
common stock in the open market. To the extent the number of rights exceeds the
number of shares of Thermo Fibergen's common stock held by persons other than
Thermo Electron or the Company, the maximum redemption value that Thermo
Fibergen would be required to pay is an amount equal to the redemption price of
$12.75 per share times the total number of shares of Thermo Fibergen's common
stock outstanding held by persons other than Thermo Electron or the Company at
the time of the redemption. The redemption rights are guaranteed, on a
subordinated basis, by Thermo Electron Corporation, but the Company is required
to reimburse Thermo Electron if Thermo Electron makes any payment under the
guarantee. In addition, the Company has agreed to lend Thermo Fibergen up to $5
million on commercially reasonable terms for the September 2001 redemption
obligation and for working capital needs.
At December 30, 2000, the Company had $72.3 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.
During 2001, the Company plans to make expenditures for property, plant,
and equipment of approximately $7.9 million. Included in this amount is $4.1
million for Thermo Fibergen, which intends to make capital expenditures to
develop and expand its fiber-based composites business. This business will
continue to require a significant amount of capital investment as the business
grows. The Company believes that its existing resources are sufficient to meet
the capital requirements of its existing operations for the foreseeable future.
37
Thermo Fibertek Inc. 2000 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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
2000 and 1999 market interest rates would result in a negative impact of $2
million and $4 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 2000 and 1999 interest rates would
result in a negative impact of $0.4 million and $0.6 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 2000 and 1999 market equity
prices would result in a negative impact of $0.1 million and $3.0 million,
respectively, on the net fair value of the Company's subordinated convertible
debentures.
The Company's common stock of subsidiary subject to redemption is
sensitive to fluctuations in the price of Thermo Fibergen's common stock. The
holder of a Thermo Fibergen redemption right that holds a share of Thermo
Fibergen's common stock at such time may require Thermo Fibergen to redeem one
share of Thermo Fibergen's common stock at $12.75 per share in September 2001,
the second and final redemption period. These redemption rights are all
guaranteed on a subordinated basis by Thermo Electron, but the Company is
required to reimburse Thermo Electron in the event that Thermo Electron makes a
payment under the guarantee. If Thermo Fibergen's common stock is trading on the
open market at a price that is less than $12.75 per share in September 2001, the
holders of redemption rights that also hold shares of Thermo Fibergen's common
stock at such time would more likely than not exercise their redemption rights.
In the event all redemption rights for which there is a corresponding share of
Thermo Fibergen common stock outstanding, other than those shares held by Thermo
Electron or the Company, are exercised, Thermo Fibergen and/or the Company may
use up to $17.0 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's common stock and Thermo
Fibergen's redemption rights. Since
38
Thermo Fibertek Inc. 2000 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Market Risk (continued)
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's 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's 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 2000 and 1999
functional currencies, relative to the U.S. dollar, would result in a reduction
of shareholders' investment of $7.6 million and $7.9 million, respectively.
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 2000 and 1999 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 $1.2
million and $0.2 million, respectively. 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.
39
Thermo Fibertek Inc. 2000 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 2001 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Dependency on the condition of the pulp and paper industry. The pulp and
paper industry has been in a down cycle for several years. The Company's
products are primarily sold to the paper industry. Generally, the financial
condition of the global 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 global paper industry entered a severe downcycle in
early 1996 from which it has not fully recovered. Recently, the North American
paper industry has been adversely affected by a slowing economy, higher energy
prices and a strong U.S. dollar. This cyclical downturn has adversely affected
the Company's business. No assurance can be given that the financial condition
of the paper industry will improve in the near future.
Economic, currency and political risks and other risks associated with
international sales and operations. During 2000, approximately 49% of the
Company's sales were to customers outside the United States, principally in
Europe. In addition, China is becoming an increasingly important market for the
Company. 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 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 the Company provides in foreign markets where payment for the 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 its business and
results of operations.
Competition. The Company encounters and continues 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 such
as J.M. Voith AG and Metso Corporation. 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.
The composites business - a new entrant into a new market. The Company
recently established a subsidiary to develop, produce, market and sell
fiber-based composites primarily for the building industry. The Company has
recently introduced a soundwall fence, privacy fence and decking product to the
market. The Company is currently developing several composite roof tile
products. Development and commercialization of the Company's composite products
will require significant development and testing of the products and
manufacturing process and there can be no assurance its development efforts will
be successful. Further, there can be no assurance that the Company's composite
products will gain market acceptance. The Company's ability to successfully
market these products will depend on converting the demand for wood-based
building products into demand for the Company's fiber-based composites and on
the Company's ability to educate customers of the benefits of its products. The
Company's strategy will be to emphasize the advantages of its products over
conventional wood-based products or other competitive non-wood alternatives. To
penetrate the market and gain market share, the Company must educate consumers,
including wood suppliers, contractors and homebuilders, regarding the benefits
of the Company's fiber-based products over products made of wood and other
traditional materials.
40
Thermo Fibertek Inc. 2000 Financial Statements
Forward-looking Statements
Limited Composites Manufacturing Experience. The Company has limited
experience manufacturing composite products at volume, cost and quality levels
sufficient to satisfy expected demand and no assurance can be given that it will
not encounter difficulties in connection with any large scale manufacturing or
commercialization of these new products.
Dependence on Patents and Proprietary Rights. The Company's inability to
protect its intellectual property could have a material adverse effect on its
business. In addition. third parties may claim that the Company infringes their
intellectual property and the Company could suffer significant litigation or
licensing expense. 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. The Company has also filed for several patents relating to its
composite materials business. 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 its 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 under these patents will
provide competitive advantages to the Company. In addition, competitors may
design around the Company's technology or develop competing technologies.
Intellectual property rights may also be unavailable or limited in some foreign
countries, which could make it easier for competitors to capture increased
market position. The Company could incur substantial costs in defending itself
in suits brought against it or in suits in which it may assert our patent rights
against others. If the outcome of any such litigation is unfavorable to the
Company, the business and results of operations could be materially adversely
affected.
There can be no assurance that third parties will not assert claims
against the Company to the effect that we are infringing their intellectual
property rights. The Company could incur substantial costs and diversion of
management resources with respect to the defense of these claims, which could
have a material adverse effect on the Company's business, financial condition,
and results of operations. In addition, 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 or there are pending or issued patents held by third parties
not affiliated with the Company that relate to its products or technology, 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, or that such challenge would be successful. The
failure to obtain the necessary licenses or other rights could prevent the sale,
manufacture, or distribution of its 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 to or be
independently developed by competitors.
Risks Associated with Acquisition Strategy. The Company may not be
successful in identifying and completing acquisitions or successfully
integrating any acquisitions. The Company's acquisition strategy includes the
acquisition of businesses that complement or augment its 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 be able to successfully
integrate any acquired businesses into the existing businesses or make such
businesses profitable.
41
Thermo Fibertek Inc. 2000 Financial Statements
Forward-looking Statements
Risks Associated with Fluctuations in Quarterly Operating Results. Given
the nature of the markets in which the Company participates and the effect of
the newly issued Staff Accounting Bulletin No. 101 regarding the recognition of
revenues, the Company cannot reliably predict future revenue and profitability,
and unexpected changes may cause the Company to adjust operations. A significant
proportion of the Company's costs are fixed, due in part to significant sales,
research and development, and manufacturing costs. Thus, small declines in
revenue could disproportionately affect the Company's operating results. Other
factors that could affect the Company's quarterly operating results include:
- Demand for and market acceptance of its products
- Competitive pressures resulting in lower selling prices
- Adverse changes in the pulp and paper industry on which the Company is
particularly dependent - Unanticipated delays or problems in the
introduction of new products - Competitors' announcements of new products,
services or technological innovations - Contractual liability related to
guarantees of its equipment performance - Increased costs of raw materials
or supplies, including the cost of natural gas - Changes in the timing of
product orders - The Company's inability to forecast revenue in a given
quarter from large system sales, which
in many cases, are required to pass an acceptance test demonstrating
the system's effect on the customer's process.
Risks Related to the Distribution of the Company's Common Stock by Thermo
Electron. Thermo Electron has announced its intention to distribute the shares
of Thermo Fibertek it owns as a dividend to its shareholders. A number of
actions following the distribution of the Company's common stock could cause the
distribution to be taxable to the Company, Thermo Electron, and stockholders of
Thermo Electron who receive shares of the Company's common stock in the
distribution.
Although the IRS has issued a ruling that no gain or loss will be
recognized by the Company, Thermo Electron, or its stockholders upon the
distribution of common stock as of the date of the distribution, the
distribution could become taxable if the Company, Thermo Electron, or the
stockholders of Thermo Electron who receive shares of the Company's common stock
in the distribution take any of a number of actions following the distribution.
The Company expects it will enter into a Tax Matters Agreement with Thermo
Electron, which will restrict the Company's ability to engage in these types of
actions. These restrictions could prevent the Company from engaging in
transactions following the distribution that might otherwise benefit its
business. Thermo Electron may impose other restrictions on the Company's
activities, including the use of cash or the Company's borrowing capacity, in
connection with the distribution of the Company's shares.
Sales of substantial amounts of the Company's common stock may occur in
connection with the distribution, which could cause the stock price to decline.
Substantially all of the shares of the Company's common stock to be distributed
by Thermo Electron will be eligible for immediate resale in the public market.
The Company is unable to predict whether significant amounts of common stock
will be sold in the public market in anticipation of or immediately following
the distribution or whether a sufficient number of buyers will be in the public
market at that time. Stockholders of Thermo Electron that received shares of the
Company's common stock in the distribution may decide to sell such shares in the
public market for any number of reasons, including the fact that the Company's
business profile or market capitalization may not fit their investment
requirements or objectives. For example, a portion of Thermo Electron's common
stock is held by index funds tied to the Standard & Poor's 500 Index or other
stock indices. If the Company is not in these indices at the time of Thermo
Electron's distribution of the Company's common stock, these index funds will be
required to sell the Company's stock.
In addition, the IRS ruling required that the Company raise additional
equity within one year of the spin off subject to certain conditions. The
Company has announced that it plans to issue equity in the range of 10-20% of
its outstanding shares of its common stock to support its current business plan.
Any sales of substantial amounts of the Company's common stock in the public
market, or the perception that such sales might occur, whether as a result of
this distribution or otherwise, could cause the market price of the Company's
common stock to decline.
42
Thermo Fibertek Inc. 2000 Financial Statements
Forward-looking Statements
The Company may have potential business conflicts of interest with Thermo
Electron with respect to its past and ongoing relationships that could harm the
Company's business operations. Conflicts of interest may arise between Thermo
Electron and the Company in a number of areas relating to its past and ongoing
relationships, including:
- Labor, tax, employee benefit, indemnification and other matters arising
from the Company's separation from Thermo Electron;
- Intellectual property matters;
- Employee retention and recruiting;
- The nature, quality and pricing of the transition services Thermo
Electron has agreed to provide the Company; and
- Restrictions related to the Company's use of cash and debt and Thermo
Electron's continuing obligations under the guaranty of the Company's
subordinated convertible debentures.
The Company may not be able to resolve any potential conflicts, and even
if it does, the resolution may be less favorable than if it were dealing with an
unaffiliated party.
Thermo Electron has agreed to provide certain transitional administrative
services to the Company for a period following the distribution, including legal
advice and services, risk management, employee benefit administration, tax
advice and preparation of tax returns, centralized cash management and financial
and other services in exchange for a fee. Thermo Electron has agreed to provide
the Company with these services at a level and in a manner consistent with the
services provided to the Company by Thermo Electron prior to the distribution.
Such services may not be sufficient to meet the Company's needs and the Company
may not be able to supplement and eventually replace them in a timely manner or
on terms and conditions as favorable as those the Company receives from Thermo
Electron. In addition, after the distribution of the Company's stock, it will no
longer be entitled to benefit from group or volume discounts negotiated by
Thermo Electron for items such as employee benefits, insurance and travel.
43
Thermo Fibertek Inc. 2000 Financial Statements
Selected Financial Information
(In thousands except per share amounts) 2000 (a) 1999 (b) 1998 1997 (c) 1996
- ----------------------------------------------------------------------------------------------------------
Statement of Income Data
Revenues $234,913 $228,036 $247,426 $239,642 $192,209
Income Before Cumulative Effect of Change
in Accounting Principle 16,012 17,778 17,995 16,426 19,894
Net Income 15,142 17,778 17,995 16,426 19,894
Earnings per Share Before Cumulative
Effect of Change in Accounting Principle:
Basic .26 .29 .29 .27 .33
Diluted .26 .29 .29 .26 .31
Earnings per Share:
Basic .25 .29 .29 .27 .33
Diluted .25 .29 .29 .26 .31
Balance Sheet Data
Working Capital $173,097 $158,711 $193,446 $176,996 $115,609
Total Assets 414,215 442,577 427,100 418,938 257,232
Long-term Obligations 154,650 154,350 153,000 153,000 34
Common Stock of Subsidiary Subject to
Redemption - - 53,801 52,812 56,087
Shareholders' Investment 170,633 164,070 150,948 138,095 130,850
(a) Reflects a $1.7 million pretax gain on the sale of property, $0.5 million of pretax income related to
restructuring and unusual items, the redemption of $34.6 million of Thermo Fibergen's common stock,
and the cumulative effect of change in accounting principle of $0.9 million, net of income taxes of
$0.6 million.
(b) Reflects an $11.2 million pretax gain on the February 1999 disposition of Thermo Wisconsin, Inc.,
pretax restructuring costs and unusual items of $6.2 million, and the reclassification of common stock
of subsidiary subject to redemption to current liabilities.
(c) 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.
44
Thermo Fibertek Inc. 2000 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 2000 and 1999, as reported in the consolidated
transaction reporting system.
2000 1999
-------------------- -------------------
Quarter High Low High Low
- ----------------------------------------------------------------------------------------------------------
First $8 3/16 $6 7/16 $7 15/16 $7
Second 6 15/16 3 15/16 7 13/16 6 1/2
Third 5 1/8 4 7 7/16 6 1/8
Fourth 4 1/4 3 7/16 7 1/4 6 7/16
As of January 26, 2001, the Company had 649 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 26, 2001, was $3 5/16 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, respectively).
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. Company information is also available at
http://www.thermofibertek.com.
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
59 Maiden Lane
New York, New York 10038
(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
December 30, 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.