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 1-12137
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 October 30, 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
October 3, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $11,447 $21,752
Available-for-sale investments, at quoted market
value (amortized cost of $43,326 and $36,273) 43,346 36,319
Accounts receivable, less allowance of $30 in
1998 and 1997 763 645
Inventories:
Raw materials and supplies 180 -
Finished goods 304 507
Prepaid income taxes and other current assets 373 300
Due from parent company and affiliated companies 258 115
------- -------
56,671 59,638
------- -------
Property, Plant, and Equipment, at Cost 11,158 6,727
Less: Accumulated depreciation and amortization 1,993 1,416
------- -------
9,165 5,311
------- -------
Other Assets 823 885
------- -------
Cost in Excess of Net Assets of Acquired Company 4,154 4,330
------- -------
$70,813 $70,164
======= =======
2
<PAGE>
THERMO FIBERGEN 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 $ 726 $ 338
Accrued payroll and employee benefits 296 344
Accrued income taxes 132 -
Other accrued liabilities 344 347
------- -------
1,498 1,029
------- -------
Common Stock Subject to Redemption ($60,116
redemption value), 4,715,000 shares issued and
outstanding 57,989 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 11,214 11,830
Accumulated other comprehensive income (Note 3) 12 29
------- -------
11,326 11,959
------- -------
$70,813 $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
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $ 1,124 $ 906
------- -------
Costs and Operating Expenses:
Cost of revenues 688 534
Selling, general, and administrative expenses 739 666
Research and development expenses 342 413
------- -------
1,769 1,613
------- -------
Operating Loss (645) (707)
Interest Income 770 865
------- -------
Income Before Provision for Income Taxes 125 158
Provision for Income Taxes 50 -
------- -------
Net Income $ 75 $ 158
======= =======
Earnings per Share (Note 2):
Basic $ .01 $ .01
======= =======
Diluted $ - $ .01
======= =======
Weighted Average Shares (Note 2):
Basic 14,715 14,715
======= =======
Diluted 17,174 16,105
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO FIBERGEN INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $ 3,784 $ 4,030
------- -------
Costs and Operating Expenses:
Cost of revenues 2,280 2,080
Selling, general, and administrative expenses 2,427 2,124
Research and development expenses 1,162 1,336
------- -------
5,869 5,540
------- -------
Operating Loss (2,085) (1,510)
Interest Income 2,414 2,603
------- -------
Income Before Provision for Income Taxes 329 1,093
Provision for Income Taxes 132 -
------- -------
Net Income $ 197 $ 1,093
======= =======
Earnings per Share (Note 2):
Basic $ .01 $ .07
======= =======
Diluted $ .01 $ .07
======= =======
Weighted Average Shares (Note 2):
Basic 14,715 14,715
======= =======
Diluted 16,688 16,420
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMO FIBERGEN INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 197 $ 1,093
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 815 887
Changes in current accounts:
Accounts receivable (118) 134
Inventories 23 (101)
Other current assets (63) 40
Accounts payable (30) (334)
Other current liabilities 81 307
Other 130 (383)
-------- --------
Net cash provided by operating activities 1,035 1,643
-------- --------
Investing Activities:
Purchases of available-for-sale investments (51,225) (29,050)
Proceeds from sale and maturities of
available-for-sale investments 43,961 -
Purchases of property, plant, and equipment (4,017) (224)
Other 84 -
-------- --------
Net cash used in investing activities (11,197) (29,274)
-------- --------
Financing Activities:
Change in due from parent company and
affiliated companies (143) (2,162)
-------- --------
Net cash used in financing activities (143) (2,162)
-------- --------
Decrease in Cash and Cash Equivalents (10,305) (29,793)
Cash and Cash Equivalents at Beginning of Period 21,752 58,388
-------- --------
Cash and Cash Equivalents at End of Period $ 11,447 $ 28,595
======== ========
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 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 $ 75 $ 158 $ 197 $ 1,093
------- ------- ------- -------
Weighted Average Shares 14,715 14,715 14,715 14,715
------- ------- ------- -------
Basic Earnings per Share $ .01 $ .01 $ .01 $ .07
======= ======= ======= =======
Diluted
Net Income $ 75 $ 158 $ 197 $ 1,093
------- ------- ------- -------
Weighted Average Shares 14,715 14,715 14,715 14,715
Effect of:
Redemption rights 2,459 1,388 1,972 1,704
Stock options - 2 1 1
------- ------- ------- -------
Weighted Average Shares,
as Adjusted 17,174 16,105 16,688 16,420
------- ------- ------- -------
Diluted Earnings per Share $ - $ .01 $ .01 $ .07
======= ======= ======= =======
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 October 3, 1998, there were 401,000 of such options
outstanding, with exercise prices ranging from $8.50 to $13.65 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 third quarter of 1998 and 1997, the
Company had comprehensive income of $80,000 and $196,000, respectively. During
the first nine months of 1998 and 1997, the Company had comprehensive income of
$180,000 and $1,131,000, 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 convert them
into commercial products. The Company also clarifies and recycles process water
to be reused in papermaking. 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
8
<PAGE>
Overview (continued)
the construction of the facility to provide such services. Construction of the
fiber-recovery and water-clarification facility was completed in July 1998. The
Company began operations at the facility in July 1998, 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 introduced a cat
box filler product called PaPurr (pronounced paper) in regular and clumping
formulations. The Company's biochemical group has completed development of a
nontoxic, noncorrosive, biodegradable de-icer. Other products in development
include controlled-release granules for carrying fertilizers and
cellulose-fiber-reinforced composite materials.
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 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.
Results of Operations
Third Quarter 1998 Compared With Third Quarter 1997
Revenues increased to $1,124,000 in the third quarter of 1998 from $906,000
in the third quarter of 1997, due to revenue earned for fiber-recovery and
water-clarification services at the Company's facility, which began operations
in July 1998.
The gross margin decreased to 39% in the third quarter of 1998 from 41% in
the third quarter of 1997, primarily as a result of additional costs at GranTek
associated with the introduction of its cat box filler product, offset in part
by a reduction in costs relating to GranTek's agricultural carrier product.
9
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
Selling, general, and administrative expenses as a percentage of revenues
decreased to 66% in the third quarter of 1998 from 74% in the third quarter of
1997. The decrease, due to an increase in revenues, was offset in part by higher
expenses resulting from the hiring of additional sales and marketing staff to
expand the Company's fiber-recovery business. Research and development expenses
decreased to $342,000 in the third quarter of 1998 from $413,000 in the third
quarter of 1997, primarily due to a reduction in expenditures at the Company's
fiber-recovery business and the completion of the development of the Company's
cat box filler product.
The provision for income taxes was $50,000 in the third quarter of 1998. The
Company did not record a provision for income taxes in the third quarter of 1997
due to the benefit of net operating loss carryforwards.
First Nine Months 1998 Compared With First Nine Months 1997
Revenues were $3,784,000 in the first nine months of 1998, compared with
$4,030,000 in the first nine months of 1997. Revenues decreased at GranTek
primarily due to a decrease in demand from its largest customer, offset in part
by an increase in demand from its other customers. The decrease in revenues at
GranTek was offset in part by revenues earned for fiber-recovery and
water-clarification services at the Company's facility which began operations in
July 1998.
The gross profit margin decreased to 40% in the first nine months of 1998
from 48% in the first nine months of 1997, primarily due to a decrease in
production volume at GranTek in the second quarter resulting from shutdowns of
the manufacturing plant while emptying inventory storage tanks, a decrease in
revenues, and additional costs at GranTek 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 plant shutdowns have been
completed.
Selling, general, and administrative expenses as a percentage of revenues
increased to 64% in the first nine months of 1998 from 53% in the first nine
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 $1,162,000 in the first
nine months of 1998 from $1,336,000 in the first nine months of 1997, primarily
due to completion of the development of the Company's cat box filler product and
a reduction in expenditures at the Company's fiber-recovery business.
The provision for income taxes was $132,000 in the first nine months of
1998. The Company did not record a provision for income taxes in the first nine
months of 1997 due to the benefit of net operating loss carryforwards.
10
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $55,173,000 at October 3, 1998, compared
with $58,609,000 at January 3, 1998. Included in working capital at October 3,
1998, are cash, cash equivalents, and available-for-sale investments of
$54,793,000, compared with $58,071,000 at January 3, 1998. During the first nine
months of 1998, $1,035,000 of cash was provided by operating activities.
During the first nine months of 1998, the Company's primary investment
activity, excluding available-for-sale investments activity, was the purchase of
property, plant, and equipment for $4,017,000, which included $3,087,000
expended for the construction of a fiber-recovery and water-clarification
facility, completed in July 1998.
The Company's common stock subject to redemption is redeemable by holders of
redemption rights in September 2000 or 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 $50,000. The Company plans to
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 until September
2000 when the Company's redemption rights become exercisable.
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, vendors, and customers 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
11
<PAGE>
Year 2000 (continued)
computer systems, software applications, and related equipment. 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, vendors, and customers 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, vendors, and customers, 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 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. 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.
12
<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 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 October 3, 1998, the Company had
expended $3,087,000 of such net proceeds for the construction of a
water-clarification and fiber-recovery facility. The Company has invested, from
time to time, the balance of such net proceeds primarily in investment grade
interest- or dividend-bearing instruments. As of October 3, 1998, remaining net
proceeds of $46,437,000 were invested directly with persons other than
Affiliates and $6,257,000 were invested pursuant to a repurchase agreement with
Thermo Electron.
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 5th day of November 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 OCTOBER 3, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 11,447
<SECURITIES> 43,346
<RECEIVABLES> 793
<ALLOWANCES> 30
<INVENTORY> 484
<CURRENT-ASSETS> 56,671
<PP&E> 11,158
<DEPRECIATION> 1,993
<TOTAL-ASSETS> 70,813
<CURRENT-LIABILITIES> 1,498
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 11,226
<TOTAL-LIABILITY-AND-EQUITY> 70,813
<SALES> 3,784
<TOTAL-REVENUES> 3,784
<CGS> 2,280
<TOTAL-COSTS> 2,280
<OTHER-EXPENSES> 1,162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 329
<INCOME-TAX> 132
<INCOME-CONTINUING> 197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
