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 July 4, 1998.
[ ] 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 (I.R.S. Employer
incorporation or organization) 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
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 July 31, 1998
---------------------------- ----------------------------
Common Stock, $.01 par value 14,715,000
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO FIBERGEN INC.
Consolidated Balance Sheet
(Unaudited)
Assets
July 4, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $20,042 $21,752
Available-for-sale investments, at quoted
market value (amortized cost of $35,720
and $36,273) 35,730 36,319
Accounts receivable, less allowance of $30 in
1998 and 1997 552 645
Inventories 329 507
Prepaid income taxes and other current assets 344 300
Due from parent company and affiliated companies 63 115
------- -------
57,060 59,638
------- -------
Property, Plant, and Equipment, at Cost 10,444 6,727
Less: Accumulated depreciation and amortization 1,747 1,416
------- -------
8,697 5,311
------- -------
Other Assets 844 885
------- -------
Cost in Excess of Net Assets of Acquired Company 4,213 4,330
------- -------
$70,814 $70,164
======= =======
2
<PAGE>
THERMO FIBERGEN INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 4, January 3,
(In thousands except share amounts) 1998 1998
- --------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 904 $ 338
Accrued payroll and employee benefits 273 344
Other accrued liabilities 402 347
------- -------
1,579 1,029
------- -------
Common Stock Subject to Redemption ($60,116
redemption value), 4,715,000 shares issued
and outstanding 57,718 57,176
------- -------
Shareholders' Investment:
Common stock, $.01 par value, 25,000,000
shares authorized; 10,000,000 shares issued
and outstanding 100 100
Capital in excess of par value 11,410 11,830
Accumulated other comprehensive income (Note 3) 7 29
------- -------
11,517 11,959
------- -------
$70,814 $70,164
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THERMO FIBERGEN INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $ 1,317 $ 1,598
------- -------
Costs and Operating Expenses:
Cost of revenues 801 744
Selling, general, and administrative expenses 891 699
Research and development expenses 408 470
------- -------
2,100 1,913
------- -------
Operating Loss (783) (315)
Interest Income 792 883
------- -------
Income Before Provision for Income Taxes 9 568
Provision for Income Taxes 4 -
------- -------
Net Income $ 5 $ 568
======= =======
Earnings per Share (Note 2):
Basic $ - $ .04
======= =======
Diluted $ - $ .03
======= =======
Weighted Average Shares (Note 2):
Basic 14,715 14,715
======= =======
Diluted 16,340 16,606
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO FIBERGEN INC.
Consolidated Statement of Income
(Unaudited)
Six Months Ended
------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $ 2,660 $ 3,124
------- -------
Costs and Operating Expenses:
Cost of revenues 1,592 1,546
Selling, general, and administrative expenses 1,688 1,458
Research and development expenses 820 923
------- -------
4,100 3,927
------- -------
Operating Loss (1,440) (803)
Interest Income 1,644 1,738
------- -------
Income Before Provision for Income Taxes 204 935
Provision for Income Taxes 82 -
------- -------
Net Income $ 122 $ 935
======= =======
Earnings per Share (Note 2):
Basic $ .01 $ .06
======= =======
Diluted $ .01 $ .06
======= =======
Weighted Average Shares (Note 2):
Basic 14,715 14,715
======= =======
Diluted 16,445 16,577
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMO FIBERGEN INC.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
--------------------
July 4, June 28,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 122 $ 935
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 489 587
Changes in current accounts:
Accounts receivable 93 (545)
Inventories 178 87
Other current assets (31) 45
Accounts payable 566 (151)
Other current liabilities (16) 410
Other 208 -
-------- --------
Net cash provided by operating activities 1,609 1,368
-------- --------
Investing Activities:
Purchases of available-for-sale investments (23,150) (10,000)
Proceeds from sale and maturities of available-
for-sale investments 23,311 -
Purchases of property, plant, and equipment (3,721) (187)
Other 189 (9)
-------- --------
Net cash used in investing activities (3,371) (10,196)
-------- --------
Financing Activities:
Change in due from parent company and
affiliated companies 52 (1,732)
-------- --------
Net cash provided by (used in) financing
activities 52 (1,732)
-------- --------
Decrease in Cash and Cash Equivalents (1,710) (10,560)
Cash and Cash Equivalents at Beginning of Period 21,752 58,388
-------- --------
Cash and Cash Equivalents at End of Period $ 20,042 $ 47,828
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
THERMO FIBERGEN INC.
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Fibergen 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 July 4, 1998, the results of
operations for the three- and six-month periods ended July 4, 1998, and June 28,
1997, and the cash flows for the six-month periods ended July 4, 1998, and June
28, 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 Six Months Ended
-------------------- --------------------
(In thousands except July 4, June 28, July 4, June 28,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net income $ 5 $ 568 $ 122 $ 935
------- ------- ------- -------
Weighted average shares 14,715 14,715 14,715 14,715
------- ------- ------- -------
Basic earnings per share $ - $ .04 $ .01 $ .06
======= ======= ======= =======
Diluted
Net income $ 5 $ 568 $ 122 $ 935
------- ------- ------- -------
Weighted average shares 14,715 14,715 14,715 14,715
Effect of:
Redemption rights 1,623 1,891 1,728 1,862
Stock options 2 - 2 -
------- ------- ------- -------
Weighted average shares,
as adjusted 16,340 16,606 16,445 16,577
------- ------- ------- -------
Diluted earnings per share $ - $ .03 $ .01 $ .06
======= ======= ======= =======
7
<PAGE>
2. Earnings per Share (continued)
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 July 4, 1998, there were 330,000 of such options
outstanding, with exercise prices ranging from $10.00 to $12.75 per share.
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 income. In general,
comprehensive income combines net income and "other comprehensive income," 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. During the second quarter of 1998 and 1997, the
Company had a comprehensive loss of $4,000 and comprehensive income of $568,000,
respectively. During the first six months of 1998 and 1997, the Company had
comprehensive income of $100,000 and $935,000, respectively.
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.
Overview
The Company 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 to clarify and
recycle process water to be reused in papermaking. The Company also converts
papermaking byproducts into commercial products. 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 paper mill, and also entered into an
engineering, procurement, and construction contract for the construction of the
facility to provide
8
<PAGE>
Overview (continued)
such services. Construction of the fiber-recovery and water-clarification
facility was completed in July 1998. The Company has been able to test-run the
facility, delivering clean water and long fiber to the mill.
Through its GranTek Inc. subsidiary, the Company employs patented technology
to produce absorbing granules from papermaking byproducts. These granules,
marketed under the trade name Biodac(R), are currently used as a carrier to
deliver agricultural chemicals for professional turf, home lawn and garden,
agricultural row-crop, and mosquito-control applications. The Company has begun
selling oil-and-grease absorbents on a limited basis and has completed
development and market testing of a cat box filler product called PaPurr
(pronounced paper), which it plans to introduce to the U.S. market during 1998.
The Company's sales are principally 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 planned entrance into the oil- and
grease-absorption, cat box filler, and international agricultural row-crop
markets, if successful, may mitigate the seasonality of the Company's sales.
The Company currently intends to limit the pace and amount of its research
and development so that its research and development expenditures will not
exceed the interest income earned on its cash, cash equivalents, and
available-for-sale investments, plus the Company's operating earnings before
research and development expenses, if any.
The Company believes that the potential impact of the year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems, and on products sold as well as products purchased by the
Company, will not have a material effect on the Company's business, results of
operations, or financial position, although there can be no assurance that the
Company will not experience unexpected problems or costs.
Results of Operations
Second Quarter 1998 Compared With Second Quarter 1997
Revenues were $1,317,000 in the second quarter of 1998, compared with
$1,598,000 in the second quarter of 1997. Revenues decreased primarily due to a
decrease in demand from the Company's largest customer, which is expected to
continue.
The gross margin decreased to 39% in the second quarter of fiscal 1998 from
53% in the second quarter of fiscal 1997, primarily due to a decrease in
revenues and a decrease in production volume due to shutdowns
9
<PAGE>
Second Quarter 1998 Compared With Second Quarter 1997 (continued)
of the GranTek manufacturing plant while emptying storage tanks. Storage tanks
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 plant shutdowns were for approximately four
weeks and were completed by the end of the quarter. In addition, the plant was
shut down for approximately one week in July 1998 for routine maintenance.
Selling, general, and administrative expenses as a percentage of revenues
increased to 68% in the second quarter of 1998 from 44% in the second quarter of
1997, principally due to the hiring of additional sales and marketing staff to
expand the Company's fiber-recovery business and a decrease in revenues at
GranTek. Research and development expenses decreased to $408,000 in the second
quarter of 1998 from $470,000 in the second quarter of 1997, primarily due to
completion of the development of the Company's cat box filler product.
The provision for income taxes was $4,000 in the second quarter of 1998. The
Company did not record a provision for income taxes in the second quarter of
1997 due to the benefit of net operating loss carryforwards.
First Six Months 1998 Compared With First Six Months 1997
Revenues were $2,660,000 in the first six months of 1998, compared with
$3,124,000 in the first six months of 1997. Revenues decreased primarily due to
a decrease in demand from the Company's largest customer, offset in part by an
increase in demand from other customers. The decrease in demand from the
Company's largest customer is expected to continue.
The gross profit margin decreased to 40% in the first six months of 1998
from 51% in the first six months of 1997, primarily for the reasons discussed in
the results of operations for the second quarter.
Selling, general, and administrative expenses as a percentage of revenues
increased to 63% in the first six months of 1998 from 47% in the first six
months of 1997, principally due to the hiring of additional sales and marketing
staff to expand the Company's fiber-recovery business, and a decrease in
revenues and increased marketing expenses relating to new granular products at
GranTek. Research and development expenses decreased to $820,000 in the first
six months of 1998 from $923,000 in the first six months of 1997, primarily due
to completion of the development of the Company's cat box filler product.
The provision for income taxes was $82,000 in the first six months of 1998.
The Company did not record a provision for income taxes in the first six months
of 1997 due to the benefit of net operating loss carryforwards.
10
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $55,481,000 at July 4, 1998, compared with
$58,609,000 at January 3, 1998. Included in working capital at July 4, 1998, are
cash, cash equivalents, and available-for-sale investments of $55,772,000,
compared with $58,071,000 at January 3, 1998.
During the first six months of 1998, $1,609,000 of cash was provided by
operating activities. Cash provided by the Company's operating results was
improved primarily by an increase in accounts payable related to the
construction of a fiber-recovery and water-clarification facility.
During the first six months of 1998, the Company's primary investment
activity, excluding available-for-sale investments activity, was the purchase of
property, plant, and equipment for $3,721,000, which included $2,906,000
expended for the construction of a fiber-recovery and water-clarification
facility.
The Company's common stock subject to redemption is redeemable by holders of
redemption rights in September 2000 and 2001 for a total redemption value of
$60,116,000. The redemption rights are guaranteed, on a subordinated basis, by
Thermo Electron Corporation.
In the remainder of 1998, the Company plans to make expenditures for
property, plant, and equipment of approximately $1.4 million, which includes
expenditures for the construction of a fiber-recovery and water-clarification
facility, which was completed in July 1998. In addition, the Company may make
additional capital expenditures for the construction of additional
fiber-recovery facilities. Construction of fiber-recovery facilities is
dependent upon the Company entering into long-term contracts with paper mills,
under which the Company will charge fees to process the mills' papermaking
byproducts. The Company currently has only one such agreement in place and there
is no assurance that the Company will be able to obtain such additional
contracts. The Company anticipates it will require significant amounts of cash
for the construction of its fiber-recovery facilities. The Company will seek to
finance the construction of its fiber-recovery facilities through a combination
of internal funds, additional debt or equity financing, and/or borrowings from
Thermo Fibertek Inc. and Thermo Electron, although there is no agreement with
Thermo Fibertek or Thermo Electron under which such parties would be obligated
to lend funds to the Company. The Company believes that its existing resources
will be sufficient to meet the Company's capital requirements for the
foreseeable future.
11
<PAGE>
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
(d) Use of Proceeds
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 and 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 July 4, 1998, the Company had expended
$4,401,000 of such net proceeds for the purchase of property, plant, and
equipment and $3,022,000 for research and development expenses. As of July 4,
1998, the Company had expended an aggregate of $7,423,000 of such net proceeds.
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
July 4, 1998, remaining net proceeds of $44,728,000 were invested directly with
persons other than Affiliates and $3,630,000 were invested pursuant to a
repurchase agreement with Thermo Electron Corporation.
Item 4 - Submission of Matters of a Vote of Security Holders
On June 1, 1998, at the Annual Meeting of Shareholders, the
shareholders reelected six incumbent directors to a one-year term expiring
in 1999. The directors reelected at the meeting were: Anne T. Barrett,
Francis L. McKone, Yiannis A. Monovoukas, Jonathan W. Painter, William A.
Rainville, and Roger D. Wellington. Each director received 13,713,615
shares voted in favor of his or her election and no shares voted against.
No abstentions or broker nonvotes were recorded on the election of
directors.
Item 5 - Other Information
Pursuant to recent amendments to the rules relating to proxy statements
under the Securities Exchange Act of 1934, as amended (the Exchange Act),
shareholders of the Company are hereby notified that any shareholder proposal
not included in the Company's proxy materials for its 1999 Annual Meeting of
Shareholders (the Annual Meeting) in accordance with Rule 14a-8 under the
Exchange Act will be considered
12
<PAGE>
Item 5. Other Information (continued)
untimely for the purposes of Rules 14a-4 and 14a-5 under the Exchange Act if
notice thereof is received by the Company after March 15, 1999. Management
proxies will be authorized to exercise discretionary voting authority with
respect to any shareholder proposal not included in the Company's proxy
materials for the Annual Meeting unless (a) the Company receives notice of such
proposal by March 15, 1999, and (b) the conditions set forth in Rule
14a-4(c)(2)(i)-(iii) under the Exchange Act are met.
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
13
<PAGE>
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 August 1998.
THERMO FIBERGEN INC.
Paul F. Kelleher
---------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
---------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ----------------------------------------------------------------------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
FIBERGEN INC.'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 4, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JUL-04-1998
<CASH> 20,042
<SECURITIES> 35,730
<RECEIVABLES> 582
<ALLOWANCES> 30
<INVENTORY> 329
<CURRENT-ASSETS> 57,060
<PP&E> 10,444
<DEPRECIATION> 1,747
<TOTAL-ASSETS> 70,814
<CURRENT-LIABILITIES> 1,579
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 11,417
<TOTAL-LIABILITY-AND-EQUITY> 70,814
<SALES> 2,660
<TOTAL-REVENUES> 2,660
<CGS> 1,592
<TOTAL-COSTS> 1,592
<OTHER-EXPENSES> 820
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 204
<INCOME-TAX> 82
<INCOME-CONTINUING> 122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
