-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EAkzDWGSj0Ujlh7LpBVJtXVc7ipdNt/dtLMflegzzVY7NnMdB+1fLT05gm9A5Zkk ggxRoqIYsj75lNLQYRqwgw== 0000886346-98-000008.txt : 19981109 0000886346-98-000008.hdr.sgml : 19981109 ACCESSION NUMBER: 0000886346-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMO FIBERTEK INC CENTRAL INDEX KEY: 0000886346 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY (NO METALWORKING MACHINERY) [3550] IRS NUMBER: 521762325 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11406 FILM NUMBER: 98739772 BUSINESS ADDRESS: STREET 1: 81 WYMAN ST STREET 2: P O BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02254 BUSINESS PHONE: 6176221000 MAIL ADDRESS: STREET 1: 81 WYMAN STREET CITY: WALTHAM STATE: MA ZIP: 02254 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------------------------------- FORM 10-Q (mark one) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended October 3, 1998. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Commission File Number 1-11406 THERMO FIBERTEK INC. (Exact name of Registrant as specified in its charter) Delaware 52-1762325 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 245 Winter Street Waltham, Massachusetts 02451 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 622-1000 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 such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at October 30, 1998 ---------------------------- ------------------------------- Common Stock, $.01 par value 61,481,456 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements - ----------------------------- THERMO FIBERTEK INC. Consolidated Balance Sheet (Unaudited) Assets October 3, January 3, (In thousands) 1998 1998 - -------------------------------------------------------------------------- Current Assets: Cash and cash equivalents (includes $66,413 and $62,550 under repurchase agreement with parent company) $108,349 $111,648 Available-for-sale investments, at quoted market value (amortized cost of $43,326 and $36,273) 43,346 36,319 Accounts receivable, less allowances of $2,222 and $2,565 45,072 53,408 Unbilled contract costs and fees 5,682 4,422 Inventories: Raw materials and supplies 16,528 14,609 Work in process 5,367 6,426 Finished goods 9,791 10,925 Prepaid and refundable income taxes 6,663 7,457 Other current assets 2,371 2,256 -------- -------- 243,169 247,470 -------- -------- Property, Plant, and Equipment, at Cost 67,407 61,059 Less: Accumulated depreciation and amortization 35,742 32,723 -------- -------- 31,665 28,336 -------- -------- Other Assets (Note 4) 15,202 14,437 -------- -------- Cost in Excess of Net Assets of Acquired Companies 127,534 128,695 -------- -------- $417,570 $418,938 ======== ======== 2 THERMO FIBERTEK INC. Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment October 3, January 3, (In thousands except share amounts) 1998 1998 - -------------------------------------------------------------------------- Current Liabilities: Accounts payable $ 19,726 $ 25,755 Accrued payroll and employee benefits 9,360 10,588 Billings in excess of contract costs and fees 5,716 5,548 Accrued warranty costs 6,687 8,620 Accrued income taxes 3,649 - Other accrued expenses 12,332 18,512 Due to parent company and affiliated companies 1,110 1,451 -------- -------- 58,580 70,474 -------- -------- Deferred Income Taxes and Other Deferred Items 4,174 4,267 -------- -------- Subordinated Convertible Debentures 153,000 153,000 -------- -------- Minority Interest 318 290 -------- -------- Common Stock of Subsidiary Subject to Redemption ($54,762 redemption value) 53,554 52,812 -------- -------- Shareholders' Investment: Common stock, $.01 par value, 150,000,000 shares authorized; 63,358,087 and 63,331,887 shares issued 634 633 Capital in excess of par value 77,729 81,865 Retained earnings 96,343 82,607 Treasury stock at cost, 1,831,631 and 1,820,709 shares (18,880) (19,494) Accumulated other comprehensive items (Note 3) (7,882) (7,516) -------- -------- 147,944 138,095 -------- -------- $417,570 $418,938 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 3 THERMO FIBERTEK INC. Consolidated Statement of Income (Unaudited) Three Months Ended ------------------------- October 3, September 27, (In thousands except per share amounts) 1998 1997 - -------------------------------------------------------------------------- Revenues $ 59,678 $ 67,606 -------- -------- Costs and Operating Expenses: Cost of revenues 35,702 42,336 Selling, general, and administrative expenses 15,208 16,189 Research and development expenses 1,754 1,789 Gain on sale of property (178) - Restructuring costs - 1,063 -------- --------- 52,486 61,377 -------- --------- Operating Income 7,192 6,229 Interest Income 1,918 2,060 Interest Expense (includes $510 to related party in fiscal 1997) (1,854) (2,020) -------- --------- Income Before Provision for Income Taxes and Minority Interest 7,256 6,269 Provision for Income Taxes 2,797 2,495 Minority Interest Expense 302 180 -------- -------- Net Income $ 4,157 $ 3,594 ======== ======== Earnings per Share (Note 2): Basic $ .07 $ .06 ======== ======== Diluted $ .07 $ .06 ======== ======== Weighted Average Shares (Note 2): Basic 61,684 61,504 ======== ======== Diluted 62,339 63,294 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4 THERMO FIBERTEK INC. Consolidated Statement of Income (Unaudited) Nine Months Ended ------------------------- October 3, September 27, (In thousands except per share amounts) 1998 1997 - -------------------------------------------------------------------------- Revenues $185,591 $166,784 -------- -------- Costs and Operating Expenses: Cost of revenues 110,218 100,522 Selling, general, and administrative expenses 47,006 43,670 Research and development expenses 5,378 4,652 Gain on sale of property (260) - Restructuring costs - 1,063 -------- -------- 162,342 149,907 -------- --------- Operating Income 23,249 16,877 Interest Income 6,002 5,162 Interest Expense (includes $1,412 to related party in fiscal 1997) (5,562) (2,961) -------- -------- Income Before Provision for Income Taxes and Minority Interest 23,689 19,078 Provision for Income Taxes 9,183 7,425 Minority Interest Expense 770 840 -------- -------- Net Income $ 13,736 $ 10,813 ======== ======== Earnings per Share (Note 2): Basic $ .22 $ .18 ======== ======== Diluted $ .22 $ .17 ======== ======== Weighted Average Shares (Note 2): Basic 61,683 61,296 ======== ======== Diluted 62,539 63,885 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5 THERMO FIBERTEK INC. Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended ------------------------- October 3, September 27, (In thousands) 1998 1997 - -------------------------------------------------------------------------- Operating Activities: Net income $ 13,736 $ 10,813 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,785 5,368 Provision for losses on accounts receivable 112 147 Minority interest expense 770 840 Gain on sale of property (260) - Restructuring costs - 1,063 Change in deferred income tax benefit - (93) Other noncash items 210 (383) Changes in current accounts, excluding the effects of acquisitions: Accounts receivable 8,973 2,490 Inventories and unbilled contract costs and fees (448) (3,683) Prepaid income taxes and other current assets 834 415 Accounts payable (7,554) (6,827) Other current liabilities (3,786) 2,297 --------- --------- Net cash provided by operating activities 19,372 12,447 --------- --------- Investing Activities: Acquisitions, net of cash acquired (1,296) (107,738) Purchases of available-for-sale investments (51,225) (29,050) Proceeds from sale and maturities of available-for-sale investments 43,961 - Proceeds from sale of property, plant, and equipment 351 - Purchases of property, plant, and equipment (6,832) (2,102) Advances under notes receivable (Note 4) (2,910) (3,000) Repayment of notes receivable - 3,000 Other 50 (189) --------- --------- Net cash used in investing activities $ (17,901) $(139,079) --------- --------- 6 THERMO FIBERTEK INC. Consolidated Statement of Cash Flows (continued) (Unaudited) Nine Months Ended ------------------------- October 3, September 27, (In thousands) 1998 1997 - -------------------------------------------------------------------------- Financing Activities: Net proceeds from issuance of subordinated convertible debentures $ - $ 149,771 Issuance of obligation to parent company - 110,000 Repayment of obligation to parent company - (110,000) Purchase of Company common stock (5,331) (16,320) Purchases of subsidiary common stock - (3,791) Net proceeds from issuance of Company common stock 1,809 680 Other - (34) --------- --------- Net cash provided by (used in) financing activities (3,522) 130,306 --------- --------- Exchange Rate Effect on Cash (1,248) (3,833) --------- --------- Decrease in Cash and Cash Equivalents (3,299) (159) Cash and Cash Equivalents at Beginning of Period 111,648 109,805 --------- --------- Cash and Cash Equivalents at End of Period $ 108,349 $ 109,646 ========= ========= Noncash Activities: Fair value of assets of acquired companies $ 1,493 $ 129,271 Cash paid for acquired companies (1,296) (107,750) --------- --------- Liabilities assumed of acquired companies $ 197 $ 21,521 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 7 THERMO FIBERTEK INC. Notes to Consolidated Financial Statements 1. General The interim consolidated financial statements presented have been prepared by Thermo Fibertek Inc. (the Company) without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at October 3, 1998, the results of operations for the three- and nine-month periods ended October 3, 1998, and September 27, 1997, and the cash flows for the nine-month periods ended October 3, 1998, and September 27, 1997. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of January 3, 1998, has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual financial statements and notes of the Company. The consolidated financial statements and notes included herein should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998, filed with the Securities and Exchange Commission. 2. Earnings per Share Basic and diluted earnings per share were calculated as follows: Three Months Ended Nine Months Ended ------------------ ------------------ (In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27, per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------- Basic Net Income $ 4,157 $ 3,594 $13,736 $10,813 ------- ------- ------- ------- Weighted Average Shares 61,684 61,504 61,683 61,296 ------- ------- ------- ------- Basic Earnings per Share $ .07 $ .06 $ .22 $ .18 ======= ======= ======= ======= 8 2. Earnings per Share (continued) Three Months Ended Nine Months Ended ------------------ ------------------ (In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27, per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------- Diluted Net Income $ 4,157 $ 3,594 $13,736 $10,813 Effect of: Convertible obligations - 30 - 188 Majority-owned subsidiary's dilutive securities (7) (8) (16) (76) ------- ------- ------- ------- Income Available to Common Shareholders, as Adjusted $ 4,150 $ 3,616 $13,720 $10,925 ------- ------- ------- ------- Weighted Average Shares 61,684 61,504 61,683 61,296 Effect of: Convertible obligations - 726 - 1,501 Stock options 655 1,064 856 1,088 ------- ------- ------- ------- Weighted Average Shares, as Adjusted 62,339 63,294 62,539 63,885 ------- ------- ------- ------- Diluted Earnings per Share $ .07 $ .06 $ .22 $ .17 ======= ======= ======= ======= The computation of diluted earnings per share excludes the effect of assuming the exercise of certain outstanding stock options because the effect would be antidilutive. As of October 3, 1998, there were 885,000 of such options outstanding, with exercise prices ranging from $10.06 to $14.32 per share. In addition, the computation of diluted earnings per share for the 1998 periods excludes the effect of assuming the conversion of the Company's $153.0 million principal amount of 4 1/2% subordinated convertible debentures, convertible at $12.10 per share, because the effect would be antidilutive. 3. Comprehensive Income During the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This pronouncement sets forth requirements for disclosure of the Company's comprehensive income and accumulated other comprehensive items. In general, comprehensive income combines net income and "other comprehensive items," which represent certain amounts that are reported as components of shareholders' investment in the accompanying balance sheet, including foreign currency translation adjustments and unrealized net of tax gains and losses on available-for-sale investments. During the third quarter of 1998 and 1997, the Company had comprehensive income of $4,520,000 and $610,000, respectively. During the first nine months of 9 3. Comprehensive Income (continued) 1998 and 1997, the Company had comprehensive income of $13,374,000 and $3,400,000, respectively. 4. Notes Receivable During 1996, the Company loaned $6.0 million to Tree-Free Fiber Company, LLC (Tree-Free) in connection with a proposed engineering, procurement, and construction project. This project was delayed due to weakness in pulp prices, and will not proceed as a result of Tree-Free's recent insolvency. Tree-Free was unable to repay the note upon its original maturity. The note is secured by pari-passu liens on a tissue mill in Maine and by stock representing partial ownership of a tissue mill located in Mexico. In December 1997, a receiver was appointed by the Superior Court of Maine to preserve and protect the collateral for the loans made by the Company and other lenders to Tree-Free. In May 1998, the Company purchased an assignment of Tree-Free's secured indebtedness to the other pari-passu lender for $2.9 million. In June 1998, the Company conducted a foreclosure sale of the tissue mill and was the successful bidder and executed a purchase and sale agreement. The Company intends to assign its right to purchase the mill to a third party as soon as practicable or, alternatively, to purchase the mill and operate it with the intent of selling it as a going concern. In October 1998, the stock of the mill located in Mexico was sold and the proceeds of $1.3 million were paid to the Company. The Company believes that the aggregate of the fair value of the tissue mill, net of amounts owed by Tree-Free to a senior lender, and the proceeds received from the sale of the stock in the mill located in Mexico is in excess of the carrying amount of the notes, net of established reserves. However, no assurance can be given as to the outcome of a sale of the tissue mill, the timing of any such sale, or the amount of the proceeds that may be received therefrom. Item 2 - 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 under the heading "Forward-looking Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998, filed with the Securities and Exchange Commission. 10 Overview The Company designs and manufactures processing machinery, accessories, and water-management systems for the paper and paper recycling industries. The Company's principal products include custom-engineered systems and equipment for the preparation of wastepaper for conversion into recycled paper; accessory equipment and related consumables important to the efficient operation of papermaking machines; and water-management systems essential for draining, purifying, and recycling process water. The Company's Thermo Black Clawson subsidiary, acquired May 1997, is a leading supplier of recycling equipment used in processing fiber for the manufacture of "brown paper," such as that used in the manufacture of corrugated boxes. The Company's Thermo Fibergen Inc. subsidiary is developing and commercializing technologies to recover valuable components such as water, long cellulose fiber, and minerals, generated as byproducts of the virgin and recycled papermaking process, and convert them into commercial products. Thermo Fibergen also clarifies and recycles process water to be reused in papermaking. Through its GranTek Inc. subsidiary, Thermo Fibergen employs patented technology to produce absorbing granules from papermaking byproducts. The Company's manufacturing facilities are principally located in the U.S. and France. The manufacturing facility in France is located at the Company's E. & M. Lamort, S.A. subsidiary, which primarily manufactures recycling equipment and accessories. In 1997, approximately 37% of the Company's sales originated outside the U.S., principally in Europe, and approximately 13% of the Company's revenues were exports from the U.S. During 1997, the Company had exports from the Company's U.S. and foreign operations to Asia of approximately 6% of total revenues, a substantial portion of which represents sales from Thermo Black Clawson, acquired May 1997. Exports to Asia in 1997 were primarily to China, Japan, and South Korea. Asia, excluding China, is experiencing a severe economic crisis, which has been characterized by sharply reduced economic activity and liquidity, highly volatile foreign-currency-exchange and interest rates, and unstable stock markets. The Company's sales to Asia have been adversely affected by the unstable economic conditions in that region. The Company's products are primarily sold to the paper industry. Generally, the financial condition of the paper industry corresponds both to changes in the general economy and to a number of other factors, including paper and pulp production capacity. The paper industry entered a severe downcycle in early 1996 and has not recovered. This cyclical downturn, which began adversely affecting the Company's business during the second half of 1996, continues to have an adverse effect on the Company's business. In addition, the unstable economic conditions in Asia, and weakened currencies in that region, have resulted in increased low-cost imports of pulp and paper in North America resulting in reduced pricing. In addition, paper and pulp exports from North America and Europe to Asia have declined. The timing of the recovery of the financial condition of the paper industry cannot be predicted. 11 Results of Operations Third Quarter 1998 Compared With Third Quarter 1997 Revenues decreased to $59.7 million in the third quarter of 1998 from $67.6 million in the third quarter of 1997, primarily as a result of a decrease in revenues at the Company's recycling and water-management businesses. The decrease in revenues at the recycling business of $5.7 million, primarily at Thermo Black Clawson, was principally due to a decrease in demand in Asia and North America. A decline in revenues at the water-management business of $2.1 million was also principally due to a decrease in demand in North America. The primary reasons for the decrease in demand in Asia and North America are discussed in the Overview. The decrease in revenues at the recycling business was offset in part by the inclusion of revenues from a French subsidiary of Thermo Black Clawson, acquired in August 1997, for the full three-month period and the inclusion of revenues from a business acquired in July 1998, which resulted in an aggregate increase in revenues of $2.7 million. The unfavorable effects of currency translation due to a stronger U.S. dollar decreased 1998 revenues by $0.5 million. The gross profit margin increased to 40% in the third quarter of 1998 from 37% in the third quarter of 1997, primarily due to improved margins at Thermo Black Clawson and the Company's water-management business. Gross profit margins improved at Thermo Black Clawson principally due to a change in pricing strategies and an improved cost structure. Improvement in gross profit margin at the water-management business resulted primarily from a change in sales mix. Selling, general, and administrative expenses were reduced 6% to $15.2 million in the third quarter of 1998 from $16.2 million in the third quarter of 1997 in response to reduced revenues. Research and development expenses were unchanged at $1.8 million in the third quarter of 1998 and 1997. In the third quarter of 1998, the Company recorded gains of $0.2 million, primarily relating to the sale of real estate at Lamort. In the third quarter of 1997, the Company recorded restructuring costs of $1.1 million, related primarily to severance costs. Interest income and interest expense were relatively unchanged in the third quarter of 1998 as compared with the third quarter of 1997. The effective tax rate was 39% in the third quarter of 1998 and 40% in the third quarter of 1997. These rates exceeded the statutory federal income tax rate primarily due to the impact of state income taxes. Minority interest expense primarily represents accretion of Thermo Fibergen's common stock subject to redemption. 12 First Nine Months 1998 Compared With First Nine Months 1997 Revenues increased to $185.6 million in the first nine months of 1998 from $166.8 million in the first nine months of 1997, primarily due to an increase in revenues of $21.4 million from Thermo Black Clawson, acquired in May 1997. An increase in revenues at Thermo Black Clawson due to the inclusion of revenues for the full nine-month period in 1998 was offset in part by a decrease in its revenues for the reasons discussed in the results of operations for the third quarter of 1998. In addition, revenues from the Company's water-management business decreased $3.9 million principally due to a decrease in demand in North America. The unfavorable effects of currency translation due to a stronger U.S. dollar decreased 1998 revenues by $3.0 million. The gross profit margin increased to 41% in the first nine months of 1998 from 40% in the first nine months of 1997, principally due to the reasons discussed in the results of operations for the third quarter. Selling, general, and administrative expenses as a percentage of revenues decreased to 25% in the first nine months of 1998 from 26% in the first nine months of 1997, primarily due to lower expenses as a percentage of revenues at Thermo Black Clawson. In addition, the Company reduced selling, general, and administrative expenses during the third quarter of 1998 in response to reduced revenues during that period. Research and development expenses increased to $5.4 million in the first nine months of 1998 from $4.7 million in the first nine months of 1997, due to the inclusion of expenses at Thermo Black Clawson for the full nine-month period in 1998. In the first nine months of 1998, the Company recorded gains of $0.3 million primarily relating to the sale of real estate at Lamort. In the first nine months of 1997, the Company recorded restructuring costs of $1.1 million, related primarily to severance costs. Interest income increased to $6.0 million in the first nine months of 1998 from $5.2 million in the first nine months of 1997, primarily due to an increase in average invested balances resulting from the remaining net proceeds from the July 1997 sale of $153.0 million principal amount of 4 1/2% subordinated convertible debentures, of which $103.4 million was used to finance the acquisition of Thermo Black Clawson. Interest expense increased to $5.6 million in the first nine months of 1998 from $3.0 million in the first nine months of 1997 as a result of the July 1997 issuance of subordinated convertible debentures. The effective tax rate was unchanged at 39% in the first nine months of 1998 and 1997. The effective tax rate exceeded the statutory federal income tax rate primarily due to the impact of state income taxes. Minority interest expense primarily represents accretion of Thermo Fibergen's common stock subject to redemption. 13 Liquidity and Capital Resources Consolidated working capital was $184.6 million at October 3, 1998, compared with $177.0 million at January 3, 1998. Included in working capital are cash, cash equivalents, and available-for-sale investments of $151.7 million at October 3, 1998, compared with $148.0 million at January 3, 1998. Of the $151.7 million balance at October 3, 1998, $54.8 million was held by Thermo Fibergen, $7.1 million was held by Fiberprep, and the remainder was held by the Company and its wholly owned subsidiaries. At October 3, 1998, $36.3 million of the Company's cash and cash equivalents was held by its foreign subsidiaries. Repatriation of this cash into the U.S. would be subject to foreign withholding taxes and could also be subject to a U.S. tax. During the first nine months of 1998, $19.4 million of cash was provided by operating activities. Cash provided by a decrease in accounts receivable of $9.0 million was offset in part by a $7.6 million reduction of accounts payable. The reduction in both accounts receivable and accounts payable is due primarily to the reduction in third quarter 1998 sales and related inventory activity as compared with the fourth quarter of 1997. During the first nine months of 1998, the Company's primary investing activities, excluding available-for-sale investments activity, were the purchase of property, plant, and equipment for $6.8 million, an advance of $2.9 million under a note receivable (Note 4), and an acquisition for $1.3 million. In July 1998, the Company acquired Goslin Birmingham, a division of Green Bay Packaging Inc., a manufacturer of paper recycling equipment. During the first nine months of 1998, the Company's financing activities used $3.5 million in cash, including $5.3 million to purchase Company common stock. At October 3, 1998, the Company had a remaining authorization to purchase 573,000 shares of Company common stock, or the equivalent in outstanding convertible debentures, in open market or negotiated transactions through July 15, 1999. Any such purchases are funded from working capital. Thermo Fibergen's common stock is subject to redemption in September 2000 or 2001, the redemption value of which is $54.8 million. At October 3, 1998, the Company had $61.9 million of undistributed foreign earnings. The Company does not intend to repatriate undistributed foreign earnings into the U.S., and does not expect that this will have a material adverse effect on the Company's current liquidity. During the remainder of 1998, the Company plans to make expenditures for property, plant, and equipment of approximately $1.5 million. Thermo Fibergen may make additional capital expenditures for the construction of additional fiber-recovery facilities. Construction of fiber-recovery facilities is dependent upon Thermo Fibergen entering into long-term contracts with paper mills, under which Thermo Fibergen will charge fees to process the mills' papermaking byproducts. Thermo Fibergen currently has only one such agreement in place and there is no assurance that 14 Liquidity and Capital Resources (continued) Thermo Fibergen will be able to obtain such additional contracts. The Company believes that its existing resources are sufficient to meet the capital requirements of its existing operations for the foreseeable future. Year 2000 The Company continues to assess the potential impact of the year 2000 on the Company's internal business systems, products, and operations. The Company's year 2000 initiatives include (i) testing and upgrading internal business systems and facilities; (ii) contacting key suppliers and vendors to determine their year 2000 compliance status; and (iii) developing contingency plans. The Company's State of Readiness The Company has tested and evaluated its critical information technology systems for year 2000 compliance, including its significant computer systems, software applications, and related equipment. The Company is currently in the process of upgrading or replacing its noncompliant systems. In most cases, such upgrades or replacements are being made in the ordinary course of business. The Company expects that all of its material information technology systems will be year 2000 compliant by the end of 1999. The Company is also evaluating the potential year 2000 impact on its facilities, including its buildings and utility systems. Any problems that are identified will be prioritized and remediated based on their assigned priority. The Company believes that all of the material products that it currently manufactures and sells are not date sensitive and should not be affected by year 2000 issues. The Company is initiating efforts to identify and contact suppliers and vendors that are believed to be significant to the Company's business operations in order to assess their year 2000 readiness. Contingency Plans The Company intends to develop a contingency plan that will allow its primary business operations to continue despite disruptions due to year 2000 problems. These plans may include identifying and securing other suppliers, increasing inventories, and modifying production facilities and schedules. As the Company continues to evaluate the year 2000 readiness of its business systems, facilities, and significant suppliers and vendors, it will modify and adjust its contingency plan as may be required. Costs to Address the Company's Year 2000 Issues To date, costs incurred in connection with the year 2000 issue have not been material. The Company does not expect total year 2000 remediation costs to be material, but there can be no assurance that the 15 Year 2000 (continued) Company will not encounter unexpected costs or delays in achieving year 2000 compliance. Risks of the Company's Year 2000 Issues While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 problems will not have a material adverse impact on the Company's business, operations, or financial condition. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. If any of the Company's material suppliers, vendors, or customers experience business disruptions due to year 2000 issues, the Company might also be materially adversely affected. The Company's research and development, production, distribution, financial, administrative, and communications operations might be disrupted. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. Any unexpected costs or delays arising from the year 2000 issue could have a significant adverse impact on the Company's business, operations, and financial condition. PART II - OTHER INFORMATION Item 6 - Exhibits See Exhibit Index on the page immediately preceding exhibits. 16 SIGNATURES Pursuant to the requirements 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 as of the 6th day of November 1998. THERMO FIBERTEK INC. Paul F. Kelleher --------------------------- Paul F. Kelleher Chief Accounting Officer John N. Hatsopoulos --------------------------- John N. Hatsopoulos Chief Financial Officer and Senior Vice President 17 EXHIBIT INDEX Exhibit Number Description of Exhibit - ------------------------------------------------------------------------- 27 Financial Data Schedule. EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO FIBERTEK INC.'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-02-1999 OCT-03-1998 108,349 43,346 47,294 2,222 31,686 243,169 67,407 35,742 417,570 58,580 153,000 0 0 634 147,310 417,570 185,591 185,591 110,218 110,218 5,378 112 5,562 23,689 9,183 13,736 0 0 0 13,736 0.22 0.22
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