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 1, 2000
[ ] 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 of
incorporation or organization) (I.R.S. Employer Identification No.)
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 28, 2000, was approximately $42,148,000.
As of January 28, 2000, the Registrant had 14,160,600 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
January 1, 2000, 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 18, 2000, 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) 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 to help pulp and paper mills
improve product quality, reduce costs, and close the loop in their water and
solids systems on a long-term contract basis. The Company currently owns and
operates one such plant in South Carolina, which it began operating in July 1998
under a ten-year contract.
The Cellulose-based Products segment includes the Company's GranTek
subsidiary, which employs patented technology to produce biodegradable absorbing
granules from papermaking byproducts that are marketed and sold as Biodac(R)
inert carriers for agricultural crop protection chemicals, Gran-sorb(TM) oil and
grease absorbents, PaPurr(TM) cat box fillers, and FiberRest(TM) animal bedding.
In addition, in October 1999, the Company established a subsidiary, NEXT Fiber
Products Inc., to develop, produce, and market fiber-based composites primarily
for the building industry. The Company is currently finalizing development of
the composites material and expects to complete construction of and begin
operating the composites manufacturing facility, located in Green Bay,
Wisconsin, during 2000.
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. On January 31, 2000, Thermo Electron
announced that, as part of a major reorganization, it plans to spin off its
equity interest in Thermo Fibertek as a dividend to Thermo Electron
shareholders. Under the plan, the Company will remain a majority-owned
subsidiary of Thermo Fibertek.
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. The common stock and redemption rights
subsequently began trading separately. 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 1, 2000,
there were 4,715,000 redemption rights outstanding and only 3,725,500 shares of
Company common stock held by persons other than Thermo Electron or Thermo
Fibertek. In addition, Thermo Electron, Thermo Fibertek, and/or the Company 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 1, 2000, Thermo Fibertek owned 10,419,350 shares of the
Company's common stock, representing 74% of such outstanding common stock. As of
January 1, 2000, Thermo Electron owned 15,750 shares of Company common stock,
representing 0.1% of such outstanding common stock.
Thermo Fibertek develops, manufactures, and markets a range of equipment
and products for the pulp and paper recycling industries. Thermo Electron
develops, manufactures, and sells measurement and detection instruments used in
virtually every industry to monitor, collect, and analyze data that provide
knowledge for the user. For example, Thermo Electron's powerful analysis
technologies help researchers sift through data to unlock the mysteries of DNA
or develop new drugs; allow manufacturers to fabricate ever-smaller components
required to carry greater amounts of information, faster; or monitor and control
industrial processes on-line to ensure that critical quality standards are met
efficiently.
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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 1999* 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 1999 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
Through its Fiber-recovery and Water-clarification Services segment, the
Company designs, builds, owns, and operates plants to help pulp and paper mills
improve product quality, reduce costs, and close the loop in their water and
solids systems on a long-term contract-basis. The Company currently owns and
operates one such plant in South Carolina, which it began operating in July 1998
under a ten-year contract. 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 employs patented technology to produce
biodegradable absorbing granules from papermaking byproducts that are marketed
and sold as Biodac(R) agricultural carriers, Gran-sorb(TM) oil and grease
absorbents, PaPurr(TM) (pronounced "paper") cat box filler, and FiberRest(TM)
animal bedding.
Biodac(R) is used to deliver agricultural chemicals for professional turf,
home lawn and garden, agricultural row-crop, and mosquito-control applications.
Gran-sorb is currently being sold throughout the Midwest. PaPurr, which is
offered in conventional and clumping formulations as an alternative to clay, is
now available in more than 3,000 stores throughout the U.S. and Canada. The
Company is working to further expand distribution through mass merchandisers and
specialty pet stores. The Company's recently introduced FiberRest animal bedding
is a highly absorbent granular product made from paper fibers, clay, and lime.
FiberRest is available throughout Southern Ohio, North/Central Kentucky, and
Southeastern Indiana. Products under development include controlled-release
granules for carrying fertilizers.
In October 1999, the Company formed a subsidiary, NEXT Fiber Products
Inc., to develop, produce, and market fiber-based composites. The Company is
currently finalizing development of fiber-based composite products and is
constructing a facility in Green Bay, Wisconsin, to manufacture such products.
- --------------------
* References to 1999, 1998, and 1997 herein are for the fiscal years ended
January 1, 2000, January 2, 1999, and January 3, 1998, respectively.
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(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, cellulose-fiber-based composites for plastic lumber
and other applications.
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 $1,385,000,
$1,454,000, and $1,877,000 in 1999, 1998, and 1997, respectively.
(iii) Raw Materials
The raw material used in the manufacture of GranTek's cellulose-based
products is 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 that expires in December 2001, 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 that
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.
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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, which is an important
component of the Company's fiber-recovery system, that 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.
(v) Seasonal Influences
Fiber-recovery and Water-clarification Services
Not applicable.
Cellulose-based Products
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, animal bedding, 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 Scotts Company, which acquired The Solaris Group in January
1999, accounted for 43%, 34%, and 54% of the Company's total revenues in 1999,
1998, and 1997, respectively. Revenues from Rhone-Poulenc AG Company accounted
for 10%, 14%, and 15% of the Company's total revenues in 1999, 1998, and 1997,
respectively. Revenues from American Cyanamid Company accounted for 11%, 16%,
and 14% of the Company's total revenues in 1999, 1998, and 1997, respectively.
Revenues from LinPac (previously Somerset Paper), the customer for which the
Company is providing fiber-recovery and water-clarification services, accounted
for 16% and 11% of revenues in 1999 and 1998.
(viii) Backlog
The backlog of firm orders in the Company's Cellulose-based Products
segment was $799,000 as of January 1, 2000, and $419,000 as of January 2, 1999.
The Company believes that substantially all of the backlog at January 1, 2000,
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 1999 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.
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(ix) Government Contracts
Not applicable.
(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.
NEXT Fiber Products will compete in the plastic lumber segment of the
building and construction industry, primarily with companies such as Trex
Company, Inc. and U.S. Plastic Lumber.
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
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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
1999 Annual Report to Shareholders and is incorporated herein by reference.
(xiii) Number of Employees
As of January 1, 2000, the Company employed 47 people. None of the
Company's employees is represented by a union. The Company believes that
relations with its employees are good.
(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 39 President and Chief Executive Officer (1996)
Theo Melas-Kyriazi 40 Chief Financial Officer (1998)
Paul F. Kelleher 57 Chief Accounting Officer (1996)
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 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 1,
2000, 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 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.
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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 that expires
in January 2001, a 30,000-square foot processing plant in Green Bay, Wisconsin,
under a lease that expires in December 2004, and a 14,000-square foot test
facility in Columbus, Indiana, under a lease that expires in December 2000.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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 1999 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 1, 2000, the Company had expended
$5,924,000 of such net proceeds for the purchase of property, plant, and equipment, including
$3,573,000 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 1, 2000, remaining net proceeds of
$44,770,000 were invested directly with persons other than Affiliates and $5,087,000 were invested
in an advance 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 1999 Annual Report to Shareholders and is incorporated herein by
reference.
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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 1999 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 1999 Annual Report to Shareholders and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements as of January 1, 2000,
and Supplementary Data are included in the Registrant's 1999 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.
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.
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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 Income
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:
All 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.
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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 21, 2000 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 21, 2000.
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
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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 Corporation (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 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).
10.7 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).
12
<PAGE>
Exhibit
Number Description of Exhibit
10.8 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated as of June 1,
1999, between the Registrant and Thermo Electron (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No.
1-12137] and incorporated herein by reference).
10.9 Amended and Restated Equity Incentive Plan of the Registrant
(filed as Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 3, 1999 [File No. 1-12137]
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.
10.10 Amended and Restated Deferred Compensation Plan for Directors of the Registrant (filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July
3, 1999 [File No. 1-12137] and incorporated herein by reference).
10.11 Amended and Restated Directors Stock Option Plan of the Registrant (filed as Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
[File No. 1-12137] and incorporated herein by reference).
10.12 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).
10.13 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 1, 2000
(only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
</TABLE>
Exhibit 13
Thermo Fibergen Inc.
Consolidated Financial Statements
1999
<PAGE>
<TABLE>
<CAPTION>
Thermo Fibergen Inc. 1999 Financial Statements
Consolidated Statement of Income
<S> <C> <C> <C>
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------- -------- --------- -------
Revenues (Note 10) $ 8,579 $ 5,276 $ 4,836
------- -------- -------
Costs and Operating Expenses:
Cost of revenues 4,804 3,171 2,656
Selling, general, and administrative expenses (Note 7) 3,400 3,119 2,727
Research and development expenses (Note 7) 1,385 1,454 1,877
------- -------- -------
9,589 7,744 7,260
------- -------- -------
Operating Loss (1,010) (2,468) (2,424)
Interest Income 2,691 3,113 3,522
Gain on Sale of Investments - 20 -
------- -------- -------
Income Before Provision for Income Taxes and Minority Interest 1,681 665 1,098
Provision for Income Taxes (Note 6) 694 266 -
Minority Interest Income (53) - -
------- -------- -------
Net Income $ 1,040 $ 399 $ 1,098
======= ======== =======
Earnings per Share (Note 11)
Basic $ .07 $ .03 $ .07
======= ======== =======
Diluted $ .07 $ .02 $ .07
======= ======== =======
Weighted Average Shares (Note 11)
Basic 14,389 14,715 14,715
======= ======== =======
Diluted 15,540 16,867 16,414
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
Thermo Fibergen Inc. 1999 Financial Statements
Consolidated Balance Sheet
<S> <C> <C>
(In thousands except share amounts) 1999 1998
- ---------------------------------------------------------------------------------------- -------- --------
Assets
Current Assets:
Cash and cash equivalents (includes $6,707 under repurchase $ 51 $ 6,748
agreement with affiliated company in 1998)
Advance to affiliate 5,087 -
Available-for-sale investments, at quoted market value (amortized 46,405 48,206
cost of $46,470 and $48,210; Note 2)
Accounts receivable, less allowance of $30 (Note 10) 1,164 1,188
Inventories 817 485
Deferred tax asset and other current assets (Note 6) 197 366
Due from parent company and affiliated companies 377 300
------- -------
54,098 57,293
------- -------
Property, Plant, and Equipment, at Cost, Net 10,062 8,925
------- -------
Other Assets (Notes 1 and 3) 4,416 802
------- -------
Cost in Excess of Net Assets of Acquired Company (Note 3) 3,862 4,096
------- -------
$72,438 $71,116
======= =======
3
<PAGE>
Thermo Fibergen Inc. 1999 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1999 1998
- ---------------------------------------------------------------------------------------- -------- --------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 920 $ 327
Accrued payroll and employee benefits 385 325
Accrued income taxes 290 -
Other accrued liabilities (Note 3) 2,326 732
Common stock subject to redemption ($60,116 redemption value), 59,344 -
4,715,000 shares issued and outstanding ------- -------
63,265 1,384
------- -------
Deferred Income Taxes (Note 6) 512 230
------- -------
Commitments (Note 8)
Minority Interest (Note 3) 3,021 -
------- -------
Common Stock Subject to Redemption ($60,116 redemption value), - 58,260
4,715,000 Shares Issued and Outstanding ------- -------
Shareholders' Investment (Notes 4 and 5):
Common stock, $.01 par value, 25,000,000 shares authorized; 100 100
10,000,000 shares issued
Capital in excess of par value 11,102 11,145
Treasury stock at cost, 554,400 shares (5,520) -
Accumulated other comprehensive items (42) (3)
------- -------
5,640 11,242
------- -------
$72,438 $71,116
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
Thermo Fibergen Inc. 1999 Financial Statements
Consolidated Statement of Cash Flows
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- ---------- --------
Operating Activities
Net income $ 1,040 $ 399 $ 1,098
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,410 1,151 1,204
Minority interest income (53) - -
Deferred income tax expense (benefit) 270 242 (100)
Other noncash items - (239) (481)
Changes in current accounts:
Accounts receivable 24 (543) 93
Inventories (195) 22 (195)
Other current assets 192 (48) (151)
Accounts payable 422 (11) (91)
Other current liabilities 574 36 31
--------- --------- -------
Net cash provided by operating activities 3,684 1,009 1,408
--------- --------- -------
Investing Activities
Acquisition of capital equipment and technology (Note 3) (500) - -
Advances to affiliate, net (5,087) - -
Purchases of available-for-sale investments (61,825) (70,882) (48,050)
Proceeds from sale of available-for-sale investments - 7,730 -
Proceeds from maturities of available-for-sale investments 63,565 51,470 12,256
Purchases of property, plant, and equipment (939) (4,134) (377)
Other 2 (12) 8
--------- --------- -------
Net cash used in investing activities (4,784) (15,828) (36,163)
--------- --------- -------
Financing Activities
Purchases of Company common stock (3,293) - -
Purchases of Company common stock from Thermo Electron (2,227) - -
Change in due from parent company and affiliated companies (77) (185) (1,881)
--------- --------- -------
Net cash used in financing activities (5,597) (185) (1,881)
--------- --------- -------
Decrease in Cash and Cash Equivalents (6,697) (15,004) (36,636)
Cash and Cash Equivalents at Beginning of Year 6,748 21,752 58,388
--------- --------- -------
Cash and Cash Equivalents at End of Year $ 51 $ 6,748 $21,752
========= ========= =======
Cash Paid (Refunded) For
Income taxes $ (71) $ 89 $ 27
5
<PAGE>
Thermo Fibergen Inc. 1999 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- ---------- --------
Noncash Activities (Note 3)
Fair value of capital equipment and technology acquired $ 5,275 $ - $ -
Cash paid for capital equipment and technology (500) - -
Payable for capital equipment and technology (1,700) - -
Equity interest in subsidiary transferred for capital equipment (3,075) - -
and technology --------- --------- -------
$ - $ - $ -
========= ========= =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Thermo Fibergen Inc. 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Comprehensive Income
Net Income $ 1,040 $ 399 $ 1,098
-------- -------- --------
Other Comprehensive Items:
Net unrealized gain (loss) on available-for-sale investments (39) (32) 29
-------- -------- --------
$ 1,001 $ 367 $ 1,127
======== ======== ========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning and end of year $ 100 $ 100 $ 100
-------- -------- --------
Capital in Excess of Par Value:
Balance at beginning of year 11,145 11,830 12,094
Accretion of common stock subject to redemption (Note 1) (43) (685) (264)
-------- -------- --------
Balance at end of year 11,102 11,145 11,830
-------- -------- --------
Retained Earnings:
Balance at beginning of year - - (273)
Net income 1,040 399 1,098
Accretion of common stock subject of redemption (Note 1) (1,040) (399) (825)
-------- -------- --------
Balance at end of year - - -
-------- -------- --------
Accumulated Other Comprehensive Items:
Balance at beginning of year (3) 29 -
Other comprehensive items (39) (32) 29
-------- -------- --------
Balance at end of year (42) (3) 29
-------- -------- --------
Treasury Stock:
Balance at beginning of year - - -
Purchases of Company common stock (5,520) - -
-------- -------- --------
Balance at end of year (5,520) - -
-------- -------- --------
$ 5,640 $ 11,242 $ 11,959
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Thermo Fibergen Inc. 1999 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.
Through its Fiber-recovery and Water-clarification Services segment, the Company
designs, builds, owns, and operates plants to help pulp and paper mills improve
product quality, reduce costs, and 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. The Company currently owns and
operates one such plant in South Carolina, which it began operating in July 1998
under a ten-year contract (Note 8).
The Cellulose-based Products segment includes the Company's GranTek
subsidiary, which employs patented technology to produce biodegradable absorbing
granules from papermaking byproducts that are marketed and sold as Biodac(R)
inert carriers for agricultural crop protection chemicals, Gran-sorb(TM) oil and
grease absorbents, PaPurr(TM) cat box filler, and FiberRest(TM) animal bedding.
In addition, through its majority-owned NEXT Fiber Products Inc. subsidiary, the
Company intends to develop, produce, and market fiber-based composites primarily
for the building industry (Note 3). The Company is currently finalizing
development of the composites material and expects to complete construction of
and begin operating the composites manufacturing facility, located in Green Bay,
Wisconsin, during 2000.
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 1, 2000, Thermo
Fibertek owned 10,419,350 shares of the Company's common stock, representing 74%
of such stock outstanding. Thermo Fibertek is a 91%-owned subsidiary of Thermo
Electron Corporation. In addition, as of January 1, 2000, Thermo Electron owned
15,750 shares of the Company's common stock, representing 0.1% of such stock
outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
its wholly owned subsidiaries, and its majority-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 1999, 1998, and 1997 are for the fiscal years ended January 1,
2000, January 2, 1999, and January 3, 1998, respectively. Fiscal years 1999 and
1998 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.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Except where the
effect would be antidilutive, diluted earnings per share have been computed
assuming the redemption of redeemable common stock and the exercise of stock
options, as well as their related income tax effect.
Cash and Cash Equivalents
At year-end 1998, $6,707,000 of the Company's cash equivalents were
invested in a repurchase agreement with Thermo Electron. Under this agreement,
the Company in effect lent excess cash to Thermo Electron, which Thermo Electron
collateralized with investments principally consisting of corporate notes, U.S.
government-agency securities, commercial paper, money market funds, and other
marketable securities, in the amount of at least 103% of such obligation. The
Company's funds subject to the repurchase agreement were readily convertible
into cash by the Company. The repurchase agreement earned a rate based on the
90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. Effective June 1999, the Company adopted a new cash
management arrangement with Thermo Electron, described below, that replaces the
repurchase agreement. Cash equivalents are carried at cost, which approximates
market value. At year-end 1998, the Company's cash equivalents also included
$33,000 of U.S. government-agency securities, which had original maturities of
three months or less.
Advance to Affiliate
Effective June 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points,
set at the beginning of each month. Thermo Electron is contractually required to
maintain cash, cash equivalents, and/or immediately available bank lines of
credit equal to at least 50% of all funds invested under this cash management
arrangement by all Thermo Electron subsidiaries other than wholly owned
subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice.
In addition, under the new domestic cash management arrangement, amounts
borrowed from Thermo Electron for domestic cash management purposes bear
interest at the 30-day Dealer Commercial Paper Rate plus 150 basis points, set
at the beginning of each month. The Company has no borrowings under this
arrangement at year-end 1999.
</TABLE>
Inventories
Inventories are stated at the lower of cost (on a weighted average or
first-in, first-out basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- -------------------------------------------------------------------------------------------- ------- -----
Raw Materials and Supplies $364 $151
Finished Goods 453 334
---- ----
$817 $485
==== ====
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The Company periodically reviews its quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. The Company records as a charge to cost of revenues any amounts required
to reduce the carrying value of inventories to net realizable value.
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: 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 the following:
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Land $ 87 $ 87
Buildings 4,120 4,120
Fiber-recovery and Water-clarification Facility 3,573 3,500
Machinery, Equipment, and Leasehold Improvements 3,557 3,468
Construction in Process 1,971 -
------- -------
13,308 11,175
Less: Accumulated Depreciation and Amortization 3,246 2,250
------- -------
$10,062 $ 8,925
======= =======
Other Assets
Other assets in the accompanying balance sheet includes the cost of
acquired intellectual property and patents, which are amortized using the
straight-line method over estimated useful lives of 7 and 12 years,
respectively. The carrying value of acquired intellectual property was
$3,697,000, net of accumulated amortization of $90,000, at year-end 1999. The
carrying value of patents was $708,000 and $792,000, net of accumulated
amortization of $292,000 and $208,000, at year-end 1999 and 1998, 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 $831,000 and $597,000 at year-end 1999 and 1998, respectively.
The Company assesses the future useful life of this asset whenever events or
changes in circumstances indicate that the current useful life has diminished.
Such events or circumstances generally would include the occurrence of operating
losses or a significant decline in earnings associated with the acquired
business or asset. The Company considers the future undiscounted cash flows of
the acquired company in assessing the recoverability of this asset. The Company
assesses cash flows before interest charges and when impairment is indicated,
writes the asset down to fair value. If quoted market values are not available,
the Company estimates fair value by calculating the present value of future cash
flows. If impairment has occurred, any excess of carrying value over fair value
is recorded as a loss.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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 subsequently began trading separately.
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 1, 2000, Thermo Electron, Thermo Fibertek, and the Company had
purchased and owned an aggregate of 989,500 shares of the total 4,715,000 shares
of Company common stock issued in connection with its initial public offering.
As of January 1, 2000, there were 4,715,000 redemption rights outstanding and
only 3,725,500 shares of Company common stock held by persons other than Thermo
Electron or Thermo Fibertek. In addition, Thermo Electron, Thermo Fibertek,
and/or the Company may acquire additional shares of the Company's common stock
in the open market. 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 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
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 income for 1999, 1998, and 1997
(Note 8).
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, advance to affiliate, 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 $61,592,000 and
$58,053,000 at year-end 1999 and 1998, 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.
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Available-for-sale Investments
</TABLE>
The Company's debt securities are considered available-for-sale
investments in the accompanying balance sheet and are carried at market value,
with the difference between cost and market value, net of related tax effects,
recorded in the "Accumulated other comprehensive items" component of
shareholders' investment. The aggregate market value, cost basis, and gross
unrealized gains and losses of available-for-sale investments by major security
type are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands) Gross Gross
Market Cost Unrealized Unrealized
Value Basis Gains Losses
- ----------------------------------------------------------- ----------- ----------- ----------- ----------
1999
Government-agency Securities $46,074 $46,139 $ - $ (65)
Other 331 331 - -
------- ------- ------- -------
$46,405 $46,470 $ - $ (65)
======= ======= ======= =======
1998
Government-agency Securities $47,494 $47,498 $ 6 $ (10)
Other 712 712 - -
------- ------- ------- -------
$48,206 $48,210 $ 6 $ (10)
======= ======= ======= =======
Available-for-sale investments in the accompanying 1999 balance sheet have
contractual maturities of one year or less. Actual maturities may differ from
contractual maturities as a result of the Company's intent to sell these
securities prior to maturity and as a result of put and call features of the
securities that enable either the Company, the issuer, or both to redeem these
securities at an earlier date.
The cost of available-for-sale investments that were sold was based on
specific identification in determining the gross realized gains and losses
recorded in the accompanying statement of income.
12
<PAGE>
3. Composites Venture
In October 1999, the Company created a subsidiary, NEXT Fiber Products
Inc., to develop, produce, and market fiber-based composites primarily for the
building industry. The Company capitalized NEXT Fiber Products with $3,200,000
in cash. NEXT Fiber Products then purchased capital equipment and technology
related to the development of fiber-based composites, valued at $5,275,000, in
exchange for shares of the subsidiary's common stock equal to 49% of its equity
and $2,200,000 in cash, payable in installments, if certain conditions are met.
The Company paid $500,000 of the purchase price in 1999. The $1,700,000
remaining obligation is included in other accrued liabilities in the
accompanying 1999 balance sheet. Subsequent to year end, the Company paid
$1,200,000 of this obligation. To the extent that NEXT Fiber Products does not
purchase $1,000,000 of capital equipment by April 2001, the remaining funds will
be remitted to the seller as additional consideration for the acquired assets.
As of January 1, 2000, the Company had committed $517,000 of such funds for
purchases of capital equipment. The Company has options to acquire the 49%
equity interest not owned by the Company, exercisable during the months of
October 2001, 2002, or 2003, for pre-established multiples of NEXT Fiber
Products' pre-tax earnings.
The Company is currently finalizing development of the composites material
and expects to complete construction of and begin operating the composites
manufacturing facility, located in Green Bay, Wisconsin, during 2000.
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 1999, 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.
</TABLE>
13
<PAGE>
4. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
------------------ ------------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- --------- --------- --------- ---------- -------- ---------
Options Outstanding, Beginning of Year 430 $9.78 383 $10.13 340 $10.27
Granted 68 8.93 90 8.71 55 9.05
Forfeited (23) 9.55 (23) 9.57 (12) 9.25
Canceled due to exchange - - (20) 11.83 - -
--- --- ---
Options Outstanding, End of Year 475 $9.67 430 $ 9.78 383 $10.13
=== ===== === ====== === ======
Options Exercisable 475 $9.67 430 $ 9.78 383 $10.13
=== ===== === ====== === ======
Options Available for Grant 325 370 416
=== === ===
</TABLE>
A summary of the status of the Company's stock options at January 1, 2000,
is as follows:
<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 - $ 9.15 128 5.8 years $8.68
9.16 - 10.36 327 8.2 years 9.87
10.37 - 12.75 20 1.7 years 12.75
---
$ 7.95 - $ 12.75 475 7.3 years $9.67
===
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. Under this program, 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. 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. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages.
14
<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 and earnings per share would
have been as follows:
(In thousands except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Net Income:
As reported $1,040 $ 399 $1,098
Pro forma 774 170 847
Basic Earnings per Share:
As reported .07 .03 .07
Pro forma .05 .01 .06
Diluted Earnings per Share:
As reported .07 .02 .07
Pro forma .05 .01 .05
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 $3.57,
$3.43, and $5.18 in 1999, 1998, and 1997, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Volatility 35% 35% 35%
Risk-free Interest Rate 5.3% 5.0% 6.3%
Expected Life of Options 5.0 years 5.1 years 7.1 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
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 $76,000, $67,000, and $60,000 in 1999, 1998, and 1997,
respectively.
15
<PAGE>
5. Common Stock
At January 1, 2000, 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 as follows:
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------- -------- ------- ------
Currently Payable:
Federal $ 394 $ 14 $ 77
State 30 10 23
------ ------ ------
424 24 100
------ ------ ------
Net Deferred (Prepaid):
Federal 219 211 (77)
State 51 31 (23)
------ ------ ------
270 242 (100)
------ ------ ------
$ 694 $ 266 $ -
====== ====== ======
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 34% to income before provision for income taxes due to the
following:
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------- -------- ------- ------
Provision for Income Taxes at Statutory Rate $ 572 $ 226 $ 373
Increases (Decreases) Resulting From:
State income taxes, net of federal benefit (30) (176) 63
Nondeductible expenses and other 108 18 8
Tax benefit of foreign sales corporation (6) (5) 96
Change in valuation allowance 50 203 (540)
------ ------ ------
$ 694 $ 266 $ -
====== ====== ======
</TABLE>
16
<PAGE>
6. Income Taxes (continued)
Deferred tax asset and deferred income taxes in the accompanying balance
sheet consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------- ------- ------
Deferred Tax Asset:
State operating loss carryforwards $253 $203
Reserves and accruals 141 126
Available-for-sale investments 23 5
---- ----
417 334
Less: Valuation allowance 253 203
---- ----
$164 $131
==== ====
Deferred Income Taxes:
Depreciation $462 $179
Amortization of intangibles 50 51
---- ----
$512 $230
==== ====
The valuation allowance relates to uncertainty surrounding the realization
of state operating loss carryforwards of $2.7 million and $2.1 million at
year-end 1999 and 1998, respectively, which begin to 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 pays Thermo Electron annually an amount equal to 0.8% of the
Company's revenues. The Company paid an amount equal to 0.8% and 1.0% of the
Company's revenues in 1998 and 1997, respectively. For these services, the
Company was charged $69,000, $42,000, and $48,000 in 1999, 1998, and 1997,
respectively. The fee is reviewed and adjusted annually by mutual agreement of
the parties. Management believes that the service fee charged by Thermo Electron
is reasonable and that such fees are representative of the expenses the Company
would have incurred on a stand-alone basis. The corporate services agreement is
renewed annually but can be terminated upon 30 days' prior notice by the Company
or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the
Thermo Electron Corporate Charter defines the 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.
Cash Management
The Company invests excess cash in arrangements with Thermo Electron as
discussed in Note 1.
17
<PAGE>
7. Related-party Transactions (continued)
License Agreement
In 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. As of year-end 1999, the Company had
purchased two scalping units from a wholly owned subsidiary of Thermo Fibertek.
These purchases are included in other related-party transactions for 1998.
Other Related-party Transactions
During 1999 and 1998, the Company purchased equipment for $52,000 and
$441,000, respectively, from wholly owned subsidiaries of Thermo Fibertek for
use in its fiber-recovery and water-clarification systems.
During 1998, two wholly owned subsidiaries of Thermo Fibertek performed
certain laboratory and administrative services for the Company, for which the
Company paid $69,000.
8. Commitments
Operating Leases
The Company occupies office space under several operating leases. The
accompanying statement of income includes expense from operating leases of
$135,000, $121,000, and $71,000 in 1999, 1998, and 1997, respectively. The
future minimum payments due under noncancelable operating leases as of January
1, 2000, are $256,000 in 2000; $120,000 in 2001; and $96,000 in each of 2002,
2003, and 2004. Total future minimum lease payments are $664,000.
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 Inc. 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 1, 2000, the Company had committed
to purchase natural gas for $132,000 in 2000.
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.
18
<PAGE>
9. Business Segment Information
The Company organizes and manages its business by individual functional
operating entity. The Company operates in two business segments: Fiber-recovery
and Water-clarification Services and Cellulose-based Products. Through its
Fiber-recovery and Water-clarification Services segment, the Company designs,
builds, owns, and operates plants to help pulp and paper mills improve product
quality, reduce costs, and 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 includes the Company's GranTek
subsidiary, which employs patented technology to produce biodegradable absorbing
granules from papermaking byproducts used as agricultural carriers, oil and
grease absorbents, cat box fillers, and animal bedding. 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. In addition, the Company plans to
develop, produce, and market fiber-based composites through its majority-owned
NEXT Fiber Products subsidiary. The Company is currently finalizing development
of the composites material and expects to complete construction of and begin
operating the composites manufacturing facility, located in Green Bay,
Wisconsin, during 2000.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Revenues:
Cellulose-based Products $ 7,183 $ 4,711 $ 4,836
Fiber-recovery and Water-clarification Services 1,396 565 -
------- -------- -------
$ 8,579 $ 5,276 $ 4,836
======= ======== =======
Income Before Provision for Income Taxes:
Cellulose-based Products $ 793 $ 65 $ 246
Fiber-recovery and Water-clarification Services (1,803) (2,533) (2,670)
------- -------- -------
Total operating loss (1,010) (2,468) (2,424)
Interest and other income 2,691 3,133 3,522
------- -------- -------
$ 1,681 $ 665 $ 1,098
======= ======== =======
Total Assets:
Cellulose-based Products $19,216 $ 12,974 $12,861
Fiber-recovery and Water-clarification Services 53,222 58,142 57,303
------- -------- -------
$72,438 $ 71,116 $70,164
======= ======== =======
Depreciation and Amortization:
Cellulose-based Products $ 840 $ 773 $ 1,038
Fiber-recovery and Water-clarification Services 570 378 166
------- -------- -------
$ 1,410 $ 1,151 $ 1,204
======= ======== =======
Capital Expenditures:
Cellulose-based Products $ 541 $ 844 $ 88
Fiber-recovery and Water-clarification Services 398 3,290 289
------- -------- -------
$ 939 $ 4,134 $ 377
======= ======== =======
19
<PAGE>
10. Significant Customers, Export Sales, and Concentrations of Risk
Revenues from one customer accounted for 43%, 34%, and 54% of the
Company's total revenues in 1999, 1998, and 1997, respectively. Revenues from a
second customer accounted for 11%, 16%, and 14% of the Company's total revenues
in 1999, 1998, and 1997, respectively. Revenues from a third customer accounted
for 10%, 14%, and 15% of the Company's total revenues in 1999, 1998, and 1997,
respectively. In addition, the Company began providing services to a mill in
July 1998 under a ten-year contract. Revenues from the mill accounted for 16%
and 11% of the Company's total revenues in 1999 and 1998, respectively.
Export revenues accounted for 8%, 13%, and 7% of the Company's total
revenues in 1999, 1998, and 1997, respectively.
At year-end 1999, a significant portion of the accounts receivable due to
the Company was from four 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.
The raw material used in the manufacture of the products sold by GranTek
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 that expires in December 2001, 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.
11. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------ --------- -------- --------
Basic
Net Income $ 1,040 $ 399 $ 1,098
-------- ------- -------
Weighted Average Shares 14,389 14,715 14,715
-------- ------- -------
Basic Earnings per Share $ .07 $ .03 $ .07
======== ======= =======
Diluted
Net Income $ 1,040 $ 399 $ 1,098
-------- ------- -------
Weighted Average Shares 14,389 14,715 14,715
Effect of:
Redemption rights 1,125 2,151 1,698
Stock options 26 1 1
-------- ------- -------
Weighted Average Shares, as Adjusted 15,540 16,867 16,414
-------- ------- -------
Diluted Earnings per Share $ .07 $ .02 $ .07
======== ======= =======
Options to purchase 123,000, 385,000, and 350,000 shares of common stock were not included in the
computation of diluted earnings per share for 1999, 1998, and 1997, respectively, because the options'
exercise prices were greater than the average market price for the common stock and their effect would
have been antidilutive.
</TABLE>
20
<PAGE>
12. Unaudited Quarterly Information
(In thousands except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 First Second Third Fourth
- ---------------------------------------------------------------- --------- ---------- ---------- ---------
Revenues $2,074 $2,253 $2,266 $1,986
Gross Profit 964 1,024 938 849
Net Income 279 282 302 177
Basic and Diluted Earnings per Share .02 .02 .02 .01
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
13. Subsequent Event
On January 31, 2000, Thermo Electron announced that, as part of a major
reorganization plan, it plans to spin off its equity interest in Thermo Fibertek
as a dividend to Thermo Electron shareholders. The distribution is subject to
receipt of a favorable ruling from the Internal Revenue Service regarding the
tax treatment of the spin off, and other customary conditions. Under the plan,
the Company will remain a majority-owned subsidiary of Thermo Fibertek. Thermo
Electron will continue to guarantee the Company's obligation under its
redemption rights (Note 1) following the spin off.
21
<PAGE>
Thermo Fibergen Inc. 1999 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 74%-owned subsidiary of Thermo
Fibertek Inc.) and subsidiaries as of January 1, 2000, and January 2, 1999, and
the related consolidated statements of income, comprehensive income and
shareholders' investment, and cash flows for each of the three years in the
period ended January 1, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo
Fibergen Inc. and subsidiaries as of January 1, 2000, and January 2, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended January 1, 2000, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 9, 2000
22
<PAGE>
Thermo Fibergen Inc. 1999 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company 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. Through its Fiber-recovery and Water-clarification
Services segment, the Company designs, builds, owns, and operates plants to help
pulp and paper mills improve product quality, reduce costs, and close the loop
in their water and solids systems on a long-term contract basis. The plants
recover and return to the mill long cellulose fiber and clarified water to be
reused in papermaking. The Company currently owns and operates one such plant in
South Carolina, which it began operating in July 1998 under a ten-year contract.
The Cellulose-based Products segment includes the Company's GranTek
subsidiary, which employs patented technology to produce biodegradable absorbing
granules from papermaking byproducts that are marketed and sold as Biodac(R)
agricultural carriers, Gran-sorb(TM) oil and grease absorbents, PaPurr(TM)
(pronounced "paper") cat box filler, and FiberRest(TM) animal bedding. Biodac(R)
is used to deliver agricultural chemicals for professional turf, home lawn and
garden, agricultural row-crop, and mosquito-control applications. Products under
development include controlled-release granules for carrying fertilizers.
Through its majority-owned NEXT Fiber Products Inc. subsidiary, formed in
October 1999, the Company intends to develop, produce, and market fiber-based
composites primarily for the building industry. The Company is currently
finalizing development of the composites material and expects to complete
construction of and begin operating the composites manufacturing facility,
located in Green Bay, Wisconsin, during 2000.
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,
available-for-sale investments, and advance to affiliate, plus the Company's
operating earnings, if any, before research and development expenses.
Results of Operations
1999 Compared With 1998
Revenues increased to $8,579,000 in 1999 from $5,276,000 in 1998. This
increase was primarily in the Cellulose-based Products segment as a result of
$1,683,000 of increased demand for Biodac, principally from its two largest
customers, as well as increased sales of its cat box filler product, which was
introduced in late 1998. Revenues increased in the Fiber-recovery and
Water-clarification Services segment due to the inclusion of revenues for the
full 1999 period from its fiber-recovery and water-clarification facility, which
began operations in July 1998.
The gross profit margin increased to 44% in 1999 from 40% in 1998,
primarily because the 1998 gross profit margin in the Cellulose-based Products
segment was reduced due to the effect of a decrease in production volume
resulting from necessary shutdowns of the GranTek manufacturing plant while
inventory storage tanks were emptied. In addition, the Cellulose-based Products
segment gross margin was $150,000 lower in 1998 due to costs associated with the
introduction of its cat box filler product. The gross profit margin increased in
the Fiber-recovery and Water- clarification Services segment due to the
inclusion for the full year of higher-margin revenues from its fiber-recovery
and water-clarification facility.
23
<PAGE>
1999 Compared With 1998 (continued)
Selling, general, and administrative expenses as a percentage of revenues
decreased to 40% in 1999 from 59% in 1998, principally due to an increase in
revenues in both segments. Selling, general, and administrative expenses
increased to $3,400,000 in 1999 from $3,119,000 in 1998, primarily due to
$410,000 of additional selling costs for cat box filler, offset in part by a
$136,000 decrease in selling costs for agricultural carriers. The Company
expects that selling, general, and administrative expenses will increase as it
expands its fiber-based composites business.
Research and development expenses decreased to $1,385,000 in 1999 from
$1,454,000 in 1998, primarily due to a reduction in expenditures related to the
development of the fiber-recovery process in the Fiber-recovery and
Water-clarification Services segment. The Company expects to increase its
research and development expenses in 2000 as it develops new products at its
fiber-based composites business.
Interest income decreased to $2,691,000 in 1999 from $3,113,000 in 1998,
principally due to a decrease in average invested balances resulting primarily
from the use of cash to fund the construction of the Company's fiber-recovery
and water-clarification facility, completed in July 1998, and purchases of
Company common stock in 1999.
The effective tax rate was 41% in 1999, compared with 40% in 1998. The
effective tax rate exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes, including increases in the associated
valuation allowance, and certain nondeductible expenses.
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 in
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 and did not adversely affect
subsequent revenues.
The gross profit margin decreased to 40% in 1998 from 45% in 1997, due to
a decrease in gross profit margin in 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 inventory storage
tanks were emptied, a decrease in revenues, and $257,000 of 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 in the Cellulose-based Products segment was offset in part
by the inclusion of higher-margin revenue in 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 in 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 in the
Fiber-recovery and Water-clarification Services segment and completion of the
development of the cat box filler product in 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 resulting primarily from 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, including increases in the associated valuation
allowance. 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.
24
<PAGE>
Liquidity and Capital Resources
The Company had negative working capital of $9,167,000 at January 1, 2000,
compared with working capital of $55,909,000 at January 2, 1999. Working capital
decreased by $59,344,000 due to the reclassification of common stock subject to
redemption to current liabilities. Included in working capital at January 1,
2000, are cash, cash equivalents, and available-for-sale investments of
$46,456,000, compared with $54,954,000 at January 2, 1999. In addition, the
Company had $5,087,000 invested in an advance to affiliate at January 1, 2000.
Prior to the use of a new domestic cash management arrangement between the
Company and Thermo Electron Corporation, which became effective June 1999,
amounts invested with Thermo Electron were included in cash and cash
equivalents.
During 1999, $3,684,000 of cash was provided by operating activities. An
increase in accounts payable provided $422,000 of cash, primarily due to
increased purchasing activity at GranTek to support its increased sales. An
increase in other current liabilities provided $574,000 of cash, primarily due
to increased accrued income taxes.
During 1999, the Company's primary investment activities involved the
purchase and maturity of available-for-sale investments and advances to
affiliate. The Company used $939,000 for purchases of property, plant, and
equipment, including $346,000 for the composites manufacturing facility.
In October 1999, the Company capitalized its NEXT Fiber Products
subsidiary with $3,200,000 in cash. NEXT Fiber Products then purchased capital
equipment and technology related to the development of fiber-based composites,
valued at $5,275,000, in exchange for shares of its common stock equal to 49% of
its equity and $2,200,000 in cash, payable in installments, if certain
conditions are met. The Company paid $500,000 of the purchase price in 1999. The
$1,700,000 remaining obligation is included in other accrued liabilities in the
accompanying 1999 balance sheet. Subsequent to year end, the Company paid
$1,200,000 of this obligation. To the extent that NEXT Fiber Products does not
purchase $1,000,000 of capital equipment by April 2001, the remaining funds will
be remitted to the seller as additional consideration for the acquired assets.
As of January 1, 2000, the Company had committed $517,000 of such funds for
purchases of capital equipment. Accounts payable in the accompanying 1999
balance sheet includes $171,000 for such purchases. The Company has options to
acquire the 49% equity interest not owned by the Company, exercisable during the
months of October 2001, 2002, or 2003, for pre-established multiples of NEXT
Fiber Products' pre-tax earnings.
During 1999, the Company's financing activities used $5,597,000 of cash,
principally for the purchase of Company common stock in open market and
negotiated transactions, pursuant to authorizations by its Board of Directors.
The Company's authorization to purchase Company common stock has expired.
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. The redemption rights are guaranteed, on a subordinated
basis, by Thermo Electron. As of January 1, 2000, there were 4,715,000
redemption rights outstanding and only 3,725,500 shares of Company common stock
held by persons other than Thermo Electron or Thermo Fibertek Inc.
During 2000, the Company plans to make expenditures for property, plant,
and equipment of approximately $2,400,000, including $483,000 at NEXT Fiber
Products. In addition, the Company may make capital expenditures for the
construction of additional fiber-recovery and water-clarification facilities.
Construction of fiber-recovery and water-clarification 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 any construction of its fiber-recovery and water-clarification
facilities. The Company will seek to finance any construction of such facilities
through a combination of internal funds, additional debt financing, and/or
borrowings from Thermo Fibertek, although there is no agreement with Thermo
Fibertek under which it 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. The Company's liquidity will be materially
adversely affected if the redemption of its common stock occurs in the third
quarter of 2000. Thermo Fibertek has committed to provide any required funding
to enable the Company to maintain its operations through at least December 31,
2000.
25
<PAGE>
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.
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 1999 and 1998 market interest rates would result in a
negative impact to the Company of $96,000 and $40,000, respectively, on the fair
value of the Company's interest-sensitive financial instruments.
Year 2000
As of the date of this report, the Company has completed its year 2000
initiatives, which included: (i) testing and upgrading significant information
technology systems and facilities; (ii) testing and developing upgrades, where
necessary, for the Company's current products and certain discontinued products;
(iii) assessing the year 2000 readiness of its key suppliers, vendors, and
customers; and (iv) developing contingency plans.
As a result of completing these initiatives, the Company believes that all
of its material information technology systems and critical non-information
technology systems are year 2000 compliant. The Company believes that all of the
material products that it currently manufactures and sells are year 2000
compliant or are not date sensitive. In addition, the Company is not aware of
any significant supplier or vendor that has experienced material disruption due
to year 2000 issues. The Company has also developed a contingency plan to allow
its primary business operations to continue despite disruptions due to year 2000
problems, if any, that might yet arise in the future. The costs incurred to date
by the Company in connection with the year 2000 issue have not been material.
While the Company to date has been successful in minimizing negative
consequences arising from year 2000 issues, there can be no assurance that in
the future the Company's business operations or financial condition may not be
impacted by year 2000 problems, such as increased warranty claims, vendor and
supplier disruptions, or litigation relating to year 2000 issues.
26
<PAGE>
Thermo Fibergen Inc. 1999 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 2000 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
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 1, 2000, the cumulative operating losses of the Company were
approximately $8,475,000. The Company expects to continue to incur operating
losses for at least the next year.
Risks Associated With New Composites Business. The Company recently
established a majority-owned subsidiary to develop, produce, market, and sell
fiber-based composites primarily for the building industry. Development and
commercialization of this new product will require significant development and
testing of the product and manufacturing process and there can be no assurance
the Company's development efforts will be successful. Further, even if the
Company successfully develops these new products, there can be no assurance that
they will gain market acceptance. The Company's ability to successfully market
these products will depend on converting the demand for wood-based building
products into demand for the Company's fiber-based composites. The Company's
strategy will be to emphasize the advantages of its products over conventional
wood-based products or other competitive non-wood alternatives. To penetrate the
market and gain market share, the Company must educate consumers, including wood
suppliers, contractors, and homebuilders, regarding the benefits of its
fiber-based products over wood products. Moreover, the Company has no experience
manufacturing these products at volume, cost, and quality levels sufficient to
satisfy expected demand and no assurance can be given that the Company will not
encounter difficulties in connection with any large-scale manufacturing or
commercialization of these new products.
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 43% and 34% of the Company's total revenues in 1999 and 1998,
respectively. Revenues from a second customer accounted for 11% and 16% of the
Company's total revenues in 1999 and 1998, respectively. Revenues from a third
customer accounted for 10% and 14% of the Company's total revenues in 1999 and
1998, respectively. In addition, the Company began providing services to a mill
in July 1998 under a ten-year contract. Revenues from the mill accounted for 16%
and 11% of the Company's total revenues in 1999 and 1998, respectively. 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 1, 2000, 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, cat box filler, and animal bedding. 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, and animal bedding, 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.
27
<PAGE>
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.
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,
2001, 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 2001.
28
<PAGE>
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. 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 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
29
<PAGE>
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.
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
30
<PAGE>
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 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.
Risks Associated with Cash Management Arrangement with Thermo Electron.
The Company participates in a cash management arrangement with Thermo Electron.
Under this cash management arrangement, the Company lends its excess cash to
Thermo Electron on an unsecured basis. The Company has the contractual right to
withdraw its funds invested in the cash management arrangement upon 30 days'
prior notice. Thermo Electron is contractually required to maintain cash, cash
equivalents and/or immediately available bank lines of credit equal to at least
50% of all funds invested under the cash management arrangement by all Thermo
Electron subsidiaries other than wholly owned subsidiaries. The funds are held
on an unsecured basis and therefore are subject to the credit risk of Thermo
Electron. The Company's ability to receive its cash upon notice of withdrawal
could be adversely affected if participants in the cash management arrangement
demand withdrawal of their funds in an aggregate amount in excess of the 50%
reserve required to be maintained by Thermo Electron. In the event of a
bankruptcy of Thermo Electron, the Company would be treated as an unsecured
creditor and its right to receive funds from the bankruptcy estate would be
subordinated to secured creditors and would be treated on a pari passu basis
with all other unsecured creditors. Further, all cash withdrawn by the Company
from the cash management arrangement within one year before the bankruptcy would
be subject to rescission. The inability of Thermo Electron to return the
Company's cash on a timely basis or at all could have a material adverse effect
on the Company's results of operations and financial position.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Thermo Fibergen Inc. 1999 Financial Statements
Selected Financial Information
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts) 1999 (a) 1998 1997 1996 (b) 1995
- ----------------------------------------------------- ---------- --------- ---------- ---------- ---------
Statement of Operations Data
Revenues $ 8,579 $5,276 $ 4,836 $ 2,223 $ -
Net Income (Loss) 1,040 399 1,098 (367) (601)
Earnings (Loss) per Share:
Basic .07 .03 .07 (.03) (.06)
Diluted .07 .02 .07 (.03) (.06)
Balance Sheet Data
Working Capital $(9,167) $55,909 $58,609 $56,477 $ -
Total Assets 72,438 71,116 70,164 71,033 -
Common Stock Subject to Redemption - 58,260 57,176 56,087 -
Shareholders' Investment 5,640 11,242 11,959 11,921 -
(a) Reflects the reclassification of common stock subject to redemption to current liabilities.
(b) 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>
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 1999 and 1998, as reported in the consolidated
transaction reporting system.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Common Stock Redemption Rights
Quarter High Low High Low
- -------------------------------------------------------------- ---------- ---------- ---------- ----------
1999
First $ 9 3/8 $ 8 1/2 $3 3/8 $2 5/8
Second 11 3/4 9 1/16 2 1/2 1 3/16
Third 11 1/2 11 3/16 1 3/8 1 1/16
Fourth 12 3/16 10 1/4 1 15/16 7/8
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
As of January 28, 2000, the Company had 32 and 26 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 and redemption rights on January 28,
2000, was $11 3/8 per share and 15/16 per share, respectively.
32
<PAGE>
Thermo Fibergen Inc. 1999 Financial Statements
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. Company information is
available at http://www.thermo.com/subsid/tfg1.html on Thermo Electron's
Internet site.
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
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
1, 2000, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Thermo Fibergen
Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
</TABLE>
Exhibit 21
Subsidiaries of the Registrant
As of February 23, 2000, Thermo Fibergen Inc. owned the following
companies:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
STATE OR JURISDICTION REGISTRANT'S
OF INCORPORATION PERCENT OF
NAME OWNERSHIP
- ----------------------------------------------------------------------------------------------------------
Fibergen Securities Corporation Massachusetts 100
GranTek Inc. Wisconsin 100
Next Fiber Products Inc. Delaware 51*
*Joint Venture/Partnership
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated February 9, 2000, included in or incorporated
by reference into Thermo Fibergen Inc.'s Annual Report on Form 10-K for the year
ended January 1, 2000, into the Company's previously filed Registration
Statement No. 333-64433 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
March 15, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THERMO FIBERGEN INC.'S
ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JANUARY 1,2000
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-01-2000
<PERIOD-END> JAN-01-2000
<CASH> 51
<SECURITIES> 46,405
<RECEIVABLES> 1,194
<ALLOWANCES> 30
<INVENTORY> 817
<CURRENT-ASSETS> 54,098
<PP&E> 13,308
<DEPRECIATION> 3,246
<TOTAL-ASSETS> 72,438
<CURRENT-LIABILITIES> 63,265
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 5,540
<TOTAL-LIABILITY-AND-EQUITY> 72,438
<SALES> 8,579
<TOTAL-REVENUES> 8,579
<CGS> 4,804
<TOTAL-COSTS> 4,804
<OTHER-EXPENSES> 1,385
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,681
<INCOME-TAX> 694
<INCOME-CONTINUING> 1,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,040
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
