Exhibit 13
THERMO FIBERTEK INC.
Consolidated Financial Statements
1996
PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1996 1995 1994
------------------------------------------------------------------------
Revenues (includes $1,876 and
$14,737 from related party
in 1996 and 1995; Notes 9 and 12) $192,209 $206,743 $162,625
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues (includes $639
and $8,797 for related party
revenues in 1996 and 1995; Note 9) 109,537 123,094 96,581
Selling, general, and administrative
expenses (Note 9) 47,093 48,659 43,316
Research and development expenses 5,460 4,061 3,812
-------- -------- --------
162,090 175,814 143,709
-------- -------- --------
Operating Income 30,119 30,929 18,916
Interest Income 3,568 3,497 1,952
Interest Expense (123) (188) (229)
Interest Expense, Related Party (Note 8) (540) (1,178) (708)
-------- -------- --------
Income Before Provision for Income Taxes
and Minority Interest 33,024 33,060 19,931
Provision for Income Taxes (Note 7) 12,684 12,578 7,570
Minority Interest Expense 446 233 1,467
-------- -------- --------
Net Income $ 19,894 $ 20,249 $ 10,894
======== ======== ========
Earnings per Share:
Primary $ .33 $ .33 $ .18
======== ======== ========
Fully diluted $ .31 $ .32 $ .18
======== ======== ========
Weighted Average Shares:
Primary 61,040 60,785 60,394
======== ======== ========
Fully diluted 64,343 64,263 63,024
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
2PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Consolidated Balance Sheet
(In thousands) 1996 1995
------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $109,805 $ 57,028
Available-for-sale investments, at quoted
market value (amortized cost of $2,781 in
1995; Note 2) - 2,784
Accounts receivable, less allowances of
$1,948 and $2,552 38,115 43,085
Unbilled contract costs and fees 1,236 1,921
Inventories 24,467 27,102
Prepaid income taxes (Note 7) 7,220 9,069
Other current assets 1,582 1,287
-------- --------
182,425 142,276
-------- --------
Property, Plant, and Equipment, at Cost, Net 26,540 21,209
-------- --------
Other Assets (Note 4) 8,720 1,298
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Notes 3 and 7) 39,547 34,888
-------- --------
$257,232 $199,671
======== ========
3PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1996 1995
------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 16,805 $ 20,747
Accrued payroll and employee benefits 10,989 11,115
Billings in excess of contract costs and fees 2,540 3,018
Accrued warranty costs 7,752 9,759
Accrued income taxes (includes $1,340 and
$1,521 due to parent company) 2,414 4,430
Other accrued expenses 8,707 11,466
Due to parent company and affiliated
companies (Note 8) 17,609 10,859
-------- --------
66,816 71,394
-------- --------
Deferred Income Taxes and Other Deferred
Items (Note 7) 3,168 3,031
-------- --------
Long-term Obligations (including $15,000 due
to parent company in 1995; Note 8) 34 15,041
-------- --------
Minority Interest (Note 3) 277 574
-------- --------
Commitments and Contingency (Note 10)
Common Stock of Subsidiary Subject to Redemption
($60,116 redemption value; Note 1) 56,087 -
-------- --------
Shareholders' Investment (Notes 5 and 6):
Common stock, $.01 par value, 75,000,000
shares authorized; 61,154,930 and
40,623,919 shares issued 612 406
Capital in excess of par value 65,951 65,222
Retained earnings 66,181 46,287
Treasury stock at cost, 23,550 and 33,223
shares (360) (446)
Cumulative translation adjustment (1,534) (1,840)
Net unrealized gain on available-for-sale
investments (Note 2) - 2
-------- --------
130,850 109,631
-------- --------
$257,232 $199,671
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Operating Activities:
Net income $ 19,894 $ 20,249 $ 10,894
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 4,983 4,760 4,240
Provision for losses on
accounts receivable (450) 440 508
Minority interest expense 446 233 1,467
Deferred income tax expense
(benefit) 2,017 (1,876) (406)
Other noncash items (316) (111) (29)
Changes in current accounts,
excluding the effects of
acquisitions:
Accounts receivable 5,724 (8,052) (3,800)
Inventories and unbilled
contract costs and fees 3,139 (3,113) (2,440)
Other current assets 1,468 398 (995)
Accounts payable (3,436) 3,731 418
Other current liabilities (6,417) 1,718 8,098
-------- -------- --------
Net cash provided by operating activities 27,052 18,377 17,955
-------- -------- --------
Investing Activities:
Acquisitions, net of cash acquired
(Note 3) (12,066) (12,783) -
(Issuance) repayment of notes
receivable (Note 4) (6,000) 150 240
Purchases of available-for-sale
investments - - (4,250)
Proceeds from sale and maturities of
available-for-sale investments 2,750 4,700 1,330
Purchases of property, plant, and
equipment (3,936) (3,493) (3,126)
Other (150) 440 503
-------- -------- --------
Net cash used in investing activities (19,402) (10,986) (5,303)
-------- -------- --------
Financing Activities:
Net proceeds from issuance of Company
and subsidiary common stock (Note 1) 55,923 235 442
Issuance (repayment) of short-term
obligations (Note 8) (10,400) 10,400 (5,000)
Repayment of long-term obligations - (385) (203)
-------- -------- --------
Net cash provided by (used in) financing
activities $ 45,523 $ 10,250 $ (4,761)
-------- -------- --------
5PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Exchange Rate Effect on Cash $ (396) $ 2,137 $ 1,763
-------- -------- --------
Increase in Cash and Cash Equivalents 52,777 19,778 9,654
Cash and Cash Equivalents at Beginning
of Year 57,028 37,250 27,596
-------- -------- --------
Cash and Cash Equivalents at End of Year $109,805 $ 57,028 $ 37,250
======== ======== ========
Cash Paid For:
Interest $ 662 $ 1,391 $ 947
Income taxes $ 12,625 $ 14,760 $ 5,472
Noncash Activities:
Retirement of subordinated convertible
note $ - $ - $(15,000)
Issuance of subordinated convertible
note $ - $ - $ 15,000
Issuance of Company common stock in
connection with the redemption of
Fiberprep stock (Note 3) $ - $ 1,428 $ -
Fair value of assets of acquired
company $ 12,480 $ - $ -
Cash paid for acquired company (12,070) - -
-------- -------- --------
Liabilities assumed of acquired
company $ 410 $ - $ -
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
6PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Consolidated Statement of Shareholders' Investment
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Common Stock, $.01 Par Value
Balance at beginning of year $ 406 $ 269 $ 268
Issuance of stock under employees'
and directors' stock plans 2 1 1
Effect of three-for-two stock splits 204 135 -
Issuance of Company common stock for
redemption of Fiberprep stock
(Note 3) - 1 -
-------- -------- --------
Balance at end of year 612 406 269
-------- -------- --------
Capital in Excess of Par Value
Balance at beginning of year 65,222 62,954 62,072
Issuance of stock under employees'
and directors' stock plans 54 680 441
Effect of three-for-two stock splits (204) (135) -
Issuance of Company common stock for
redemption of Fiberprep stock
(Note 3) - 1,427 -
Tax benefit related to employees'
and directors' stock plans 781 296 428
Effect of majority-owned subsidiary's
equity transactions 98 - 13
-------- -------- --------
Balance at end of year 65,951 65,222 62,954
-------- -------- --------
Retained Earnings
Balance at beginning of year 46,287 26,038 15,144
Net income 19,894 20,249 10,894
-------- -------- --------
Balance at end of year 66,181 46,287 26,038
-------- -------- --------
Treasury Stock
Balance at beginning of year (446) - -
Activity under employees' and
directors' stock plans 86 (446) -
-------- -------- --------
Balance at end of year (360) (446) -
-------- -------- --------
Cumulative Translation Adjustment
Balance at beginning of year (1,840) (4,539) (6,731)
Translation adjustment 306 2,699 2,192
-------- -------- --------
Balance at end of year $ (1,534) $ (1,840) $ (4,539)
-------- -------- --------
7PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Consolidated Statement of Shareholders' Investment (continued)
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Net Unrealized Gain (Loss) on Available-
for-sale Investments
Balance at beginning of year $ 2 $ (26) $ -
Change in net unrealized gain (loss)
on available-for-sale investments
(Note 2) (2) 28 (42)
Effect of change in accounting
principle (Note 2) - - 16
-------- -------- --------
Balance at end of year - 2 (26)
-------- -------- --------
Total Shareholders' Investment $130,850 $109,631 $ 84,696
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
8PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Fibertek Inc. (the Company) designs and manufactures
processing machinery and accessories for the paper and paper-recycling
industries. The Company's principal products include custom-engineered
systems and equipment for the preparation of wastepaper for conversion
into recycled paper, accessory equipment and related consumables
important to the efficient operation of papermaking machines, and
water-management systems essential for draining, purifying, and recycling
process water.
Relationship with Thermo Electron Corporation
The Company was incorporated in November 1991 as a wholly owned
subsidiary of Thermo Electron Corporation (Thermo Electron). As of
December 28, 1996, Thermo Electron owned 51,520,895 shares of the
Company's common stock, representing 84% of such stock outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the
Company, its wholly owned subsidiaries, its 68%-owned public subsidiary
Thermo Fibergen Inc. (Thermo Fibergen), and its 95%-owned Fiberprep, Inc.
(Fiberprep) subsidiary (Note 3). All significant intercompany accounts
and transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
December 31. References to 1996, 1995, and 1994 are for the fiscal years
ended December 28, 1996, December 30, 1995, and December 31, 1994,
respectively. The Company's E. & M. Lamort, S.A. (Lamort) subsidiary,
based in France, has a fiscal year ending on the Saturday nearest
November 30 to allow sufficient time for the Company to receive Lamort's
financial statements.
Revenue Recognition
The Company recognizes revenues upon shipment of its products. The
Company provides a reserve for its estimate of warranty costs at the time
of shipment. Revenues and profits on large contracts are recognized using
the percentage-of-completion method. Revenues recorded under the
percentage-of-completion method were $31,066,000 in 1996, $51,741,000 in
1995, and $42,122,000 in 1994. The percentage of completion is determined
by relating the actual costs incurred to date to management's estimate of
total costs to be incurred on each contract. If a loss is indicated on
any contract in process, a provision is made currently for the entire
loss. 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.
9PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 5). Accordingly,
no accounting recognition is given to stock options granted at fair
market value until they are exercised. Upon exercise, net proceeds,
including tax benefits realized, are credited to equity.
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, beginning in 1996, its Thermo
Fibergen 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.
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
Primary earnings per share have been computed based on the weighted
average number of shares outstanding during the year. Because the effect
of the assumed exercise of the Company's stock options would be
immaterial, they have been excluded from the primary earnings per share
calculation. Fully diluted earnings per share have been computed assuming
conversion of the Company's subordinated convertible note and elimination
of the related interest expense, where dilutive, as well as the exercise
of stock options and their related income tax effects.
Stock Split
All share and per share information, except as noted below, has been
restated to reflect three-for-two stock splits, effected in the form of
50% stock dividends, which were distributed in June 1996 and September
1995. Share information in the accompanying 1995 balance sheet has not
been restated for the stock split distributed in June 1996.
Cash and Cash Equivalents
As of December 28, 1996, $75,566,000 of the Company's cash
equivalents were invested in a repurchase agreement with Thermo Electron.
Under this agreement, the Company in effect lends excess cash to Thermo
Electron, which Thermo Electron collateralizes with investments
principally consisting of U.S. government agency securities, corporate
notes, commercial paper, money market funds, and other marketable
10PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
securities, in the amount of at least 103% of such obligation. The
Company's funds subject to the repurchase agreement are readily
convertible into cash by the Company. The repurchase agreement earns a
rate based on the 90-day Commercial Paper Composite Rate plus 25 basis
points, set at the beginning of each quarter. As of year-end 1996 and
1995, the Company's cash equivalents also include money market fund
investments of the Company's foreign subsidiaries, which have original
maturities of three months or less. Cash equivalents are carried at cost,
which approximates market value.
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) 1996 1995
-----------------------------------------------------------------------
Raw materials and supplies $13,778 $14,283
Work in process 4,180 7,577
Finished goods 6,509 5,242
------- -------
$24,467 $27,102
======= =======
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while
maintenance and repairs are charged to expense as incurred. The Company
provides for depreciation and amortization using the straight-line method
over the estimated useful lives of the property as follows: buildings, 15
to 50 years; machinery and equipment, 2 to 15 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) 1996 1995
-----------------------------------------------------------------------
Land and buildings $22,293 $18,891
Machinery, equipment, and leasehold improvements 35,576 31,085
------- -------
57,869 49,976
Less: Accumulated depreciation and amortization 31,329 28,767
------- -------
$26,540 $21,209
======= =======
11PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Other Assets
Other assets in the accompanying balance sheet includes the cost of
patents acquired in 1996 that are amortized using the straight-line
method over an estimated useful life of 12 years. These assets were
$958,000, net of accumulated amortization of $42,000, at year-end 1996.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired
companies is amortized using the straight-line method over periods
ranging between 20 to 40 years. Accumulated amortization was $3,521,000
and $2,523,000 at year-end 1996 and 1995, respectively. The Company
assesses the future useful life of this asset whenever events or changes
in circumstances indicate that the current useful life has diminished.
The Company considers the future undiscounted cash flows of the acquired
companies in assessing the recoverability of this asset. 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 began
trading separately on December 13, 1996. Holders of a redemption right
have the option to require Thermo Fibergen to redeem, in September 2000
and 2001, one share of Thermo Fibergen common stock at $12.75 per share.
The redemption rights carry terms that generally provide for their
expiration if the closing price of Thermo Fibergen's common stock exceeds
$19 1/8 for 20 of any 30 consecutive trading days prior to September
2001. The difference between the redemption value and the original
carrying amount of common stock of subsidiary subject to redemption is
accreted over the period ending September 2000, which corresponds with
the first redemption period. The accretion is charged to minority
interest expense in the accompanying statement of income. The redemption
rights are guaranteed, on a subordinated basis, by Thermo Electron. The
Company has agreed to reimburse Thermo Electron in the event Thermo
Electron is required to make a payment under the guarantee.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are
translated at average exchange rates for the year, in accordance with
SFAS No. 52, "Foreign Currency Translation." Resulting translation
adjustments are reflected as a separate component of shareholders'
investment titled "Cumulative translation adjustment." Foreign currency
transaction gains and losses are included in the accompanying statement
of income and are not material for the three years presented.
12PAGE
Thermo Fibertek Inc. 1996 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.
Presentation
Certain amounts in 1995 and 1994 have been reclassified to conform to
the presentation in the 1996 financial statements.
2. Available-for-sale Investments
Effective January 2, 1994, the Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, the Company's debt and marketable equity
securities are considered available-for-sale investments in the
accompanying balance sheet and are carried at market value, with the
difference between cost and market value, net of related tax effects,
recorded currently as a component of shareholders' investment titled "Net
unrealized gain (loss) on available-for-sale investments." Effect of
change in accounting principle in the accompanying 1994 statement of
shareholders' investment represents the unrealized gain, net of related
tax effects, pertaining to available-for-sale investments held by the
Company on January 2, 1994.
Available-for-sale investments in the accompanying 1995 balance sheet
represents investments in corporate bonds. The difference between the
market value and the cost basis of available-for-sale investments at
December 30, 1995, was $3,000, which represents gross unrealized gains on
those investments.
3. Acquisitions
In July 1996, Thermo Fibergen acquired substantially all of the
assets, subject to certain liabilities, of Granulation Technology, Inc.
(Granulation Technology) and Biodac, a division of Edward Lowe
Industries, Inc., for $12,070,000 in cash. The acquisition has been
accounted for using the purchase method of accounting, and the combined
results of operations of Granulation Technology and Biodac have been
included in the accompanying financial statements from the date of
acquisition. The cost of the acquisition exceeded the estimated fair
value of the acquired net assets by $4,862,000, which is being amortized
over 20 years. Allocation of the purchase price for the acquisition was
based on the estimated fair value of net assets acquired and is subject
to adjustment upon finalization of the purchase price allocation. Pro
forma data is not presented since the acquisition of Granulation
Technology and Biodac was not material to the Company's results of
operations.
13PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Acquisitions (continued)
In January 1995, the Company increased its ownership of Fiberprep
from 51% to 95% through a redemption by Fiberprep of a portion of its
stock owned by Aikawa Iron Works Co., Ltd. (Aikawa) for a total purchase
price equal to (a) $12,783,000 in cash, which included a royalty payment
of $845,000, (b) a ten-year 1% royalty on sales of certain Aikawa
products, and (c) the issuance of 225,000 shares of the Company's common
stock. The acquisition has been accounted for using the purchase method
of accounting. The cost of the acquisition exceeded the estimated fair
value of the incremental net assets by $7,516,000, which is being
amortized over 40 years. The accompanying statement of income includes
royalty expense in connection with this agreement of $66,000 and $258,000
in 1996 and 1995, respectively.
Based on unaudited data, if the acquisition of the additional 44%
ownership in Fiberprep had occurred at the beginning of 1994, net income
and earnings per share on a pro forma basis for 1994 would have been
$11,468,000 and $.19, respectively. The pro forma results are not
necessarily indicative of future operations or the actual results that
would have occurred had the redemption by Fiberprep been made at the
beginning of 1994.
4. Note Receivable
In connection with a proposed engineering, procurement, and
construction project, the Company loaned $6.0 million to Tree-Free Fiber
Company, LLC (Tree-Free) during 1996. The $6.0 million note to the
Company is secured by a first priority security interest in the
membership (equity) interests of the equity owners of Tree-Free, as well
as certain other assets of Tree-Free. This project has been indefinitely
delayed due to the current weakness in pulp prices and, therefore, the
Company expects the project will not proceed in the near future.
Tree-Free was unable to repay the note upon its original maturity and the
Company consented to several payment extensions. On March 10, 1997, the
Company formally notified Tree-Free that Tree-Free was in default of its
obligations, and demanded payment in full within seven days. If Tree-Free
is unable to cure the default within seven days, or to make other
arrangements acceptable to the Company, the Company intends to exercise
its rights under its security agreement to cause all of such membership
interests to be transferred to the Company. In such event, the Company
expects that it will operate an existing tissue mill owned by Tree-Free,
with the intent of either selling the mill or membership interests at one
or more public or private sales as soon as practicable thereafter.
Although no assurance can be given as to either the timing of any such
sale or the amount of the proceeds that may be received therefrom, the
Company believes that the fair value of its security exceeds the carrying
amount of the note from Tree-Free.
14PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
------------------
The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans, adopted in 1991, permit the
grant of nonqualified and incentive stock options. A third plan, adopted
in 1994, permits the grant of a variety of stock and stock-based awards
as determined by the human resources committee of the Company's Board of
Directors (the Board Committee), including restricted stock, stock
options, stock bonus shares, or performance-based shares. To date, only
nonqualified stock options have been awarded under this plan. 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 five 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, adopted in 1991, 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.
Employee Stock Purchase Program
-------------------------------
Substantially all of the Company's full-time U.S. employees are
eligible to participate in an employee stock purchase program sponsored
by the Company and Thermo Electron. Under this program, shares of the
Company's and Thermo Electron's common stock can be purchased at the end
of a 12-month period at 95% of the fair market value at the beginning of
the period, and the shares purchased are subject to a six-month resale
restriction. Prior to November 1, 1995, the applicable shares of common
stock could be purchased at 85% of the fair market value at the beginning
of the period, and the shares purchased were subject to a one-year resale
restriction. Shares are purchased through payroll deductions of up to 10%
of each participating employee's gross wages. During 1996, 1995, and
1994, the Company issued 30,830 shares, 38,981 shares, and 67,602 shares,
respectively, of its common stock under this program.
15PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which sets forth a
fair-value based method of recognizing stock-based compensation expense.
As permitted by SFAS No. 123, the Company has elected to continue to
apply APB No. 25 to account for its stock-based compensation plans. Had
compensation cost for awards granted in 1996 and 1995 under the Company's
stock-based compensation plans been determined based on the fair value at
the grant dates consistent with the method set forth under SFAS No. 123,
the effect on the Company's net income and earnings per share would have
been as follows:
(In thousands except per share amounts) 1996 1995
-------------------------------------------------------------------------
Net income:
As reported $19,894 $20,249
Pro forma 19,454 20,118
Primary earnings per share:
As reported .33 .33
Pro forma .32 .33
Fully diluted earnings per share:
As reported .31 .32
Pro forma .31 .32
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 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:
1996 1995
-----------------------------------------------------------------------
Volatility 26% 26%
Risk-free interest rate 5.9% 5.9%
Expected life of options 4.7 years 4.6 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.
16PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
Stock Option Activity
A summary of the Company's stock option activity is as follows:
1996 1995 1994
---------------- ---------------- -----------------
Weighted Weighted Range of
Number Average Number Average Number Option
(Shares in of Exercise of Exercise of Prices
thousands) Shares Price Shares Price Shares per Share
--------------------------------------------------------------------------
Options outstanding, $ 3.00-
beginning of year 3,783 $ 4.52 3,782 $ 3.91 3,804 6.88
6.28
Granted 102 11.80 315 10.70 6 6.88
Exercised (282) 3.25 (236) 3.08 (27) 3.00
Forfeited (33) 6.15 (78) 4.53 (1) 6.15
----- ----- -----
Options outstanding, $ 3.00-
end of year 3,570 $ 4.81 3,783 $ 4.52 3,782 6.88
===== ====== ===== ====== ===== ======
$ 3.00-
Options exercisable 3,570 $ 4.81 3,783 $ 4.52 3,780 6.88
===== ====== ===== ====== ===== ======
Options available
for grant 2,410 2,478 2,715
===== ===== =====
Weighted average fair
value per share of
options granted
during year $ 3.89 $ 3.60
====== ======
A summary of the status of the Company's stock options at December 28,
1996, is as follows:
Options Outstanding and Exercisable
------------------------------------
Weighted
Average Weighted
Number Remaining Average
Range of of Contractual Exercise
Exercise Prices Shares Life Price
-------------------------------------------------------------------------
(Shares in thousands)
$ 3.00 - $ 5.83 2,160 3.2 years $ 3.00
5.84 - 8.66 993 7.8 years 6.16
8.67 - 11.49 387 6.0 years 10.71
11.50 - 14.32 30 11.2 years 14.32
-----
$ 3.00 - $14.32 3,570 4.9 years $ 4.81
=====
17PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
401(k) Savings Plan
Two of the Company's domestic subsidiaries participate in Thermo
Electron's 401(k) savings plan. Contributions to the plan are made by
both the employee and the Company. Company contributions are based upon
the level of employee contributions. For this plan, the Company
contributed and charged to expense $449,000, $449,000, and $382,000 in
1996, 1995, and 1994, respectively.
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 profit-sharing net income, which equals 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 and a voluntary profit-sharing plan,
which the Company has agreed with its trade unions to maintain. Under the
state-mandated plan, the Company contributes 0-13% of the subsidiary's
net profit after taxes reduced by 5% of its shareholders' investment.
Contributions become fully vested after five years. The voluntary plan
provides for the subsidiary to contribute 8-10% of profit after taxes in
excess of 5% of its revenues. Contributions become fully vested in May of
the following year. For these plans, the Company contributed and charged
to expense $1,263,000, $1,215,000, and $1,189,000 in 1996, 1995, and
1994, respectively.
6. Common Stock
At December 28, 1996, the Company had reserved 8,630,224 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 note.
7. Income Taxes
The components of income before provision for income taxes and
minority interest in the accompanying statement of income are as follows:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Domestic $17,515 $20,472 $13,831
Foreign 15,509 12,588 6,100
------- ------- -------
$33,024 $33,060 $19,931
======= ======= =======
18PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
7. Income Taxes (continued)
The components of the provision for income taxes in the accompanying
statement of income are as follows:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Currently payable:
Federal $ 5,672 $ 7,915 $ 4,590
Foreign 3,382 4,776 2,205
State 1,613 1,763 1,181
------- ------- --------
10,667 14,454 7,976
------- ------- --------
Deferred (prepaid), net:
Federal 142 (1,312) (435)
Foreign 1,813 (286) 95
State 62 (278) (66)
------- ------- --------
2,017 (1,876) (406)
------- ------- -------
$12,684 $12,578 $ 7,570
======= ======= =======
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 $781,000, $296,000, and $428,000 of tax benefits from
exercises of stock options that have been allocated to capital in excess
of par value in 1996, 1995, and 1994, respectively.
The deferred provision for income taxes in 1995 does not reflect
$2,409,000 of tax benefits used to reduce cost in excess of net assets of
acquired companies.
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% in 1996 and 1995 and 34% in 1994 to income
before provision for income taxes and minority interest due to the
following:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Provision for income taxes at
statutory rate $11,558 $11,571 $ 6,777
Increases (decreases) resulting from:
State income taxes, net of federal tax 1,089 965 736
Dividend from foreign subsidiary, net
of tax credits - 709 -
Foreign tax rate and tax regulation
differential (233) (434) 95
Nondeductible expenses 150 147 192
Other 120 (380) (230)
------- ------- -------
$12,684 $12,578 $ 7,570
======= ======= =======
19PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
7. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1996 1995
----------------------------------------------------------------------
Prepaid income taxes:
Reserves and accruals $5,087 $5,402
Inventory basis difference 1,263 2,835
Accrued compensation 602 408
Allowance for doubtful accounts 268 250
Other, net - 174
------ ------
$7,220 $9,069
====== ======
Deferred income taxes, net:
Amortization of intangible assets $ 496 $ 494
Depreciation 184 304
Foreign taxes 633 347
------ ------
$1,313 $1,145
====== ======
The Company has not recognized a deferred tax liability for the
difference between the book basis and the tax basis of its investment in
the stock of its domestic subsidiaries (such difference relates primarily
to unremitted earnings by subsidiaries) because it does not expect this
basis difference to become subject to tax at the parent level. The
Company believes it can implement certain tax strategies to recover its
investment in its domestic subsidiaries tax free.
A provision has not been made for U.S. or additional foreign taxes on
$50.2 million of undistributed earnings of foreign subsidiaries that
could be subject to tax if remitted to the U.S. because the Company
currently 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. Short- and Long-term Obligations
In 1991, the Company issued to Thermo Electron a $15.0 million
principal amount 5% subordinated note due 2001, payable on demand upon 30
days' notice by Thermo Electron any time after January 15, 1994. In
February 1994, the Company refinanced this note into a $15.0 million
principal amount 3.5% subordinated convertible note due August 1, 1997.
The note is held by Thermo Electron and is convertible into shares of the
Company's common stock at a conversion price of $7.94 per share. This
note is included in "Due to parent company and affiliated companies" in
the accompanying 1996 balance sheet.
20PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
8. Short- and Long-term Obligations (continued)
In January 1995, in connection with a partial redemption of Fiberprep
stock (Note 3), Fiberprep issued to Thermo Electron a $10.4 million
promissory note due January 1996, bearing interest at the Commercial
Paper Composite Rate plus 25 basis points, which was repaid in 1996. This
note is included in "Due to parent company and affiliated companies" in
the accompanying 1995 balance sheet. The interest rate was 6.01% at
year-end 1995.
In September 1993, the Company borrowed $5.0 million from Thermo
Electron pursuant to a promissory note due September 13, 1994, bearing
interest at the Commercial Paper Composite Rate plus 25 basis points,
which was repaid in September 1994.
See Note 11 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 1.0% of the Company's revenues. The Company
paid an annual fee equal to 1.20% and 1.25% of the Company's revenues in
1995 and 1994, respectively. The annual fee is reviewed and adjusted
annually by mutual agreement of the parties. For these services, the
Company was charged $1,922,000, $2,481,000, and $2,033,000 in 1996, 1995,
and 1994, respectively. The corporate services agreement is renewed
annually but can be terminated upon 30 days' prior notice by the Company
or upon the Company's withdrawal from the Thermo Electron Corporate
Charter (the Thermo Electron Corporate Charter defines the relationship
among Thermo Electron and its majority-owned subsidiaries). Management
believes that the service fee charged by Thermo Electron is reasonable
and that such fees are representative of the expenses the Company would
have incurred on a stand-alone basis. For additional items such as
employee benefit plans, insurance coverage, and other identifiable costs,
Thermo Electron charges the Company based upon costs attributable to the
Company.
Recycling Equipment Subcontract
In December 1994, Thermo Electron subcontracted with Fiberprep to
supply equipment and services to Thermo Electron, in its role as general
contractor on a turnkey contract with a customer for an office wastepaper
de-inking facility. During 1996 and 1995, the Company recorded revenues
of $1,876,000 and $14,737,000, respectively, and cost of revenues of
$639,000 and $8,797,000, respectively, under this two-year subcontract.
No revenues were recorded under this subcontract during 1994.
21PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
9. Related Party Transactions (continued)
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
Short- and Long-term Obligations
See Note 8 for obligations of the Company held by Thermo Electron.
10. Commitments and Contingency
Operating Leases
The Company occupies office and operating facilities under various
operating leases. The accompanying statement of income includes expenses
from operating leases of $1,252,000, $1,167,000, and $1,407,000 in 1996,
1995, and 1994, respectively. The future minimum payments due under
noncancellable operating leases as of December 28, 1996, are $1,113,000
in 1997; $929,000 in 1998; $468,000 in 1999; $159,000 in 2000; $87,000 in
2001; and $95,000 in 2002 and thereafter. Total future minimum lease
payments are $2,851,000.
Contingency
Fiberprep was a supplier of de-inking equipment to the general
contractor for a pulp mill (unrelated to the subcontract from Thermo
Electron discussed in Note 9). The general contractor has received
notices from the mill owner alleging failure to perform and claiming
liquidated damages. Although the general contractor is challenging the
mill owner's claims, if the general contractor is found liable, the
Company has been informed that the general contractor will seek 50% of
its damages from the Company. The Company's limit of liability for any
contractual disputes arising from its contract totals $6.0 million. While
it is reasonably possible that resolution of this matter could have a
material effect on the Company's results of operations for a particular
quarter, in the opinion of management the Company's reserves for such
matters are adequate and such result is not likely to occur.
11. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable,
accounts payable, due to parent company and affiliated companies,
long-term obligations, and forward exchange contracts. The carrying
amount of these financial instruments, with the exception of
available-for-sale investments, the subordinated convertible note, other
long-term obligations, and forward exchange contracts, approximate fair
value due to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying 1995 balance sheet. The fair values were determined based on
quoted market prices. See Note 2 for fair value information pertaining to
these financial instruments.
22PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
11. Fair Value of Financial Instruments (continued)
The Company enters into forward exchange contracts to hedge certain
firm purchase and sale commitments denominated in currencies other than
its subsidiaries' local currencies, principally U.S. dollars, British
pounds sterling, French francs, and Japanese yen. 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 amounts of such forward exchange contracts
at year-end 1996 and 1995 were $2,378,000 and $12,274,000, respectively.
The carrying amount and fair value of the Company's convertible
obligation, other long-term obligations, and off-balance-sheet financial
instruments are as follows:
1996 1995
------------------ ------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-----------------------------------------------------------------------
Convertible obligation $15,000 $17,400 $15,000 $28,485
Other long-term obligations 34 34 41 41
------- ------- ------- -------
$15,034 $17,434 $15,041 $28,526
======= ======= ======= =======
Off-balance-sheet financial
instruments:
Forward exchange contracts
payable (receivable) $ 32 $ (325)
The fair value of debt obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the
respective year-ends. The fair value of the convertible obligation
exceeds the carrying amount primarily due to the market price of the
Company's common stock exceeding the conversion price of the convertible
obligation.
The fair value of forward exchange contracts is the estimated amount
that the Company would receive or pay upon termination of the contract,
taking into account the change in foreign exchange rates.
12. Geographical Information
The Company is engaged in one business segment: the design and
manufacture of processing machinery for paper-recycling, accessories, and
water-management systems for the paper and paper-recycling industries.
Revenues from the paper-recycling business were $56,171,000, $76,981,000,
and $50,698,000 in 1996, 1995, and 1994, respectively. Revenues from the
accessories business were $82,173,000, $73,934,000, and $60,448,000 in
1996, 1995, and 1994, respectively. Revenues from the water-management
business were $39,950,000, $40,835,000, and $32,170,000 in 1996, 1995,
and 1994, respectively.
23PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
12. Geographical Information (continued)
The following table shows data for the Company by geographic area.
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Revenues:
United States $102,118 $121,932 $ 96,434
France 59,941 59,126 42,272
United Kingdom 14,644 14,930 15,739
Other 24,070 21,883 16,624
Transfers among geographic areas (a) (8,564) (11,128) (8,444)
-------- --------- --------
$192,209 $206,743 $162,625
======== ======== ========
Income before provision for income taxes
and minority interest:
United States $ 16,053 $ 21,716 $ 14,945
France 6,598 5,671 3,487
United Kingdom 3,081 1,732 64
Other 4,764 3,734 1,610
Corporate and eliminations (b) (377) (1,924) (1,190)
-------- -------- --------
Total operating income 30,119 30,929 18,916
Interest income, net 2,905 2,131 1,015
-------- -------- --------
$ 33,024 $ 33,060 $ 19,931
======== ======== ========
Identifiable assets:
United States (c) $131,540 $ 81,609 $ 66,593
France 57,643 56,538 50,843
United Kingdom 24,496 20,868 21,474
Other 18,999 16,686 13,194
Corporate and eliminations (d) 24,554 23,970 10,285
-------- -------- --------
$257,232 $199,671 $162,389
======== ======== ========
(a) Transfers among geographic areas are accounted for at prices that are
representative of transactions with unaffiliated parties.
(b) Primarily general and administrative expenses.
(c) Reflects the net proceeds from Thermo Fibergen's September 1996
initial public offering.
(d) Primarily cash, cash equivalents, and available-for-sale investments.
24PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
13. Unaudited Quarterly Information
(In thousands except per share amounts)
1996 First Second Third Fourth
------------------------------------------------------------------------
Revenues $48,980 $48,595 $46,124 $48,510
Gross profit 20,788 20,491 19,951 21,442
Net income 5,206 4,876 4,213 5,599
Earnings per share:
Primary .09 .08 .07 .09
Fully diluted .08 .08 .07 .09
1995 First Second Third Fourth
------------------------------------------------------------------------
Revenues $43,736 $49,588 $56,227 $57,192
Gross profit 17,787 19,968 22,268 23,626
Net income 3,583 4,628 5,992 6,046
Earnings per share:
Primary .06 .08 .10 .10
Fully diluted .06 .07 .09 .10
14. Subsequent Event
On February 26, 1997, the Company entered into a letter of intent to
acquire the assets, subject to certain liabilities, of the
stock-preparation business of The Black Clawson Company (Black Clawson)
for approximately $110 million in cash. Black Clawson is a leading
supplier of recycling equipment used in processing fiber for the
manufacture of "brown paper" such as that used for corrugated boxes. The
transaction is subject to several conditions, including completion by
the Company of its due diligence investigation; negotiation of a
definitive agreement; regulatory approvals, including antitrust
clearances; and approval by the Board of Directors of the Company,
Thermo Electron, and Black Clawson. If this transaction is consummated,
the Company intends to borrow a portion of the purchase price from
Thermo Electron.
25PAGE
Thermo Fibertek Inc. 1996 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 84%-owned subsidiary of Thermo
Electron Corporation) and subsidiaries as of December 28, 1996, and
December 30, 1995, and the related consolidated statements of income,
shareholders' investment, and cash flows for each of the three years in
the period ended December 28, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the 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 28, 1996, and
December 30, 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 28, 1996,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 3, 1997 (except with
respect to the matter discussed
in Note 14 as to which the date
is February 26, 1997)
26PAGE
Thermo Fibertek Inc. 1996 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
caption "Forward-looking Statements."
Overview
The Company designs and manufactures processing machinery,
accessories, and water-management systems for the paper and
paper-recycling industries. The Company's principal products include
custom-engineered systems and equipment for the preparation of wastepaper
for conversion into recycled paper, accessory equipment and related
consumables important to the efficient operation of papermaking machines,
and water-management systems essential for draining, purifying, and
recycling process water. The Company's Thermo Fibergen Inc. (Thermo
Fibergen) subsidiary's principal business consists of conducting research
and development to commercialize equipment and systems to recover
materials from papermaking sludge generated by plants that produce virgin
and recycled pulp and paper. Thermo Fibergen's GranTek Inc. (GranTek)
subsidiary employs patented technology to convert the papermaking sludge
into granules that are currently used as carriers for agricultural
chemicals.
The Company's products are primarily sold to the paper industry.
Generally, the financial condition of the paper industry corresponds both
to changes in the general economy, as well as a number of other factors,
including paper and pulp production capacity. The paper industry entered
a severe down cycle in early 1996 and has not recovered. This cyclical
downturn adversely affected the Company's business during the second half
of 1996. No assurance can be given that the financial condition of the
paper industry will recover in the near future.
During 1996, approximately 47% of the Company's revenues originated
outside the United States, primarily in Europe. Although the Company
seeks to charge its customers in the same currency as its operating
costs, 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.
27PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
1996 Compared With 1995
Revenues decreased 7% to $192.2 million in 1996 from $206.7 million
in 1995. Revenues earned by the Company's Fiberprep subsidiary under a
subcontract from Thermo Electron Corporation (Thermo Electron) to supply
equipment and services for an office wastepaper de-inking facility
decreased $12.9 million because this subcontract was substantially
completed in the first quarter of 1996. Revenues from the Company's
recycling business decreased $7.5 million, excluding the effect of the
subcontract from Thermo Electron, due to a decrease in demand resulting
from a severe drop in de-inked pulp prices, offset in part by $2.2
million of revenues from the Company's GranTek subsidiary, which acquired
Granulation Technology Inc. (Granulation Technology) and Biodac, a
division of Edward Lowe Industries, Inc., in July 1996. Revenues from the
Company's accessories business increased $8.8 million due principally to
an increase in demand. The unfavorable effects of currency translation
due to a stronger U.S. dollar decreased revenues by $1.7 million in 1996.
The gross profit margin increased to 43% in 1996 from 40% in 1995.
Margins improved at the Company's Lamort subsidiary primarily due to a
change in product mix, and at the Company's water-management business
principally due to an increase in direct mill sales. Additionally,
margins improved at the Company's Fiberprep Inc. (Fiberprep) subsidiary
primarily due to the effect of a $0.7 million payment received under the
subcontract from Thermo Electron, which represents the Company's share of
certain cost savings on the project.
Selling, general, and administrative expenses as a percentage of
revenues increased to 25% in 1996 from 24% in 1995, primarily due to a
decrease in revenues.
Research and development expenses increased to $5.5 million in 1996
from $4.1 million in 1995, primarily due to Thermo Fibergen's continued
development of technology to recover materials from papermaking sludge
generated by plants that produce virgin and recycled pulp and paper. The
Company expects Thermo Fibergen to continue to increase research and
development expenses during the next fiscal year.
Fiberprep was a supplier of de-inking equipment to the general
contractor for a pulp mill (unrelated to the office wastepaper de-inking
facility described above). The general contractor has received notices
from the mill owner alleging failure to perform and claiming liquidated
damages. Although the general contractor is challenging the mill owner's
claims, if the general contractor is found liable, the Company has been
informed that the general contractor will seek 50% of its damages from
the Company. The Company's limit of liability for any contractual
disputes arising from its contract totals $6.0 million. While it is
reasonably possible that resolution of this matter could have a material
effect on the Company's results of operations for a particular quarter,
in the opinion of management the Company's reserves for such matters are
adequate and such result is not likely to occur.
28PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations
1996 Compared With 1995 (continued)
Interest income increased to $3.6 million in 1996 from $3.5 million
in 1995, primarily due to higher average invested balances resulting from
the net proceeds from Thermo Fibergen's initial public offering in
September 1996, offset in part by lower prevailing interest rates. The
Company anticipates an increase in interest income in 1997 from the
invested net proceeds from Thermo Fibergen's initial public offering.
Interest expense decreased to $0.7 million in 1996 from $1.4 million in
1995, primarily due to the January 1996 repayment of a $10.4 million
promissory note to Thermo Electron.
Minority interest expense increased to $446,000 in 1996 from $233,000
in 1995, primarily due to accretion of Thermo Fibergen's common stock
subject to redemption.
The effective tax rate was 38% in 1996 and 1995. These rates exceed
the statutory federal income tax rate primarily due to the impact of
state income taxes, and in 1995 the tax effect on a dividend from a
foreign subsidiary, offset in part by the effect of lower foreign tax
rates.
In connection with a proposed engineering, procurement, and
construction project, the Company made a secured loan of $6.0 million to
Tree-Free Fiber Company, LLC (Tree-Free) during 1996. This project has
been indefinitely delayed due to the current weakness in pulp prices, and
Tree-Free was unable to repay the note upon maturity. On March 10, 1997,
the Company formally notified Tree-Free that Tree-Free is in default of
its payment obligations. If Tree-Free is unable to cure the default
within seven days, or to make other arrangements acceptable to the
Company, the Company intends to foreclose upon the assets securing the
note (Note 4).
1995 Compared With 1994
Revenues increased 27% to $206.7 million in 1995 from $162.6 million
in 1994. Revenues from the Company's paper-recycling equipment business
increased $22.3 million primarily due to the inclusion of $14.7 million
in revenues earned by Fiberprep under the subcontract from Thermo
Electron. In addition, paper-recycling equipment revenues increased due
to higher demand at the Company's subsidiary in France. Revenues from the
Company's accessories and water-management businesses increased $12.5
million and $10.0 million, respectively, due principally to an increase
in demand. The favorable effects of currency translation, due to a weaker
U.S. dollar, increased revenues by $2.7 million.
The gross profit margin remained relatively unchanged at 40% in 1995,
compared with 41% in 1994. A decrease in margins at Fiberprep due to the
establishment of warranty reserves for certain large de-inking projects
was largely offset by an increase in margins at the Company's North
American accessories business.
Selling, general, and administrative expenses as a percentage of
revenues decreased to 24% in 1995 from 27% in 1994, primarily due to an
increase in revenues. Research and development expenses remained
relatively unchanged at $4.1 million in 1995, compared with $3.8 million
in 1994.
Interest income increased to $3.5 million in 1995 from $2.0 million
in 1994 due to higher average invested balances and, to a lesser extent,
29PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations
1995 Compared With 1994 (continued)
higher prevailing interest rates. Interest expense increased to $1.4
million in 1995 from $0.9 million in 1994, primarily due to the issuance
of a $10.4 million promissory note to Thermo Electron in connection with
a partial redemption of Fiberprep stock in January 1995 (Notes 3 and 8),
offset in part by the repayment in September 1994 of a $5.0 million
promissory note to Thermo Electron (Note 8).
Minority interest expense decreased to $233,000 in 1995 from $1.5
million in 1994 due to the partial redemption of Fiberprep stock in
January 1995, which increased the Company's ownership of Fiberprep from
51% to 95%, offset in part by higher profits at Fiberprep in 1995.
The effective tax rate was 38% in 1995 and 1994. These rates exceed
the statutory federal income tax rate primarily due to the impact of
state income taxes and in 1995 the tax effect on a dividend from a
foreign subsidiary, offset in part by the effect of lower foreign tax
rates.
Liquidity and Capital Resources
Consolidated working capital was $115.6 million at December 28, 1996,
compared with $70.9 million at December 30, 1995. Included in working
capital are cash, cash equivalents, and available-for-sale investments of
$109.8 million at December 28, 1996, compared with $59.8 million at
December 30, 1995. Of the $109.8 million balance at December 28, 1996,
$58.4 million was held by Thermo Fibergen and $2.2 million was held by
Fiberprep, with the remainder being held by the Company and its wholly
owned subsidiaries. At December 28, 1996, $21.0 million of the Company's
cash and cash equivalents were held by its Lamort subsidiary.
Repatriation of this cash into the United States would be subject to a 5%
withholding tax in France and could also be subject to a United States
tax.
During 1996, $27.1 million of cash was provided by operating
activities. Cash provided by the Company's operating results was
increased by a $5.7 million reduction in accounts receivable and a $3.1
million reduction in inventories and unbilled contract costs and fees.
These sources of cash were more than offset by the effect of a reduction
in accounts payable and other current liabilities. The decrease in
accounts receivable resulted primarily from cash collections and the
completion of the office wastepaper de-inking facility subcontract with
Thermo Electron, which also resulted in a reduction in inventories and
unbilled contract costs and fees. The decrease in other current
liabilities was primarily due to a warranty claim payment and a decrease
in accrued income taxes.
During 1996, the Company's primary investing activities, excluding
the sale and maturities of available-for-sale investments, included an
acquisition, the issuance of a note receivable, and capital expenditures.
In July, Thermo Fibergen acquired substantially all of the assets,
subject to certain liabilities, of Granulation Technology and Biodac for
$12.1 million in cash (Note 3). During 1996, the Company loaned $6.0
million to Tree-Free (Note 4) and expended $3.9 million for purchases of
property, plant, and equipment.
30PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources (continued)
The Company's financing activities provided $45.5 million of cash in
1996. In September 1996 Thermo Fibergen sold units, each unit consisting
of one share of Thermo Fibergen common stock and one redemption right, in
an initial public offering for net proceeds of $55.8 million (Note 1).
The common stock and redemption rights began trading separately on
December 13, 1996. Holders of a redemption right have the option to
require Thermo Fibergen to redeem, in September 2000 and 2001, one share
of Thermo Fibergen common stock at $12.75 per share. The 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 January 1996, the
Company repaid a $10.4 million promissory note to Thermo Electron (Note
8).
On February 26, 1997, the Company entered into a letter of intent to
acquire the assets, subject to certain liabilities, of the
stock-preparation business of The Black Clawson Company for approximately
$110 million in cash (Note 14). If this transaction is consummated, the
Company intends to borrow a portion of the purchase price from Thermo
Electron. In 1997, the Company plans to make expenditures for property,
plant, and equipment of approximately $14 million, including $10 million
at Thermo Fibergen primarily for construction of one or more
fiber-recovery plants. Construction of fiber-recovery plants is dependent
upon Thermo Fibergen entering into long-term contracts with paper mills,
under which Thermo Fibergen will charge fees to accept the mills' pulp
sludge. Thermo Fibergen does not currently have such agreements in place
nor is there any assurance that Thermo Fibergen will be able to obtain
such contracts. The Company believes that its existing resources are
sufficient to meet the capital requirements of its existing operations
for the foreseeable future.
31PAGE
Thermo Fibertek Inc. 1996 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 1997 and beyond to differ
materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
Dependence on Paper Industry and Pulp and Paper Prices. The Company's
products are primarily sold to the paper industry. Generally, the
financial condition of the paper industry corresponds both to changes in
the general economy, as well as a number of other factors, including
paper and pulp production capacity. The paper industry entered a severe
down cycle in early 1996 and has not recovered. This cyclical downturn
adversely affected the Company's business during the second half of 1996.
No assurance can be given that the financial condition of the paper
industry will recover in the near future.
Risks Associated with International Operations. During 1996,
approximately 47% of the Company's revenues originated outside of the
United States, particularly in Europe. International revenues are subject
to a number of risks, including the following: agreements may be
difficult to enforce and receivables difficult to collect through a
foreign country's legal system; foreign customers may have longer payment
cycles; foreign countries may impose additional withholding taxes or
otherwise tax the Company's foreign income, impose tariffs, or adopt
other restrictions on foreign trade; U.S. export licenses may be
difficult to obtain; and the protection of intellectual property in
foreign countries may be more difficult to enforce. In addition, although
the Company seeks to charge its customers in the same currency as its
operating costs, fluctuations in currency exchange rates may affect
product demand and adversely affect the profitability in U.S. dollars of
products provided by the Company in foreign markets where payment for the
Company's products and services is made in the local currency. There can
be no assurance that any of these factors will not have a material
adverse impact on the Company's business and results of operations.
Competition. The Company encounters and expects to continue to
encounter significant competition in each of its principal markets. The
Company believes that the principal competitive factors affecting the
markets for its products include quality, service, technical expertise,
and product innovation. The Company's competitors include a number of
large multinational corporations. Competition could increase if new
companies enter the market or if existing competitors expand their
product lines or intensify efforts within existing product lines. There
can be no assurance that the Company's current products, products under
development, or ability to develop new technologies will be sufficient to
enable it to compete effectively.
Dependence on Patents and Proprietary Rights. The Company places
considerable importance 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
32PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Forward-looking Statements
patents, and intends to file additional applications as appropriate for
patents covering its products. No assurance can be given that patents
will issue from any pending or future patent applications owned by or
licensed to the Company, or that the claims allowed under any issued
patents will be sufficiently broad to protect the Company's technology.
No assurance can be given that any issued patents owned by or licensed to
the Company will not be challenged, invalidated, or circumvented, or that
the rights thereunder will provide competitive advantages to the Company.
The Company could incur substantial costs in defending itself in suits
brought against it or in suits in which the Company may assert its patent
rights against others. If the outcome of any such litigation is
unfavorable to the Company, the Company's business and results of
operations could be materially adversely affected.
In addition, there can be no assurance that third parties will not
assert claims against the Company that the Company infringes the
intellectual property rights of such parties. The Company could incur
substantial costs and diversion of management resources with respect to
the defense of any such claims, which could have a material adverse
effect on the Company's business, financial condition, and results of
operations. Furthermore, parties making such claims could secure a
judgment awarding substantial damages, as well as injunctive or other
equitable relief, which could effectively block the Company's ability to
make, use, sell, distribute, or market its products and services in the
U.S. or abroad. In the event that a claim relating to intellectual
property is asserted against the Company, the Company may seek licenses
to such intellectual property. There can be no assurance, however, that
such licenses could be obtained on commercially reasonable terms, if at
all. The failure to obtain the necessary licenses or other rights could
preclude the sale, manufacture, or distribution of the Company's products
and, therefore, could have a material adverse effect on the Company's
business, financial condition, and results of operations.
The Company relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its
collaborators, employees, and consultants. There can be no assurance that
these agreements will not be breached, that the Company would have
adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently developed by
competitors.
33PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Selected Financial Information
(In thousands except
per share amounts) 1996(a) 1995(b) 1994 1993(c) 1992
-------------------------------------------------------------------------
Statement of Income
Data:
Revenues $192,209 $206,743 $162,625 $137,088 $125,577
Net income 19,894 20,249 10,894 7,442 7,702
Earnings per share:
Primary .33 .33 .18 .12 .15
Fully diluted .31 .32 .18 .12 .15
Balance Sheet Data:
Working capital $115,609 $ 70,882 $ 54,879 $ 37,442 $ 57,162
Total assets 257,232 199,671 162,389 142,608 131,525
Long-term obligations 34 15,041 15,406 15,806 16,220
Common stock of
subsidiary subject
to redemption 56,087 - - - -
Shareholders'
investment 130,850 109,631 84,696 70,753 66,460
(a) Reflects the July 1996 acquisition of Granulation Technology and
Biodac, the net proceeds from Thermo Fibergen's September 1996
initial public offering, and the repayment of a $10.4 million
promissory note to Thermo Electron.
(b) Reflects the January 1995 redemption of a portion of Fiberprep's
stock and the issuance of a $10.4 million promissory note to Thermo
Electron.
(c) Reflects the June 1993 acquisition of AES and the issuance of a $5.0
million promissory note to Thermo Electron.
34PAGE
Thermo Fibertek Inc. 1996 Financial Statements
Common Stock Market Information
The following table shows the market range for the Company's common
stock based on reported sales prices on the American Stock Exchange
(symbol TFT) for 1996 and 1995. Prices have been restated to reflect
three-for-two stock splits, effected in the form of 50% stock dividends,
which were distributed in June 1996 and September 1995.
1996 1995
----------------- ------------------
Quarter High Low High Low
------------------------------------------------------------------------
First $16 $14 $ 7 5/6 $ 6 5/6
Second 20 14 7/12 9 1/18 7 1/2
Third 18 7/8 12 1/8 11 2/3 8 2/3
Fourth 13 1/4 9 15 1/6 10 5/12
As of January 24, 1997, the Company had 977 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 24, 1997, was $10 5/8 per share.
Units, 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-U, TFG, and TFG-R).
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent
and maintains shareholder activity records. The agent will respond to
questions on issuance of stock certificates, change of ownership, lost
stock certificates, and change of address. For these and similar matters,
please direct inquiries to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Shareholder Services
Shareholders of Thermo Fibertek Inc. who desire information about the
Company are invited to contact John N. Hatsopoulos, Chief Financial
Officer, Thermo Fibertek Inc., 81 Wyman Street, P.O. Box 9046, Waltham,
Massachusetts 02254-9046, (617) 622-1111. A mailing list is maintained to
enable shareholders whose stock is held in street name, and other
interested individuals, to receive quarterly reports, annual reports, and
press releases as quickly as possible. Beginning in 1997, quarterly
distribution will be limited to the second quarter report only. All
quarterly reports and press releases are available through the Internet
from Thermo Electron's home page on the World Wide Web
(http://www.thermo.com/subsid/tft.html).
35PAGE
Thermo Fibertek Inc. 1996 Financial Statements
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 28, 1996, as filed with the Securities and Exchange Commission,
may be obtained at no charge by writing to John N. Hatsopoulos, Chief
Financial Officer, Thermo Fibertek Inc., 81 Wyman Street, P.O. Box 9046,
Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Monday, June 2,
1997, at 8:00 a.m. at the Hyatt Regency Hotel, Hilton Head, South
Carolina.