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 April 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-12137
THERMO FIBERGEN INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-3311544
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8 Alfred Circle
Bedford, Massachusetts 01730
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
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 April 30, 1999
Common Stock, $.01 par value 14,465,000
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO FIBERGEN INC.
Consolidated Balance Sheet
(Unaudited)
Assets
<S> <C> <C>
April 3, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ---------
Current Assets:
Cash and cash equivalents $12,794 $6,748
Available-for-sale investments, at quoted market value (amortized cost 40,378 48,206
of $40,365 and $48,210)
Accounts receivable, less allowance of $30 1,655 1,188
Inventories:
Raw materials and supplies 217 151
Finished goods 305 334
Prepaid income taxes and other current assets 416 366
Due from parent company and affiliated companies 226 300
------- -------
55,991 57,293
------- -------
Property, Plant, and Equipment, at Cost 11,202 11,175
Less: Accumulated depreciation and amortization 2,499 2,250
------- -------
8,703 8,925
------- -------
Other Assets 781 802
------- -------
Cost in Excess of Net Assets of Acquired Company 4,037 4,096
------- -------
$69,512 $71,116
======= =======
2
<PAGE>
THERMO FIBERGEN INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 3, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Accounts payable $ 525 $ 327
Accrued payroll and employee benefits 312 325
Other accrued liabilities 880 732
------- -------
1,717 1,384
------- -------
Deferred Income Taxes 230 230
------- -------
Common Stock Subject to Redemption ($60,116 redemption value), 58,531 58,260
4,715,000 shares issued and outstanding
------- -------
Shareholders' Investment:
Common stock, $.01 par value, 25,000,000 shares authorized; 10,000,000 100 100
shares issued
Capital in excess of par value 11,153 11,145
Treasury stock at cost, 250,000 shares (2,227) -
Accumulated other comprehensive items (Note 2) 8 (3)
------- -------
9,034 11,242
------- -------
$69,512 $71,116
======= =======
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
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $ 2,074 $1,343
------- ------
Costs and Operating Expenses:
Cost of revenues 1,110 791
Selling, general, and administrative expenses 878 797
Research and development 305 412
------- ------
2,293 2,000
------- ------
Operating Loss (219) (657)
Interest Income 683 852
------- ------
Income Before Provision for Income Taxes 464 195
Provision for Income Taxes 185 78
------- ------
Net Income $ 279 $ 117
======= ======
Basic and Diluted Earnings per Share (Note 3) $ .02 $ .01
======= ======
Weighted Average Shares (Note 3):
Basic 14,668 14,715
======= ======
Diluted 16,741 16,549
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO FIBERGEN INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 279 $ 117
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 329 245
Other noncash items - 9
Changes in current accounts:
Accounts receivable (467) (27)
Inventories (37) 61
Other current assets (56) (9)
Accounts payable 198 293
Other current liabilities 221 29
-------- -------
Net cash provided by operating activities 467 718
-------- -------
Investing Activities:
Purchases of available-for-sale investments (25,325) (2,500)
Proceeds from sale and maturities of available-for-sale investments 33,002 9,311
Purchases of property, plant, and equipment (113) (1,125)
Other 168 -
-------- -------
Net cash provided by investing activities 7,732 5,686
-------- -------
Financing Activities:
Purchases of Company common stock from Thermo Electron (2,227) -
Change in due from parent company and affiliated companies 74 1
-------- -------
Net cash provided by (used in) financing activities (2,153) 1
-------- -------
Increase in Cash and Cash Equivalents 6,046 6,405
Cash and Cash Equivalents at Beginning of Period 6,748 21,752
-------- -------
Cash and Cash Equivalents at End of Period $ 12,794 $28,157
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
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 April 3, 1999, and the results of
operations and cash flows for the three-month periods ended April 3, 1999, and
April 4, 1998. Interim results are not necessarily indicative of results for a
full year.
The consolidated balance sheet presented as of January 2, 1999, 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 2, 1999,
filed with the Securities and Exchange Commission.
2. 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. During the first quarter of 1999 and 1998, the
Company had comprehensive income of $290,000 and $104,000, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Basic
Net Income $ 279 $ 117
------- ------
Weighted Average Shares 14,668 14,715
------- ------
Basic Earnings per Share $ .02 $ .01
======= ======
Diluted
Net Income $ 279 $ 117
------- ------
Weighted Average Shares 14,668 14,715
Effect of:
Redemption rights 2,071 1,833
Stock options 2 1
------- ------
Weighted Average Shares, as Adjusted 16,741 16,549
------- ------
Diluted Earnings per Share $ .02 $ .01
======= ======
6
<PAGE>
3. Earnings per Share (continued)
The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of April 3, 1999, there were 432,500 of such
options outstanding, with exercise prices ranging from $8.93 to $12.75 per
share.
4. Business Segment Information
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues:
Cellulose-based Products $1,729 $1,343
Fiber-recovery and Water-clarification Services 345 -
------- ------
$2,074 $1,343
======= ======
Income Before Provision for Income Taxes:
Cellulose-based Products $ 215 $ 35
Fiber-recovery and Water-clarification Services (434) (692)
------- ------
Total operating loss (219) (657)
Interest income 683 852
------- ------
$ 464 $ 195
======= ======
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 2, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company organizes and manages its business by individual functional
operating entity. The Company's two operating entities constitute the Company's
business segments: Fiber-recovery and Water-clarification Services and
Cellulose-based Products. The Fiber-recovery and Water-clarification Services
segment designs, builds, owns, and operates plants to help pulp and paper mill
customers 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. 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.
The Cellulose-based Products segment, which consists of the Company's
GranTek subsidiary, acquired July 1996, employs patented technology to produce
absorbing granules from papermaking byproducts which are used as agricultural
carriers , oil-and-grease absorbents, and cat box fillers. The agricultural
carriers are marketed under the trade name Biodac(R), and are used to deliver
agricultural chemicals for professional turf, home lawn and garden,
7
<PAGE>
Overview (continued)
agricultural row-crop, and mosquito-control applications. Development of a
nontoxic, noncorrosive, biodegradable de-icer was completed in 1998. Other
products under development include controlled-release granules for carrying
fertilizers and cellulose-fiber-reinforced composite materials.
Revenues from the Cellulose-based Products segment are principally from
sales in the agricultural-carrier market. The Company's primary customers in
this market, chemical formulators, typically purchase carriers during the winter
and spring for the cultivation and planting season. As a result, the Company
earns a disproportionate share of its revenues from its agricultural-carrier
products during the first two quarters of the year. The Company believes that
its entrance into the oil- and grease-absorption, cat box filler, and
international agricultural row-crop markets, if successful, may mitigate the
seasonality of the Company's sales.
The Company currently intends to limit the pace and amount of its research
and development so that its research and development expenditures will not
exceed the interest income earned on its cash, cash equivalents, and
available-for-sale investments, plus the Company's operating earnings, if any,
before research and development expenses.
Results of Operations
First Quarter 1999 Compared With First Quarter 1998
Revenues increased to $2,074,000 in the first quarter of 1999 from
$1,343,000 in the first quarter of 1998, due to an increase in revenues at the
Cellulose-based Products segment and the inclusion of $345,000 of revenues at
the Fiber-recovery and Water-clarification Services segment from its
fiber-recovery and water-clarification facility, which began operations in July
1998. Revenues at the Cellulose-based Products segment increased principally due
to an increase in demand from its two largest customers.
The gross profit margin increased to 46% in the first quarter of 1999 from
41% in the first quarter of 1998, primarily due to an increase in revenues at
the Cellulose-based Products segment. In addition, the inclusion of
higher-margin revenues from the Fiber-recovery and Water-clarification segment
also improved gross profit margin.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 42% in the first quarter of 1999 from 59% in the first quarter of
1998, principally due to an increase in revenues at both segments.
Research and development expenses decreased to $305,000 in the first
quarter of 1999 from $412,000 in the first quarter of 1998, primarily due to a
reduction in expenditures for the development of the fiber-recovery process at
the Fiber-recovery and Water-clarification Services segment. The Company expects
to increase its research and development efforts relating to the development of
cellulose-fiber-reinforced composite materials, and consequently its level of
research and development spending may increase in the future.
Interest income decreased to $683,000 in the first quarter of 1999 from
$852,000 in the first quarter of 1998, principally as a result of a decrease in
average invested balances. Average invested balances decreased primarily due to
the use of cash to fund the construction of the fiber-recovery and
water-clarification facility, completed in 1998.
The effective tax rate was unchanged at 40% in the first quarter of 1999
and 1998. The effective tax rate exceeded the statutory federal income tax rate
primarily due to the impact of state income taxes.
8
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $54,274,000 at April 3, 1999, compared
with $55,909,000 at January 2, 1999. Included in working capital at April 3,
1999, are cash, cash equivalents, and available-for-sale investments of
$53,172,000, compared with $54,954,000 at January 2, 1999. During the first
quarter of 1999, $467,000 of cash was provided by operating activities. An
increase in accounts receivable used $467,000 of cash, primarily due to higher
revenues.
During the first quarter of 1999, the Company's primary investment
activities involved the purchase and sale of available-for-sale investments.
During the first quarter of 1999, the Company's financing activities used
$2,153,000 of cash, principally for the purchase of Company common stock. The
Company purchased 250,000 shares of its common stock, at market value, from
Thermo Electron for $2,227,000. Thermo Electron had previously acquired the
shares through open market purchases. In March 1999, the Company's Board of
Directors authorized the purchase of up to an additional $5 million of Company
common stock in open market or negotiated transactions through March 16, 2000.
As of April 3, 1999, no purchases had been made under this authorization. Any
such purchases are funded from working capital.
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 April 3, 1999, there were 4,715,000 redemption
rights outstanding and only 4,028,250 shares of Company common stock held by
persons other than Thermo Electron, Thermo Fibertek, or the Company.
During the remainder of 1999, the Company plans to make expenditures for
property, plant, and equipment of approximately $500,000. In addition, the
Company plans to 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 the
construction of its fiber-recovery and water-clarification facilities. The
Company will seek to finance the construction of such 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 following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
on the Company's internal business systems, products, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading significant
information technology systems and facilities; (ii) assessing the year 2000
readiness of its key suppliers, vendors, and customers; and (iii) developing a
contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical
9
<PAGE>
Year 2000 (continued)
facilities. The Company's efforts included testing the year 2000 readiness of
its manufacturing, utility, and telecommunications systems at its critical
facilities. The Company is currently in phase two of its program, during which
any material noncompliant information technology systems or facilities that were
identified during phase one are prioritized and remediated. Based on its
evaluations, the Company does not believe that any material upgrades to its
critical facilities are needed. The Company is currently upgrading or replacing
its material noncompliant information technology systems, and the majority of
this process was complete as of April 3, 1999. The Company expects that all of
its material information technology systems and critical facilities will be year
2000 compliant by October 1999.
The Company believes that all of its current material products are not
date sensitive and should not be affected by year 2000 issues.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers, vendors, and customers that are believed to be
significant to the Company's business operations. As part of this effort, the
Company has developed and is distributing questionnaires relating to year 2000
compliance to its significant suppliers, vendors, and customers. To date, no
significant supplier, vendor, or customer has indicated that it believes its
business operations will be materially disrupted by the year 2000 issue. The
Company has started to follow-up with significant suppliers, vendors, and
customers that have not responded to the Company's questionnaires. The Company
has completed the majority of its assessment of third party risk, and expects to
be substantially completed by October 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems,
facilities, and significant suppliers, vendors, and customers, it will modify
and adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had not incurred any material expenses to third parties
(external costs) related to year 2000 issues as of April 3, 1999, and the total
external costs of year 2000 remediation are expected to be less than $25,000.
Year 2000 costs are funded from working capital. All internal costs and related
external costs other than capital additions related to year 2000 remediation
have been and will continue to be expensed as incurred. The Company does not
track the internal costs incurred for its year 2000 compliance project. Such
costs are principally the related payroll costs for its information systems
staff.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and services to the Company on time. The
Company's operations could be delayed or temporarily shut down, and it could be
unable to meet its obligations to customers in a timely fashion. The Company's
business, operations, and financial condition could be adversely affected in
amounts that cannot be reasonably estimated at this time. If the Company
believes that any of its key suppliers or vendors may not be year 2000
compliant, it will seek to identify and secure other suppliers or vendors as
part of its contingency plan.
10
<PAGE>
Year 2000 (continued)
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 customers, or its material suppliers or vendors
as described above, experience business disruptions due to year 2000 issues, the
Company might also be materially adversely affected. There is expected to be a
significant amount of litigation relating to the year 2000 issue and there can
be no assurance that the Company will not incur material costs in defending or
bringing lawsuits. In addition, if any year 2000 issues are identified, there
can be no assurance that the Company will be able to retain qualified personnel
to remedy such issues. Any unexpected costs or delays arising from the year 2000
issue could have a significant adverse impact on the Company's business,
operations, and financial condition in amounts that cannot be reasonably
estimated at this time. Item 3 - Quantitative and Qualitative Disclosures About
Market Risk
The Company's exposure to market risk from changes in equity prices and
interest rates has not changed materially from year-end 1998.
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 April 3, 1999, the Company had
expended $3,268,000 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 April 3, 1999, remaining net
proceeds of $45,675,000 were invested directly with persons other than
Affiliates and $6,838,000 were invested pursuant to a repurchase agreement with
Thermo Electron.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
None.
11
<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 May 1999.
THERMO FIBERGEN INC.
/s/ Paul F. Kelleher
-------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
-------------------------
Theo Melas-Kyriazi
Chief Financial Officer
12
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
FIBERGEN INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 3, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 12,794
<SECURITIES> 40,378
<RECEIVABLES> 1,685
<ALLOWANCES> 30
<INVENTORY> 522
<CURRENT-ASSETS> 55,991
<PP&E> 11,202
<DEPRECIATION> 2,499
<TOTAL-ASSETS> 69,512
<CURRENT-LIABILITIES> 1,717
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 8,934
<TOTAL-LIABILITY-AND-EQUITY> 69,512
<SALES> 2,074
<TOTAL-REVENUES> 2,074
<CGS> 1,110
<TOTAL-COSTS> 1,110
<OTHER-EXPENSES> 305
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 464
<INCOME-TAX> 185
<INCOME-CONTINUING> 279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 279
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
