SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended January 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-12137
THERMO FIBERGEN INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-3311544
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
8 Alfred Circle
Bedford, Massachusetts 01730
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value American Stock Exchange
Redemption Rights
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 29, 1999, was approximately $35,587,000.
As of January 29, 1999, the Registrant had 14,715,000 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
January 2, 1999, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 27, 1999, are incorporated by reference into
Part III.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Thermo Fibergen Inc. (the Company or the Registrant) designs, builds,
owns, and operates fiber-recovery and water-clarification plants which allow
pulp and paper mill customers to "close the loop" in their water and solids
systems on a long-term contract basis. The Company will clean and recycle water
and long fiber to be reused in papermaking and convert the remaining solids -
short fiber and fines - into commercial products.
In July 1998, the Company completed construction and began operating its
first fiber-recovery and water-clarification facility and began operating the
facility, providing clean water and long fiber to a mill located in Cowpens,
South Carolina, under a ten-year contract.
The Cellulose-based Products segment, which consists of the Company's
GranTek subsidiary, 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 agricultural carriers are
marketed under the trade name Biodac(R), and are used to deliver agricultural
chemicals for professional turf, home lawn and garden, agricultural row crop,
and mosquito-control applications.
The Company was incorporated in Delaware in February 1996 as a wholly
owned subsidiary of Thermo Fibertek Inc. Thermo Fibertek is a 91%-owned
subsidiary of Thermo Electron Corporation. In September 1996, the Company sold
4,715,000 units, each unit consisting of one share of Company 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 the Company to redeem one share of Thermo Fibergen common stock at
$12.75 per share in September 2000 or September 2001 for a total redemption
value of $60,116,000. A redemption right may only be exercised if the holder
owns a share of Company common stock at that time. As of January 2, 1999, there
were 4,715,000 redemption rights outstanding and only 4,028,250 shares of
Company common stock held by persons other than Thermo Electron or Thermo
Fibertek. In addition, Thermo Electron and/or Thermo Fibertek may acquire
additional shares of the Company's common stock in the open market, and there
can be no assurance that the Company will issue additional shares of its common
stock through the exercise of employee stock options or other transactions. To
the extent that the number of redemption rights exceeds the number of shares of
common stock held by persons other than Thermo Electron or Thermo Fibertek, the
Company will not be required to redeem the total redemption value. The
redemption rights are guaranteed, on a subordinated basis, by Thermo Electron.
As of January 2, 1999, Thermo Fibertek owned 10,419,950 shares of the Company's
common stock, representing 71% of such outstanding common stock. As of January
2, 1999, Thermo Electron owned 266,800 shares of Company common stock,
representing 2% of such outstanding common stock. During 1998*, Thermo Electron
purchased these shares of Company common stock in the open market for
$2,103,000.
Thermo Fibertek develops, manufactures, and markets a range of equipment
and products for the pulp and paper recycling industries. Thermo Electron is a
world leader in monitoring, analytical, and biomedical instrumentation;
biomedical products including heart-assist devices, respiratory-care equipment,
and mammography systems; and paper recycling and papermaking equipment. Thermo
Electron also develops alternative-energy systems and clean fuels, provides a
range of services including industrial outsourcing and environmental-liability
management, and conducts research and development in advanced imaging, laser
communications, and electronic information-management technologies.
- --------------------
* References to 1998, 1997, and 1996 herein are for the fiscal years ended
January 2, 1999, January 3, 1998, and December 28,1996, respectively.
2
<PAGE>
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report on Form
10-K. 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 under the heading
"Forward-looking Statements" in the Registrant's 1998 Annual Report to
Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Segments
Financial information concerning the Company's segments is summarized in
Note 9 to Consolidated Financial Statements in the Registrant's 1998 Annual
Report to Shareholders, which information is incorporated herein by reference.
(c) Description of Business
(i) Principal Products and Services
Fiber-recovery and Water-clarification Services
The Fiber-recovery and Water-clarification Services segment designs,
builds, owns, and operates plants which allow pulp and paper mills to "close the
loop" in their water and solid systems. The plants recover and return to the
mill long cellulose fiber and clarified water to be reused in papermaking. In
July 1998, the Company completed construction and began operating its first
fiber-recovery and water-clarification facility, providing clean water and long
fiber to a mill under a ten-year contract. The fiber-recovery and
water-clarification facility is located in a building adjacent to the South
Carolina mill. The Company's facility generally operates 24 hours a day, seven
days a week. The paper mill pumps its used process water directly into the
Company's system. The facility recovers and returns long fiber to the mill and
clarifies water which is recycled for reuse in the papermaking process. The
paper mill pays the Company a monthly fee for these services.
Cellulose-based Products
The Company's GranTek subsidiary uses a proprietary process to produce
absorbing granules from papermaking byproducts. These granules are used as
agricultural carriers, oil- and-grease absorbents, and cat box fillers. The
agricultural carriers are marketed under the trade name Biodac(R), and are
currently used to deliver agricultural chemicals for professional turf, home
lawn and garden, agricultural row-crop, and mosquito-control applications.
The Company's oil- and grease-absorbent, GranSorb(TM), was introduced in
August 1998 and is currently being sold throughout the Midwest. In addition,
during 1998, the Company also introduced a cat box filler product called PaPurr
(pronounced paper) in conventional and clumping formulations as an alternative
to clay. PaPurr is now available in more than 750 stores, which primarily
represent grocery chains in the Midwest. The Company is working to expand
distribution through mass merchandisers and specialty pet stores.
(ii) and (xi) New Products; Research and Development
The Company continues research and development efforts to develop
high-value products using materials recovered from papermaking byproducts,
including controlled-release granules for crop-protection chemicals and
fertilizers, as well as new, natural-fiber-reinforced composite thermoplastics
for plastic lumber and other applications. Development of a nontoxic,
noncorrosive, biodegradable de-icer was completed in 1998.
3
<PAGE>
The Company's mobile pilot plant is used to demonstrate its fiber-recovery
and water-clarification process, and to test the effluent streams of mills in
the United States and Canada. In addition, the GranTek subsidiary operates a
manufacturing plant in Green Bay, Wisconsin, at which it processes papermaking
byproducts provided by a nearby paper mill into cellulose-based granules. A
pilot plant is located within GranTek's main manufacturing plant. This pilot
plant processes up to 24 tons of material per day, and is used to develop many
of the innovations implemented in GranTek's main plant. The Company believes
that this pilot plant will provide the ability to process materials from other
paper mills under operating conditions and in quantities sufficient to determine
final product and operating characteristics and costs, as well as to develop new
products.
The Company currently intends to limit the pace and amount of its research
and development so that its internally funded research and development
expenditures will not exceed the interest income earned on its cash, cash
equivalents, and available-for-sale investments, plus the Company's operating
earnings, if any, before research and development expenses.
Research and development expenses for the Company were $1,454,000,
$1,877,000, and $1,300,000 in 1998, 1997, and 1996, respectively.
(iii)
Raw Materials
Papermaking byproducts, the raw material used in the manufacture of the
Company's cellulose-based products, are obtained from a single paper mill. The
mill has the exclusive right to supply papermaking byproducts to the Company's
existing granulation plant in Green Bay, Wisconsin, under a contract which
expires in December 1999, subject to successive mutual two-year extensions.
Although the Company believes that its relationship with the mill is good, no
assurance can be given that the mill will agree to renew the contract upon its
termination. The inability of the Company to obtain papermaking byproducts from
this paper mill would have a material adverse effect upon the Company's
operations.
During 1998, the Company entered into a five-year contract with a supplier
to purchase all necessary chemicals used in conjunction with certain equipment
for the processing of papermaking byproducts at its fiber-recovery and
water-clarification facility located in South Carolina. The contract expires in
July 2003.
During 1998, the Company entered into a contract with a supplier to
purchase all natural gas requirements and natural gas management services which
are used by its GranTek subsidiary from the supplier through October 2000. The
Company has the option to enter into forward contracts with the supplier to
purchase specified quantities of natural gas at the then-current posted price
through specified future dates.
(iv) Patents, Licenses, and Trademarks
The Company currently holds several U.S. patents, expiring at various
dates ranging from 2004 to 2016, relating to various aspects of the processing
of cellulose-based granular materials and the use of such materials in the
agricultural, professional turf, home lawn and garden, general absorption, oil-
and grease-absorption, and cat box filler markets. The Company also has foreign
counterparts to its U.S. patents in Canada and in various European countries,
and has additional patents pending in Canada and certain European countries.
The Company has filed several U.S. patent applications for various
products and processes relating to papermaking byproducts and expects to file
additional patent applications in the future. In addition, Thermo Fibertek holds
two U.S. patents relating to the "scalping" technology that is an important
component of the Company's fiber-recovery system which expire in 2011 and 2014.
Although the Company has licensed the technology covered by Thermo Fibertek's
patents for use in pulp and paper industry applications, the Company does not
itself hold any patents or patent applications with respect to its
fiber-recovery and water-clarification system.
The Company has granted a company a nonexclusive license under two of its
patents to sell cellulose-based granules produced at an existing site for sale
in the oil- and grease-absorption and cat box filler markets.
4
<PAGE>
(v) Seasonal Influences
Fiber-recovery and Water-clarification Services
Not applicable.
Granular-products Segment
Revenues from the Cellulose-based Products segment are principally from
sales in the agricultural-carrier market. The Company's primary customers in
this market, chemical formulators, typically purchase carriers during the winter
and spring for the cultivation and planting season. As a result, the Company
earns a disproportionately high share of its revenues from its
agricultural-carrier products during the first two quarters of the year. The
Company believes that its entrance into the oil- and grease-absorption, cat box
filler, and international agricultural row-crop markets, if successful, may
mitigate the seasonality of the Company's sales.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii) Dependency on a Single Customer
Revenues from The Solaris Group accounted for 34%, 54%, and 56% of the
Company's total revenues in 1998, 1997, and 1996, respectively. Revenues from
Rhone-Poulenc AG Company accounted for 14%, 15%, and 21% of the Company's total
revenues in 1998, 1997, and 1996, respectively. Revenues from American Cyanamid
Company accounted for 16% and 14% of the Company's total revenues in 1998 and
1997, respectively. Revenues from Somerset Paper, the customer for which the
Company is providing fiber-recovery and water-clarification services, accounted
for 11% of revenues in 1998.
The Solaris Group was sold by Monsanto Company, its parent, in January
1999. No assurance can be given that the Company's relationship with The Solaris
Group will continue.
(viii) Backlog
The backlog of firm orders at the Company's Cellulose-based Products
segment was $419,000 as of January 2, 1999, and $188,000 as of January 3, 1998.
The Company believes that substantially all of the backlog at January 2, 1999,
will be shipped or completed during the next twelve months. Certain of these
orders may be canceled by the customer upon payment of a cancellation fee. In
addition, the Fiber-recovery and Water-clarification Services segment has a
ten-year contract to provide clean water and long fiber to a mill. The contract
may be canceled by either party within six months after the end of the fourth
year of the contract, or by the paper mill with one year's notice thereafter, if
certain benefits or profitability levels are not achieved. See Note 8 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders for other terms and conditions of the contract. The Company does
not believe that the size of its backlog is necessarily indicative of
intermediate or long-term trends in its business.
(xi) Government Contracts
Not applicable.
5
<PAGE>
(x) Competition
Fiber-recovery and Water-clarification Services
The Company expects that its principal competitors for access to
papermaking byproducts will be landfills, which currently have a large market
share in both North America and Europe. The Company believes, however, that
landfill costs will tend to increase over time and that regulations governing
landfills will become more strict, particularly in Europe. The balance of the
papermaking byproducts produced in the U.S. and Europe is currently incinerated
or used to manufacture composting materials and other low-value industrial
products. The Company competes principally on its ability to offer long-term
environmentally acceptable byproducts management alternatives.
Certain companies are seeking to develop technologies and services to
treat and process papermaking byproducts that are similar to those of the
Company. No assurance can be given that such technologies and services will not
be superior to those of the Company. As other companies attempt to provide
landfill services or byproducts processing capabilities, or both, to the pulp
and paper industry, the Company expects to encounter increasing competition.
The Company believes that its approach to the management of environmental
problems associated with papermaking byproducts and its ability to take
advantage of Thermo Fibertek's name recognition, financial strength, and
experience constitute significant competitive advantages.
Cellulose-based Products
The Company believes that the Company is currently the only producer of
paper-based agricultural carriers. GranTek's principal competitors in the U.S.
are producers of clay-based agricultural carriers for row crops and professional
turf protection, including Oil-Dri Corporation of America, Floridin/Engelhard,
Aimcor, and American Colloid, and producers of corncob-based granules
traditionally used in the home lawn and garden and professional turf markets,
including The Andersons, Mt. Pulaski, Green Products, Independence Cob, and
Junior Weisner. The Company's principal competitive advantages are that Biodac
is virtually dust-free and is more uniform in absorptivity and particle-size
distribution than are clay- and corncob-based granular carriers. Biodac is also
chemically neutral, requiring little or no chemical deactivation.
As the Company attempts to develop new markets for the components of the
papermaking byproducts it processes, the Company will encounter competition from
established companies within those markets. Some of these competitors may have
substantially greater financial, marketing, and other resources than those of
the Company, and the Company expects that such competition may be intense. The
Company believes that in the absorbing-products industry price is a significant
competitive factor and therefore, expects that the demand for the Company's
products in such markets will be significantly influenced by the Company's
prices for such products.
(xii) Environmental Protection Regulations
The Company believes that compliance by the Company with federal, state,
and local environmental protection laws may materially affect the Company's
capital expenditures, earnings, and competitive position. Federal, state, and
local environmental laws govern air emissions and discharges into water, as well
as the generation, transportation, storage, treatment, and disposal of solid
waste. These laws establish standards governing most aspects of the construction
and operation of the Company's facilities. Additional information required under
this heading is included in the section labeled "Environmental and Regulatory
Risks" under "Forward-looking Statements" in the Registrant's 1998 Annual Report
to Shareholders and is incorporated herein by reference.
6
<PAGE>
(d) Financial Information About Geographic Areas
Not applicable.
(e) Executive Officers of the Registrant
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Present Title (Fiscal Year First Became Executive
Officer)
---------------------------- ------ -----------------------------------------------------
Dr. Yiannis A. Monovoukas 38 President and Chief Executive Officer (1996)
Theo Melas-Kyriazi 39 Chief Financial Officer (1998)
Paul F. Kelleher 56 Chief Accounting Officer (1996)
</TABLE>
Each executive officer serves until his successor is chosen or appointed by
the Board of Directors and qualified or until his earlier resignation, death, or
removal. Dr. Monovoukas has been President and Chief Executive Officer of the
Company since its incorporation in February 1996. Dr. Monovoukas was a Corporate
Business Analyst at Thermo Electron from July 1995 through February 1996. From
1993 through June 1995, Dr. Monovoukas was a graduate student at the Harvard
Business School. From 1990 until 1993, he was a staff scientist and engineer
with Raychem Corporation, a materials science company, which he joined upon
completion of a Ph.D. program in chemical engineering at Stanford University.
Mr. Melas-Kyriazi was appointed Chief Financial Officer of the Company and
Thermo Electron on January 1, 1999. He joined Thermo Electron in 1986 as
Assistant Treasurer, and became Treasurer in 1988. He was named President and
Chief Executive Officer of ThermoSpectra Corporation, a public subsidiary of
Thermo Instrument Systems Inc. in 1994, a position he held until becoming Vice
President of Corporate Strategy for Thermo Electron in 1998. Mr. Melas-Kyriazi
remains a Vice President of Thermo Electron. Mr. Kelleher has held a comparable
position for at least five years with Thermo Electron. Mr. Melas-Kyriazi and Mr.
Kelleher are full-time employees of Thermo Electron, but devote such time to the
affairs of the Company as the Company's needs reasonably require.
Item 2. Properties
The Company believes that its facilities are in good condition and are
suitable and adequate for its present operations and that suitable space is
readily available if any leases are not extended. The location and general
character of the Company's principal properties by segment as of January 2,
1999, are:
Fiber-recovery and Water-clarification Services
The Company leases a 6,000-square foot, stand-alone building in Bedford,
Massachusetts, which holds its administrative offices and research laboratory.
This lease expires in April 2001, subject to the Company's option to extend the
lease for two three-year terms. The Company also has the right to terminate the
lease without penalty in April 1999. The Company leases the property on which
its fiber-recovery and water-clarification facility is located. The lease is for
the life of the related service contract.
Cellulose-based Products
The Company owns approximately 3.3 acres of land in Green Bay, Wisconsin,
on which its 26,000-square foot processing plant is situated. In addition, the
Company leases a 21,000-square foot packaging plant under a lease which expires
in January 2000.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
7
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Information concerning the market and market price for the Registrant's
common equity securities and redemption rights and dividend policy is included
under the sections labeled "Common Stock Market Information" and "Dividend
Policy" in the Registrant's 1998 Annual Report to Shareholders and is
incorporated herein by reference.
(b)The Company sold 4,715,000 Units (each Unit consisting of one share of
the Company's common stock and one redemption right which enables the holder to
sell one share of the Company's common stock to the Company during the month of
September 2000 or the month of September 2001 for $12.75 in cash), pursuant to a
Registration Statement on Form S-1 (File No. 333-07585), which was declared
effective by the Securities and Exchange Commission on September 13, 1996. The
managing underwriters of the offering were NatWest Securities Limited, Lehman
Brothers, and Oppenheimer & Co., Inc. The aggregate gross proceeds of the
offering were $60,116,250. The Company's total expenses in connection with the
offering were $4,335,250, of which $3,913,450 was for underwriting discounts and
commissions, $401,800 was for other expenses paid to persons other than
directors or officers of the Company, persons owning more than 10% of any class
of equity securities of the Company, or affiliates of the Company (collectively,
Affiliates), and $20,000 was paid to Thermo Electron for certain corporate
services rendered in connection with the offering. The Company's net proceeds
from the offering were $55,781,000. As of January 2, 1999, the Company had
expended $3,182,000 of such net proceeds for the construction of a
water-clarification and fiber-recovery facility. The Company has invested, from
time to time, the balance of such net proceeds primarily in investment grade
interest- or dividend-bearing instruments. As of January 2, 1999, remaining net
proceeds of $45,892,000 were invested directly with persons other than
Affiliates and $6,707,000 were invested pursuant to a repurchase agreement with
Thermo Electron.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's 1998 Annual Report to Shareholders and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements and Supplementary Data
are included in the Registrant's 1998 Annual Report to Shareholders and are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
8
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference from the material contained under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" under the caption
"Stock Ownership" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated herein by
reference from the material contained under the caption "Executive Compensation"
in the Registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated herein by
reference from the material contained under the caption "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by
reference from the material contained under the caption "Relationship with
Affiliates" in the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the close of the fiscal year.
9
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a,d) Financial Statements and Schedules
(1)The consolidated financial statements set forth in the list below are
filed as part of this Report.
(2)The consolidated financial statement schedule set forth in the list
below is filed as part of this Report.
(3)Exhibits filed herewith or incorporated herein by reference are set
forth in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders'
Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the financial
statements or in the notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 10, 1999 THERMO FIBERGEN INC.
By: /s/ Yiannis A. Monovoukas
Yiannis A. Monovoukas
President, Chief Executive Officer,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated below, as of March 10, 1999.
Signature Title
By: /s/ Dr. Yiannis A. Monovoukas President, Chief Executive Officer, and
Dr. Yiannis A. Monovoukas Director
By: /s/ Theo Melas-Kyriazi Chief Financial Officer
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ Anne T. Barrett Director
Anne T. Barrett
By: /s/ Francis L. McKone Director
Francis L. McKone
By: /s/ Jonathan W. Painter Director
Jonathan W. Painter
By: /s/ William A. Rainville Chairman of the Board and Director
William A. Rainville
By: /s/ Roger D. Wellington Director
Roger D. Wellington
11
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Fibergen Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Thermo Fibergen Inc.'s Annual
Report to Shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated February 10, 1999. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed in Item 14 on page 11 is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the consolidated financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 10, 1999
12
<PAGE>
SCHEDULE II
THERMO FIBERGEN INC.
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Description Balance at Provision Accounts Other (a) Balance
Beginning Charged to Recovered at End
of Year Expense and of Year
Written
Off
- ------------------------------------- ------------- ------------- ------------ ------------- -------------
Allowance for Doubtful Accounts
Year Ended January 2, 1999 $30 $ - $- $ - $30
Year Ended January 3, 1998 $30 $ - $- $ - $30
Year Ended December 28, 1996 $ - $ - $- $30 $30
(a) Allowance of business acquired during the year ended December 28, 1996, as
described in Note 3 to Consolidated Financial Statements in the Registrant's
1998 Annual Report to Shareholders.
</TABLE>
13
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation of the Company, as amended (filed
as Exhibit 3.1 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 333-07585] and incorporated herein by
reference).
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
333-07585] and incorporated herein by reference).
4.1 Form of Guarantee of Thermo Electron (filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1 [Reg. No. 333-07585]
and incorporated herein by reference).
4.2 Guarantee Agreement among the Company, Thermo Electron, and the
Representatives of the Underwriters (filed as Exhibit 4.2 to
the Registrant's Registration Statement on Form S-1 [Reg. No.
333-07585] and incorporated herein by reference).
4.3 Form of Common Stock Certificate (filed as Exhibit 4.3 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
333-07585] and incorporated herein by reference).
4.4 Form of Redemption Right Certificate (filed as Exhibit 4.4 to
the Registrant's Registration Statement on Form S-1 [Reg. No.
333-07585] and incorporated herein by reference).
10.1 Asset Transfer Agreement dated as of July 2, 1996, between
Thermo Fibertek Inc. and the Company (filed as Exhibit 10.1 to
the Registrant's Registration Statement on Form S-1 [Reg. No.
333-07585] and incorporated herein by reference).
10.2 License and Supply Agreement dated as of July 2, 1996, between Thermo
Fibertek and the Company (filed as Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 333-07585] and
incorporated herein by reference).
10.3 Corporate Services Agreement dated July 2, 1996, between Thermo
Electron and the Company (filed as Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 333-07585] and
incorporated herein by reference).
10.4 Thermo Electron Corporate Charter, as amended and restated effective
January 3, 1993 (filed as Exhibit 10.1 to Thermo Electron's Annual
Report on Form 10-K for the fiscal year ended January 2, 1993
[File No. 1-8002] and incorporated herein by reference).
10.5 Tax Allocation Agreement dated as of July 2, 1996, between Thermo
Fibertek and the Company (filed as Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 333-07585] and
incorporated herein by reference).
10.6 Amended and Restated Master Repurchase Agreement dated as of December
28, 1996, between Thermo Electron and the Company (filed as Exhibit
10.6 to the Registrant's Annual Report on Form 10-K for the year
ended December 28, 1996 [File No. 1-12137] and incorporated herein by
reference).
10.7 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 8, 1997, between Thermo Electron and
the Company (filed as Exhibit 10.7 to the Registrant's Annual Report
on Form 10-K for the year ended January 3, 1998 [File No. 1-12137]
and incorporated herein by reference).
<PAGE>
Exhibit
Number Description of Exhibit
10.8 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 8, 1997, between Thermo Fibertek and
the Company (filed as Exhibit 10.8 to the Registrant's Annual Report
on Form 10-K for the year ended January 3, 1998 [File No. 1-12137]
and incorporated herein by reference).
10.9 Lease dated as of April 12, 1996, by and between Al and Lee Realty
and the Company (filed as Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 333-07585] and
incorporated herein by reference).
10.10 Equity Incentive Plan of the Company (filed as Exhibit 10.11 to
the Registrant's Registration Statement on Form S-1 [Reg. No.
333-07585] and incorporated herein by reference).
In addition to the stock-based compensation plans of the Registrant,
the executive officers of the Registrant may be granted awards under
stock-based compensation plans of Thermo Electron and Thermo Fibertek
for services rendered to the Registrant or to such affiliated
corporations. The terms of such plans are substantially the same as
those of the Registrant's Equity Incentive Plan.
10.11 Deferred Compensation Plan for Directors of the Company (filed
as Exhibit 10.12 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 333-07585] and incorporated herein by
reference).
10.12 Directors Stock Option Plan of the Company (filed as Exhibit
10.13 to the Registrant's Registration Statement on Form S-1
[Reg. No. 333-07585] and incorporated herein by reference).
10.13 Form of Indemnification Agreement for Officers and Directors of
the Company (filed as Exhibit 10.14 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 333-07585] and
incorporated herein by reference).
10.14 Restated Stock Holding Assistance Plan and Form of Promissory Note
(filed as Exhibit 10.14 to the Registrant's Annual Report on Form
10-K for the year ended January 3, 1998 [File No. 1-12137] and
incorporated herein by reference).
13 Annual Report to Shareholders for the year ended January 2, 1999
(only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
Exhibit 13
Thermo Fibergen Inc.
Consolidated Financial Statements
1998
<PAGE>
<TABLE>
<CAPTION>
Thermo Fibergen Inc. 1998 Financial Statements
Consolidated Statement of Operations
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- -------
Revenues (Note 10) $ 5,276 $ 4,836 $ 2,223
------- -------- -------
Costs and Operating Expenses:
Cost of revenues 3,171 2,656 1,388
Selling, general, and administrative expenses (Note 7) 3,119 2,727 1,126
Research and development expenses (Note 7) 1,454 1,877 1,300
------- -------- -------
7,744 7,260 3,814
------- -------- -------
Operating Loss (2,468) (2,424) (1,591)
Interest Income 3,113 3,522 1,224
Gain on Sale of Investments 20 - -
------- -------- -------
Income (Loss) Before Provision for Income Taxes 665 1,098 (367)
Provision for Income Taxes (Note 6) 266 - -
------- -------- -------
Net Income (Loss) $ 399 $ 1,098 $ (367)
======= ======== =======
Earnings (Loss) per Share (Note 11)
Basic $ .03 $ .07 $ (.03)
======= ======== ========
Diluted $ .02 $ .07 $ (.03)
======= ======== ========
Weighted Average Shares (Note 11)
Basic 14,715 14,715 11,321
======= ======== =======
Diluted 16,867 16,414 11,321
======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Thermo Fibergen Inc. 1998 Financial Statements
Consolidated Balance Sheet
(In thousands except share amounts) 1998 1997
- ---------------------------------------------------------------------------------------- -------- --------
Assets
Current Assets:
Cash and cash equivalents $ 6,748 $ 21,752
Available-for-sale investments, at quoted market value (amortized cost of 48,206 36,319
$48,210 and $36,273; Note 2)
Accounts receivable, less allowance of $30 (Note 10) 1,188 645
Inventories 485 507
Prepaid income taxes and other current assets (Note 6) 366 300
Due from parent company and affiliated companies 300 115
------- --------
57,293 59,638
------- --------
Property, Plant, and Equipment, at Cost, Net 8,925 5,311
------- --------
Other Assets 802 885
------- --------
Cost in Excess of Net Assets of Acquired Company (Note 3) 4,096 4,330
------- --------
$71,116 $ 70,164
======= ========
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 327 $ 338
Accrued payroll and employee benefits 325 344
Other accrued liabilities 732 347
------- --------
1,384 1,029
------- --------
Deferred Income Taxes (Note 6) 230 -
------- --------
Commitments (Note 8)
Common Stock Subject to Redemption ($60,116 redemption value), 4,715,000 58,260 57,176
Shares Issued and Outstanding ------- --------
Shareholders' Investment (Notes 4 and 5):
Common stock, $.01 par value, 25,000,000 shares authorized; 10,000,000 100 100
shares issued and outstanding
Capital in excess of par value 11,145 11,830
Accumulated other comprehensive items (Note 1) (3) 29
------- --------
11,242 11,959
------- --------
$71,116 $ 70,164
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Thermo Fibergen Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Operating Activities
Net income (loss) $ 399 $ 1,098 $ (367)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 1,151 1,204 701
Deferred income tax expense (benefit) 242 (100) -
Other noncash items (239) (481) -
Changes in current accounts, excluding the effects of acquisition:
Accounts receivable (543) 93 (11)
Inventories 22 (195) (73)
Other current assets (48) (151) (64)
Accounts payable (11) (91) 281
Other current liabilities 36 31 568
--------- -------- ---------
Net cash provided by operating activities 1,009 1,408 1,035
--------- -------- ---------
Investing Activities
Acquisition, net of cash acquired (Note 3) - - (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 -
investments
Purchases of property, plant, and equipment (4,134) (377) (711)
Other (12) 8 (11)
--------- -------- ---------
Net cash used in investing activities (15,828) (36,163) (12,788)
--------- -------- ---------
Financing Activities
Change in due from parent company and affiliated companies (185) (1,881) 1,766
Net proceeds from issuance of Company common stock (Note 1) - - 55,781
Cash transfer from parent company in connection with - - 12,500
capitalization of the Company (Note 1)
Net transfer from parent company prior to capitalization of the - - 94
Company --------- -------- ---------
Net cash provided by (used in) financing activities (185) (1,881) 70,141
--------- -------- ---------
Increase (Decrease) in Cash and Cash Equivalents (15,004) (36,636) 58,388
Cash and Cash Equivalents at Beginning of Year 21,752 58,388 -
--------- -------- ---------
Cash and Cash Equivalents at End of Year $ 6,748 $ 21,752 $ 58,388
========= ======== =========
Cash Paid For
Income taxes $ 89 $ 27 $ -
Noncash Activities
Fair value of assets of acquired company $ - $ - $ 12,310
Cash paid for acquired company - - (12,070)
--------- -------- ---------
Liabilities assumed of acquired company $ - $ - $ 240
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Thermo Fibergen Inc. 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Comprehensive Income
Net Income (Loss) $ 399 $ 1,098 $ (367)
-------- -------- --------
Other Comprehensive Items (Note 1):
Net unrealized gain (loss) on available-for-sale investments (32) 29 -
-------- -------- --------
$ 367 $ 1,127 $ (367)
======== ======== ========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 100 $ 100 $ -
Capitalization of the Company - - 100
-------- -------- --------
Balance at end of year 100 100 100
-------- -------- --------
Capital in Excess of Par Value:
Balance at beginning of year 11,830 12,094 -
Capitalization of the Company - - 12,400
Accretion of common stock subject to redemption (Note 1) (685) (264) (306)
-------- -------- --------
Balance at end of year 11,145 11,830 12,094
-------- -------- --------
Accumulated Deficit:
Balance at beginning of year - (273) -
Net income (loss) after capitalization of the Company 399 1,098 (273)
Accretion of common stock subject of redemption (Note 1) (399) (825) -
-------- -------- --------
Balance at end of year - - (273)
-------- -------- ---------
Accumulated Other Comprehensive Items:
Balance at beginning of year 29 - -
Other comprehensive items (32) 29 -
-------- -------- --------
Balance at end of year (3) 29 -
-------- -------- --------
Net Parent Company Investment:
Balance at beginning of year - - -
Net loss prior to capitalization of the Company - - (94)
Net transfer from parent company prior to capitalization of the - - 94
Company
Cash transfer from parent company in connection with - - 12,500
capitalization of the Company (Note 1)
Capitalization of the Company - - (12,500)
-------- -------- --------
Balance at end of year - - -
-------- -------- --------
$ 11,242 $ 11,959 $ 11,921
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
Thermo Fibergen Inc. 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Fibergen Inc. (the Company) operates in two business segments:
Fiber-recovery and Water-clarification Services and Cellulose-based Products.
The Fiber-recovery and Water-clarification Services segment designs, builds,
owns, and operates plants which allow pulp and paper mills to "close the loop"
in their water and solids systems. The plants recover and return to the mill
long cellulose fiber and clarified water to be reused in papermaking. In July
1998, the Company completed construction of, and began operating, its first
fiber-recovery and water-clarification facility, providing clean water and long
fiber to a mill under a ten-year contract (Note 8). The Cellulose-based Products
segment, which consists of the Company's GranTek subsidiary, acquired July 1996,
employs patented technology to produce absorbing granules from papermaking
byproducts used as agricultural carriers, oil-and-grease absorbents, and cat box
fillers. Prior to the acquisition of GranTek, the Company was in the development
stage.
Relationship with Thermo Fibertek Inc. and Thermo Electron Corporation
The Company was incorporated in February 1996 as a wholly owned subsidiary
of Thermo Fibertek. In connection with the capitalization of the Company, Thermo
Fibertek transferred to the Company a license to use certain technology (Note 7)
and its business relating to the development of fiber-recovery systems for the
pulp and paper industry, together with $12,500,000 in cash, in exchange for
10,000,000 shares of the Company's common stock. As of January 2, 1999, Thermo
Fibertek owned 10,419,950 shares of the Company's common stock, representing 71%
of such stock outstanding. Thermo Fibertek is a 91%-owned subsidiary of Thermo
Electron Corporation. In addition, as of January 2, 1999, Thermo Electron owned
266,800 shares of the Company's common stock, representing 2% of such stock
outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned 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. Fiscal years 1998
and 1996 each included 52 weeks; fiscal 1997 included 53 weeks.
Revenue Recognition
The Company recognizes revenues upon shipment of its products and as
services are rendered.
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 4). 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.
6
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Income Taxes
In the period prior to its initial public offering, the Company and Thermo
Fibertek were included in Thermo Electron's consolidated federal and certain
state income tax returns. Subsequent to the Company's initial public offering in
September 1996, Thermo Fibertek's equity ownership of the Company was reduced
below 80%, and as a result, the Company is 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 (Loss) per Share
Basic earnings (loss) per share have been computed by dividing net income
(loss) by the weighted average number of shares outstanding during the year. For
periods prior to the Company's February 1996 capitalization, shares issued in
connection with such capitalization have been shown as outstanding for purposes
of computing loss per share. Diluted earnings per share for 1998 and 1997 have
been computed assuming the redemption of redeemable common stock and the
exercise of stock options, as well as their related income tax effect. Diluted
loss per share for 1996 excludes the effect of assuming the redemption of
redeemable common stock and the exercise of outstanding stock options because
the effect would be antidilutive due to the Company's net loss during the year.
Cash and Cash Equivalents
At year-end 1998 and 1997, $6,707,000 and $5,777,000, 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. Cash
equivalents are carried at cost, which approximates market value. At year-end
1998 and 1997, the Company's cash equivalents also included $33,000 and
$15,964,000, respectively, of U.S. government-agency securities, which have
original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost (on a weighted average basis)
or market value and include materials, labor, and manufacturing overhead. The
components of inventories are:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------------- ------- ------
Raw Materials and Supplies $151 $ -
Finished Goods 334 507
---- ----
$485 $507
==== ====
</TABLE>
7
<PAGE>
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: buildings, 15 to 25 years;
fiber-recovery and water-clarification facility, the shorter of the term of the
service contract or the life of the asset; machinery and equipment, 2 to 10
years; and leasehold improvements, the shorter of the term of the lease or the
life of the asset. Property, plant, and equipment consists of:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ----------- -----------
Land $ 87 $ 87
Buildings 4,120 4,120
Fiber-recovery and Water-clarification Facility 3,500 -
Machinery, Equipment, and Leasehold Improvements 3,468 2,520
------ ------
11,175 6,727
Less: Accumulated Depreciation and Amortization 2,250 1,416
------ ------
$8,925 $5,311
====== ======
</TABLE>
Other Assets
Other assets in the accompanying balance sheet includes the cost of
patents that are amortized using the straight-line method over an estimated
useful life of 12 years. The carrying value of patents was $792,000 and
$875,000, net of accumulated amortization of $208,000 and $125,000, at year-end
1998 and 1997, respectively.
Cost in Excess of Net Assets of Acquired Company
The excess of cost over the fair value of net assets of acquired company
is amortized using the straight-line method over 20 years. Accumulated
amortization was $597,000 and $363,000 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 company
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 Subject to Redemption
In September 1996, the Company sold 4,715,000 units, each unit consisting
of one share of the Company's 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 the Company to
redeem one share of the Company's common stock at $12.75 per share in September
2000 or September 2001 for a total redemption value of $60,116,000. A redemption
right may only be exercised if the holder owns a share of common stock at that
time. As of January 2, 1999, Thermo Electron and Thermo Fibertek had purchased
and owned an aggregate of 686,750 shares of the total 4,715,000 shares of
Company common stock issued in connection with its initial public offering. As
of January 2, 1999, there were 4,715,000 redemption rights outstanding and only
4,028,250 shares of Company common stock held by persons other than Thermo
Electron or Thermo Fibertek. In addition, Thermo Electron and/or Thermo Fibertek
may acquire additional shares of the Company's common stock in the open market,
and there can be no assurance that the Company
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
will issue additional shares of its common stock through the exercise of
employee stock options or other transactions. To the extent the number of
redemption rights exceeds the number of shares of common stock held by persons
other than Thermo Electron or Thermo Fibertek, the Company will not be required
to redeem the total redemption value. The redemption rights carry terms that
generally provide for their expiration if the closing price of the Company's
common stock exceeds $19 1/8 for 20 of any 30 consecutive trading days prior to
September 2001. The redemption rights are guaranteed, on a subordinated basis,
by Thermo Electron. The difference between the redemption value and the original
carrying amount of common stock subject to redemption is accreted over the
period ending September 2000, which corresponds with the first redemption
period. The accretion is charged to retained earnings to the extent of income,
and the excess is charged to capital in excess of par value.
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 represents unrealized net of tax gains and
losses on available-for-sale investments, reported as a component of
shareholders' investment in the accompanying balance sheet.
Forward Contracts
The Company manages its exposure to natural gas price fluctuations by
entering into short-term forward contracts to purchase specified quantities of
natural gas from its supplier. Losses are recognized on forward purchase
contracts when the accumulated cost of inventory, including the overhead
component, exceeds its net realizable value. No losses on natural gas forward
contracts were recorded in the statement of operations for 1998, 1997, and 1996
(Note 8).
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, available-for-sale investments, accounts receivable, due from
parent company and affiliated companies, accounts payable, and common stock
subject to redemption. Available-for-sale investments are carried at fair value
in the accompanying balance sheet (Note 2). The fair value of available-for-sale
investments was determined based upon quoted market prices. The fair value of
common stock subject to redemption was $58,053,000 and $59,232,000 at year-end
1998 and 1997, respectively. The fair value of common stock subject to
redemption was determined based upon the quoted market prices of the common
stock and the redemption rights. The carrying amounts of the Company's remaining
financial instruments approximate fair value due to their short-term nature.
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.
9
<PAGE>
2. Available-for-sale Investments
The Company's debt securities are considered available-for-sale
investments in the accompanying balance sheet and are carried at market value,
with the difference between cost and market value, net of related tax effects,
recorded in the "Accumulated other comprehensive items" component of
shareholders' investment. The aggregate market value, cost basis, and gross
unrealized gains and losses of available-for-sale investments by major security
type are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(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.
The cost of available-for-sale investments that were sold was based on
specific identification in determining the gross realized gains recorded in the
accompanying 1998 statement of operations.
3. Acquisition
In July 1996, the Company 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
was renamed GranTek Inc. The acquisition has been accounted for using the
purchase method of accounting and its results of operations have been included
in the accompanying financial statements from the date of acquisition. The cost
of the acquisition exceeded the estimated fair value of the acquired net assets
by $4,692,000, which is being amortized over 20 years. Allocation of the
purchase price for the acquisition was based on the estimated fair value of net
assets acquired.
10
<PAGE>
3. Acquisition (continued)
Based upon unaudited data, the following table presents selected financial
information for the Company and GranTek on a pro forma basis, assuming the
companies had been combined since the beginning of 1996.
(In thousands except per share amounts) 1996
- ----------------------------------------------------------------------------------- ----------- -----------
Revenues $5,377
Net Loss (301)
Basic and Diluted Loss per Share (.03)
</TABLE>
The pro forma results of operations are not necessarily indicative of
future operations or the actual results that would have occurred had the
acquisition of GranTek been made at the beginning of 1996.
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has a stock-based compensation plan for its key employees,
directors, and others, which permits the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under this plan are determined by
the Board Committee. As of year-end 1998, only nonqualified stock options have
been awarded under this plan. 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. Nonqualified stock
options may be granted at any price determined by the Board Committee, although
incentive stock options must be granted at not less than the fair market value
of the Company's common 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, at fair market value,
to outside directors pursuant to a formula approved by the Company's
shareholders. Options awarded under this plan have the same general terms as
options granted under the stock-based compensation plan described above, except
that the restrictions and repurchase rights generally lapse ratably over a
four-year period and the option term is five years. 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 and Thermo
Fibertek.
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 20,000 shares at a weighted average exercise price of $11.83 per share
elected to participate in this exchange and, as a result, received options to
purchase 10,000 shares of Company common stock at $7.95 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.
11
<PAGE>
4. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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 383 $10.13 340 $10.27 - $ -
Granted 90 8.71 55 9.05 340 10.27
Forfeited (23) 9.57 (12) 9.25 - -
Canceled due to exchange (20) 11.83 - - - -
---- --- ---
Options Outstanding, End of Year 430 $ 9.78 383 $10.13 340 $10.27
==== ====== === ====== === ======
Options Exercisable 430 $ 9.78 383 $10.13 340 $10.27
==== ====== === ====== === ======
Options Available for Grant 370 416 360
==== === ===
</TABLE>
A summary of the status of the Company's stock options at January 2, 1999,
is:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options Outstanding and Exercisable
-----------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ------------------------------------------------ ------------------ ------------------- -------------------
$ 7.95 - $ 9.15 65 6.9 years $8.37
9.16 - 11.55 345 9.2 years 9.87
11.56 - 12.75 20 2.8 years 12.75
----
$ 7.95 - $12.75 430 8.6 years $9.78
===
</TABLE>
Employee Stock Purchase Program
Substantially all of the Company's full-time employees are eligible to
participate in an employee stock purchase program sponsored by Thermo Fibertek
and Thermo Electron. Prior to the 1998 program year, the applicable shares of
Thermo Fibertek's and Thermo Electron's 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.
Effective November 1, 1998, shares of Thermo Fibertek's and Thermo Electron's
common stock may be purchased at 85% of the lower of the fair market value at
the beginning or end of the period, and the shares purchased are subject to a
one-year resale restriction. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages.
12
<PAGE>
4. 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
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 (loss) and earnings (loss) per
share would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Net Income (Loss):
As reported $ 399 $1,098 $ (367)
Pro forma 170 847 (479)
Basic Earnings (Loss) per Share:
As reported .03 .07 (.03)
Pro forma .01 .06 (.04)
Diluted Earnings (Loss) per Share:
As reported .02 .07 (.03)
Pro forma .01 .05 (.04)
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 $3.43,
$5.18, and $5.19 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% 29%
Risk-free Interest Rate 5.0% 6.3% 6.6%
Expected Life of Options 5.1 years 7.1 years 8.3 years
</TABLE>
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
Substantially all of the Company's full-time employees are eligible to
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 $67,000, $60,000, and $17,000 in 1998, 1997, and 1996,
respectively.
13
<PAGE>
5. Common Stock
At January 2, 1999, the Company had reserved 825,000 unissued shares of
its common stock for possible issuance under stock-based compensation plans.
6. Income Taxes
The components of the provision for income taxes are:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------- -------- ------- -------
Currently Payable:
Federal $ 14 $ 77 $ -
State 10 23 -
------ ------ ------
24 100 -
------ ------ ------
Net Deferred (Prepaid):
Federal 211 (77) -
State 31 (23) -
------ ------ ------
242 (100) -
------ ------ ------
$ 266 $ - $ -
====== ====== ======
The provision for income taxes in the accompanying statement of operations
differs from the provision calculated by applying the statutory federal income
tax rate of 34% to income (loss) before provision for income taxes due to:
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------- -------- ------- -------
Provision (Benefit) for Income Taxes at Statutory Rate $ 226 $ 373 $ (125)
Increases (Decreases) Resulting From:
State income taxes, net of federal benefit (176) 63 -
Nondeductible expenses 18 8 -
Tax benefit of foreign sales corporation (5) 96 -
Change in valuation allowance 203 (540) 125
------ ------ ------
$ 266 $ - $ -
====== ====== ======
14
<PAGE>
6. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of:
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------- ------- -------
Prepaid Income Taxes, Net:
State operating loss carryforwards $ 203 $ -
Reserves and accruals 126 160
Available-for-sale investments 5 (17)
----- -----
334 143
----- -----
Less: Valuation allowance 203 -
----- -----
$ 131 $ 143
===== =====
Deferred Income Taxes, Net:
Depreciation $ 179 $ -
Amortization of intangibles 51 -
----- -----
$ 230 $ -
===== =====
</TABLE>
The valuation allowance relates to uncertainty surrounding the realization
of state operating loss carryforwards of $2.1 million at year-end 1998, which
expire in 2003.
7. 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
$42,000, $48,000 and $22,000 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 relationships 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.
15
<PAGE>
7. Related-party Transactions (continued)
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
License Agreement
In July 1996, the Company entered into a supply and license agreement with
Thermo Fibertek in which Thermo Fibertek granted to the Company a worldwide,
perpetual, royalty-free license to use Thermo Fibertek's proprietary fiber
"scalping" technology in the pulp and paper industry. The agreement has an
initial term of eight years and is subject to annual renewals thereafter. The
Company's rights under the agreement are exclusive for a period of at least five
years and such exclusivity will continue thereafter if the Company has purchased
at least 35 scalping units from Thermo Fibertek within the first five years of
the license and at least five such units in each subsequent year. The agreement
also provides that Thermo Fibertek will be the exclusive manufacturer of
products based on the licensed technology. Through year-end 1998, the Company
purchased two scalping units from a wholly owned subsidiary of Thermo Fibertek.
These purchases are included in other related-party transactions.
Other Related-party Transactions
During 1998 and 1997, the Company purchased equipment for $441,000 and
$92,000, respectively, from wholly owned subsidiaries of Thermo Fibertek for use
in its fiber-recovery and water-clarification systems.
During 1998 and 1997, two wholly owned subsidiaries of Thermo Fibertek
performed certain laboratory and administrative services for the Company for
which the Company paid $69,000 and $113,000, respectively.
8. Commitments
Operating Leases
The Company occupies office space under several operating leases. The
accompanying statement of operations includes expense from operating leases of
$121,000, $71,000, and $43,000 in 1998, 1997, and 1996, respectively. The future
minimum payments due under noncancelable operating leases as of January 2, 1999,
are $106,000 in 1999; $64,000 in 2000; and $20,000 in 2001. Total future minimum
lease payments are $190,000.
Purchase Commitments and Forward Contract
During 1998, the Company entered into a contract with a supplier to
purchase all natural gas requirements and natural gas management services, which
are used by its GranTek subsidiary, from the supplier through October 2000. The
Company has the option to enter into forward contracts with the supplier to
purchase specified quantities of natural gas at the then-current posted price
through specified future dates. As of January 2, 1999, the Company had committed
to purchase natural gas for $132,000 in both 1999 and 2000. Total commitments
for the purchase of natural gas are $264,000.
During 1998, the Company also entered into a five-year contract with a
supplier to purchase all necessary chemicals used in conjunction with certain
equipment for the processing of papermaking byproducts at its fiber-recovery and
water-clarification facility. The contract expires in July 2003.
16
<PAGE>
8. Commitments (continued)
Long-term Contract
In December 1997, the Company 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, the Company completed construction of, and began operating, the
fiber-recovery and water-clarification facility, providing clean water and long
fiber to the mill. In addition, the Company and the paper mill have entered into
lease and services agreements, under which the Company leases land from the
paper mill for a nominal fee and the paper mill provides certain utilities and
services to the Company. The Company provides the paper mill with fiber-recovery
and water-clarification services for fixed monthly fees, subject to certain
adjustments and increases upon the attainment of certain performance goals by
the Company. The contract may be canceled by either party within six months
after the end of the fourth year of the contract, or with one year's notice
thereafter, 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 the Company at its net book value.
9. Business Segments
The Company organizes and manages its business by individual functional
operating entity. The Company's two operating entities constitute the Company's
business segments: Fiber-recovery and Water-clarification Services and
Cellulose-based Products. The Fiber-recovery and Water-clarification Services
segment designs, builds, owns, and operates plants which allow pulp and paper
mills to "close the loop" in their water and solids systems. The plants recover
and return to the mill long cellulose fiber and clarified water to be reused in
papermaking. In July 1998, the Company completed construction of, and began
operating, its first fiber-recovery and water-clarification facility, providing
clean
water and long fiber to a mill under a ten-year contract (Note 8). The
Cellulose-based Products segment, which consists of the Company's GranTek
subsidiary, acquired July 1996, employs patented technology to produce absorbing
granules from papermaking byproducts used as agricultural carriers,
oil-and-grease absorbents, and cat box fillers. The agricultural carriers are
marketed under the trade name Biodac(R) and are used to deliver agricultural
chemicals for professional turf, home lawn and garden, agricultural row-crop,
and mosquito-control applications.
17
<PAGE>
9. Business Segments (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Revenues:
Cellulose-based Products $ 4,711 $4,836 $ 2,223
Fiber-recovery and Water-clarification Services 565 - -
-------- ------ --------
$ 5,276 $4,836 $ 2,223
======== ====== ========
Income (Loss) Before Provision for Income Taxes:
Cellulose-based Products $ 65 $ 246 $ (25)
Fiber-recovery and Water-clarification Services (2,533) (2,670) (1,566)
-------- ------ --------
Total operating loss (2,468) (2,424) (1,591)
Interest and other income 3,133 3,522 1,224
-------- ------ --------
$ 665 $1,098 $ (367)
======== ====== ========
Total Assets:
Cellulose-based Products $ 12,974 $12,861 $ 11,979
Fiber-recovery and Water-clarification Services 58,142 57,303 59,054
-------- ------- --------
$ 71,116 $70,164 $ 71,033
======== ======= ========
Depreciation and Amortization:
Cellulose-based Products $ 773 $1,038 $ 652
Fiber-recovery and Water-clarification Services 378 166 49
-------- ------ --------
$ 1,151 $1,204 $ 701
======== ====== ========
Capital Expenditures:
Cellulose-based Products $ 844 $ 88 $ 255
Fiber-recovery and Water-clarification Services 3,290 289 456
-------- ------ --------
$ 4,134 $ 377 $ 711
======== ====== ========
18
<PAGE>
10. Significant Customers and Concentrations of Risk
Revenues from one customer accounted for 34%, 54%, and 56% of the
Company's total revenues in 1998, 1997, and 1996, respectively. Revenues from a
second customer accounted for 14%, 15%, and 21% of the Company's total revenues
in 1998, 1997, and 1996, respectively. Revenues from a third customer accounted
for 16% and 14% of the Company's total revenues in 1998 and 1997. In addition,
the Company began providing services to a mill in July 1998 under a ten-year
contract. Revenues from the mill accounted for 11% of the Company's total
revenues in 1998. The Company's largest customer began reducing its level of
purchases from the Company in 1997 and continued to reduce its level of
purchases from the Company in 1998. The decrease in demand from the Company's
largest customer is believed to be a result of uncertainty surrounding the
divestiture of this business by its parent company. The divestiture was
completed in January 1999. No assurance can be given that the Company's
relationship with this customer will continue.
At year-end 1998, a significant portion of the accounts receivable due to
the Company was from three customers. The Company does not normally require
collateral or other security to support its accounts receivable. Management does
not believe that this concentration of credit risk has or will have a
significant negative impact on the Company.
Revenues from the Cellulose-based Products segment are principally from
sales of Biodac(R), its agricultural-carrier product; therefore, the Company is
dependent upon the agricultural market.
Papermaking byproducts, the raw material used in the manufacture of the
products sold by the Cellulose-based Products segment, is obtained from a single
paper mill. The mill has the exclusive right to supply papermaking byproducts to
GranTek's existing granulation plant in Green Bay, Wisconsin, under a contract
which expires in December 1999, subject to successive mutual two-year
extensions. Although the Company believes that its relationship with the mill is
good, no assurance can be given that the mill will agree to renew the contract
upon its termination. The inability of the Company to obtain papermaking
byproducts from this paper mill would have a material adverse effect upon the
Company's operations.
19
<PAGE>
11. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Basic
Net Income (Loss) $ 399 $ 1,098 $ (367)
------- -------- -------
Weighted Average Shares 14,715 14,715 11,321
------- -------- -------
Basic Earnings (Loss) per Share $ .03 $ .07 $ (.03)
======= ======== =======
Diluted
Net Income (Loss) $ 399 $ 1,098 $ (367)
------- -------- -------
Weighted Average Shares 14,715 14,715 11,321
Effect of:
Redemption rights 2,151 1,698 -
Stock options 1 1 -
------- -------- -------
Weighted Average Shares, as Adjusted 16,867 16,414 11,321
------- -------- -------
Diluted Earnings (Loss) per Share $ .02 $ .07 $ (.03)
======= ======== =======
The computation of diluted earnings per share for 1998 and 1997 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 420,000 of
such options outstanding, with exercise prices ranging from $8.43 to $12.75 per
share. The computation of diluted loss per share for 1996 excludes the effect of
assuming the redemption of redeemable common stock and exercise of outstanding
stock options because the effect would be antidilutive due to the Company's net
loss during the year.
20
<PAGE>
12. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 First Second Third Fourth
- ---------------------------------------------------------------- --------- ---------- ---------- ----------
Revenues $1,343 $1,317 $1,124 $1,492
Gross Profit 552 516 436 601
Net Income 117 5 75 202
Earnings per Share:
Basic .01 - .01 .01
Diluted .01 - - .01
1997 First Second Third Fourth
- ---------------------------------------------------------------- --------- ---------- ---------- ----------
Revenues $1,526 $1,598 $ 906 $ 806
Gross Profit 724 854 372 230
Net Income 367 568 158 5
Earnings per Share:
Basic .02 .04 .01 -
Diluted .02 .03 .01 -
</TABLE>
21
<PAGE>
Thermo Fibergen Inc. 1998 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Fibergen Inc.:
We have audited the accompanying consolidated balance sheet of Thermo
Fibergen Inc. (a Delaware corporation and 71%-owned subsidiary of Thermo
Fibertek Inc.) and subsidiary as of January 2, 1999, and January 3, 1998, and
the related consolidated statements of operations, 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
Fibergen Inc. and subsidiary 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
22
<PAGE>
Thermo Fibergen 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 organizes and manages its business by individual functional
operating entity. The Company's two operating entities constitute the Company's
business segments: Fiber-recovery and Water-clarification Services and
Cellulose-based Products. The Fiber-recovery and Water-clarification Services
segment designs, builds, owns, and operates plants, which allow pulp and paper
mills to "close the loop" in their water and solids systems. The plants recover
and return to the mill long cellulose fiber and clarified water to be reused in
papermaking. In July 1998, the Company completed construction of, and began
operating, its first fiber-recovery and water-clarification facility, providing
clean water and long fiber to a mill under a ten-year contract (Note 8).
The Cellulose-based Products segment, which consists of the Company's
GranTek subsidiary, acquired July 1996, employs patented technology to produce
absorbing granules from papermaking byproducts which are used as agricultural
carriers , oil-and-grease absorbents, and cat box fillers. The agricultural
carriers are marketed under the trade name Biodac(R), and are used to deliver
agricultural chemicals for professional turf, home lawn and garden, agricultural
row-crop, and mosquito-control applications. Development of a nontoxic,
noncorrosive, biodegradable de-icer was completed in 1998. Other products under
development include controlled-release granules for carrying fertilizers and
cellulose-fiber-reinforced composite materials.
Revenues from the Cellulose-based Products segment are principally from
sales in the agricultural-carrier market. The Company's primary customers in
this market, chemical formulators, typically purchase carriers during the winter
and spring for the cultivation and planting season. As a result, the Company
earns a disproportionate share of its revenues from its agricultural-carrier
products during the first two quarters of the year. The Company believes that
its entrance into the oil- and grease-absorption, cat box filler, and
international agricultural row-crop markets, if successful, may mitigate the
seasonality of the Company's sales.
The Company currently intends to limit the pace and amount of its research
and development so that its research and development expenditures will not
exceed the interest income earned on its cash, cash equivalents, and
available-for-sale investments, plus the Company's operating earnings, if any,
before research and development expenses.
Results of Operations
1998 Compared With 1997
Revenues increased to $5,276,000 in 1998 from $4,836,000 in 1997, due to
the inclusion of $565,000 of revenues at the Fiber-recovery and
Water-clarification Services segment from its fiber-recovery and
water-clarification facility, which began operations in July 1998. Revenues at
the Cellulose-based Products segment decreased $125,000 principally due to a
decrease in demand from its largest customer, offset in part by an increase in
demand from its other customers and the inclusion of revenues from new product
introductions. Revenues from the Company's largest customer decreased by
$845,000 to $1,780,000 in 1998. Such decrease is believed to be a result of
uncertainty surrounding the divestiture of this business by its parent company.
The divestiture was completed in January 1999. No assurance can be given that
the Company's relationship with this customer will continue (Note 10).
23
<PAGE>
1998 Compared With 1997 (continued)
The gross profit margin decreased to 40% in 1998 from 45% in 1997, due to
a decrease in gross profit margin at the Cellulose-based Products segment,
principally as a result of a decrease in production volume in the second quarter
resulting from shutdowns of the manufacturing plant while emptying inventory
storage tanks, a decrease in revenues, and additional costs associated with the
introduction of its cat box filler product. The inventory storage tanks at the
manufacturing plant were emptied to enable the Company to process an upgraded
quality of papermaking byproduct (raw material) which is necessary for the
production of the Company's new row-crop granular product. The decrease in gross
profit margin at the Cellulose-based Products segment was offset in part by the
inclusion of higher-margin revenue at the Fiber-recovery and Water-clarification
Services segment in 1998.
Selling, general, and administrative expenses as a percentage of revenues
increased to 59% in 1998 from 56% in 1997, principally due to the hiring of
additional sales and marketing staff at the Fiber-recovery and
Water-clarification Services segment. Research and development expenses
decreased to $1,454,000 in 1998 from $1,877,000 in 1997, primarily due to a
reduction in expenditures for development of the fiber-recovery process at the
Fiber-recovery and Water-clarification Services segment and completion of the
development of the cat box filler product at the Cellulose-based Products
segment.
Interest income decreased to $3,113,000 in 1998 from $3,522,000 in 1997,
principally as a result of a decrease in interest rates during the 1998 period
and a decrease in average invested balances. Average invested balances decreased
primarily due to the use of cash to fund the construction of the fiber-recovery
and water-clarification facility in 1998.
The provision for income taxes was $266,000 in 1998. The effective tax
rate of 40% exceeded the statutory federal income tax rate primarily due to the
impact of state income taxes. The Company did not record a provision for income
taxes in 1997 due to the benefit of net operating loss carryforwards, which were
fully utilized in 1997.
1997 Compared With 1996
Revenues consist of revenues from the Cellulose-based Products segment,
which increased to $4,836,000 in 1997 from $2,223,000 in 1996, primarily due to
the inclusion of revenues for the full twelve-month period from GranTek,
acquired July 1996, offset in part by a $511,000 decrease in revenues in the
second half of 1997, primarily due to a decrease in demand from the Company's
largest customer for the reason discussed in the results of operations for 1998.
The gross profit margin increased to 45% in 1997 from 38% in 1996,
primarily due to an increase in revenues, a decrease in manufacturing costs, and
a change in product mix. In addition, 1996 included an adjustment to expense
relating to the revaluation of finished goods inventory acquired from GranTek in
1996.
Selling, general, and administrative expenses as a percentage of revenues
increased to 56% in 1997 from 51% in 1996, principally due to the hiring of
additional sales, marketing, and administrative staff at the Fiber-recovery and
Water-clarification Services segment to expand the Company's fiber-recovery
business.
Research and development expenses increased to $1,877,000 in 1997 from
$1,300,000 in 1996. This increase was primarily due to the acceleration of the
Company's research and development efforts associated with the Company's
fiber-recovery system and the extraction and purification of minerals at the
Fiber-recovery and Water-clarification Services segment, as well as the
inclusion of expenses from GranTek for the full twelve-month period at the
Cellulose-based Products segment.
Interest income increased to $3,522,000 in 1997 from $1,224,000 in 1996,
primarily due to an increase in average invested balances resulting from the
proceeds from the Company's September 1996 initial public offering, as well as
cash received in connection with the initial capitalization of the Company in
February 1996.
The Company had no income tax expense in 1997 due to a benefit recorded
from the use of net operating loss carryforwards.
24
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $55,909,000 at January 2, 1999, compared
with $58,609,000 at January 3, 1998. Included in working capital at January 2,
1999, are cash, cash equivalents, and available-for-sale investments of
$54,954,000, compared with $58,071,000 at January 3, 1998. During 1998,
$1,009,000 of cash was provided by operating activities. An increase in accounts
receivable, principally due to an increase in fourth quarter 1998 sales activity
as compared to the fourth quarter of 1997, used $543,000 of cash.
During 1998, the Company's primary investment activity, excluding
available-for-sale investments activity, was the purchase of property, plant,
and equipment for $4,134,000, which included $3,182,000 expended for the
construction of the fiber-recovery and water-clarification facility, completed
in July 1998.
The Company's common stock subject to redemption is redeemable by holders
of redemption rights in September 2000 or September 2001 for a total redemption
value of $60,116,000 (Note 1). The redemption rights are guaranteed, on a
subordinated basis, by Thermo Electron.
In 1999, the Company plans to make expenditures for property, plant, and
equipment of approximately $350,000. In addition, the Company plans to make
capital expenditures for the construction of additional fiber-recovery
facilities. Construction of fiber-recovery facilities is dependent upon the
Company entering into long-term contracts with paper mills, under which the
Company will charge fees to process the mills' papermaking byproducts. There is
no assurance that the Company will be able to obtain such additional contracts.
The Company anticipates that it will require significant amounts of cash for the
construction of its fiber-recovery facilities. The Company will seek to finance
the construction of its fiber-recovery facilities through a combination of
internal funds, additional debt or equity financing, and/or borrowings from
Thermo Fibertek Inc. and Thermo Electron, although there is no agreement with
Thermo Fibertek or Thermo Electron under which such parties would be obligated
to lend funds to the Company. The Company believes that its existing resources
will be sufficient to meet the Company's capital requirements until September
2000 when the Company's redemption rights become exercisable.
Market Risk
The Company is exposed to market risk from changes in equity prices and
interest 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.
Equity Prices
The Company's common stock subject to redemption is sensitive to
fluctuations in the price of Company common stock. The holder of a redemption
right may require the Company to redeem one share of Company common stock at
$12.75 per share in September 2000 or September 2001. If the Company's common
stock is trading on the open market at a price which is less than $12.75 per
share in September 2001, the holders of redemption rights would more likely than
not exercise their redemption rights. In the event all redemption rights are
exercised, the Company may use up to $60,116,000 in cash to settle the
redemption obligation.
In addition, changes in equity prices would result in changes in the
fair value of common stock 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. Since the market price of the redemption rights generally
fluctuates in the opposite direction of fluctuations in the market price of the
Company's common stock, the effect of a 10% increase in the market price of
Company common stock on the fair value of common stock subject to redemption
would be negated in part by a decrease in the market price of redemption rights.
25
<PAGE>
Market Risk (continued)
Interest Rates
The Company's available-for-sale investments 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 of the financial instrument. A 10%
increase in year-end 1998 market interest rates would result in a negative
impact of $40,000 on the fair value of the Company's interest-sensitive
financial instruments.
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) contacting key suppliers, vendors, and
customers to determine their year 2000 compliance status; and (iii) developing a
contingency plan.
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 to its
critical facilities are needed. The Company is currently upgrading or replacing
its material noncompliant information technology systems, and this process was
approximately 50% complete as of January 2, 1999. The Company expects that all
of its material information technology systems and critical facilities will be
year 2000 compliant by October 1999.
The Company believes that all of its current material products are not
date sensitive and should not be affected by year 2000 issues.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers, vendors, and customers 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, vendors, and customers. The Company
intends to follow-up and monitor the year 2000 compliance progress of
significant suppliers, vendors, and customers that indicate that they are not
year 2000 compliant or that 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 October 1999.
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. This plan 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, vendors, and customers, it will
modify and adjust its contingency plan as may be required.
26
<PAGE>
Year 2000 (continued)
Estimated Costs to Address the Company's Year 2000 Issues
The Company had not incurred any material expenses to third parties
(External Costs) related to year 2000 issues as of January 2, 1999, and the
total External Costs of year 2000 remediation are expected to be less than
$25,000. 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 the internal costs incurred for its year 2000 compliance project.
Such costs are principally the related payroll costs for its information systems
staff.
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.
If any of the Company's material suppliers, vendors, or customers, including the
paper mill for which the Company performs fiber-recovery and water-clarification
services, 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.
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<PAGE>
Thermo Fibergen Inc. 1998 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Operating Losses. The Company has reported operating losses since its
inception as a division of Thermo Fibertek Inc. on December 29, 1991. As of
January 2, 1999, the cumulative operating losses of the Company were
approximately $7,465,000. The Company expects to continue to incur operating
losses for at least the next several years.
Concentration of Revenues. Historically, a significant portion of the
Company's revenues in any particular period has been attributable to sales to a
limited number of customers. Revenues from the Company's largest customer
accounted for 34% and 54% of the Company's total revenues in 1998 and 1997,
respectively. Revenues from a second customer accounted for 14% and 15% of the
Company's total revenues in 1998 and 1997, respectively. Revenues from a third
customer accounted for 16% and 14% of the Company's total revenues in 1998 and
1997. In addition, the Company began providing services to a mill in July 1998
under a ten-year contract. Revenues from the mill accounted for 11% of the
Company's total revenues in 1998. The Company's largest customer was sold by its
parent company in January 1999. No assurance can be given that the Company's
relationship with this customer will continue. The loss of a significant
customer, any reduction in orders from a significant customer, or the
cancellation of a significant order from a customer could have a material
adverse effect on the Company's results of operations.
Risks of Uncertain Market Acceptance. The Company's fiber-recovery and
water-clarification systems and market approach are significantly different from
processing, treatment, and disposal methods that are currently available
commercially. There is a substantial risk with any new service or product that
the marketplace may not accept or be receptive to its potential benefits. As of
January 2, 1999, the Company had installed and was operating only one full-scale
fiber-recovery and water-clarification system at a paper mill. Market acceptance
of the Company's services and products will depend, in large part, upon the
ability of the Company to demonstrate the economic advantage of its system over
available alternatives. There can be no assurance that the Company's services
will be accepted by the pulp and paper industry. The Company has also developed
and begun marketing several new products, in addition to its Biodac home lawn
and garden granules, that use the recoverable components of papermaking
byproducts. These products include oil and grease absorbents, agricultural
row-crop granules, and cat box filler. There can be no assurance that these
products, or other new products developed by the Company from papermaking
byproducts, will gain market acceptance. With respect to consumer products, such
as the Company's cat box filler, the Company has no established distribution
channel network or brand name recognition. Failure of the Company's products and
services to gain market acceptance would have a material adverse effect on the
business of the Company.
Risks Associated With Fiber-recovery and Water-clarification Systems. In
order for the Company's fiber-recovery and water-clarification business to
expand, the Company will need to continue to improve and upgrade its systems so
that they can be used throughout the pulp and paper industry. Certain mills
require more stringent water clarity for their papermaking processes. The
Company's success will, in part, depend on its ability to upgrade the technology
used in its existing fiber-recovery and water-clarification system to attain
these higher water-clarity standards. There can be no assurance that the Company
will be able to develop such technology or implement it in a cost effective
manner.
In addition, the Company's success will depend to some degree on its
ability to identify and develop new technologies to maximize the value of the
components of papermaking byproducts, such as cellulose fibers and minerals, for
sale into other markets. There can be no assurance that the Company will succeed
in obtaining or developing such new technologies. Failure of the Company to
obtain or develop such technologies, or to develop active markets for the
components of the papermaking byproducts it processes, could reduce the
Company's anticipated revenues. Accordingly, such a failure could have a
material adverse effect on the business of the Company.
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<PAGE>
Common Stock Subject to Redemption. The Company's common stock subject to
redemption is sensitive to fluctuations in the price of Company common stock.
The holder of a redemption right may require the Company to redeem one share of
Company common stock at $12.75 per share in September 2000 or September 2001. If
the Company's common stock is trading on the open market at a price which is
less than $12.75 per share, 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 $60.1 million in cash to settle the
redemption obligation. To satisfy this obligation, the Company may need to seek
financing from Thermo Fibertek or Thermo Electron, the guarantor of the
redemption rights. In addition, there is no assurance that the Company will be
able to obtain additional debt or equity financing and/or borrowings from Thermo
Fibertek or Thermo Electron on acceptable terms, or at all, to continue to
expand its business. The exercise of a significant number of redemption rights
could have a material adverse impact on the Company's results of operations,
financial condition, and prospects.
Lack of Operating History and Plant Construction and Management
Experience. Prior to the commencement of operations at the Company's first
full-scale fiber-recovery and water-clarification plant in July 1998, the
Company had no operating history in plant construction and operation. The
Company's management has had limited experience in operating fiber-recovery and
water-clarification plants and no assurance can be given that additional skilled
personnel necessary to successfully commercialize and expand the Company's
business and operations can be recruited and retained. Failure of the Company to
achieve these objectives would have a material adverse effect on the business of
the Company.
Risk of Dependence on Pulp and Paper Mill Customers. Each of the Company's
fiber-recovery and water-clarification plants will rely upon long-term
agreements with an individual pulp or paper mill customer, or a cluster of mills
within a small geographic area, for its revenue. The failure of any one mill
customer to fulfill its contractual obligations could have a substantial
negative impact on the Company. No assurance can be given that a particular mill
will be willing or able, at some time, to make required payments under, or to
otherwise honor, its agreement with the Company. The Company expects that each
of its commercial plants will be located on property leased from a pulp or paper
mill or acquired at, or immediately adjacent to, a pulp or paper mill. No
assurance can be given that the Company will be able to acquire any such sites
on terms that are favorable to the Company or at all.
The Company's GranTek subsidiary obtains its papermaking byproducts from a
single paper mill located near its Wisconsin plant, under a contract that
provides the mill with the exclusive right to supply papermaking byproducts to
GranTek's existing granulation plant. The contract terminates on December 26,
1999, subject to successive mutual two-year extensions. Although the Company
believes that GranTek's relationship with the mill is good, no assurance can be
given that the mill will agree to renew the contract upon its termination in
December 1999.
Risks Associated with Protection, Defense, and Use of Proprietary
Technology and Intellectual Property. The Company holds several United States
and foreign patents relating to various aspects of the processing and use of
cellulose-based granular materials, including the processing and use of such
materials as an agricultural carrier. Thermo Fibertek holds two United States
patents relating to the "scalping" technology licensed to the Company.
Proprietary rights relating to the Company's technology are protected from
unauthorized use by third parties only to the extent that they are covered by
valid and enforceable patents or are maintained in confidence as trade secrets.
Moreover, although the Company is developing technologies for which it believes
that it may be able to obtain patent protection, there can be no assurance 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. In the absence
of patent protection, the Company may be vulnerable to competitors who attempt
to copy the Company's services or products, or gain access to its trade secrets
and know-how. Proceedings initiated by the Company to protect its proprietary
rights could result in substantial costs to the Company. There can be no
assurance that competitors of the Company will not initiate litigation to
challenge the validity of the Company's patents, or that they will not use their
resources to design comparable products that do not infringe the Company's
29
<PAGE>
patents. There may also be pending or issued patents held by parties not
affiliated with the Company that relate to the Company's products or
technologies. The Company may need to acquire licenses to, or contest the
validity of, any such patents. There can be no assurance that any license
required under any such patent would be made available on acceptable terms or
that the Company would prevail in any such contest. The Company could incur
substantial costs in defending itself in suits brought against it or in suits in
which the Company may assert its patent rights against others. If the outcome of
any such litigation is unfavorable to the Company, the Company's business and
results of operations could be materially adversely affected. In addition, the
Company relies on trade secrets and proprietary know-how which it seeks to
protect, in part, by confidentiality agreements with its collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be 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.
Future Capital Needs; Project Financing; Dependence on Capital Markets.
The Company's future capital requirements will depend on many factors, including
continued progress in its research and development program, the magnitude of
such program, competing technological and market developments, the cost of
manufacturing activities, and the Company's ability to market its services and
products successfully. Any equity or debt financings, if available at all, may
be on terms that are not favorable to the Company and, in the case of equity
financings, could result in dilution to the Company's stockholders. If adequate
funds are not available, the Company may be required to curtail development and
commercialization of its products and services.
In addition, after successful installation of one or more additional
fiber-recovery and water-clarification plants, the Company expects to seek to
finance its plants in a manner that is substantially nonrecourse to the Company.
To minimize its equity commitment, the Company will be required to borrow
substantial amounts from third party lenders. These borrowings typically would
be secured only by the plant assets, the capital stock of a subsidiary operating
such plant, or both. If the Company were unable to repay the principal of, and
all interest on, such borrowings, the lender would have the right to foreclose
on, and obtain title to, such assets or capital stock. The Company anticipates
that it will require substantial financing to fund both the equity and debt
components of future plants. The ability to finance the Company's plants on a
nonrecourse basis will depend on a number of factors, including interest
coverage ratios, the length and terms of the Company's contracts with pulp and
paper mill customers, and the perception of technology risks by lenders. The
Company has had no discussions with potential lenders, and no assurance can be
given that financing for future plants will be available on acceptable terms, or
at all. Any failure by the Company to obtain adequate amounts of project
financing on acceptable terms would have a material adverse effect on the future
growth of the Company.
Competition. The Company expects to encounter intense competition in the
sale of its services and products. The Company expects that its principal
competitors in its fiber-recovery and water-clarification business will be
landfills. The Company also competes with incineration facilities in Europe. In
addition, many pulp and paper mills have already made substantial investments in
dewatering and drying equipment to reduce their disposal costs. Mills are
familiar with such methods and may be reluctant to switch to a new solution
unless the Company demonstrates significant cost savings to them. Certain
competitors are seeking to develop technologies and services to treat and
process papermaking byproducts which are similar to those of the Company. No
assurance can be given that these technologies will not be superior to those of
the Company. Some of these competitors may have substantially greater financial,
marketing, and other resources than those of the Company. As a result, they may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their services and products than the Company. There can be no assurance that
the Company will be able to compete effectively with its competitors.
30
<PAGE>
The Company also encounters intense competition in the sale of its Biodac
agricultural carrier products, cat box filler, and other products made from the
recoverable components of papermaking byproducts. The Company's main competitors
are companies that produce clay-based products. Many of the Company's
competitors have substantially greater financial, marketing, and other resources
than the Company, as well as better established distribution channels and brand
name recognition. There can be no assurance that the Company will be able to
compete effectively in the markets for its cellulose-based products.
Environmental and Regulatory Risks. Federal, state, and local
environmental laws govern air emissions and discharges into water, as well as
the generation, transportation, storage, treatment, and disposal of solid waste.
These laws establish standards governing most aspects of the construction and
operation of the Company's facilities, and often require multiple governmental
permits before these facilities can be constructed, modified, or operated. There
can be no assurance that all required permits will be issued for the Company's
fiber-recovery and water-clarification plants, or that the requirements for
continued permitting under environmental regulatory laws and policies governing
their enforcement will not change, requiring new technology or stricter
standards for the control of discharges of air or water pollutants, or for solid
waste handling and disposal. Such future developments could affect the manner in
which the Company constructs and operates its plants, could require significant
additional expenditures to achieve compliance with such requirements, or could
delay or result in the abandonment of certain projects. It is possible that
compliance may not be technically or economically feasible. Changes in these
regulations could also affect the characteristics of the waste generated by pulp
and paper mills. As a result, it is possible that disposal of papermaking
byproducts could be accomplished in a manner that may not involve the Company's
facilities.
In connection with its fiber-recovery and water-clarification plants, the
Company may be required to assume environmental liabilities associated with the
treatment and final disposal of components of the pulp and paper mills' stream
of byproducts that cannot be returned to mills or sold elsewhere. The Company
will endeavor to operate its business to minimize its exposure to environmental
liabilities. In entering into contracts with customers, the Company will seek to
maximize its insulation from environmental liabilities associated with pulp and
paper mill waste streams by controlling the content of the waste streams it will
accept, and by preventing customers from sending any waste streams containing
hazardous components to the Company's facilities. Any such disposal of hazardous
waste could cause the Company to be responsible for the clean-up or remediation
of the disposal site in the future under federal statutes including the Federal
Comprehensive Environmental Response, Compensation, and Liability Act, the
Federal Toxic Substances Control Act (TSCA), the Resource Conservation and
Recovery Act of 1976 (RCRA), the Clean Air Act, and equivalent state laws. No
assurance can be given that claims for environmental liabilities will not be
asserted against the Company.
GranTek currently uses papermaking byproducts from a nearby paper mill in
Green Bay, Wisconsin, to make its granules. The papermaking byproducts GranTek
receives from the mill contain trace amounts of PCBs, dioxins, and furans, as
well as residual amounts of other regulated compounds. During the granulation
process, GranTek evaporates approximately 95% of the water contained in the
papermaking byproducts. Approximately 1.6 pounds per year of PCBs, as well as
other compounds, such as formaldehyde, benzene, and volatile organic compounds
(VOCs), are emitted into the atmosphere from its Green Bay facility as a result
of the evaporation process. Applicable Wisconsin regulations limit PCB emissions
to de minimis amounts unless the generator can demonstrate that it is using the
best available control technology to limit emissions. In June 1998, GranTek was
issued a permit by the Wisconsin Department of Natural Resources (the WDNR)
relieving it of its obligation to reduce emissions. Such permit expires in 2003.
No assurance can be given that in the future the WDNR will not require GranTek
to reduce or eliminate its emissions, that such compliance will not require the
Company to make significant expenditures, or that such compliance will be
technologically or economically feasible. Such compliance may have material
adverse effects on the Company's capital expenditures, earnings, and/or
competitive position.
Because the papermaking byproducts contain trace amounts of PCBs, dioxins,
furans, and other compounds when GranTek receives them from the mill, residual
amounts of these compounds are also found in GranTek's Biodac products. Although
these substances are present in residual quantities well below the maximum
levels currently
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<PAGE>
permitted under TSCA, RCRA, and applicable federal and state regulations, no
assurance can be given that such regulations will not be made more stringent in
the future or that papermaking byproducts containing such substances will not be
regulated as hazardous under TSCA or RCRA, or that federal or state regulations
will not in the future prohibit the use of materials containing these substances
in agricultural applications. Any such regulatory changes may have material
adverse effects on the Company's capital expenditures, earnings, and/or
competitive position. Changes in these regulations could also affect the
characteristics of the waste generated by pulp and paper mills. As a result, it
is possible that disposal of papermaking byproducts could be accomplished in a
manner that may not involve the Company's facilities or that would require the
Company to purchase papermaking byproducts.
Commodity Price Risks. The Company expects to recover high quality long
fiber from the residual streams of pulp and paper mills and to sell it back to
mills under long-term contracts. The prices at which the Company may be able to
sell such fiber will in certain cases not be fixed over the term of the
contracts and will depend on several factors, including the prevailing prices
for both finished paper products and wastepaper. These prices tend to be
cyclical and to vary according to paper type.
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. If any
of the Company's material suppliers, vendors, or customers, including the paper
mill for which the Company performs fiber-recovery and water clarification
services, 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.
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<PAGE>
<TABLE>
<CAPTION>
Thermo Fibergen Inc. 1998 Financial Statements
Selected Financial Information
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996(a) 1995 1994
- ---------------------------------------------------------- --------- -------- --------- --------- --------
Statement of Operations Data
Revenues $ 5,276 $ 4,836 $ 2,223 $ - $ -
Net Income (Loss) 399 1,098 (367) (601) (128)
Earnings (Loss) per Share:
Basic .03 .07 (.03) (.06) (.01)
Diluted .02 .07 (.03) (.06) (.01)
Balance Sheet Data
Working Capital $ 55,909 $58,609 $ 56,477 $ - $ -
Total Assets 71,116 70,164 71,033 - -
Common Stock Subject to Redemption 58,260 57,176 56,087 - -
Shareholders' Investment 11,242 11,959 11,921 - -
(a) Reflects the transfer of $12,500,000 in cash to the Company from Thermo
Fibertek in connection with the capitalization of the Company in February
1996, the acquisition of GranTek in July 1996, and the net proceeds from the
Company's initial public offering in September 1996.
</TABLE>
33
<PAGE>
Common Stock Market Information
The Company's common stock and redemption rights traded together as units
until December 12, 1996, after which the Company's common stock and redemption
rights traded separately. The Company's common stock and redemption rights are
traded on the American Stock Exchange under the symbols TFG and TFG_r,
respectively. The following table sets forth the high and low sale prices of the
Company's equity securities for 1998 and 1997, as reported in the consolidated
transaction reporting system.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Common Stock Redemption Rights
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
1998
First $ 9 5/8 $ 8 1/2 $ 3 1/2 $ 2 5/8
Second 9 7/8 8 7/8 3 1/8 2 13/16
Third 9 11/16 7 1/4 5 1/8 2 5/8
Fourth 8 7/8 7 1/4 4 7/8 3 1/8
1997
First $10 10/16 $ 7 1/2 $ 4 1/2 $ 2 9/16
Second 10 3/8 7 13/16 3 15/16 2 1/2
Third 10 1/2 9 1/4 3 1/8 2 9/16
Fourth 10 1/4 8 3/4 3 1/2 2 9/16
</TABLE>
As of January 29, 1999, the Company had 36 and 31 holders of record of its
common stock and redemption rights, respectively. 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 $8 7/8 per
share.
Security-holder Services
Holders of Thermo Fibergen Inc. common stock or redemption rights who
desire information about the Company are invited to contact the Investor
Relations Department, Thermo Fibergen Inc., 81 Wyman Street, P.O. Box 9046,
Waltham, Massachusetts 02454-9046, (781) 622-1111. A mailing list is maintained
to enable holders whose stock and redemption rights are 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/tfg1.html).
Transfer Agent
American Stock Transfer & Trust Company is the transfer agent and
maintains holders' activity records. The agent will respond to questions on
issuance of stock and rights certificates, change of ownership, lost stock and
rights 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
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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 Fibergen
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.
35
<TABLE>
Exhibit 21
<CAPTION>
Subsidiaries of the Registrant
At February 20, 1999, Thermo Fibergen Inc. owned the following companies:
<S> <C> <C>
Name State or Registrant's
Jurisdiction % of
of Incorporation Ownership
- ------------------------------------ ---------------------------------- -----------------------------------
Fibergen Securities Corporation Massachusetts 100%
GranTek Inc. Wisconsin 100%
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated February 10, 1999, included in or incorporated
by reference into Thermo Fibergen Inc.'s Annual Report on Form 10-K for the year
ended January 2, 1999, into the Company's previously filed Registration
Statement No. 333-64433 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
March 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
FIBERGEN INC.'S REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 2, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 6,748
<SECURITIES> 48,206
<RECEIVABLES> 1,218
<ALLOWANCES> 30
<INVENTORY> 485
<CURRENT-ASSETS> 57,293
<PP&E> 11,175
<DEPRECIATION> 2,250
<TOTAL-ASSETS> 71,116
<CURRENT-LIABILITIES> 1,384
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 11,142
<TOTAL-LIABILITY-AND-EQUITY> 71,116
<SALES> 5,276
<TOTAL-REVENUES> 5,276
<CGS> 3,171
<TOTAL-COSTS> 3,171
<OTHER-EXPENSES> 1,454
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 665
<INCOME-TAX> 266
<INCOME-CONTINUING> 399
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<NET-INCOME> 399
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<EPS-DILUTED> 0.02
</TABLE>
