1233344v1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000 Commission File No. 0-24866
--------------- -------
ISOLYSER COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Georgia 58-1746149
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4320 International Blvd NW
Norcross, Georgia 30093
-----------------------
(Address of principal executive offices)
(770) 806-9898
--------------
(Registrant's telephone number, including area code)
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 at least the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at May 12, 2000
- - - - - ----- ---------------------------
Common Stock, $.001 par value 41,402,028
ISOLYSER COMPANY, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
Assets March 31, 2000 December 31,1999
-----------------------------------------
Current assets
Cash and cash equivalents $ 15,155 $ 17,006
Accounts receivable, net 14,697 13,773
Disposition escrow account 4,330 3,130
Inventories, net 22,696 24,036
Prepaid expenses and other assets 1,881 1,298
------------------------------------------
------------------------------------------
Total current assets 58,759 59,243
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Property, plant and equipment 21,989 21,583
Less accumulated depreciation (13,595) 12,990)
------------------------------------------
Property, plant, and equipment, net 8,394 8,593
------------------------------------------
Investment in equity securities 4,489 3,605
Intangibles and other assets, net 22,995 23,898
------------------------------------------
Total assets $ 94,637 $ 95,339
==========================================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 3,206 $ 4,340
Bank overdraft 314 565
Current installments of long term debt 2,596 2,615
Current portion of deferred licensing revenue 3,000 3,000
Current portion of product financing arrangement 520 520
Accrued expenses 2,052 2,653
------------------------------------------
Total current liabilities 11,688 13,693
------------------------------------------
Long term deferred licensing revenue 5,250 6,000
Other liabilities 794 924
------------------------------------------
Total liabilities 17,732 20,617
------------------------------------------
Shareholders' equity
Common stock 42 41
Additional paid in capital 208,167 206,600
Accumulated deficit (131,282) (131,283)
Unrealized gain on available for
sale securities 636 -
Cumulative translation adjustment (44) (22)
Unearned shares restricted to
employee stock ownership plan (180) (180)
-----------------------------------------
77,339 75,156
Treasury shares, at cost (434) (434)
-----------------------------------------
Total shareholders' equity 76,905 74,722
----------------------------------------
Total liabilities
and shareholders' equity $ 94,637 $ 95,339
========================================
2
ISOLYSER COMPANY, INC.
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss)
(in thousands, except per share data)
(unaudited)
Three months ended Three months ended
March 31, 2000 March 31, 1999
----------------------- ----------------------
Net product sales $ 13,265 $ 34,769
Licensing revenue 750 -
----------------------- ----------------------
Total revenues 14,015 34,769
Cost of products sold 7,902 23,799
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Gross profit 6,113 10,970
Operating expenses:
Selling, general and administrative 5,002 9,406
Research and development 816 700
Amortization 279 452
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Total operating expenses 6,097 10,558
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Income from operations 16 412
Interest income 169 51
Interest expense (142) (625)
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Income (loss) before income tax expense 43 (162)
Income tax expense 41 205
----------------------- ----------------------
Net income (loss) $ 2 $ (367)
======================= ======================
Other comprehensive income (loss)
Foreign currency translation gain (loss) (22) 51
Unrealized gain on available for sale securities 636 -
----------------------- ----------------------
Comprehensive income (loss) $ 616 $ (316)
======================= ======================
Net income (loss) per common share - basic
and diluted $ 0.00 $ (0.01)
======================= ======================
Basic weighted average number of common
shares outstanding 40,898 39,836
======================= ======================
Diluted weighted average number of common
shares outstanding 43,804 39,836
======================= ======================
3
ISOLYSER COMPANY, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
Three months ended Three months ended
March 31, 2000 March 31, 1999
--------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 2 $ (367)
Adjustments to reconcile net income (loss) to net cash used in
Operating activities:
Depreciation 605 982
Amortization 391 441
Provision for doubtful accounts 30 33
Licensing revenue (750) -
Provision for obsolete and slow moving inventory - 165
Changes in assets and liabilities, net of effects
from disposed businesses (2,619) (4,055)
--------------------------------------------
Net cash used in operating activities (2,341) (2,801)
--------------------------------------------
Cash flows from investing activities:
Purchase of and deposits for property, plant and equipment (406) (400)
Investment in available for sale securities (249) -
Disposition proceeds - 1,958
--------------------------------------------
Net cash provided by (used in) investing activities (655) 1,558
--------------------------------------------
Cash flows from financing activities:
Net repayments under credit agreements - (397)
Changes in bank overdraft (251) 469
Net repayments under notes payable (149) (146)
Proceeds from exercise of stock options 1,566 -
Proceeds from issuance of common stock 1 128
--------------------------------------------
Net cash provided by financing activities 1,167 54
--------------------------------------------
Effect of exchange rate changes on cash (22) 51
Net decrease in cash and cash equivalents (1,851) (1,138)
Cash and cash equivalents at beginning of period 17,006 7,325
-------------------------------------------
Cash and cash equivalents at end of period $ 15,155 $ 6,187
============================================
4
ISOLYSER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) In the opinion of management, the information furnished reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods. Results for the interim periods are not
necessarily indicative of results to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
2) Inventories are stated at the lower of cost or market and are summarized as
follows:
(in thousands) March 31, 2000 December 31, 1999
-------------- -------------- -----------------
Raw materials and supplies $ 11,401 $ 12,056
Work in process 1,174 1,389
Finished goods 12,199
11,433
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Total 24,008 25,644
Reserve for excess, slow moving
and obsolete inventory (1,312) (1,608)
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Total $ 22,696 $ 24,036
============ ===========
At March 31, 2000 and December 31, 1999 the net OREX inventory is approximately
$7.0 million and $7.2 million, respectively.
3) The remaining net assets of the MedSurg subsidiary at December 31, 1999 were
classified as held for sale in the accompanying condensed consolidated financial
statements. Title to these assets transferred to Allegiance on January 31, 2000.
They were comprised of the following:
(in thousands) December 31, 1999
--------------------------
Assets:
Inventory $ 4,846
-------------------------
Total Assets 4,846
Liabilities:
Accounts payable 3,211
Accrued liabilites 1,635
--------------------------
Total Liabilities 4,846
Net assets held for sale $ -
==========================
5
On March 31, 1999, the Company disposed of its former corporate headquarters for
proceeds of approximately $1.9 million. Effective May 31, 1999, the Company
disposed of the stock of its White Knight subsidiary ("White Knight") for
proceeds of approximately $8.2 million. These proceeds were used to reduce
outstanding borrowings under the Company's Credit Agreement.
On July 12, 1999, the Company disposed of substantially all of the assets of its
MedSurg subsidiary and entered into an OREX License and Supply Agreement (the
"License Agreement") with Allegiance Healthcare Corporation ("Allegiance") for
net proceeds of $28.6 million, consisting of $25.5 million in cash and a $3.1
million escrow receivable (the "Disposition Escrow Account"). A portion of these
proceeds were used to pay-off the remaining balance of the Company's Credit
Agreement. As part of the sale of MedSurg assets, title to certain MedSurg
assets and liabilities transferred to Allegiance on January 31, 2000. The escrow
is to be paid upon the satisfaction by the Company of certain covenants included
in the sale agreement. On February 16, 2000, Allegiance deposited an additional
$1.2 million into the Disposition Escrow Account related to costs the Company
incurred in 2000 on Allegiance's behalf.
Allegiance has made certain claims relative to product returns of excess
inventories, failure to disclose certain lost customer accounts and failure to
complete certain manufacturing assembly services under a temporary manufacturing
contract. The Company has denied that it has any liability to Allegiance for
these claims and remains in discussions with Allegiance to expeditiously reach a
satisfactory conclusion.
The following represents the results of operations of the above noted disposed
entities for the three months ended March 31, 1999:
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------
(in thousands, except per share data)
Net revenues $20,335
Net loss (707)
Net loss per share - basic $ (0.02)
4) Basic per share earnings (loss) is computed using the weighted average number
of common shares outstanding for the period. Diluted per share earnings (loss)
is computed including the dilutive effect of all contingently issuable shares.
The difference between basic and diluted weighted average shares is attributable
to 2.9 million stock options for the three months ended March 31, 2000. There
were no dilutive stock options outstanding for the three months ended March 31,
1999.
5) On February 11, 2000 the Company paid $249,000 in cash for a 13.0% interest
in Consolidated Ecoprogress Technology, Inc. ("CES"). CES is a Canadian
environmental technology company focused on being a leader in developing and
selling biodegradable and disposable absorbent products such as diapers,feminine
hygiene, adult incontinence and other
6
products. This investment is classified in accordance with Statement of
Financial Accounting Standards ("SFAS") 115, Accounting for Certain Investments
in Debt and Equity Securities, as available for sale securities and is stated at
market value. Any change in market value between periods is included as a
component of shareholders' equity. The value of this investment as of March 31,
2000 was $885,000.
ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- - - - - --------------------------------------------------------------------------------
OPERATIONS RESULTS OF OPERATIONS
- - - - - --------------------------------
Net revenues for the three months ended March 31, 2000 (the "2000 Quarter") were
$14.0 million compared to $34.8 million for the three months ended March 31,
1999 (the "1999 Quarter"). Excluding sales of White Knight and MedSurg
(businesses disposed of in 1999), net revenues in the 1999 Quarter were $14.4
million, which reflects a decrease of 2.9% in 2000 Quarter net revenues compared
to adjusted net revenues in the 1999 Quarter. Net revenues from sales of
Microtek products were $12.6 million during the 2000 Quarter as compared to
$13.7 million during the 1999 Quarter, a decrease of 7.4%. This decrease was
primarily a result of the effect of a short-term manufacturing contract with
Allegiance during the 1999 Quarter with no comparable sales in the 2000 Quarter.
Net revenues from sales of safety products were $1.8 million during the 2000
Quarter as compared to $2.2 million in the 1999 Quarter, or a decline of 19.7%.
The decline reflects a reduction in LTS product revenues.
Net revenues of OREX Technologies International ("OTI") were $1.3 million during
the 2000 Quarter as compared to $769,000 during the 1999 Quarter. In April 1999
the Company introduced new OREX degradable products to the healthcare industry
under the Enviroguard trademark, which uses a hydroentanglement manufacturing
process to produce a spunlaced fabric. The Company's future performance will
depend to a substantial degree upon market acceptance of this product and the
Company's ability to successfully manufacture, market, deliver and expand its
OREX Degradables and Enviroguard lines of products at acceptable profit margins.
In connection with the July 12, 1999 sale by the Company of the assets of
MedSurg to Allegiance, the Company granted to Allegiance a worldwide exclusive
license to Isolyser's OREX and Enviroguard proprietary technologies to make, use
and sell products made from material which can be dissolved and disposed of
through a sanitary sewer system for healthcare applications. Net revenues for
the 2000 Quarter include $750,000 of licensing revenues attributable to the
License Agreement. There can be no assurances that OREX Degradables or
Enviroguard products will achieve or maintain substantial acceptance in their
target markets. See the risks described under "Risk Factors" in the Company's
Annual Report on Form 10-K for the period ending December 31, 1999 (the "1999
Annual Report") including, without limitation, "Risk Factors-History of Net
Losses," "-Marketing Risks affecting OREX Products" and "-Manufacturing and
Supply Risks".
Gross profit for the 2000 Quarter was $6.1 million, or 43.6% of net revenues, as
compared to $11.0 million, or 31.6% of net revenues, in the 1999 Quarter. The
improvement in gross margin
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is attributable to improved gross profit at OTI, primarily due to licensing
revenues from the Allegiance License Agreement, and improvements in sales mix
associated with the cessation of sales of lower margin products due to
divestiture transactions. Microtek's gross profit declined $1.2 million or 19.6%
in the 2000 Quarter as compared to the 1999 Quarter. This decline resulted
primarily from the completion of the aforementioned short-term manufacturing
contract for a customer in 1999.
Selling, general and administrative expenses were $5.0 million, or 35.7% of net
revenues, in the 2000 Quarter, as compared to $9.4 million, or 27.1% of net
revenues, in the 1999 Quarter. The reduction in absolute selling, general and
administrative expenses was due primarily to the sale by the Company of the
White Knight and MedSurg operations. The increase in selling, general and
administrative costs as a percentage of revenues was due to the reduction in
revenues associated with the divestiture of these operations. The Company's
White Knight and MedSurg subsidiaries had lower selling, general and
administrative costs as a percentage of revenues. Although Microtek's selling,
general and administrative cost to sales ratio is higher than White Knight and
MedSurg, Microtek's gross margins are also significantly higher. During the 2000
Quarter, Microtek increased its selling, general and administrative cost as a
percentage of revenues by 3.5% as compared to the 1999 Quarter. This was
primarily due to lower revenues, as actual selling, general and administrative
expenses declined slightly.
Research and development expenses were $816,000 or 5.8% of net revenues in the
2000 Quarter as compared to $700,000, or 2.0% of net revenues in the 1999
Quarter. The decline in research and development expense is primarily related to
reduced costs associated with the development and registration of the Company's
LTS Plus product as well as reduced development cost associated with the
introduction of the Company's Enviroguard product line.
Amortization was $279,000 in the 2000 Quarter as compared to $452,000 in the
1999 Quarter. The decline in amortization expenses was primarily due to the sale
of White Knight and disposition of certain assets of the Company's MedSurg
subsidiary.
The resulting income from operations was $16,000 for the 2000 Quarter as
compared to $412,000 for the 1999 Quarter.
Interest income, net of interest expense, was $27,000 in the 2000 Quarter as
compared to a net expense of $574,000 in the 1999 Quarter. The decline in
interest expense is attributed to reduced borrowings during the 2000 Quarter, as
compared to 1999, as a result of the disposition of the aforementioned assets
during 1999.
Provision for income taxes reflects expenses of $41,000 and $205,000 in the 2000
and 1999 Quarters, respectively.
The resulting net income was $2,000 for the 2000 Quarter as compared to a net
loss of $367,000 in the 1999 Quarter.
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LIQUIDITY AND CAPITAL RESOURCES
- - - - - -------------------------------
At March 31, 2000, the Company's cash and equivalents totaled $15.2 million as
compared to $17.0 million at December 31, 1999. During the 2000 Quarter, the
Company used $2.3 million of cash from operating activities as compared to a use
of $2.8 million in the 1999 Quarter. During the 2000 Quarter, the Company
incurred costs on Allegiance's behalf totaling $1.2 million. Allegiance
subsequently deposited an additional $1.2 million into the Disposition Escrow
Account (Note 3).
The Company used $655,000 in investing activities during the 2000 Quarter as
compared to $1.6 million generated by investing activities during the 1999
Quarter. During the 2000 Quarter the Company invested $249,000 in Consolidated
Ecoprogress Technology, Inc. (Note 5).
During the 2000 Quarter, the Company generated $1.2 million in cash from
financing activities compared to $54,000 generated in the 1999 Quarter. Proceeds
from the exercise of stock options provided $1.6 million in the 2000 Quarter.
As more fully described in the Company's 1999 Annual Report, the Company
maintains a $15.0 million credit agreement (as amended to date, the "Credit
Agreement") with a bank consisting of a revolving credit facility maturing on
June 30, 2000. Borrowing availability under the revolving credit facility at
March 31, 2000 was approximately $11.7 million. The Company had no outstanding
borrowings under the revolving credit facility at March 31, 2000. The Credit
Agreement provides for the issuance of up to $1.0 million in letters of credit.
There were no letters of credit outstanding at March 31, 2000. At March 31,
2000, the Company was not in compliance with the EBITDA covenant contained in
the Credit Agreement, but has obtained a waiver dated May 2, 2000 of this
violation from the bank.
Based upon its current business plan, the Company expects that cash equivalents
and short term investments on hand, the Company's existing credit facility and
funds budgeted to be generated from operations will be adequate to meet its
liquidity and capital requirements for the next year. Currently unforeseen
future developments and increased working capital requirements may require
additional debt financing or issuance of common stock. There can be no
assurances that the Company could obtain any required additional debt financing
or successfully consummate an issuance of common stock on terms favorable to the
Company, if at all.
FORWARD LOOKING STATEMENTS
- - - - - --------------------------
Statements made in this Management's Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking statements made
under the provisions of the Private Securities Litigation Reform Act. The
Company's actual results could differ materially from such forward-looking
statements and such results will be affected by risks described in the Company's
1999 Annual Report including, without limitation, those described under "Risk
Factors - History of Net Losses", "-Marketing Risks affecting OREX Products",
"-Manufacturing and Supply Risks", "-Regulatory Risks", "-Competition", and
"-Claims Arising from Divestitures".
9
ITEM 3.
- - - - - -------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- - - - - ----------------------------------------------------------
The Company's greatest sensitivity with respect to market risk is to changes in
the general level of U.S. interest rates and its effect upon the Company's
interest expense. At March 31, 2000, the Company has no long-term or short-term
debt that bears interest at floating rates. However, should the Company incur
borrowings under its Credit Agreement, such borrowings would bear interest at
variable rates. Because these rates are variable, an increase in interest rates
would result in additional interest expense and a reduction in interest rates
would result in reduced interest expense.
10
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- - - - - ------- -----------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USES OF PROCEEDS
- - - - - ------- ------------------------------------------
During the quarter for which this report is filed, there were no material
modifications in the instruments defining the rights of shareholders. During the
quarter for which this report is filed, none of the rights evidenced by the
shares of the Company's common stock were materially limited or qualified by the
issuance or modification of any other class of securities. During the quarter
for which this report is filed, the Company sold no equity securities of the
Company that were not registered under the Securities Act of 1933, as amended.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
- - - - - ------- ------------------------------
At March 31, 2000, the Company was not in compliance with the EBITDA covenant
contained in the Credit Agreement, but has obtained a waiver dated May 2, 2000
of this violation from its senior lender.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
- - - - - ------- --------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- - - - - ------- -----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - - - - ------- --------------------------------
(a) Exhibits:
Exhibit
No. Description
--- -----------
3.1(1) Articles of Incorporation of Isolyser Company, Inc.
3.2(2) Articles of Amendment to Articles of Incorporation of Isolyser
Company, Inc.
3.3(1) Amended and Restated Bylaws of Isolyser Company, Inc.
3.4(3) First Amendment to Amended and Restated Bylaws of Isolyser
Company, Inc.
11
3.5(4) Second Amendment to Amended and Restated Bylaws of Isolyser
Company, Inc.
4.1(1) Specimen Certificate of Common Stock
27.1* Financial Data Schedule
- - - - - ------------------
* Filed herewith.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-83474).
(2) Incorporated by reference to Exhibit 3.2 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
(3) Incorporated by reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K filed July 29, 1996.
(4) Incorporated by reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K filed December 20, 1996.
(b) The Company filed no current reports on Form 8-K during the 2000 Quarter.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this quarterly report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized on May 15, 2000.
ISOLYSER COMPANY, INC.
By: /s/ Migirdic Nalbantyan
--------------------------------
Migirdic Nalbantyan
President & CEO
(principal executive officer)
By: /s/ James C. Rushing, III
--------------------------------
Chief Financial Officer
(principal financial officer)
10