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 March 31, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-12137 THERMO FIBERGEN INC. (Exact name of Registrant as specified in its charter) Delaware 04-3311544 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 8 Alfred Circle Bedford, Massachusetts 01730 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 622-1000 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 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 27, 2001 ---------------------------- ----------------------------- Common Stock, $.01 par value 11,500,649 PART I - Financial Information Item 1 - Financial Statements THERMO FIBERGEN INC. Consolidated Balance Sheet (Unaudited) Assets

~~September~~March 3031, ~~January~~December 130, (In thousands) ~~2000~~2001 2000 ------------------------------------------------------------------------------- ------------- -------------- Current Assets: Cash and cash equivalents ~~(Note 6)~~ $4312,~~432~~274 $ ~~51 Advance to affiliate (Note 6) -~~ 5,~~087~~115 Available-for-sale investments, at quoted market value (amortized cost of $58,~~154~~047 ~~and~~in ~~$46,470~~2000) ~~5,183~~- 468,~~405~~050 Accounts receivable, less allowance of $30 ~~809~~in 2001 and 2000 2,417 1,~~164~~583 Inventories: Raw materials and supplies ~~534~~374 ~~364~~395 Work in process 34 85 Finished goods 1507 591 Note receivable 2,~~130~~000 ~~453~~2,400 Other current assets ~~(Note~~460 5)201 ~~2,609 197~~ Due from parent company and affiliated companies ~~297~~295 ~~377~~324 ------- ------- 5318,~~994~~361 5418,~~098~~744 ------- ------- Property, Plant, and Equipment, at Cost ~~(Note 5) 12~~13,~~392~~384 13,~~308~~341 Less: Accumulated depreciation and amortization 3,~~169~~699 3,~~246~~417 ------- ------- 9,~~223~~685 109,~~062~~924 ------- ------- Other Assets (Note 5) 43,~~748~~376 46,~~416~~169 ------- ------- ~~Cost~~Goodwill ~~in Excess of Net Assets of Acquired Company~~ 3,~~686~~569 3,~~862~~628 ------- ------- $7134,~~651~~991 $7238,~~438~~465 ======= ======= < 2 > THERMO FIBERGEN INC. Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment ~~September~~March 3031, ~~January~~December 130, (In thousands except share amounts) ~~2000~~2001 2000 ------------------------------------------------------------------------------- ------------- -------------- Current Liabilities: Accounts payable $ ~~399~~1,090 $ ~~920~~753 Accrued payroll and employee benefits ~~416~~323 ~~385~~451 ~~Accrued income taxes 677 290~~ Other accrued liabilities 1,~~252~~262 21,~~326~~421 Common stock subject to redemption, 4,715,000 shares issued; 2,001,049 ~~and 4,715,000~~ shares outstanding ~~(Note 7) 60~~25,~~116~~513 5925,~~344~~513 ------- ------- 6228,~~860~~188 6328,~~265~~138 ------- ------- Deferred Income Taxes ~~512~~1,349 ~~512~~2,335 ------- ------- Minority Interest (Note 5) - 2,~~505~~156 ~~3,021~~ ------- ------- Shareholders' Investment: Common stock, $.01 par value, 25,000,000 shares authorized; 10,~~011~~053,500 and 10,~~000~~051,~~000~~500 shares issued ~~100~~101 ~~100~~101 Capital in excess of par value 11,~~170~~577 11,~~102~~557 Accumulated deficit (709) (309) Treasury stock at cost, 553,900 ~~and 554,400~~ shares (5,515) (5,~~520~~515) Accumulated other comprehensive items (Note 2) 19- ~~(42)~~2 ------- ------- 5,~~774~~454 5,~~640~~836 ------- ------- $7134,~~651~~991 $7238,~~438~~465 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. < 3 > THERMO FIBERGEN INC. Consolidated Statement of ~~Income~~Operations (Unaudited) Three Months Ended ------------------------- ~~September~~March 3031, ~~October~~April 21, (In thousands except per share amounts) 2001 2000 ~~1999~~ ------------------------------------------------------------------------------- ------------- ------------- Revenues $ 12,~~276~~913 $ 2,~~266~~733 ------- ------- Costs and Operating Expenses: Cost of revenues 12,~~227~~502 1,~~328~~666 Selling, general, and administrative expenses ~~877~~1,098 ~~781~~1,044 Research and development expenses ~~275~~296 ~~331~~326 ~~Gain on sale of property (Note 5) (729)~~ - ------- ------- 13,~~650~~896 23,~~440~~036 ------- ------- Operating Loss (~~374~~983) (~~174~~303) Interest Income ~~816~~216 ~~678~~655 ------- ------- Income (Loss) Before ~~Provision for~~ Income Taxes and Minority Interest ~~442~~(767) ~~504~~352 ~~Provision for~~ Income ~~Taxes~~Tax (~~389~~Provision) Benefit 307 (~~202~~186) Minority Interest Income ~~260~~(Note -5) 60 112 ------- ------- Net Income (Loss) $ ~~313~~(400) $ ~~302~~278 ======= ======= Basic and Diluted Earnings (Loss) per Share (Note 3) $ (.0203) $ .02 ======= ======= Weighted Average Shares (Note 3): Basic 1411,~~173~~500 14,~~307~~161 ======= ======= Diluted 1411,~~510~~500 14,~~959~~537 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. < 4 > THERMO FIBERGEN INC. Consolidated Statement of ~~Income~~Cash Flows (Unaudited) ~~Nine~~Three Months Ended ------------------------- ~~September~~March 3031, ~~October~~April 21, (In thousands ~~except per share amounts~~) 2001 2000 ~~1999~~ ------------------------------------------------------------------------------- ------------- ---------- ~~Revenues $ 5,755 $ 6,593~~ ---~~----~~ ~~------- Costs and~~ Operating ~~Expenses~~Activities: Cost of revenues 4,013 3,667 Selling, general, and administrative expenses 3,008 2,518 Research and development expenses 878 990 Gain on sale of property (Note 5) (729) - ------- ------- 7,170 7,175 ------- ------- Operating Loss (1,415) (582) Interest Income 2,204 2,021 ------- ------- Income Before Provision for Income Taxes and Minority Interest 789 1,439 Provision for Income Taxes (573) (576) Minority Interest Income 516 - ------- ------- Net ~~Income~~income ~~$ 732 $ 863 ======= ======= Earnings per Share~~ (~~Note 3~~loss): ~~Basic~~ $ ~~.05 $ .06 ======= ======= Diluted $ .05 $ .05 ======= ======= Weighted Average Shares~~ (~~Note 3~~400): Basic 14,167 14,451 ======= ======= Diluted 14,532 15,730 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 5 THERMO FIBERGEN INC. Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended ------------------------- September 30, October 2, (In thousands) 2000 1999 ------------------------------------------------------------------------------- ------------- ---------- Operating Activities: Net income $ ~~732~~278 ~~$ 863~~ Adjustments to reconcile net income (loss) to net cash ~~provided~~used byin operating activities: Depreciation and amortization ~~1,377~~685 ~~989~~457 Minority interest income (~~516) - Gain on sale of property (~~Note 5) (~~729~~60) -(112) Other noncash items 2(9) -(4) Changes in current accounts~~, excluding the effect of disposition~~: Accounts receivable ~~355~~(834) (~~568~~1,241) Inventories ~~(896)~~155 ~~(88)~~105 Other current assets (45258) (1618) Accounts payable 337 (~~350~~125) ~~275~~ Other current liabilities ~~534~~(368) ~~1,002~~(105) -------- -------- Net cash ~~provided~~used byin operating activities ~~464~~(752) ~~2,457~~(765) -------- -------- Investing Activities: Acquisition of capital equipment and technology - (1,200) -Payments ~~Proceeds from sale of property (Note 5) 200 - Payment~~ received on note for sale of property ~~(Note~~600 ~~5) 200~~ - ~~Purchases of available-for-sale investments (18,500) (61,825)~~ Proceeds from maturities of available-for-sale investments 598,~~816~~047 6310,~~681~~244 Advances to affiliate, net ~~(Note~~- ~~6) 5,087~~ (67,~~658~~175) Purchases of property, plant, and equipment (~~2,900~~794) (~~469~~1,000) Proceeds from sale of property, plant, and equipment 209 -4 -------- -------- Net cash provided by ~~(used in)~~ investing activities 427,~~723~~862 ~~(5,271)~~873 -------- -------- Financing Activities: Net proceeds from issuance of Company common stock ~~114~~20 -4 ~~Purchases of Company common stock - (1,598) Purchases of Company common stock from Thermo Electron - (2,227)~~ Change in due from parent company and affiliated companies 8029 ~~(72)~~47 -------- -------- Net cash provided by ~~(used in)~~ financing activities ~~194~~49 ~~(3,897)~~51 -------- -------- Increase ~~(Decrease)~~ in Cash and Cash Equivalents 437,~~381~~159 ~~(6,711)~~159 Cash and Cash Equivalents at Beginning of Period ~~51 6~~5,~~748~~115 51 -------- -------- Cash and Cash Equivalents at End of Period $ 4312,~~432~~274 $ 37210 ======= ======= Noncash Activity: Amounts forgiven in exchange for the 49% minority interest in NEXT Fiber Products (Note 5) $ 2,053 $ - ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 6< 5 > 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 ~~September~~March 3031, ~~2000~~2001, and the results of operations ~~for the three-~~ and ~~nine-month periods ended September 30, 2000, and October 2, 1999, and the~~ cash flows for the ~~nine~~three-month periods ended ~~September~~March 3031, ~~2000~~2001, and ~~October~~April 21, ~~1999~~2000. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of ~~January~~December 130, 2000, 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~~December 130, 2000, filed with the Securities and Exchange Commission. 2. Comprehensive Income Comprehensive income combines net income and "other comprehensive items," ~~which~~that ~~represents~~represent 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~~first quarter of ~~2000~~2001 and ~~1999~~2000, the Company had comprehensive ~~income~~loss of $~~335~~398,000 and comprehensive income of $~~263~~291,000, respectively. ~~During~~3. ~~the~~Earnings ~~first~~(Loss) ~~nine~~per ~~months~~Share ofBasic and diluted earnings (loss) per share were calculated as follows: Three Months Ended ------------------------ March 31, April 1, (In thousands except per share amounts) 2001 2000 ~~and~~--------------------------------------------------------------------------------------------------------- ~~1999~~Basic Net Income (Loss) $ (400) $ 278 ------- ------- Weighted Average Shares 11,500 ~~the~~14,161 ~~Company~~------- ~~had~~------- ~~comprehensive~~Basic ~~income~~Earnings (Loss) per Share $ (.03) $ .02 ======= ======= Diluted Net Income (Loss) $ (400) $ 278 ------- ------- Weighted Average Shares 11,500 14,161 Effect of: Redemption rights - 324 Stock options - 52 ------- ------- Weighted Average Shares, as Adjusted 11,500 14,537 ------- ------- Diluted Earnings (Loss) per Share $~~793~~ (.03) $ .02 ======= ======= < 6 > THERMO FIBERGEN INC. 3. Earnings (Loss) per Share (continued) Options to purchase 60,000 and ~~$797~~20,000 shares of common stock for the three-month periods ended March 31, 2001 and April 1, 2000, respectively, were not included in the computation of diluted earnings (loss) per share because their effect would have been antidilutive. 4. Business Segment Information Three Months Ended ------------------------ March 31, April 1, (In thousands) 2001 2000 --------------------------------------------------------------------------------------------------------- Revenues: Cellulose-based Products $2,021 $2,364 Fiber-based Composite Products 920 - Fiber-recovery and Water-clarification Services - 369 Intersegment sales elimination (a) (28) - ------ ------ $2,913 $2,733 ====== ====== Income (Loss) Before Income Taxes and Minority Interest: Cellulose-based Products $ 77 $ 567 Fiber-based Composite Products (800) (382) Fiber-recovery and Water-clarification Services (29) (229) Corporate (b) (231) (259) ------ ------ Total Operating Loss (983) (303) Interest Income 216 655 ------ ------ $ (767) $ 352 ====== ====== (a) Intersegment sales are accounted for at prices that are representative of transactions with unaffiliated parties. (b) Primarily general and administrative expenses.

5. Acquisition of Composites Venture Minority Interest In January 2001, the Company acquired the outstanding 49% equity interest in NEXT Fiber Products Inc. from the minority investors (the seller). NEXT Fiber Products was a joint venture formed in 1999 to develop, produce, and market fiber-based composite products primarily for the building industry. In exchange for the 49% minority interest, the Company agreed to forgive $2,053,000 due from the seller, which related to the seller's investment in NEXT Fiber Products. The excess of assigned fair value of net assets acquired from the buyout over the acquisition costs resulted in a reduction in the intangible asset recorded at the time of the Company's initial investment in NEXT Fiber Products. 6. Proposed Spin Off On January 31, 2000, Thermo Electron announced that, as part of a major reorganization plan, it plans to spin off its equity interest in Thermo Fibertek as a dividend to Thermo Electron shareholders. Under the plan, the Company will remain a majority-owned subsidiary of Thermo Fibertek. In February 2001, Thermo Electron received a favorable ruling from the Internal Revenue Service regarding the spin off. The spin off of Thermo Fibertek will require final Thermo Electron Board of Director actions and other customary conditions. Thermo Electron has stated that it expects to complete the spin off in the summer of 2001. Thermo Electron will continue to guarantee, on a subordinated basis, the Company's obligation under its redemption rights following the spin off. < 7 > THERMO FIBERGEN INC. 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 December 30, 2000, filed with the Securities and Exchange Commission. Overview The Company organizes and manages its business by individual functional operating entity. The Company's three operating entities constitute the Company's business segments: Cellulose-based Products, Fiber-based Composite Products, and Fiber-recovery and Water-clarification Services. The Cellulose-based Products segment includes the Company's GranTek subsidiary, which employs patented technology to produce biodegradable absorbing granules from papermaking byproducts that are marketed and sold as Biodac(R) agricultural carriers, Gran-sorb(TM) oil and grease absorbents, and PaPurr(R) (pronounced "paper") cat box fillers. Biodac(R) is used as a carrier to deliver chemicals for professional turf, home lawn and garden, agricultural row-crop, and mosquito-control applications. Through its NEXT Fiber Products Inc. subsidiary, formed in October 1999, the Fiber-based Composite Products segment develops, produces, and markets fiber-based composites primarily for the building industry, used for applications such as soundwalls, decking, privacy fencing, roofing, and siding. The Company constructed a composites manufacturing facility in Green Bay, Wisconsin, and began limited production there in 2000. The Company is currently working to expand the facility and expects to have the capacity to support up to $20 million in annual revenues by the fourth quarter of 2001. In January 2001, the Company acquired the 49% minority interest in NEXT Fiber Products (Note 5). Prior to September 2000, the Company owned and operated a plant that provided fiber-recovery and water-clarification services to the host mill on a long-term contract basis. The plant, which the Company began operating in July 1998, cleaned and recycled water and long fiber for reuse in the papermaking process. The Company sold this plant to the host mill in September 2000. The Company intends to continue operating in this line of business and is pursuing other fiber-recovery projects. Results of Operations First Quarter 2001 Compared With First Quarter 2000 --------------------------------------------------- Revenues increased to $2,913,000 in the first quarter of 2001 from $2,733,000 in the first quarter of 2000. Revenues increased $920,000 due to sales from the Company's Fiber-based Composite Products segment. Revenues decreased $369,000 due to the September 2000 sale of the fiber-recovery and water-clarification services plant. In addition, revenues decreased at the Cellulose-based Products segment primarily as a result of a $347,000 decrease in sales of Biodac due to lower demand from one of the Company's largest customers, offset in part by a net increase in demand from other customers. Revenues from this customer decreased $660,000, primarily due to a decrease in demand resulting from its acquisition in 2000 by its competitor. In addition, the Company's largest customer has indicated that it is currently contemplating switching from Biodac to an alternate carrier for the one of its products. If such a change were to occur, it would have a material adverse effect on the Company's results of operations. < 8 > THERMO FIBERGEN INC. First Quarter 2001 Compared With First Quarter 2000 (continued) --------------------------------------------------- The gross profit margin decreased to 14% in the first quarter of 2001 from 39% in the first quarter of 2000. The gross profit margin at the Cellulose-based Products segment decreased to 23% in the first quarter of 2001 from 44% in the first quarter of 2000, primarily due to an increase of approximately $525,000 in the cost of natural gas, which is used in the production process. Natural gas prices sharply increased in the last nine months. Continued high natural gas prices will have a material adverse effect on the Company's profitability. In addition, the gross profit margin decreased as a result of startup efforts at its Fiber-based Composite Products segment. Selling, general, and administrative expenses as a percentage of revenues remained constant at 38% in the first quarters of 2001 and 2000. Selling, general and administrative expenses increased slightly to $1,098,000 in the first quarter of 2001 from $1,044,000 in the first quarter of 2000 primarily due to an increase of $271,000 at the Fiber-based Composite Products segment, largely offset by a decrease of $149,000 as a result of lower selling expenses at its Fiber-recovery and Water-clarification Services segment. The Company expects that selling, general, and administrative expenses will increase as it continues to expand its fiber-based composites business in 2001. Research and development expenses decreased to $296,000 in the first quarter of 2001 from $326,000 in the first quarter of 2000, primarily due to a reduction of costs in the Fiber-recovery and Water-clarification Services segment, offset in part by the inclusion of $225,000 of costs in the Fiber-based Composite Products segment as the Company focuses its research and development efforts on this business. The Company expects to increase its research and development expenses in 2001 as it develops new products at the fiber-based composites business. Interest income decreased to $216,000 in the first quarter of 2001 from $655,000 in the first quarter of 2000, principally due to the effect of a decrease in average invested balances, resulting from the use of cash to fund the September 2000 purchase of Company common stock from common stock redemption rightholders for $34,603,000, and lower prevailing interest rates. These decreases were offset in part by the inclusion of interest earned on a note receivable from the September 2000 sale of its fiber-recovery and water-clarification services plant. The Company expects interest income to decrease significantly in 2001 due to lower invested amounts as a result of the September 2000 redemption and the anticipated September 2001 redemption of the Company's common stock, as well as lower prevailing interest rates. The effective tax rates exceeded the statutory federal income tax rates due to the impact of state income taxes, certain nondeductible expenses, and for the first quarter of 2000, included increases in the valuation allowance. Minority interest income in the first quarters of 2001 and 2000 represent the minority investor's share of losses in NEXT Fiber Products. In January 2001, the Company acquired the 49% minority interest in NEXT Fiber Products (Note 5). Liquidity and Capital Resources The Company had negative working capital of $9,827,000 and $9,394,000 at March 31, 2001, and December 30, 2000, respectively. Included in working capital at March 31, 2001, are cash, cash equivalents, and available-for-sale investments of $12,274,000, compared with $13,165,000 at December 30, 2000. During the first quarter of 2001, $752,000 of cash was used in operating activities. A net increase in accounts receivable used cash of $834,000, primarily at the Fiber-based Composite Products segment, as well as at the Cellulose-based Products segment. An increase in other current assets used of cash of $258,000, primarily from an increase in current deferred income taxes. Cash of $155,000 was provided by a decrease in inventories, primarily at the fiber-based composites business, as well as $337,000 from an increase in accounts payable, primarily at the Cellulose-based Products segment due to the timing of payments. In addition, a decrease in accrued payroll and employee benefits, and accrued income taxes primarily contributed to a net $368,000 decrease in other accrued liabilities. < 9 > THERMO FIBERGEN INC. Liquidity and Capital Resources (continued) During the first quarter of 2001, the Company's primary investment activities included maturities of available-for-sale investments and cash received of $600,000 from the repayment of a note receivable. In addition, the Company used $794,000 for purchases of property, plant, and equipment, including $613,000 for the composites business. In January 2001, the Company acquired the 49% minority interest in NEXT Fiber Products (Note 5). The Company has a remaining obligation to the former minority investors relating to its initial investment in NEXT Fiber Products made in 1999 of $500,000, which is expected to be paid in 2001 and is included in other accrued liabilities in the accompanying balance sheet. During the month of September 2000, the initial redemption period, holders of the Company's common stock and common stock redemption rights surrendered 2,713,951 shares of the Company's common stock at a redemption price of $12.75 per share, for a total of $34,603,000. The Company used available working capital to fund the payment and retired these shares immediately following the redemption. Following the September 2000 redemption period, 2,001,049 redemption rights remain outstanding. Holders of a redemption right have the option to require the Company to redeem one share of the Company's common stock at $12.75 per share in September 2001 for a total redemption value of $25,513,000. As of March 31, 2001, there were 1,087,299 shares of Company common stock held by persons other than Thermo Fibertek. In addition, Thermo Fibertek and/or the Company may acquire additional shares of the Company's common stock in the open market. There can be no assurance that the Company will issue additional shares of its common stock through the exercise of employee stock options or other transactions. To the extent the number of redemption rights exceeds the number of shares of common stock held by persons other than Thermo Fibertek, the maximum redemption value that the Company would be required to pay is an amount equal to the redemption price of $12.75 per share times the total number of shares of the Company's common stock outstanding held by persons other than Thermo Fibertek at the time of the redemption. As of March 31, 2001, the Company expects this amount will not exceed $17,026,000. The redemption rights are guaranteed, on a subordinated basis, by Thermo Electron. During the remainder of 2001, the Company plans to make expenditures for property, plant, and equipment of approximately $3,300,000, primarily at NEXT Fiber Products. The Company may make additional capital expenditures to expand its fiber-based composites business. Thermo Fibertek has agreed to lend the Company up to $15 million on commercially reasonable terms, for its common stock redemption obligation in September 2001 and for working capital needs. Thermo Fibergen's obligation to make any specific payment of principal and/or interest on the loan shall be conditioned on the ability of Thermo Fibergen to meet reasonable cash flow requirements at the time of such specified payment, which cash flow requirements shall be mutually satisfactory to both parties. The Company believes that the availability of this funding from Thermo Fibertek, if required, will enable the Company to continue operations as a going concern for the foreseeable future. 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 2000. 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 require the Company to redeem one share of the Company's common stock during the redemption periods for $12.75 in cash; the next and final redemption period will occur during the < 10 > THERMO FIBERGEN INC. Item 2 - Changes in Securities and Use of Proceeds (continued) -------------------------------------------------- month of September 2001), 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 March 31, 2001, the Company had expended $12,223,000 of such net proceeds for the purchase of property, plant, and equipment, including $3,573,000 for the construction of a water-clarification and fiber-recovery facility; $1,700,000 for the acquisition of capital equipment and technology related to the fiber-based composites business; and $3,923,000 for the composites manufacturing business. In addition, in September 2000, the initial redemption period, the Company expended $34,603,000 for the redemption of its common stock. 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 March 31, 2001, remaining net proceeds of $8,955,000 were invested directly with persons other than Affiliates. Item 5 - Other Information -------------------------- On May 7, 2001, the Company announced that effective May 18, 2001, Jonathan W. Painter has been appointed President and Chief Executive Officer succeeding Yiannis Monovoukas. 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 > THERMO FIBERGEN INC. 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 7th day of May 2001. THERMO FIBERGEN INC. /s/ Theo Melas-Kyriazi -------------------------------------------- Theo Melas-Kyriazi Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) < 12 > THERMO FIBERGEN INC. Exhibit Index Exhibit Number Description of Exhibit -------------------------------------------------------------------------------- 10 Amendment No. 1 to Agreement of Loan dated as of May 7, 2001, between the Company and Thermo Fibertek Inc.

Three Months Ended Nine Months Ended ---------------------------- ---------------------------- September 30, October 2, September 30, October 2, (In thousands except per share amounts) 2000 1999 2000 1999 --------------------------------------------- ------------- ---------- ------------- ---------- Basic Net Income $ 313 $ 302 $ 732 $ 863 ------- ------- ------- ------- Weighted Average Shares 14,173 14,307 14,167 14,451 ------- ------- ------- ------- Basic Earnings per Share $ .02 $ .02 $ .05 $ .06 ======= ======= ======= ======= Diluted Net Income $ 313 $ 302 $ 732 $ 863 ------- ------- ------- ------- Weighted Average Shares 14,173 14,307 14,167 14,451 Effect of: Redemption rights 286 610 313 1,257 Stock options 51 42 52 22 ------- ------- ------- ------- Weighted Average Shares, as Adjusted 14,510 14,959 14,532 15,730 ------- ------- ------- ------- Diluted Earnings per Share $ .02 $ .02 $ .05 $ .05 ======= ======= ======= ======= 7 THERMO FIBERGEN INC. 3. Earnings per Share (continued) Options to purchase 20,000 shares of common stock for the 2000 periods and the third quarter of 1999, and 158,000 shares of common stock for the first nine months of 1999, were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price for the common stock and their effect would have been antidilutive. 4. Business Segment Information Three Months Ended Nine Months Ended ---------------------------- ---------------------------- September 30, October 2, September 30, October 2, (In thousands) 2000 1999 2000 1999 --------------------------------------------- ------------- ---------- ------------- ---------- Revenues: Cellulose-based Products $ 1,040 $ 1,922 $ 4,800 $ 5,558 Fiber-recovery and Water-clarification Services (a) 236 344 955 1,035 ------- ------- ------- ------- $ 1,276 $ 2,266 $ 5,755 $ 6,593 ======= ======= ======= ======= Income Before Provision for Income Taxes and Minority Interest: Cellulose-based Products $ (742) $ 277 $(1,071) $ 797 Fiber-recovery and Water-clarification Services (a) 368 (451) (344) (1,379) ------- ------- ------- ------- Total operating loss (374) (174) (1,415) (582) Interest income 816 678 2,204 2,021 ------- ------- ------- ------- $ 442 $ 504 $ 789 $ 1,439 ======= ======= ======= ======= (a) The Company sold its fiber-recovery and water-clarification services plant on September 5, 2000. Results include a gain of $729,000 on this sale in the 2000 periods. 5. Sale of Fiber-recovery and Water-clarification Services Plant On September 5, 2000, the Company sold substantially all of the assets of its fiber-recovery and water-clarification services plant for $3,600,000. The purchase price consists of an initial payment of $200,000 at the date of closing and a note receivable to be paid in seventeen monthly payments of $200,000, plus interest at 9.5 percent, beginning September 28, 2000. The note receivable is secured by a letter of credit. The Company recognized a pretax gain of $729,000 on the sale. 6. Advance to Affiliate Effective August 2000, the Company no longer participates in a domestic cash management arrangement with Thermo Electron Corporation. Amounts previously invested in this arrangement are included in cash and cash equivalents in the September 30, 2000, balance sheet and primarily include investments in commercial paper and U.S. government-agency and U.S. Treasury securities. 8 THERMO FIBERGEN INC. 7. Redemption Rights During the month of September 2000, holders of the Company's common stock and common stock redemption rights surrendered 2,713,951 shares of Company common stock at a redemption price of $12.75 per share. In October 2000, the Company remitted $34,603,000 for the shares, using available working capital to fund the payment. The accrued liability for the payment is included in common stock subject to redemption in the September 30, 2000, balance sheet. Following the redemption period, 2,001,049 redemption rights, redeemable in September 2001, remain outstanding, for a total redemption value of $25,513,000. The redemption rights are guaranteed, on a subordinated basis, by Thermo Electron. As of September 30, 2000, there were 1,027,349 shares of Company common stock held by persons other than Thermo Electron or Thermo Fibertek Inc. 8. Proposed Spin Off of Thermo Fibertek Inc. On January 31, 2000, Thermo Electron announced that, as part of a major reorganization plan, it plans to spin off its equity interest in Thermo Fibertek as a dividend to Thermo Electron shareholders. The distribution is subject to receipt of a favorable ruling from the Internal Revenue Service regarding the tax treatment of the spin off, and other customary conditions. Under the plan, the Company will remain a majority-owned subsidiary of Thermo Fibertek. Thermo Electron will continue to guarantee any remaining obligation of the Company under its redemption rights following the spin off. 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 1, 2000, 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. Through its Fiber-recovery and Water-clarification Services segment, the Company designs, owns, and operates plants to help pulp and paper mills improve product quality, reduce costs, and close the loop in their water and solids systems on a long-term contract basis. Prior to September 2000, the Company owned and operated one such plant in South Carolina, which it began operating in July 1998 under a 10-year contract. The Company sold this plant to the host mill in September 2000 (Note 5), although it intends to continue operating in this line of business and is pursuing other similar projects. The Cellulose-based Products segment includes the Company's GranTek subsidiary, which employs patented technology to produce biodegradable absorbing granules from papermaking byproducts that are marketed and sold as Biodac(R) agricultural carriers, Gran-sorb(TM) oil and grease absorbents, and PaPurr(R) (pronounced "paper") cat box fillers. Biodac(R) is used to deliver agricultural chemicals for professional turf, home lawn and garden, agricultural row-crop, and mosquito-control applications. Through its 51%-owned NEXT Fiber Products Inc. subsidiary, formed in October 1999, the Company develops, produces, and markets fiber-based composites primarily for the building industry, used for applications such as fencing, decking, and siding. The Company began construction of the composites manufacturing facility, located in Green Bay, Wisconsin, in the first quarter of 2000 and began limited-scale production in June 2000. The Company expects to continue to improve the manufacturing process throughout 2000. 9 THERMO FIBERGEN INC. Results of Operations Third Quarter 2000 Compared With Third Quarter 1999 --------------------------------------------------- Revenues decreased to $1,276,000 in the third quarter of 2000 from $2,266,000 in the third quarter of 1999. Revenues decreased $117,000 due to the September 2000 sale of the fiber-recovery and water-clarification services plant (Note 5). Revenues decreased in the Cellulose-based Products segment as a result of a $760,000 decrease in sales of Biodac and a $270,000 decrease in sales of cat box filler, offset in part by $150,000 in sales from the Company's new fiber-based composites business. The decreased sales of Biodac resulted from decreased demand from two of the Company's largest customers, offset in part by a net increase in demand from other customers. Sales to one customer decreased $440,000 due to the timing of a large order that was shipped in the first quarter of 2000. Sales to this customer were relatively unchanged in the first nine months of 2000, compared with the first nine months of 1999. Sales to the other customer decreased $430,000, primarily due to decreased demand for the customer's product as a result of recent federal regulations that prohibit a certain insecticide that the customer used in its product. Although the customer has announced the introduction of a replacement product that is expected to be in production before year-end, there can be no assurance that future sales to this customer will not be adversely affected. The introduction of the Company's cat box filler in late 1998 resulted in high initial shipment levels, primarily during the second and third quarters of 1999, as customers built inventory. As a result of these high initial shipments and decreased demand, sales are lower in 2000 compared to 1999. The gross profit margin decreased to 4% in the third quarter of 2000 from 41% in the third quarter of 1999, primarily due to decreased sales without a corresponding decrease in costs and higher gas prices at GranTek, and the inclusion of $300,000 of overhead costs at the Company's new fiber-based composites business. The gross profit margin at GranTek decreased to 26% in 2000 from 41% in 1999, primarily due to a suspension of production for five weeks that resulted from the decline in sales. Selling, general, and administrative expenses as a percentage of revenues increased to 69% in the third quarter of 2000 from 34% in the third quarter of 1999, principally due to the inclusion of $300,000 of costs related to the fiber-based composites business and decreased Cellulose-based Products revenues. The increase in selling, general, and administrative expenses was offset in part by a $150,000 decrease in selling costs in the Fiber-recovery and Water-clarification Services segment. The Company expects that selling, general, and administrative expenses will increase as it expands its fiber-based composites business. Research and development expenses decreased to $275,000 in the third quarter of 2000 from $331,000 in the third quarter of 1999, primarily due to a reduction of costs in the Fiber-recovery and Water-clarification Services segment as the Company focuses its research and development efforts on the fiber-based composites business. The Company expects to increase its research and development expenses as it develops new products at its fiber-based composites business. In September 2000, the Company sold its fiber-recovery and water-clarification services plant for $3,600,000, resulting in a gain of $729,000 (Note 5). Interest income increased to $816,000 in the third quarter of 2000 from $678,000 in the third quarter of 1999, principally due to an increase in average interest rates during the period and, to a lesser extent, the inclusion of interest earned on the note receivable from the September 2000 sale of the fiber-recovery and water-clarification services plant. Interest income will decline in future periods due to the October 2000 purchase of Company common stock from common stock redemption rightholders for $34,603,000 in cash (Note 7). The effective tax rate was 88% in the third quarter of 2000, compared with 40% in the third quarter of 1999. The effective tax rate increased in 2000 due to an increase in the valuation allowance for losses at its majority-owned fiber-based composites business. In addition, the effective tax rate exceeded the statutory federal income tax rate due to the impact of state income taxes and certain nondeductible expenses. Minority interest income in the third quarter of 2000 represents the minority investor's share of losses in the Company's NEXT Fiber Products subsidiary. 10 THERMO FIBERGEN INC. First Nine Months 2000 Compared With First Nine Months 1999 ----------------------------------------------------------- Revenues decreased to $5,755,000 in the first nine months of 2000 from $6,593,000 in the first nine months of 1999. This decrease was primarily in the Cellulose-based Products segment as a result of a $520,000 decrease in sales of Biodac and a $370,000 decrease in sales of cat box filler, for the reasons discussed in the results of operations for the quarter, offset in part by $150,000 in sales from the Company's new fiber-based composites business. The lower sales of Biodac resulted from decreased demand in the second and third quarters of 2000 from one of the Company's largest customers, as discussed in the results of operations for the third quarter. The gross profit margin decreased to 30% in the first nine months of 2000 from 44% in the first nine months of 1999, primarily due to the inclusion of $600,000 of overhead costs at the fiber-based composites business. In addition, the gross profit margin decreased due to lower sales without a corresponding decrease in costs and higher gas prices at GranTek, as discussed in the results of operations for the third quarter. Selling, general, and administrative expenses as a percentage of revenues increased to 52% in the first nine months of 2000 from 38% in the first nine months of 1999, principally due to the inclusion of $800,000 of costs related to the fiber-based composites business, offset in part by a $230,000 decrease in costs at GranTek, primarily as a result of lower selling expenses. Research and development expenses decreased to $878,000 in the first nine months of 2000 from $990,000 in the first nine months of 1999, primarily due to a reduction of costs in the Fiber-recovery and Water-clarification Services segment as the Company focuses its research and development efforts on the fiber-based composites business. In September 2000, the Company sold its fiber-recovery and water-clarification services plant for $3,600,000, resulting in a gain of $729,000 (Note 5). Interest income increased slightly to $2,204,000 in the first nine months of 2000 from $2,021,000 in the first nine months of 1999, principally due to an increase in average interest rates during the period, offset in part by the effect of a decrease in average invested balances resulting primarily from the use of cash to fund purchases of Company common stock in 1999 and purchases of capital equipment and technology by the Company's NEXT Fiber Products subsidiary in late 1999 and early 2000. The effective tax rate was 73% in the first nine months of 2000, compared with 40% in the first nine months of 1999. The effective tax rate increased in 2000 due to an increase in the valuation allowance for losses at its fiber-based composites business. In addition, the effective tax rate exceeded the statutory federal income tax rate due to the impact of state income taxes and certain nondeductible expenses. Minority interest income in the first nine months of 2000 represents the minority investor's share of losses in the Company's NEXT Fiber Products subsidiary. Liquidity and Capital Resources The Company had negative working capital of $8,866,000 and $9,167,000 at September 30, 2000, and January 1, 2000, respectively. Included in working capital at September 30, 2000, are cash, cash equivalents, and available-for-sale investments of $48,615,000, compared with $46,456,000 at January 1, 2000. In addition, the Company had $5,087,000 invested in an advance to affiliate at January 1, 2000 (Note 6). During the month of September 2000, holders of the Company's common stock and common stock redemption rights surrendered 2,713,951 shares of Company common stock at a redemption price of $12.75 per share. In October 2000, the Company remitted $34,603,000 for the shares, using available working capital to fund the payment. The accrued liability for the payment is included in common stock subject to redemption in the September 30, 2000, balance sheet. Following the redemption period, 2,001,049 redemption rights, redeemable in September 2001, 11 THERMO FIBERGEN INC. Liquidity and Capital Resources (continued) remain outstanding, for a total redemption value of $25,513,000. The redemption rights are guaranteed, on a subordinated basis, by Thermo Electron. As of September 30, 2000, there were 1,027,349 shares of Company common stock held by persons other than Thermo Electron or Thermo Fibertek. During the first nine months of 2000, $464,000 of cash was provided by operating activities. A net decrease in accounts receivable provided $355,000, primarily at GranTek due to decreased sales. The Company used $896,000 of cash to increase inventories, primarily at GranTek. The Company used $350,000 to reduce accounts payable during the period, primarily at GranTek. An increase in accrued income taxes and liabilities for the composites manufacturing business contributed to a net $534,000 increase in other accrued liabilities. During the first nine months of 2000, the Company's primary investment activities involved the purchases and maturities of available-for-sale investments and the withdrawal of funds that were advanced to Thermo Electron under a domestic cash management arrangement. The Company no longer participates in this arrangement (Note 6). On September 5, 2000, the Company sold substantially all of the assets of its fiber-recovery and water-clarification services plant for $3,600,000 (Note 5). The purchase price consists of an initial payment of $200,000 at the date of closing and a note receivable to be paid in seventeen monthly payments of $200,000, plus interest at 9.5%, beginning September 28, 2000. In addition, the Company used $2,900,000 for purchases of property, plant, and equipment, including $2,429,000 for the composites manufacturing facility. The Company's NEXT Fiber Products subsidiary used $1,200,000 of cash to pay for the 1999 purchase of capital equipment and technology related to the development of fiber-based composites. The Company has a remaining obligation for this purchase of $500,000, which is included in other accrued liabilities in the accompanying September 30, 2000, balance sheet. The Company has options to acquire the 49% equity interest in NEXT Fiber Products not owned by the Company, exercisable during the months of October 2001, 2002, or 2003, for pre-established multiples of NEXT Fiber Products' pre-tax earnings. During the remainder of 2000, the Company plans to make expenditures for property, plant, and equipment of approximately $1,600,000, primarily at NEXT Fiber Products. The Company may make additional capital expenditures to expand its fiber-based composites business. Thermo Fibertek has agreed to lend the Company up to $5 million on commercially reasonable terms, to satisfy its common stock redemption obligation in September 2001 and for working capital needs. Thermo Fibertek will seek repayment of amounts advanced only to the extent permitted by Thermo Fibergen's cash flows. The Company believes that the availability of this funding from Thermo Fibertek, if required, will enable the Company to continue operations as a going concern for the forseeable future. 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 1999. 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 12 THERMO FIBERGEN INC. Item 2 - Changes in Securities and Use of Proceeds (continued) -------------------------------------------------- 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 September 30, 2000, the Company had expended $10,353,000 of such net proceeds for the purchase of property, plant, and equipment, including $3,573,000 for the construction of a water-clarification and fiber-recovery facility, $1,700,000 for the acquisition of capital equipment and technology related to the fiber-based composites business, and $2,775,000 for the composites manufacturing 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 September 30, 2000, remaining net proceeds of $45,428,000 were invested directly with persons other than Affiliates. On October 5, 2000, the Company used $34,603,000 of such remaining net proceeds to purchase shares of Company common stock that were redeemed by redemption holders. 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 On September 15, 2000, the Company filed a Current Report on Form 8-K dated as of September 5, 2000, with respect to the sale of substantially all of the assets of its fiber-recovery and water-clarification services plant. 13 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 2000. THERMO FIBERGEN INC. -------------------------------------------- /s/ Theo Melas-Kyriazi Theo Melas-Kyriazi Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 14 THERMO FIBERGEN INC. EXHIBIT INDEX Exhibit Number Description of Exhibit -------------------------------------------------------------------------------- 10.1 Bill of Sale by and among Thermo Fibergen Inc. (as Seller) and LINPAC, Inc. (as Buyer), dated as of September 5, 2000 (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated as of September 5, 2000 [File No. 1-9549] and incorporated herein by reference). 27 Financial Data Schedule.

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