Exhibit 13
Thermo Fibertek Inc.
Consolidated Financial Statements
1998
Thermo Fibertek Inc. 1998 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Revenues (includes $1,876 from related party in 1996; Notes 9 $ 247,426 $239,642 $ 192,209
and 13) --------- -------- ---------
Costs and Operating Expenses:
Cost of revenues (includes $639 for related-party revenues in 147,262 145,159 109,537
1996; Note 9)
Selling, general, and administrative expenses (Note 9) 63,381 60,675 47,093
Research and development expenses 6,971 6,814 5,460
Gain on sale of property (536) - -
Restructuring costs (Note 11) - 1,063 -
--------- ------- ---------
217,078 213,711 162,090
--------- ------- ---------
Operating Income 30,348 25,931 30,119
Interest Income 7,956 7,325 3,568
Interest Expense (includes $1,411 and $540 to related party in (7,408) (4,830) (663)
--------- ------- ---------
1997 and 1996; Note 8)
Income Before Provision for Income Taxes and Minority Interest 30,896 28,426 33,024
Provision for Income Taxes (Note 7) 11,902 11,011 12,684
Minority Interest Expense 999 989 446
--------- ------- ---------
Net Income $ 17,995 $16,426 $ 19,894
========= ======= =========
Earnings per Share (Note 14)
Basic $ .29 $ .27 $ .33
========= ======= =========
Diluted $ .29 $ .26 $ .31
========= ======= =========
Weighted Average Shares (Note 14)
Basic 61,612 61,384 61,040
========= ======= =========
Diluted 62,353 63,613 64,343
========= ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
Thermo Fibertek Inc. 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents (includes $74,447 and $62,550 under repurchase $115,472 $111,648
agreement with parent company)
Available-for-sale investments, at quoted market value (amortized cost 48,206 36,319
of $48,210 and $36,273; Note 2)
Accounts receivable, less allowances of $2,231 and $2,565 50,281 53,408
Unbilled contract costs and fees 2,968 4,422
Inventories 30,624 31,960
Prepaid and refundable income taxes (includes $940 due from parent 6,806 7,457
company in 1997; Note 7)
Other current assets 1,935 2,256
-------- --------
256,292 247,470
-------- --------
Property, Plant, and Equipment, at Cost, Net 31,736 28,336
-------- --------
Other Assets (Note 4) 12,309 14,437
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 3) 126,763 128,695
-------- --------
$427,100 $418,938
======== ========
3
Thermo Fibertek Inc. 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 21,548 $ 25,755
Accrued payroll and employee benefits 10,273 10,588
Billings in excess of contract costs and fees 5,846 5,548
Accrued warranty costs 5,830 8,620
Customer deposits 3,154 1,906
Other accrued expenses 14,916 16,606
Due to parent company and affiliated companies 1,279 1,451
--------- ---------
62,846 70,474
--------- ---------
Deferred Income Taxes and Other Deferred Items (Note 7) 6,202 4,267
--------- ---------
Subordinated Convertible Debentures (Note 8) 153,000 153,000
--------- ---------
Minority Interest 303 290
--------- ---------
Commitments and Contingencies (Note 10)
Common Stock of Subsidiary Subject to Redemption ($54,762 redemption 53,801 52,812
value; Note 1) --------- ---------
Shareholders' Investment (Notes 5 and 6):
Common stock, $.01 par value, 150,000,000 shares authorized; 63,379,337 634 633
and 63,331,887 shares issued
Capital in excess of par value 78,731 81,865
Retained earnings 100,602 82,607
Treasury stock at cost, 2,238,830 and 1,820,709 shares (21,286) (19,494)
Accumulated other comprehensive items (Note 15) (7,733) (7,516)
--------- ---------
150,948 138,095
--------- ---------
$ 427,100 $ 418,938
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Thermo Fibertek Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------ ---------- ----------- ----------
Operating Activities
Net income $ 17,995 $ 16,426 $ 19,894
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,062 7,545 4,983
Provision for losses on accounts receivable 248 362 (450)
Minority interest expense 999 989 446
Gain on sale of property (536) - -
Restructuring costs (Note 11) - 1,063 -
Deferred income tax expense 2,090 1,976 2,017
Other noncash items (256) (479) (316)
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 3,702 (1,878) 5,724
Inventories and unbilled contract costs and fees 3,277 (1,183) 3,139
Other current assets 836 (625) 1,468
Accounts payable (5,787) (3,344) (3,436)
Other current liabilities 307 68 (6,417)
--------- ---------- ---------
Net cash provided by operating activities 31,937 20,920 27,052
--------- ---------- ---------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (964) (103,403) (12,066)
Purchases of available-for-sale investments (70,882) (48,050) -
Proceeds from sale and maturities of available-for-sale 59,200 12,256 2,750
investments
Purchases of property, plant, and equipment (7,773) (3,793) (3,936)
Proceeds from sale of property, plant, and equipment 1,586 60 581
Advances under notes receivable (Note 4) (2,910) (3,000) (6,000)
Repayment of notes receivable (Note 4) 1,250 3,000 -
Other (458) 57 (731)
--------- ---------- ---------
Net cash used in investing activities (20,951) (142,873) (19,402)
--------- ---------- ---------
Financing Activities
Purchase of Company and subsidiary common stock (6,598) (23,951) -
Net proceeds from issuance of Company and subsidiary common 405 1,069 55,923
stock (Note 1)
Net proceeds from issuance of subordinated convertible - 149,768 -
debentures (Note 8)
Issuance of obligations to parent company (Note 8) - 110,000 -
Repayment of obligations to parent company (Note 8) - (110,000) (10,400)
Repayment of long-term obligations - (32) -
--------- ---------- ---------
Net cash provided by (used in) financing activities $ (6,193) $ 126,854 $ 45,523
--------- ---------- ---------
5
Thermo Fibertek Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------ ---------- ----------- ----------
Exchange Rate Effect on Cash $ (969) $ (3,058) $ (396)
--------- ---------- ---------
Increase in Cash and Cash Equivalents 3,824 1,843 52,777
Cash and Cash Equivalents at Beginning of Year 111,648 109,805 57,028
--------- ---------- ---------
Cash and Cash Equivalents at End of Year $ 115,472 $ 111,648 $ 109,805
========= ========== =========
Cash Paid For
Interest $ 6,917 $ 1,741 $ 662
Income taxes $ 5,431 $ 10,593 $ 12,625
Noncash Activities
Fair value of assets of acquired companies $ 1,161 $ 127,649 $ 12,310
Cash paid for acquired companies (964) (103,415) (12,070)
--------- ---------- ---------
Liabilities assumed of acquired companies $ 197 $ 24,234 $ 240
========= ========== =========
Conversion of subordinated convertible note by parent company $ - $ 15,000 $ -
(Note 8) ========= ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
Thermo Fibertek Inc. 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Comprehensive Income
Net Income $ 17,995 $ 16,426 $ 19,894
--------- --------- ---------
Other Comprehensive Items (Note 15):
Foreign currency translation adjustment (185) (6,011) 306
Unrealized gain (loss) on available-for-sale investments, net of (32) 29 (2)
--------- --------- ---------
reclassification adjustment
(217) (5,982) 304
--------- --------- ---------
$ 17,778 $ 10,444 $ 20,198
========= ========== =========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 633 $ 612 $ 406
Activity under employees' and directors' stock plans 1 2 2
Conversion of subordinated convertible note by parent company - 19 -
(Note 8)
Effect of three-for-two stock split - - 204
--------- --------- ---------
Balance at end of year 634 633 612
--------- --------- ---------
Capital in Excess of Par Value:
Balance at beginning of year 81,865 65,951 65,222
Activity under employees' and directors' stock plans (4,401) 42 54
Tax benefit related to employees' and directors' stock plans 1,267 363 781
Conversion of subordinated convertible note by parent company - 14,981 -
(Note 8)
Effect of purchases of subsidiary common stock (Note 1) - 528 98
Effect of three-for-two stock split - - (204)
--------- --------- ---------
Balance at end of year 78,731 81,865 65,951
--------- --------- ---------
Retained Earnings:
Balance at beginning of year 82,607 66,181 46,287
Net income 17,995 16,426 19,894
--------- --------- ---------
Balance at end of year 100,602 82,607 66,181
--------- --------- ---------
Treasury Stock:
Balance at beginning of year (19,494) (360) (446)
Purchases of Company common stock (6,598) (20,159) -
Activity under employees' and directors' stock plans 4,806 1,025 86
--------- --------- ---------
Balance at end of year (21,286) (19,494) (360)
--------- --------- ---------
Accumulated Other Comprehensive Items (Note 15):
Balance at beginning of year (7,516) (1,534) (1,838)
Other comprehensive items (217) (5,982) 304
--------- --------- ---------
Balance at end of year (7,733) (7,516) (1,534)
--------- --------- ---------
$ 150,948 $ 138,095 $ 130,850
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
Thermo Fibertek Inc. 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Fibertek Inc. (the Company) designs and manufactures processing
machinery, accessories, and water-management systems for the paper and paper
recycling industries. The Company's principal products include custom-engineered
systems and equipment for the preparation of wastepaper for conversion into
recycled paper; accessory equipment and related consumables important to the
efficient operation of papermaking machines; and water-management systems
essential for draining, purifying, and recycling process water.
Relationship with Thermo Electron Corporation
The Company was incorporated in November 1991 as a wholly owned subsidiary
of Thermo Electron. As of January 2, 1999, Thermo Electron owned 55,845,630
shares of the Company's common stock, representing 91% of such stock
outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
its wholly owned subsidiaries, its 71%-owned public subsidiary Thermo Fibergen
Inc., and its 95%-owned Fiberprep, Inc. subsidiary. All material intercompany
accounts and transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, 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 Lamort's
financial statements. Fiscal years 1998 and 1996 each included 52 weeks; fiscal
1997 included 53 weeks.
Revenue Recognition
The Company recognizes the majority of its revenues upon shipment of its
products. The Company provides a reserve for its estimate of warranty costs at
the time of shipment. In addition, revenues and profits on large contracts are
recognized using the percentage-of-completion method. Revenues recorded under
the percentage-of-completion method were $45,114,000 in 1998, $37,733,000 in
1997, and $31,066,000 in 1996. 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.
8
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Income Taxes
The Company and Thermo Electron have a tax allocation agreement under
which the Company and its subsidiaries, exclusive of its foreign operations and
its Fiberprep and Thermo Fibergen subsidiaries, are included in the consolidated
federal and certain state income tax returns filed by Thermo Electron. The
agreement provides that in years in which these entities have taxable income,
the Company will pay to Thermo Electron amounts comparable to the taxes it would
have paid if the Company had filed separate tax returns. If Thermo Electron's
equity ownership of the Company were to drop below 80%, the Company would be
required to file its own federal income tax returns.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted earnings
per share have been computed assuming the conversion of convertible obligations
and the elimination of the related interest expense, and the exercise of stock
options, as well as their related income tax effects.
Cash and Cash Equivalents
At year-end 1998 and 1997, $74,447,000 and $62,550,000, respectively, 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 corporate notes, U.S. government-agency securities,
commercial paper, money market funds, and other marketable securities, in the
amount of at least 103% of such obligation. The Company's funds subject to the
repurchase agreement 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. The Company's
cash equivalents also include $15,964,000 of U.S. government-agency securities
at year-end 1997 and money market fund investments of the Company's foreign
subsidiaries at year-end 1998 and 1997, 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:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Raw Materials and Supplies $14,848 $ 14,609
Work in Process 5,341 6,426
Finished Goods 10,435 10,925
------- --------
$30,624 $ 31,960
======= ========
9
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 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:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Land $ 3,172 $ 3,070
Fiber-recovery and Water-clarification Facility 3,500 -
Buildings 20,513 19,493
Machinery, Equipment, and Leasehold Improvements 41,476 38,496
------- --------
68,661 61,059
Less: Accumulated Depreciation and Amortization 36,925 32,723
------- --------
$31,736 $ 28,336
======= ========
Other Assets
Other assets in the accompanying balance sheet includes intangible assets,
deferred debt expense, and a note receivable (Note 4). Intangible assets include
the costs of a noncompete agreement entered into in connection with the
acquisition of the stock-preparation business of Black Clawson Company and its
affiliates and patents that are amortized using the straight-line method over
periods of 10 and 12 years, respectively. The aggregate carrying value of these
assets is $3,317,000 and $3,700,000, net of accumulated amortization of $683,000
and $300,000 at year-end 1998 and 1997, respectively.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method principally over 40 years.
Accumulated amortization was $9,193,000 and $5,726,000 at year-end 1998 and
1997, 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 one share of Thermo Fibergen common stock at $12.75
per share in September 2000 or September 2001. A redemption right may only be
exercised if the holder owns a share of Thermo Fibergen common stock at that
time. The redemption rights carry terms that generally provide for their
expiration if the closing price of Thermo Fibergen's common stock exceeds $19
1/8 for 20 of any 30 consecutive trading days prior to September 2001. The
difference between the redemption value and the original carrying amount of
common stock of subsidiary subject to redemption is accreted over the period
ending September 2000, which corresponds with the first redemption period. The
accretion is charged to minority interest expense in the accompanying statement
of income. The redemption rights are guaranteed on a subordinated basis by
Thermo Electron. The Company has agreed to reimburse Thermo Electron in the
event Thermo Electron is required to make a payment under the guarantee.
10
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
During 1997, the Company purchased 419,950 shares of Thermo Fibergen
common stock, resulting in a reduction of common stock of subsidiary subject to
redemption and an increase in capital in excess of par value.
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 and British pounds sterling. 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.
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 1997 and 1996 have been reclassified to conform to the
presentation in the 1998 financial statements.
2. Available-for-sale Investments
The Company's debt securities are considered available-for-sale
investments in the accompanying balance sheet and are carried at market value,
with the difference between cost and market value, net of related tax effects,
recorded in the "Accumulated other comprehensive items" component of
shareholders' investment.
11
2. Available-for-sale Investments (continued)
The aggregate market value, cost basis, and gross unrealized gains and
losses of available-for-sale investments by major security type are:
(In thousands) Gross Gross
Market Cost Unrealized Unrealized
Value Basis Gains Losses
- --------------------------------------------------- ------------- ------------- ------------- -------------
1998
Government-agency Securities $47,494 $47,498 $ 6 $ (10)
Other 712 712 - -
------- ------- ------- --------
$48,206 $48,210 $ 6 $ (10)
======= ======= ======= ========
1997
Government-agency Securities $35,826 $35,780 $ 46 $ -
Other 493 493 - -
------- ------- ------- --------
$36,319 $36,273 $ 46 $ -
======= ======= ======= ========
Available-for-sale investments in the accompanying 1998 balance sheet
includes $33,523,000 with contractual maturities of one year or less and
$14,683,000 with contractual maturities of more than one year through five
years. 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.
3. Acquisitions
In July 1998, the Company acquired Goslin Birmingham, a division of Green
Bay Packaging Inc., for $1,296,000 in cash, which is subject to a post-closing
adjustment. Goslin manufactures evaporators and recausticizing systems that
concentrate and recycle process chemicals used during pulping, and products that
remove condensate gases.
In May 1997, the Company acquired a majority of the assets, subject to
certain liabilities, of the stock-preparation business of Black Clawson Company
and affiliates. In August 1997, the Company acquired the remaining assets of the
stock-preparation business of Black Clawson Company and affiliates. This
business has been renamed Thermo Black Clawson. The aggregate purchase price was
approximately $103.1 million in cash, which is net of a purchase price
adjustment of $0.3 million in 1998. Pursuant to a promissory note, the Company
borrowed $110.0 million from Thermo Electron to finance this acquisition (Note
8). The note was repaid in July 1997 with the net proceeds from the sale of
long-term subordinated convertible debentures. Thermo Black Clawson is a leading
supplier of recycling equipment used in processing fiber for the production of
"brown paper," such as that used in the manufacture of corrugated boxes.
In July 1996, Thermo Fibergen acquired substantially all of the assets,
subject to certain liabilities, of Granulation Technology, Inc. and Biodac, a
division of Edward Lowe Industries, Inc. for $12,070,000 in cash. This business
has been renamed GranTek Inc.
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.
The aggregate cost of these acquisitions exceeded the estimated fair value of
the acquired net assets by $97,482,000, which is being amortized principally
over 40 years. Allocation of the purchase price for these acquisitions was based
on estimates of the fair value of the net assets acquired.
12
3. Acquisitions (continued)
In connection with these acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels and acquired overmarket leases. In connection with these restructuring
activities, as part of the cost of the acquisitions, the Company established
reserves as detailed below, primarily for severance and acquired overmarket
leases. In accordance with EITF 95-3, the Company finalized, and for the Goslin
acquisition intends to finalize, its restructuring plans no later than one year
from the respective dates of the acquisitions. Unresolved matters at January 2,
1999, included completion of planned severances. A summary of the changes in
accrued acquisition expenses, which are included in other accrued expenses in
the accompanying balance sheet, is:
Overmarket
(In thousands) Severance Leases Other Total
- ----------------------------------------------- -------------- -------------- -------------- --------------
Balance at December 30, 1995 $ 45 $ - $ 26 $ 71
Reserves established - - - -
Usage (45) - (26) (71)
-------- -------- -------- --------
Balance at December 28, 1996 - - - -
Reserves established 654 227 64 945
Usage (139) (114) (17) (270)
-------- -------- -------- --------
Balance at January 3, 1998 515 113 47 675
Reserves established 80 - - 80
Usage (227) (113) (47) (387)
Decrease due to finalization of (219) - - (219)
-------- -------- -------- --------
restructuring plan, recorded as a
decrease to cost in excess of net
assets of acquired companies
Balance at January 2, 1999 $ 149 $ - $ - $ 149
======== ======== ======== ========
Based on unaudited data, the following table presents selected financial
information for the Company and Thermo Black Clawson on a pro forma basis for
1997 and 1996, assuming the companies had been combined since the beginning of
1996. The effect of acquisitions not included in the pro forma data was not
material to the Company's results of operations.
(In thousands except per share amounts) 1997 1996
----------------------------------------------------------------------- ---------- ---------- ----------
Revenues $282,376 $290,636
Net Income 16,093 17,373
Earnings per Share:
Basic .26 .28
Diluted .25 .27
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of Thermo
Black Clawson been made at the beginning of 1996.
13
4. Note Receivable
During 1996, the Company loaned $6,000,000 to Tree-Free Fiber Company LLC
(Tree-Free) in connection with a proposed engineering, procurement, and
construction project. This project was delayed due to weakness in pulp prices,
and will not proceed as a result of Tree-Free's insolvency. Tree-Free was unable
to repay the note upon its original maturity. The note is secured by pari-passu
liens on a tissue mill in Maine. In December 1997, a receiver was appointed by
the Superior Court of Maine to preserve and protect the collateral for the loans
made by the Company and other lenders to Tree-Free. In May 1998, the Company
purchased an assignment of Tree-Free's secured indebtedness to the other
pari-passu lender for $2,910,000. In June 1998, the Company conducted a
foreclosure sale of the tissue mill and was the successful bidder and executed a
purchase and sale agreement. The Company intends to assign its right to purchase
the mill to a third party as soon as practicable or, alternatively, to purchase
the mill and operate it with the intent of selling it as a going concern. In
October 1998, the stock of a mill located in Mexico, which had also secured the
note, was sold and the proceeds of $1,250,000 were paid to the Company and
recorded as a reduction of the carrying amount of the notes. The Company
believes that the aggregate of the fair value of the tissue mill, net of amounts
owed by Tree-Free to a senior lender, is in excess of the carrying amount of the
notes, net of established reserves. However, no assurance can be given as to the
outcome of a sale of the tissue mill, the timing of any such sale, or the amount
of the proceeds that may be received therefrom.
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, adopted in 1991, 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. As of year-end 1998, only nonqualified stock options
have been awarded under these plans. The option recipients and the terms of
options granted under these plans are determined by the Board Committee.
Generally, options granted to date are exercisable immediately, but are subject
to certain transfer restrictions and the right of the Company to repurchase
shares issued upon exercise of the options at the exercise price, upon certain
events. The restrictions and repurchase rights generally lapse ratably over a
one- to ten-year period, depending on the term of the option, which may range
from five- to twelve years. In addition, under certain options, shares acquired
upon exercise are restricted from resale until retirement or other events.
Nonqualified options may be granted at any price determined by the Board
Committee, although incentive stock options must be granted at not less than the
fair market value of the Company's stock on the date of grant. To date, all
options have been granted at fair market value. The Company also has a
directors' stock option plan that provides for the grant of stock options to
outside directors pursuant to a formula approved by the Company's shareholders.
Options awarded under this plan are exercisable six months after the date of
grant and generally expire three or seven years after the date of grant. In
addition to the Company's stock-based compensation plans, certain officers and
key employees may also participate in the stock-based compensation plans of
Thermo Electron.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 690,000 shares at a weighted average exercise price of $10.68 per share
elected to participate in this exchange and, as a result, received options to
purchase 345,000 shares of Company common stock at $5.63 per share, which are
included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
14
5. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is:
1998 1997 1996
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- --------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 3,988 $ 6.24 3,570 $ 4.81 3,783 $4.52
Granted 957 6.82 845 11.00 102 11.80
Exercised (646) 3.11 (396) 3.21 (282) 3.25
Forfeited (120) 9.23 (31) 9.85 (33) 6.15
Canceled due to exchange (690) 10.68 - - - -
------ ----- ------
Options Outstanding, End of Year 3,489 $ 6.00 3,988 $ 6.24 3,570 $4.81
====== ====== ===== ====== ====== =====
Options Exercisable 3,486 $ 6.00 3,988 $ 6.24 3,570 $4.81
====== ====== ===== ====== ====== =====
Options Available for Grant 1,449 1,596 2,410
====== ===== ======
A summary of the status of the Company's stock options at January 2, 1999,
is:
Options Outstanding
---------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ------------------------------------------------------------- -------------- ---------------- --------------
$ 3.00 - $ 5.83 1,773 3.3 years $ 3.95
5.84 - 8.66 1,157 5.6 years 6.55
8.67 - 11.49 529 7.7 years 11.21
11.50 - 14.32 30 9.2 years 14.32
-----
$ 3.00 - $14.32 3,489 4.8 years $ 6.00
=====
The information disclosed above for options outstanding at January 2,
1999, does not differ materially for options exercisable.
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. Prior to the 1998 program year, the applicable shares of
common stock could be purchased at the end of a 12-month period at 95% of the
fair market value at the beginning of the period, and the shares purchased were
subject to a six-month resale restriction. Beginning in November 1998, the
applicable shares of 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. Shares are purchased
through payroll deductions of up to 10% of each participating employee's gross
wages. No shares of Company common stock were issued under this program during
1998. During 1997 and 1996, the Company issued 29,000 shares and 31,000 shares,
respectively, of its common stock under this program.
15
5. Employee Benefit Plans (continued)
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after 1994 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income and earnings per
share would have been:
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Net Income:
As reported $17,995 $ 16,426 $19,894
Pro forma 16,668 15,552 19,454
Basic Earnings per Share:
As reported .29 .27 .33
Pro forma .27 .25 .32
Diluted Earnings per Share:
As reported .29 .26 .31
Pro forma .27 .25 .31
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $2.32,
$5.25, and $3.89 in 1998, 1997, and 1996, 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:
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Volatility 35% 35% 26%
Risk-free Interest Rate 4.6% 6.6% 5.9%
Expected Life of Options 4.2 years 6.4 years 4.7 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
The majority of the Company's domestic subsidiaries participate in Thermo
Electron's 401(k) savings plan. Contributions to the plan are made by both the
employee and the Company. Company contributions are based upon the level of
employee contributions. For this plan, the Company contributed and charged to
expense $974,000, $719,000, and $449,000 in 1998, 1997, and 1996, respectively.
16
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 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 0-11% of the subsidiary's net
profit after taxes reduced by 5% of its shareholders' investment. The voluntary
plan provides for the subsidiary to contribute up to 3% of profit after taxes if
operating income exceeds 5% of its revenues. For these plans, the Company
contributed and charged to expense $1,119,000, $1,125,000, and $1,263,000 in
1998, 1997, and 1996, respectively.
Other Retirement Plans
In addition, certain of the Company's subsidiaries offer other retirement
plans in addition to the Thermo Electron 401(k) savings plan and profit-sharing
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
$1,285,000, $1,636,000, and $1,989,000 in 1998, 1997, and 1996, respectively.
6. Common Stock
At January 2, 1999, the Company had reserved 18,316,537 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:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Domestic $19,751 $ 17,017 $17,515
Foreign 11,145 11,409 15,509
------- -------- -------
$30,896 $ 28,426 $33,024
======= ======== =======
17
7. Income Taxes (continued)
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Currently Payable:
Federal $ 4,491 $ 3,624 $ 5,672
Foreign 4,282 4,367 3,382
State 1,039 1,044 1,613
------- -------- -------
9,812 9,035 10,667
------- -------- -------
Net Deferred (Prepaid):
Federal 1,939 1,852 142
Foreign (71) (338) 1,813
State 222 462 62
------- -------- -------
2,090 1,976 2,017
------- -------- -------
$11,902 $ 11,011 $12,684
======= ======== =======
The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the Company's common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect
$1,267,000, $363,000, and $781,000 of such benefits from exercises of stock
options that have been allocated to capital in excess of par value in 1998,
1997, and 1996, respectively.
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before provision for income taxes and minority
interest due to:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Provision for Income Taxes at Statutory Rate $10,814 $ 9,949 $11,558
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 820 980 1,089
Foreign tax rate and tax regulation differential 310 36 (233)
Nondeductible expenses 178 163 150
Other (220) (117) 120
------- -------- -------
$11,902 $ 11,011 $12,684
======= ======== =======
18
7. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------- --------- --------
Prepaid Income Taxes:
Reserves and accruals $ 5,076 $ 5,298
Inventory basis difference 1,439 1,253
Accrued compensation 193 227
Allowance for doubtful accounts 77 308
Other 21 -
-------- -------
$ 6,806 $ 7,086
======== =======
Deferred Income Taxes, Net:
Amortization of intangible assets $ 3,183 $ 1,837
Depreciation 663 283
Other 633 549
-------- -------
$ 4,479 $ 2,669
======== =======
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
$63.8 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. Short- and Long-term Obligations
In connection with the acquisition of Thermo Black Clawson, the Company
borrowed $110.0 million from Thermo Electron in May 1997. The promissory note
bore interest at the 90-day Commercial Paper Composite Rate plus 25 basis
points. In July 1997, the Company issued and sold at par $153.0 million
principal amount of 4 1/2% subordinated convertible debentures due 2004 for net
proceeds of approximately $149.8 million. The debentures are convertible into
shares of the Company's common stock at a conversion price of $12.10 per share
and are guaranteed on a subordinated basis by Thermo Electron. In July 1997, the
Company repaid the $110.0 million promissory note due to Thermo Electron with a
portion of the net proceeds from the sale of subordinated convertible
debentures.
In February 1994, the Company issued to Thermo Electron a $15.0 million
principal amount 3 1/2% subordinated convertible note due August 1997,
convertible at $7.94 per share. The note was converted by Thermo Electron during
1997 for 1,888,122 shares of Company common stock.
In January 1995, in connection with a partial redemption of Fiberprep
stock, Fiberprep issued to Thermo Electron a $10.4 million promissory note due
January 1996, which bore interest at the Commercial Paper Composite Rate plus 25
basis points and was repaid in 1996.
See Note 12 for fair value information pertaining to the Company's
long-term obligations.
19
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 currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In 1997 and 1996, the Company paid an amount equal to
1.0% of the Company's revenues. For these services, the Company was charged
$1,979,000, $2,396,000, and $1,922,000 in 1998, 1997, and 1996, 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.
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.
The subcontract was substantially completed by Fiberprep during 1996. Under this
subcontract, the Company recorded revenues of $1,876,000 during 1996.
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 Contingencies
Operating Leases
The Company occupies office and operating facilities under various
operating leases. The accompanying statement of income includes expenses from
operating leases of $1,862,000, $1,998,000, and $1,252,000 in 1998, 1997, and
1996, respectively. The future minimum payments due under noncancelable
operating leases as of January 2, 1999, are $1,079,000 in 1999; $546,000 in
2000; $360,000 in 2001; $162,000 in 2002; and $3,000 in 2003. Total future
minimum lease payments are $2,150,000.
Long-term Contract
In December 1997, Thermo Fibergen entered into a ten-year contract with a
paper mill to provide fiber-recovery and water-clarification services to the
mill, and also entered into an engineering, procurement, and construction
contract for the construction of the facility to provide such services. In July
1998, Thermo Fibergen completed construction of, and began operating, the
fiber-recovery and water-clarification facility, providing clean water and long
fiber to the mill. In addition, Thermo Fibergen and the paper mill have entered
into lease and services agreements, under which it leases land from the paper
mill for a nominal fee and the paper mill provides certain utilities and
services. Thermo Fibergen provides the paper mill with fiber-recovery and
water-clarification services for established fixed fees, subject to certain
adjustments and increases upon the attainment of certain performance goals by
Thermo Fibergen. The contract may be canceled by either party within six months
after the end of the fourth year of the contract, or thereafter by the paper
mill with one year's notice, if certain benefits or profitability levels are not
achieved. If either party elects to terminate the agreement, the paper mill will
be required to purchase the facility from Thermo Fibergen at its net book value.
20
10. Commitments and Contingencies (continued)
Contingencies
In the ordinary course of business, the Company is often required to issue
limited performance guarantees relating to its equipment and systems. The
Company typically limits its liability under these guarantees to the cost of the
equipment. The Company believes that it has adequate reserves for any potential
liability in connection with such guarantees.
11. Restructuring Costs
During 1997, the Company recorded restructuring costs of $1,063,000
relating to the consolidation of operations at its Fiberprep, Inc. subsidiary
and Lamort Paper Services Ltd. subsidiary (a subsidiary of E&M Lamort, S.A.
located in the United Kingdom) into the operations of Thermo Black Clawson. The
restructuring charges, which were accounted for in accordance with EITF 94-3,
related primarily to severance for 34 employees whose employment was terminated
during 1997 and abandoned-facility payments. Of the total restructuring costs,
$197,000 remained accrued at year-end 1997, of which $163,000 was paid during
1998.
12. 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, subordinated
convertible debentures, common stock of subsidiary subject to redemption, and
forward foreign exchange contracts. The carrying amounts of accounts receivable,
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:
1998 1997
-------------------- ---------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
Subordinated Convertible Debentures $153,000 $130,433 $153,000 $ 160,650
Common Stock of Subsidiary Subject to Redemption $ 53,801 $ 53,626 $ 52,812 $ 54,717
Off-balance-sheet Financial Instruments:
Forward foreign exchange contracts payable $ 1 $ 22
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 $3,284,000 and $1,728,000 at year-end 1998 and 1997, 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.
21
13. Business Segment and Geographical Information
The Company organizes and manages its business by individual functional
operating entity. The Company has combined its operating entities into three
segments: Pulp and Papermaking Equipment and Systems, Dryers and
Pollution-control Equipment, and Water- and Fiber-recovery Services and
Products. In classifying operational entities into a particular segment the
Company aggregated businesses with similar economic characteristics, products
and services, production processes, customers, and methods of distribution.
The Company's Pulp and Papermaking Equipment and Systems segment designs
and manufactures processing machinery, accessories, and water-management systems
for the paper and paper recycling industries. Principal products manufactured by
this segment include custom-engineered systems and equipment for the preparation
of wastepaper for conversion into recycled paper; accessory equipment and
related consumables important to the efficient operation of papermaking
machines; and water-management systems essential for draining, purifying, and
recycling process water. Revenues from the stock-preparation equipment product
line were $107,518,000, $88,848,000, and $53,948,000 in 1998, 1997, and 1996,
respectively. Revenues from the accessories product line were $77,817,000,
$82,970,000, and $82,173,000 in 1998, 1997, and 1996, respectively. Revenues
from the water-management product line were $36,908,000, $44,106,000, and
$39,950,000 in 1998, 1997, and 1996, respectively.
The Dryers and Pollution-control Equipment segment, which consists of the
Company's Thermo Wisconsin, Inc. subsidiary, manufactures and markets dryers and
pollution-control equipment for the printing, papermaking, and converting
industries. In February 1999, the Company sold its Thermo Wisconsin subsidiary
(Note 17).
The Water- and Fiber-recovery Services and Products segment, which
consists of the Company's Thermo Fibergen subsidiary, designs, builds, owns, and
operates plants to help pulp and paper mill customers "close the loop" in their
water and solids systems on a long-term contract basis. The plants clean and
recycle water and long fiber for reuse in the papermaking process. In July 1998,
the Company completed construction, and began operating, its first plant (Note
10). In addition, through its GranTek subsidiary, Thermo Fibergen employs
patented technology to produce absorbing granules from papermaking byproducts.
These granules are used as agricultural carriers, oil- and grease-absorbents,
and cat box fillers.
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Business Segment Information
Revenues:
Pulp and Papermaking Equipment and Systems (a) $ 223,799 $217,270 $ 178,004
Dryers and Pollution-control Equipment (b) 19,513 19,724 14,988
Water- and Fiber-recovery Services and Products 5,276 4,836 2,223
Intersegment sales elimination (c) (1,162) (2,188) (3,006)
--------- ------- ---------
$ 247,426 $239,642 $ 192,209
========= ======== =========
Income Before Provision for Income Taxes and Minority Interest:
Pulp and Papermaking Equipment and Systems $ 33,937 $30,060 $ 33,390
Dryers and Pollution-control Equipment 2,736 1,594 1,196
Water- and Fiber-recovery Services and Products (2,468) (2,424) (1,591)
Corporate (d) (3,857) (3,299) (2,876)
--------- ------- ---------
Total operating income 30,348 25,931 30,119
Interest income, net 548 2,495 2,905
--------- ------- ---------
$ 30,896 $28,426 $ 33,024
========= ======= =========
22
13. Business Segment and Geographical Information (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Total Assets:
Pulp and Papermaking Equipment and Systems $ 277,688 $276,784 $ 157,571
Dryers and Pollution-control Equipment 5,390 7,155 4,074
Water- and Fiber-recovery Services and Products 71,116 70,164 71,033
Corporate (e) 72,906 64,835 24,554
--------- ------- ---------
$ 427,100 $418,938 $ 257,232
========= ======== =========
Depreciation and Amortization:
Pulp and Papermaking Equipment and Systems $ 7,286 $ 5,996 $ 4,150
Dryers and Pollution-control Equipment 153 133 132
Water- and Fiber-recovery Services and Products 1,151 1,204 701
Corporate 472 212 -
--------- ------- ---------
$ 9,062 $ 7,545 $ 4,983
========= ======= =========
Capital Expenditures:
Pulp and Papermaking Equipment and Systems $ 3,442 $ 3,215 $ 3,109
Dryers and Pollution-control Equipment 197 201 116
Water- and Fiber-recovery Services and Products 4,134 377 711
--------- ------- ---------
$ 7,773 $ 3,793 $ 3,936
========= ======= =========
Geographical Information
Revenues (f):
United States $153,658 $150,998 $ 102,118
France 65,308 52,416 59,941
Other 39,636 47,266 38,650
Transfers among geographic areas (c) (11,176) (11,038) (8,500)
-------- ------- ---------
$247,426 $239,642 $ 192,209
======== ======== =========
Long-lived Assets (g):
United States $ 27,232 $23,119 $ 13,884
France 5,381 6,139 7,152
Other 4,844 5,304 5,686
-------- ------- ---------
$ 37,457 $34,562 $ 26,722
======== ======= =========
Export Revenues Included in United States Revenues Above (h) $ 24,244 $20,140 $ 11,060
======== ======= =========
(a) Includes intersegment sales of $526,000, $198,000, and $7,000 in 1998, 1997,
and 1996, respectively.
(b) Includes intersegment sales of $636,000, $1,990,000, and $2,999,000 in 1998,
1997, and 1996, respectively.
(c) Intersegment sales and transfers among geographic areas are accounted for at
prices that are representative of transactions with unaffiliated parties.
(d) Primarily general and administrative expenses.
(e) Primarily cash, cash equivalents, and available-for-sale investments. (f)
Revenues are attributed to countries based on selling location. (g) Includes
property, plant, and equipment, net and other long-term tangible assets. (h) In
general, export revenues are denominated in U.S. dollars.
23
14. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Basic
Net Income $17,995 $ 16,426 $19,894
------- -------- -------
Weighted Average Shares 61,612 61,384 61,040
------- -------- -------
Basic Earnings per Share $ .29 $ .27 $ .33
======= ======== =======
Diluted
Net Income $17,995 $ 16,426 $19,894
Effect of:
Convertible obligations - 188 315
Majority-owned subsidiary's dilutive securities (33) (76) -
------- -------- -------
Income Available to Common Shareholders, as Adjusted $17,962 $ 16,538 $20,209
------- -------- -------
Weighted Average Shares 61,612 61,384 61,040
Effect of:
Convertible obligations - 1,126 1,888
Stock options 741 1,103 1,415
------- -------- -------
Weighted Average Shares, as Adjusted 62,353 63,613 64,343
------- -------- -------
Diluted Earnings per Share $ .29 $ .26 $ .31
======= ======== =======
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of January 2, 1999, there were 818,000 such options
outstanding, with exercise prices of $6.28 to $14.32 per share.
In addition, the computation of diluted earnings per share for 1998
excludes the effect of assuming the conversion of the Company's $153.0 million
principal amount of 4 1/2% subordinated convertible debentures, convertible at
$12.10 per share, because the effect would be antidilutive.
15. Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income 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.
24
15. Comprehensive Income (continued)
Accumulated other comprehensive items in the accompanying consolidated
balance sheet consist of the following:
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------- ---------- ----------
Cumulative Translation Adjustment $(7,730) $(7,545)
Net Unrealized Gain (Loss) on Available-for-sale Investments (3) 29
------- -------
$(7,733) $(7,516)
======= =======
16. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 First Second Third Fourth
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $62,330 $63,583 $59,678 $61,835
Gross Profit 25,278 26,119 23,976 24,791
Net Income 4,251 5,328 4,157 4,259
Earnings per Share:
Basic .07 .09 .07 .07
Diluted .07 .08 .07 .07
1997 First Second(a) Third Fourth
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $44,667 $54,511 $67,606 $72,858
Gross Profit 19,131 21,861 25,270 28,221
Net Income 3,460 3,759 3,594 5,613
Earnings per Share:
Basic .06 .06 .06 .09
Diluted .05 .06 .06 .09
(a) Reflects the May 1997 acquisition of Thermo Black Clawson and borrowings to
finance such acquisition.
17. Subsequent Event
In February 1999, the Company sold its Thermo Wisconsin subsidiary for
$13.0 million in cash, which is subject to a post-closing adjustment. Thermo
Wisconsin's unaudited revenues to external customers and net income in 1998 were
$18,877,000 and $1,547,000, respectively. Thermo Wisconsin manufactured and
marketed dryers and pollution-control equipment.
25
Thermo Fibertek Inc. 1998 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Fibertek Inc.:
We have audited the accompanying consolidated balance sheet of Thermo
Fibertek Inc. (a Delaware corporation and 91%-owned subsidiary of Thermo
Electron Corporation) and subsidiaries as of January 2, 1999, and January 3,
1998, and the related consolidated statements of income, comprehensive income
and shareholders' investment, and cash flows for each of the three years in the
period ended January 2, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo
Fibertek Inc. and subsidiaries as of January 2, 1999 and January 3, 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended January 2, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 10, 1999
26
Thermo Fibertek Inc. 1998 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company operates in three segments: Pulp and Papermaking Equipment and
Systems, Dryers and Pollution-control Equipment, and Water- and Fiber-recovery
Services and Products. The Company's Pulp and Papermaking Equipment and Systems
(Papermaking Equipment) segment designs and manufactures stock-preparation
equipment, accessories, and water-management systems for the paper and paper
recycling industries. Principal products manufactured by this segment include
custom-engineered systems and equipment for the preparation of wastepaper for
conversion into recycled paper; accessory equipment and related consumables
important to the efficient operation of papermaking machines; and
water-management systems essential for draining, purifying, and recycling
process water.
The Dryers and Pollution-control Equipment segment, which consisted of the
Company's Thermo Wisconsin, Inc. subsidiary, manufactures and markets dryers and
pollution-control equipment for the printing, papermaking, and converting
industries. In February 1999, the Company sold its Thermo Wisconsin subsidiary
for $13.0 million in cash, which is subject to a post-closing adjustment. Thermo
Wisconsin's unaudited revenues to external customers and net income in 1998 were
$18,877,000 and $1,547,000, respectively.
The Water- and Fiber-recovery Services and Products segment, which
consists of the Company's Thermo Fibergen subsidiary, designs, builds, owns, and
operates plants to help pulp and paper mill customers "close the loop" in their
water and solids systems on a long-term contract basis. The plants clean and
recycle water and long fiber for reuse in the papermaking process. In July 1998,
the Company completed construction, and began operating, its first plant (Note
10). In addition, through its GranTek subsidiary, Thermo Fibergen employs
patented technology to produce absorbing granules from papermaking byproducts.
These granules are used as agricultural carriers, oil- and grease-absorbents,
and cat box fillers.
The Company's manufacturing facilities are principally located in the
United States and France. The manufacturing facility in France is located at the
Company's E. & M. Lamort, S.A. subsidiary, which primarily manufactures
stock-preparation equipment and accessories.
During 1998, approximately 48% of the Company's sales were to customers
outside the United States, principally in Europe. The Company generally seeks to
charge its customers in the same currency as its operating costs. However, the
Company's financial performance and competitive position can be affected by
currency exchange rate fluctuations affecting the relationship between the U.S.
dollar and foreign currencies. The Company reduces its exposure to currency
fluctuations through the use of forward contracts. The Company enters into
forward contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than its subsidiaries' local currencies,
principally U.S. dollars and British pounds sterling. 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. In addition, the Company's results of
operations could be adversely affected by possible costs related to the Euro
currency's introduction, which began in January 1999.
27
Overview (continued)
The Company's sales to customers in Asia were approximately 5% of the
Company's total sales in 1998, a substantial portion of which were sales to
China. Asia, excluding China, is experiencing a severe economic crisis, which
has been characterized by sharply reduced economic activity and liquidity,
highly volatile foreign-currency-exchange and interest rates, and unstable stock
markets. The Company's sales to Asia have been adversely affected by the
unstable economic conditions in that region.
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 and to a number of other factors, including paper
and pulp production capacity. The paper industry entered a severe downcycle in
early 1996 and has not recovered. This cyclical downturn, which began adversely
affecting the Company's business during the second half of 1996, continues to
have an adverse effect on the Company's business. In addition, the unstable
economic conditions in Asia, and weakened currencies in that region, have
resulted in increased low-cost imports of pulp and paper in North America and
Europe resulting in reduced pricing. These factors have also resulted in a
decline in paper and pulp exports from North America and Europe to Asia. The
timing of the recovery of the financial condition of the paper industry cannot
be predicted.
Results of Operations
1998 Compared With 1997
Revenues increased to $247.4 million in 1998 from $239.6 million in 1997,
primarily due to an increase in revenues of $6.5 million at the Papermaking
Equipment segment. The increase in revenues at the Papermaking Equipment segment
was primarily due to an $18.9 million increase in revenues from the
stock-preparation equipment product line, offset in part by decreases in
revenues from the accessories and water-management product lines, primarily due
to a decrease in demand, and the unfavorable effects of foreign currency
translation. Revenues from the stock-preparation equipment product line
increased principally due to a $14.0 million increase in revenues from Thermo
Black Clawson, acquired in May 1997, due to its inclusion for the full
twelve-month period in 1998, offset in part by a decrease in its revenues due to
a decrease in demand in Asia, North America, and Europe. The primary reasons for
the decrease in demand in Asia, North America, and Europe are discussed in the
Overview. The unfavorable effects of currency translation due to the
strengthening of the U.S. dollar relative to foreign currencies in countries in
which the Company operates decreased revenues by $2.4 million in 1998.
The gross profit margin increased to 40% in 1998 from 39% in 1997,
primarily due an increase in gross profit margin at the Papermaking Equipment
segment as a result of improvement at Thermo Black Clawson. Gross profit margins
improved at Thermo Black Clawson principally as a result of a change in pricing
strategies and product mix, and an improved cost structure.
Selling, general, and administrative expenses as a percentage of revenues
were relatively unchanged at 25.6% in 1998, compared with 25.3% in 1997.
Research and development expenses were relatively unchanged at $7.0
million in 1998, compared with $6.8 million in 1997.
In 1998, the Company recorded gains of $0.5 million relating to the sale of
real estate. In 1997, restructuring costs of $1.1 million were recorded by the
Papermaking Equipment segment, primarily for severance costs relating to the
consolidation of the operations of two subsidiaries into the operations of
Thermo Black Clawson (Note 11).
Interest income increased to $8.0 million in 1998 from $7.3 million in
1997, primarily due to an increase in average invested balances, offset in part
by the effect of a decrease in interest rates in 1998. The increase in average
invested balances principally related to the net proceeds from the sale of
$153.0 million principal amount of 4 1/2% subordinated convertible debentures in
July 1997, of which $103.4 million was used to finance the acquisition of Thermo
Black Clawson (Note 8). Interest expense increased to $7.4 million in 1998 from
$4.8 million in 1997, principally as a result of the July 1997 issuance of
subordinated convertible debentures.
28
1998 Compared With 1997 (continued)
The effective tax rate was unchanged at 39% in 1998 and 1997. The
effective tax rate exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes.
Minority interest expense primarily represents accretion of Thermo
Fibergen's common stock subject to redemption.
In connection with a proposed engineering, procurement, and construction
project, the Company loaned $6.0 million to Tree-Free Fiber Company, LLC
(Tree-Free) during 1996. This project was delayed due to weakness in pulp
prices, and will not proceed as a result of Tree-Free's insolvency. Tree-Free
was unable to repay the note upon its original maturity. The note is secured by
pari-passu liens on a tissue mill in Maine. In December 1997, a receiver was
appointed by the Superior Court of Maine to preserve and protect the collateral
for the loans made by the Company and other lenders to Tree-Free. In May 1998,
the Company purchased an assignment of Tree-Free's secured indebtedness to the
other pari-passu lender for $2.9 million. In June 1998, the Company conducted a
foreclosure sale of the tissue mill and was the successful bidder and executed a
purchase and sale agreement. The Company intends to assign its right to purchase
the mill to a third party as soon as practicable or, alternatively, to purchase
the mill and operate it with the intent of selling it as a going concern. In
October 1998, the stock of a mill located in Mexico, which had also secured the
note, was sold and the proceeds of $1.3 million were paid to the Company and
recorded as a reduction of the carrying amount of the notes. The Company
believes that the aggregate of the fair value of the tissue mill, net of amounts
owed by Tree-Free to a senior lender, is in excess of the carrying amount of the
notes, net of established reserves. However, no assurance can be given as to the
outcome of a sale of the tissue mill, the timing of any such sale, or the amount
of the proceeds that may be received therefrom.
1997 Compared With 1996
Revenues increased 25% to $239.6 million in 1997 from $192.2 million in
1996, primarily due to the inclusion of $52.7 million in revenues from Thermo
Black Clawson, acquired in May 1997, and GranTek, acquired in July 1996.
Excluding the effect of the Thermo Black Clawson acquisition, revenues at the
Papermaking Equipment segment decreased $10.3 million, due to an $11.3 million
decrease in revenues from the stock-preparation equipment product line resulting
from a continuing decrease in demand, principally at the Company's Fiberprep
subsidiary, due to a severe drop in de-inked pulp prices in the summer of 1996
and a $6.3 million decrease in revenues due to the unfavorable effects of
currency translation, offset in part by an increase in revenues from the
accessories and water-management product lines due to an increase in demand.
Revenues at the Dryers and Pollution-control Equipment segment increased $4.7
million, principally due to large orders from various customers during 1997.
Revenues at the Fiber-recovery segment increased $2.6 million due to the
inclusion of revenues from GranTek for the full twelve-month period in 1997.
The gross profit margin decreased to 39% in 1997 from 43% in 1996,
primarily due a decrease in gross profit margin at the Papermaking Equipment
segment due to the inclusion of lower-margin revenues at Thermo Black Clawson.
Selling, general, and administrative expenses as a percentage of revenues
was unchanged at 25% in 1997 and 1996. At the Papermaking Equipment segment, the
impact of the inclusion of lower expenses as a percentage of revenues at Thermo
Black Clawson was offset by an increase in expenses as a percentage of revenues
at Lamort, principally due to a decrease in its revenues. Selling, general, and
administrative expenses as a percentage of revenues at the Fiber-recovery
segment increased because of an increase in expenses due to the hiring of
additional sales, marketing, and administrative staff to expand that business.
Research and development expenses increased to $6.8 million in 1997 from
$5.5 million in 1996, primarily due to an increase at the Papermaking Equipment
segment due to the inclusion of $1.1 million in expenses at Thermo Black Clawson
and at the Fiber-recovery segment due to continuing research and development
efforts relating to fiber-recovery and water-clarification systems.
29
1997 Compared With 1996 (continued)
During 1997, restructuring costs of $1.1 million were recorded by the
Papermaking Equipment segment for the reasons discussed in the results of
operations for 1998.
Interest income increased to $7.3 million in 1997 from $3.6 million in
1996, primarily due to an increase in average invested balances resulting from
the net proceeds from Thermo Fibergen's initial public offering in September
1996 and the remaining net proceeds from the sale of subordinated convertible
debentures in July 1997. Interest expense increased to $4.8 million in 1997 from
$0.7 million in 1996, as a result of borrowings from Thermo Electron to finance
the May 1997 acquisition of Thermo Black Clawson and the July 1997 issuance of
subordinated convertible debentures. The borrowings from Thermo Electron were
repaid with a portion of the net proceeds from the sale of subordinated
convertible debentures.
The effective tax rate was 39% in 1997 and 38% in 1996. These rates
exceeded the statutory federal income tax rate primarily due to the impact of
state income taxes. In 1996, the impact of state income taxes was offset in part
by the effect of lower foreign tax rates.
Minority interest expense primarily represents accretion of Thermo
Fibergen's common stock subject to redemption.
Liquidity and Capital Resources
Consolidated working capital was $193.4 million at January 2, 1999,
compared with $177.0 million at January 3, 1998. Included in working capital are
cash, cash equivalents, and available-for-sale investments of $163.7 million at
January 2, 1999, compared with $148.0 million at January 3, 1998. Of the $163.7
million balance at January 2, 1999, $55.0 million was held by Thermo Fibergen,
$7.2 million was held by Fiberprep, and the remainder was held by the Company
and its wholly owned subsidiaries. At January 2, 1999, $40.7 million of the
Company's cash and cash equivalents was held by its foreign subsidiaries.
Repatriation of this cash into the United States would be subject to foreign
withholding taxes and could also be subject to a U.S. tax.
During 1998, $31.9 million of cash was provided by operating activities.
Cash provided by a decrease in accounts receivable of $3.7 million was more than
offset by a $5.8 million reduction of accounts payable. The reduction in both
accounts receivable and accounts payable is due primarily to the reduction in
fourth quarter 1998 sales and related inventory activity as compared with the
fourth quarter of 1997.
During 1998, the Company's primary investing activities, excluding
available-for-sale investments activity, were the purchase of property, plant,
and equipment for $7.8 million and a net cash payment of $1.7 million under a
note receivable (Note 4). In July 1998, the Company acquired Goslin Birmingham,
a division of Green Bay Packaging Inc., a manufacturer of systems that recycle
chemicals used during the pulping process and products that remove condensate
gases. The $1.3 million purchase price for this business, which is subject to a
post-closing adjustment, was offset in part by a $0.3 million post-closing
adjustment relating to the 1997 acquisition of Thermo Black Clawson.
In February 1999, the Company sold its Thermo Wisconsin subsidiary for
approximately $13.0 million in cash, which is subject to a post-closing
adjustment (Note 17).
During 1998, the Company's financing activities used $6.2 million in cash.
The Company used $6.6 million to purchase Company common stock pursuant to
authorizations by the Company's Board of Directors. At January 2, 1999, the
Company had a remaining authorization to purchase 125,500 shares of Company
common stock, or the equivalent in outstanding convertible debentures, in open
market or negotiated transactions through July 15, 1999. In January 1999, the
Company's Board of Directors authorized the purchase of up to $10 million of
Company common stock, outstanding convertible debentures, or Thermo Fibergen
common stock in open market or negotiated transactions through January 22, 2000.
Any such purchases are funded from working capital.
Thermo Fibergen's common stock is subject to redemption in September 2000
or September 2001, the redemption value of which is $54.8 million.
30
Liquidity and Capital Resources (continued)
At January 2, 1999, the Company had $63.8 million of undistributed foreign
earnings. 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 1999, the Company plans to make expenditures for property, plant,
and equipment of approximately $5 million. In addition, Thermo Fibergen may make
capital expenditures for the construction of additional fiber-recovery
facilities. Construction of fiber-recovery facilities is dependent upon Thermo
Fibergen entering into long-term contracts with pulp and paper mills, under
which Thermo Fibergen will charge fees to process the mills' papermaking
byproducts. Thermo Fibergen currently has only one such agreement in place and
there is no assurance that Thermo Fibergen will be able to obtain such
additional contracts. The Company believes that its existing resources are
sufficient to meet the capital requirements of its existing operations for the
foreseeable future.
Market Risk
The Company is exposed to market risk from changes in interest rates,
equity prices, and foreign currency exchange rates, which could affect its
future results of operations and financial condition. The Company manages its
exposure to these risks through its regular operating and financing activities.
Additionally, the Company uses short-term forward contracts to manage certain
exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge firm purchase and sale commitments denominated in
currencies other than its subsidiaries' local currencies. The Company does not
engage in extensive foreign currency hedging activities; however, the purpose of
the Company's foreign currency hedging activities is to protect the Company's
local currency cash flows related to these commitments from fluctuations in
foreign exchange rates. The Company's forward foreign exchange contracts
principally hedge transactions denominated in U.S. dollars and British pounds
sterling. 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
1998 market interest rates would result in a negative impact of $21 million on
the net fair value of the Company's interest-sensitive financial instruments.
The Company's cash, cash equivalents, 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 1998 interest rates would result in a negative impact of
$0.4 million 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 1998 market equity prices would
result in a negative impact of $6.3 million 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 common stock. The
holder of a Thermo Fibergen redemption right may require Thermo Fibergen to
redeem one share of Thermo Fibergen common stock at $12.75 per share in
September 2000 or September 2001. If Thermo Fibergen's common stock is trading
on the open market at a price which is less than $12.75 per share in
31
Market Risk (continued)
September 2001, the holders of redemption rights would more likely than not
exercise their redemption rights. In the event all redemption rights are
exercised, the Company may use up to $54.8 million in cash to settle the
redemption obligation.
In addition, changes in equity prices would result in changes in the fair
value of common stock of subsidiary subject to redemption due to the difference
between the current market price and the price at the date of issuance of the
underlying financial instruments, Thermo Fibergen common stock and redemption
rights. Since the market price of Thermo Fibergen's redemption rights generally
fluctuates in the opposite direction of fluctuations in the market price of
Thermo Fibergen's common stock, the effect of a 10% increase in the market price
of Thermo Fibergen common stock on the fair value of common stock of subsidiary
subject to redemption would be mitigated in part by a decrease in the market
price of the Thermo Fibergen redemption rights.
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in French francs, British
pounds sterling, and Canadian dollars. The effect of a change in foreign
exchange rates on the Company's net investment in foreign subsidiaries is
reflected in the "Accumulated other comprehensive items" component of
shareholders' investment. A 10% depreciation in year-end 1998 functional
currencies, relative to the U.S. dollar, would result in a $7.9 million
reduction of shareholders' investment.
Year 2000
The Company continues to assess the potential impact of the year 2000 on
the Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) evaluating the compliance status of the
Company's current products and certain discontinued products; (iii) contacting
key suppliers and vendors to determine their year 2000 compliance status; and
(iv) developing contingency plans.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. Based on its
evaluations, the Company does not believe that any material upgrades are
necessary to make its critical facilities year 2000 compliant. The Company is
currently upgrading or replacing its material noncompliant information
technology systems, and the Company expects that all such systems will be year
2000 compliant by November 1999.
The Company has also tested and evaluated the year 2000 readiness of the
material products that it currently manufactures and sells. The Company believes
that all of such material products are either year 2000 compliant or not date
sensitive. Certain of the Company's older products, which it no longer
manufactures or sells, may not be year 2000 compliant.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. The Company has started to follow-up and
monitor the year 2000 compliance progress of significant suppliers and
32
Year 2000 (continued)
vendors which indicate that they are not year 2000 compliant or which do not
respond to the Company's questionnaires. The Company has not completed the
majority of its assessment of third-party risk, but expects to be substantially
completed by September 1999.
Contingency Plans
The Company is developing contingency plans that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
These plans may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems,
facilities, and significant suppliers and vendors, it will modify and adjust its
contingency plans as may be required.
Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
are funded from working capital. All internal costs and related external costs,
other than capital additions, related to year 2000 remediation have been and
will continue to be expensed as incurred. The Company does not track internal
costs incurred for its year 2000 compliance project. Such costs are principally
the related payroll costs for its information systems group.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Certain of the Company's older products, which it no longer manufactures or
sells, may not be year 2000 compliant, which may expose the Company to claims.
If any of the Company's material suppliers or vendors experience business
disruptions due to year 2000 issues, the Company might also be materially
adversely affected. There is expected to be a significant amount of litigation
relating to the year 2000 issue and there can be no assurance that the Company
will not incur material costs in defending or bringing lawsuits. In addition, if
any year 2000 issues are identified, there can be no assurance that the Company
will be able to retain qualified personnel to remedy such issues. Any unexpected
costs or delays arising from the year 2000 issue could have a significant
adverse impact on the Company's business, operations, and financial condition in
amounts that cannot be reasonably estimated at this time.
33
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 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Dependence on Paper Industry and Pulp and Paper Prices. The Company's
products are primarily sold to the paper industry. Generally, the financial
condition of the paper industry corresponds to the condition of the general
economy, as well as a number of other factors, including paper and pulp
production capacity. The paper industry entered a severe downcycle in early 1996
and has not recovered. This cyclical downturn has adversely affected the
Company's business since the second half of 1996. No assurance can be given that
the financial condition of the paper industry will improve in the near future.
Risks Associated with International Operations. During 1998, approximately
48% of the Company's sales were to customers outside the United States,
principally in Europe. International revenues are subject to a number of risks,
including the following: agreements may be difficult to enforce and receivables
difficult to collect through a foreign country's legal system; foreign customers
may have longer payment cycles; foreign countries may impose additional
withholding taxes or otherwise tax the Company's foreign income, impose tariffs,
or adopt other restrictions on foreign trade; U.S. export licenses may be
difficult to obtain; and the protection of intellectual property in foreign
countries may be more difficult to enforce. Although the Company seeks to charge
its customers in the same currency as its operating costs, fluctuations in
currency exchange rates may affect product demand and adversely affect the
profitability in U.S. dollars of products provided by the Company in foreign
markets where payment for the Company's products and services is made in the
local currency. In addition, the Company's results of operations could be
adversely affected by possible costs related to the Euro currency's introduction
which began in January 1999. 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.
During 1998, the Company's sales to customers in Asia were approximately
5% of the Company's total revenues, a substantial portion of which were sales to
China. Asia is experiencing a severe economic crisis, which has been
characterized by sharply reduced economic activity and liquidity, highly
volatile foreign-currency-exchange and interest rates, and unstable stock
markets. The Company's sales to Asia have been, and could continue to be,
adversely affected by the unstable economic conditions in that region. In
addition, the unstable economic conditions in Asia, and weakened currencies in
that region, have resulted in increased low-cost imports of pulp and paper in
North America and Europe, resulting in reduced pricing. These factors have also
resulted in a decline in paper and pulp exports from North America and Europe to
Asia. As a result, the pulp and paper industry in North America and Europe has
been making fewer capital expenditures, including expenditures to purchase the
Company's products. The economic crisis in Asia has, and could continue to,
adversely affect the Company's sales to North America, Europe, and Asia.
Competition. The Company encounters and expects to continue to encounter
significant competition in each of its principal markets. The Company believes
that the principal competitive factors affecting the markets for its products
include quality, price, service, technical expertise, and product innovation.
The Company's competitors include a number of large multinational corporations.
Competition could increase if new companies enter the market or if existing
competitors expand their product lines or intensify efforts within existing
product lines. There can be no assurance that the Company's current products,
products under development, or ability to develop new technologies will be
sufficient to enable it to compete effectively.
Dependence on Patents and Proprietary Rights. The Company places
considerable emphasis on obtaining patent and trade secret protection for
significant new technologies, products, and processes because of the length of
time and expense associated with bringing new products through the development
process and to the marketplace. The Company's success depends in part on its
ability to develop patentable products and obtain and enforce patent
34
protection for its products both in the United States and in other countries.
The Company owns numerous U.S. and foreign patents, and intends to file
additional applications as appropriate for patents covering its products. No
assurance can be given that patents will issue from any pending or future patent
applications owned by or licensed to the Company, or that the claims allowed
under any issued patents will be sufficiently broad to protect the Company's
technology. No assurance can be given that any issued patents owned by or
licensed to the Company will not be challenged, invalidated, or circumvented, or
that the rights thereunder will provide competitive advantages to the Company.
The Company could incur substantial costs in defending itself in suits brought
against it or in suits in which the Company may assert its patent rights against
others. If the outcome of any such litigation is unfavorable to the Company, the
Company's business and results of operations could be materially adversely
affected.
In addition, there can be no assurance that third parties will not assert
claims against the Company to the effect that the Company is infringing the
intellectual property rights of such parties. The Company could incur
substantial costs and diversion of management resources with respect to the
defense of any such claims, which could have a material adverse effect on the
Company's business, financial condition, and results of operations. Furthermore,
parties making such claims could secure a judgment awarding substantial damages,
as well as injunctive or other equitable relief, which could effectively block
the Company's ability to make, use, sell, distribute, or market its products and
services in the U.S. or abroad. In the event that a claim relating to
intellectual property is asserted against the Company, the Company may seek
licenses to such intellectual property. There can be no assurance, however, that
such licenses could be obtained on commercially reasonable terms, if at all. The
failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture, or distribution of the Company's products and, therefore,
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
The Company relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
Risks Associated with Acquisition Strategy. The Company's acquisition
strategy includes the acquisition of businesses that complement or augment the
Company's existing products and services. Promising acquisitions are difficult
to identify and complete for a number of reasons, including competition among
prospective buyers and the need for regulatory, including antitrust, approvals.
Any acquisition completed by the Company may be made at a substantial premium
over the fair value of the net assets of the acquired company. There can be no
assurance that the Company will be able to complete future acquisitions or that
the Company will be able to successfully integrate any acquired businesses into
its existing businesses or make such businesses profitable.
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays.
Certain of the Company's older products, which it no longer manufactures or
sells, may not be year 2000 compliant, which may expose the Company to claims.
If any of the Company's material suppliers or vendors experience business
disruptions due to year 2000 issues, the Company might also be materially
adversely affected. There is expected to be a significant amount of litigation
relating to the year 2000 issue and there can be no assurance that the Company
will not incur material costs in defending or bringing lawsuits. In addition, if
any year 2000 issues are identified, there can be no assurance that the Company
will be able to retain qualified personnel to remedy such issues. Any unexpected
costs or delays arising from the year 2000 issue could have a significant
adverse impact on the Company's business, operations, and financial condition in
amounts that cannot be reasonably estimated at this time.
35
Selected Financial Information
(In thousands except per share amounts) 1998 1997(a) 1996(b) 1995(c) 1994
- -------------------------------------------------- ---------- ----------- ---------- ---------- ----------
Statement of Income Data
Revenues $247,426 $ 239,642 $192,209 $206,743 $162,625
Net Income 17,995 16,426 19,894 20,249 10,894
Earnings per Share:
Basic .29 .27 .33 .33 .18
Diluted .29 .26 .31 .32 .18
Balance Sheet Data
Working Capital $193,446 $ 176,996 $115,609 $ 70,882 $ 54,879
Total Assets 427,100 418,938 257,232 199,671 162,389
Long-term Obligations 153,000 153,000 34 15,041 15,406
Common Stock of Subsidiary Subject to 53,801 52,812 56,087 - -
Redemption
Shareholders' Investment 150,948 138,095 130,850 109,631 84,696
(a) 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.
(b) Reflects the July 1996 acquisition of GranTek, the net proceeds from Thermo
Fibergen's September 1996 initial public offering, and the repayment of a
$10.4 million promissory note to Thermo Electron.
(c) 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.
36
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 1998 and 1997, as reported in the consolidated
transaction reporting system.
1998 1997
----------------- -------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
First $14 1/4 $11 1/4 $12 1/2 $ 8 1/2
Second 12 3/4 9 1/2 11 8 1/8
Third 10 5/8 7 7/16 12 3/8 9 7/16
Fourth 7 3/4 4 15/16 13 5/8 10 9/16
As of January 29, 1999, the Company had 809 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 29, 1999, was $7 5/8 per share.
Common stock and redemption rights of Thermo Fibergen Inc., the Company's
majority-owned public subsidiary, are traded on the American Stock Exchange
(symbols TFG and TFG_r).
Shareholder Services
Shareholders of Thermo Fibertek Inc. who desire information about the
Company are invited to contact the Investor Relations Department, Thermo
Fibertek Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046, (781) 622-1111. 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.
Distribution of printed quarterly reports is limited to the second quarter only.
All material is available from Thermo Electron's Internet site
(http://www.thermo.com/ subsid/tft1.html).
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
2, 1999, 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.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 27, 1999,
at 9 a.m. at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.