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 June 30, 2001 Commission File No. 0-24866
ISOLYSER COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Georgia 58-1746149
- ------------------------------- -------------------
(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 August 10, 2001
Common Stock, $.001 par value 41,757,499
ISOLYSER COMPANY, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
June 30, December
Assets 2001 31, 2000
------ --------------------------
Current assets
Cash and cash equivalents $ 9,371 $ 14,379
Accounts receivable, net 18,868 12,269
Inventory, net 24,204 16,160
Prepaid expenses and other assets 1,308 1,633
--------------------------
Total current assets 53,751 44,441
--------------------------
Property and equipment 22,687 19,980
Less accumulated depreciation (14,181) (12,948)
--------------------------
Property and equipment, net 8,506 7,032
--------------------------
Intangible assets, net 26,553 23,057
Other assets, net 3,107 2,439
--------------------------
Total assets $ 91,917 $ 76,969
==========================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
Accounts payable $ 7,534 $ 4,035
Accrued expenses 2,687 3,260
Current portion of accrued customer rebates 490 490
Current portion of long-term debt 258 256
Current portion of deferred licensing revenue 1,502 1,508
Current portion of product financing agreement 520 520
--------------------------
Total current liabilities 12,991 10,069
--------------------------
Long-term debt 11,140 491
Long-term portion of deferred licensing revenue 759 1,508
Long-term portion of product financing agreement 142 406
Other long-term liabilities 1,629 897
--------------------------
Total liabilities 26,661 13,371
--------------------------
Shareholders' equity
Common stock 42 42
Additional paid-in capital 209,280 208,613
Accumulated deficit (142,154) (143,425)
Cumulative translation adjustment (311) (180)
Unrealized loss on available for sale securities (19) -
Unearned shares restricted to employee stock
ownership plan (120) (120)
--------------------------
66,718 64,930
Treasury shares, at cost (1,462) (1,332)
--------------------------
Total shareholders' equity 65,256 63,598
--------------------------
Total liabilities and shareholders'
equity $ 91,917 $ 76,969
==========================
See notes to condensed consolidated financial statements.
2
ISOLYSER COMPANY, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
(unaudited)
Three months ended Three months ended Six months ended Six months ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
---------------------- ---------------------- ------------------- -------------------
Net sales $ 21,339 $ 13,678 $ 37,216 $ 26,943
Licensing revenues 377 750 756 1,500
---------------------- ---------------------- ------------------- -----------------
Net revenues 21,716 14,428 37,972 28,443
Cost of goods sold 13,246 7,770 22,839 15,673
---------------------- ---------------------- ------------------- -----------------
Gross profit 8,470 6,658 15,133 12,770
Operating expenses:
Selling, general and administrative 6,559 5,336 11,938 10,336
Research and development 445 836 898 1,652
Amortization of intangibles 378 279 698 559
---------------------- ---------------------- ------------------- -----------------
Total operating expenses 7,382 6,451 13,534 12,547
---------------------- ---------------------- ------------------- -----------------
Income from operations 1,088 207 1,599 223
Interest income 76 190 189 363
Interest expense (236) (204) (343) (350)
---------------------- ---------------------- ------------------- -----------------
Income before income tax provision 928 193 1,445 236
Income tax provision 83 82 173 123
Net income $ 845 $ 111 $ 1,272 $ 113
====================== ====================== =================== =================
Other comprehensive income (loss):
Foreign currency translation loss (46) (96) (131) (118)
Unrealized (loss) gain on available for
sale securities (5) (292) (19) 344
---------------------- ---------------------- ------------------- -----------------
Comprehensive income (loss) $ 794 $ (277) $ 1,122 $ 339
====================== ====================== =================== =================
Net income per common share - basic and $ 0.02 $ 0.00 $ 0.03 $ 0.00
diluted Basic weighted average number
of common shares outstanding 41,680 41,362 41,545 41,129
====================== ====================== =================== =================
Diluted weighted average number of common shares
outstanding 42,024 44,224 41,759 44,024
====================== ====================== =================== =================
See notes to condensed consolidated financial statements.
3
ISOLYSER COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six months ended Six months ended
June 30, 2001 June 30, 2000
--------------------------------------
Cash flows from operating activities:
Net income $ 1,272 $ 113
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 1,233 1,164
Amortization of intangibles 698 781
Provision for doubtful accounts 10 60
Licensing revenues (756) (1,482)
Provision for obsolete and slow
moving inventory 177 126
Changes in assets and liabilities,
net of effects of acquisitions (6,164) (1,723)
--------------------------------------
Net cash used in operating activities (3,530) (961)
--------------------------------------
Cash flows from investing activities:
Purchase of and deposits for
property and equipment (562) (673)
Investment in available
for sale securities - (249)
Investment in other securities - (41)
Acquisitions (11,983) -
--------------------------------------
Net cash used in investing activities (12,545) (963)
--------------------------------------
Cash flows from financing activities:
Net borrowings under credit agreements 10,665 -
Changes in bank overdraft 540 (357)
Net repayments under notes payable (278) (214)
Proceeds from exercise of stock options 125 1,676
Repurchase of treasury stock (131) (337)
Proceeds from issuance of common stock 277 1
-------------------------------------
Net cash provided by financing activities 11,198 769
-------------------------------------
Effect of exchange rate changes on cash (131) (118)
Net decrease in cash and cash equivalents (5,008) (1,273)
Cash and cash equivalents at beginning
of period 14,379 17,006
-------------------------------------
Cash and cash equivalents at end of period $ 9,371 $ 15,733
=====================================
See notes to condensed consolidated financial statements.
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 presented. Results for the interim periods are not
necessarily indicative of results to be expected for the full year. The
consolidated financial statements herein 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, 2000 (the "Annual
Report").
2) Inventories are stated at the lower of cost or market and are summarized as
follows:
(in thousands) June 30, 2001 December 31, 2000
Raw materials and supplies $ 13,884 $ 10,019
Work in process 725 984
Finished goods 11,802 9,830
----------------- -------------------
26,411 20,833
Reserves for slow moving and
obsolete inventories (2,207) (4,673)
----------------- -------------------
Inventory, net $ 24,204 $ 16,160
================= ===================
At June 30, 2001 and December 31, 2000, the net OREX inventory was
approximately $2.6 million.
3) Effective February 2, 2001, Microtek Medical, Inc. ("Microtek"), a subsidiary
of the Company, entered into a definitive agreement to acquire substantially all
of the assets of Deka Medical, Inc. ("Deka") for cash. Microtek and Deka
manufacture and sell specialty equipment drapes used in various surgical
procedures to prevent infection. Concurrently with the signing of the definitive
agreement, Microtek acquired Deka's post-surgical clean-up product line.
Effective March 2, 2001, Microtek concluded the acquisition by acquiring
substantially all of the assets of Deka used in Deka's patient and medical
equipment drape product line. The preliminary allocation of the total estimated
purchase price of approximately $11.3 million is subject to adjustment in 2001
when finalized and resulted in an excess of purchase price over the fair value
of the net assets acquired (goodwill) of approximately $2.7 million. Such
goodwill is being amortized on a straight-line basis over 15 years.
On February 16, 2001, the Company acquired the assets of MICROBasix LLC
("MICROBasix") for approximately $675,000 in cash and the issuance of 250,000
shares of the Company's common stock having a market value of approximately
$265,000 on the date of the acquisition. The acquisition follows the development
of a cooperative alliance relationship with MICROBasix in 2000 for the purpose
of sharing technologies, products and services that provide significant volume
reduction of low level radioactive waste for the nuclear industry.
Each of the above described acquisitions were accounted for under the
purchase method, and accordingly, the results of operations related to the
acquired assets have been included in the accompanying condensed consolidated
5
financial statements from their respective dates of acquisition. The following
unaudited pro forma financial information reflects the Company's results of
operations as if the Deka acquisition had been completed on January 1, 2000:
Three months ended Six months ended
(in thousands, except June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
per share data) ------------- ------------- ------------- -------------
Net revenues $ 21,716 $ 20,548 $ 41,722 $ 40,458
Net income (loss) 845 (709) 1,290 (1,610)
Net income (loss) per
common share - basic
and diluted .02 (.02) .03 (.04)
Including the MICROBasix acquisition in the above pro forma financial
information would not have a material effect on the amounts presented. The pro
forma financial information is based on estimates and assumptions which
management believes are reasonable. However, the pro forma results are not
necessarily indicative of the operating results that would have occurred had the
Deka acquisition been consummated as of the date indicated, nor are they
necessarily indicative of future operating results.
4) The Company maintains a $17.5 million credit agreement (as amended to date,
the "Credit Agreement") with The Chase Manhattan Bank (the "Bank"), consisting
of a revolving credit facility maturing on June 30, 2004. Borrowing availability
under the revolving credit facility is based on the lesser of (i) a percentage
of eligible accounts receivable and inventory or (ii) $17.5 million, less any
outstanding letters of credit issued under the Credit Agreement. Revolving
credit borrowings bear interest, at the Company's option, at either a floating
rate approximating the Bank's prime rate plus an interest margin, as defined, or
LIBOR plus an interest margin (6.2% at June 30, 2001). There were no outstanding
borrowings under the revolving credit facility at December 31, 2000 and $10.7
million of borrowings at June 30, 2001. Borrowings under the Credit Agreement
are collateralized by the Company's accounts receivable, inventory, equipment,
Isolyser's stock of its subsidiaries and certain of the Company's plants and
offices. The Credit Agreement contains certain restrictive covenants, including
the maintenance of certain financial ratios and earnings, and limitations on
acquisitions, dispositions, capital expenditures and additional indebtedness.
The Company also is not permitted to pay any dividends. At June 30, 2001, the
Company was not in violation of any of its financial covenants under the Credit
Agreement.
5) Basic per share income is computed using the weighted average number of
common shares outstanding for the period. Diluted per share income is computed
including the dilutive effect of all contingently issuable shares. The
difference between basic and diluted weighted average shares is attributable to
344,000 and 214,000 stock options for the three months and six months ended June
30, 2001, respectively. There were 2.9 million dilutive stock options
outstanding for the three months and six months ended June 30, 2000.
6) On February 11, 2000, the Company paid $249,000 for approximately 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 products. This investment is
classified in accordance with Statement of Financial Accounting Standards
(0"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 June 30, 2001 was $230,500.
7) At December 31, 2000, the Company had restructuring reserves of $4.7 million.
Additions to and charges against the reserves totaled $143,000 and $4.6 million,
respectively, during the six months ended June 30, 2001, leaving a balance of
$261,000 in the reserves at June 30, 2001. The activity is shown below:
6
(in thousands) December 31, 2000 June 30, 2001
Description Balance Additions Deductions Balance
Reserve for obsolete inventory $ 3,477 $ - $ (3,477) $ -
Severance and consulting
arrangements 885 143 (842) 186
Closed office lease liabilities 281 - (281) -
Impaired equipment reserve 75 - - 75
------- ----- ------- -----
Total $ 4,718 $ 143 $ 4,600 $ 261
======= ===== ======= =====
Severance benefits for 99 employees totaling $636,000 were accrued at
December 31, 2000. Additional severance benefits for 54 employees totaling
$143,000 were accrued during the second quarter of 2001. Five of these employees
were terminated in 2000 and the remaining 148 have been terminated in 2001.
Severance benefits totaling $740,000 were paid to these 153 employees during the
six months ended June 30, 2001. Deductions to the Company's reserve for obsolete
inventory represent the non-cash write-off of the inventory and related reserve
during the six months ended June 30, 2001. Deductions to the Company's closed
office lease liabilities include the $45,000 cash payment made during the second
quarter of 2001 to settle the Company's outstanding lease obligations and the
non-cash reversal of the $236,000 remaining obligation subsequent to the
settlement.
8) In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and prohibits the use of the
pooling-of-interest method. SFAS No. 142 requires that, upon adoption,
amortization of goodwill will cease and instead, the carrying value of goodwill
will be evaluated for impairment on an annual basis. Identifiable intangible
assets will continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001, and will be
implemented by the Company on January 1, 2002. The Company is evaluating the
impact of the adoption of these standards and has not yet determined the effect
of adoption on its financial position and results of operation.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net revenues for the three months ended June 30, 2001 (the "2001 Quarter") were
$21.7 million as compared to $14.4 million for the three months ended June 30,
2000 (the "2000 Quarter"), an increase of 50.5%. Net revenues for the six months
ended June 30, 2001 (the "2001 Period") were $38.0 million as compared to $28.4
million for the six months ended June 30, 2000 (the "2000 Period"), an increase
7
of 33.5%. Excluding licensing revenues, net revenues in the 2001 Quarter were
$21.3 million as compared to $13.7 million in the 2000 Quarter, an increase of
56.0%, and net revenues in the 2001 Period were $37.2 million as compared to
$26.9 million in the 2000 Period, an increase of 38.1%.
Net revenues from sales of Microtek products (which includes the Company's
safety products) were $21.3 million in the 2001 Quarter as compared to $13.3
million in the 2000 Quarter, an increase of 60.3%. Net revenues from sales of
Microtek products were $36.9 million in the 2001 Period as compared to $25.9
million in the 2000 Period, an increase of 42.3%. The increases recorded in the
2001 Quarter and 2001 Period are primarily attributable to the Deka acquisition
which was completed during March 2001. Additionally, Microtek's domestic core
branded revenues remain strong. Sales of the Company's safety products increased
4.1% from $2.1 million in the 2000 Quarter to $2.2 million in the 2001 Quarter
and 4.9% from $3.9 million in the 2000 Period to $4.1 million in the 2001
Period. The Company expects that the Deka acquisition will contribute
approximately $20 million in sales revenue during 2001, including increased
revenues recorded for the 2001 Period.
Net revenues of OREX Technologies International ("OTI") in the 2001 Quarter and
2001 Period were $420,000 and $1.0 million, respectively, as compared to $1.1
million and $2.4 million in the 2000 Quarter and 2000 Period, respectively.
Licensing revenues in the 2001 Quarter and 2001 Period decreased $373,000 and
$744,000 from the 2000 Quarter and 2000 Period, respectively, due to the
settlement with Allegiance Healthcare that was recorded in 2000 and described in
the Annual Report. Additionally, OTI's product sales in the 2001 Quarter and
2001 Period decreased by $319,000 and $676,000 from the 2000 Quarter and 2000
Period, respectively, reflecting in part the Company's increased focus on the
profitable Microtek business. The Company's OTI business is subject to various
risks described under "Risk Factors" in the Company's Annual Report.
Gross profit for the 2001 Quarter was $8.5 million, or 39.0% of net revenues, as
compared to $6.7 million, or 46.1% of revenues, in the 2000 Quarter. Gross
profit for the 2001 Period was $15.1 million, or 39.9% of net revenues, as
compared to $12.8 million, or 44.9% of revenues, in the 2000 period. The
decreases in gross profit margin in the 2001 Quarter and 2001 Period are
attributable to the costs of transitioning production from the Microtek plant in
Mexico to its facility in the Dominican Republic and expenses associated with
integrating the Deka operations. The Mexico transition was completed in May
2001. Additionally, the reduced margins in 2001 reflect the slightly dilutive
nature of the OEM businesses acquired from Deka. Microtek's gross profit in the
2001 Quarter was $8.1 million or 38.3% of net revenues as compared to $5.9
million or 44.4% of net revenues in the 2000 Quarter. Microtek's gross profit in
the 2001 Period was $14.4 million or 39.1% of net revenues as compared to $11.3
million or 43.5% of net revenues in the 2000 Period. Contributing to the overall
decline in gross margin, OTI's gross profit decreased $440,000 in the 2001
Quarter and $807,000 in the 2001 Period as compared to the corresponding periods
of 2000, primarily due to lower licensing revenues resulting from the settlement
with Allegiance Healthcare referred to in the preceding paragraph.
Selling, general and administrative expenses were $6.6 million, or 30.2% of net
revenues, in the 2001 Quarter, as compared to $5.3 million, or 37.0% of net
revenues, in the 2000 Quarter. Selling, general and administrative expenses were
$11.9 million, or 31.4% of net revenues, in the 2001 Period, as compared to
$10.3 million, or 36.3% of net revenues, in the 2000 Period. The overall
increase in the absolute dollar amount of selling, general and administrative
expenses was due in part to the Deka acquisition and increases in variable
selling costs resulting from increased net revenues in the 2001 Quarter and 2001
8
Period. The improvements in selling, general and administrative expenses as a
percentage of net revenues in the 2001 Quarter and 2001 Period are the result of
cost control and expense reduction efforts begun in the fourth quarter of 2000
and synergies resulting from the Deka acquisition.
Research and development expenses in the 2001 Quarter and 2001 Period decreased
by $391,000 or 46.7% and $754,000 or 45.6% from the 2000 Quarter and 2000
Period, respectively. These decreases are primarily a result of reduced
development costs, reflecting management's objective to focus the Company's
resources on the OTI division's more promising market segments.
Amortization of intangible assets was $378,000 in the 2001 Quarter and $698,000
in the 2001 Period, reflecting increases of $99,000 from the 2000 Quarter and
$139,000 from the 2000 Period. These increases result from the effect of
amortization of intangible assets acquired in conjunction with the Deka and
MICROBasix acquisitions that were completed in the 2001 Period, partially offset
by lower amortization expense in the 2001 Quarter and 2001 Period for intangible
assets which were fully amortized during 2000.
Interest expense, net of interest income, was $160,000 in the 2001 Quarter as
compared to $14,000 in the 2000 Quarter. Interest expense, net of interest
income, was $154,000 in the 2001 Period as compared to interest income, net of
interest expense, of $13,000 in the 2000 Period. These increases are the result
of higher interest expense in the 2001 Quarter and 2001 Period and lower
interest income on cash and cash equivalents which are attributable to
borrowings on the Company's line of credit facility in the 2001 Period and lower
cash balances as a result of recent acquisitions.
The provision for income taxes reflects expenses of $83,000 and $173,000 in the
2001 Quarter and 2001 Period, respectively. These provisions reflect an increase
in income taxes from the 2000 Quarter and the 2000 Period of $1,000 and $50,000,
respectively. Due to the Company's federal net operating loss carryforwards, the
Company's income tax provision in 2001 results primarily from state and foreign
taxes.
The resulting net income of $845,000, or $0.02 per basic and diluted share, in
the 2001 Quarter compares favorably to net income of $111,000 recorded in the
2000 Quarter. Net income for the 2001 Period of $1.3 million, or $.03 per basic
and diluted share, compares favorably to net income of $113,000 recorded in the
2000 Period.
The notes to the Company's condensed consolidated financial statements include
unaudited pro forma financial data for the 2001 Quarter, the 2000 Quarter, the
2001 Period and the 2000 Period as if the Deka and MICROBasix acquisitions had
been completed on January 1, 2000, rather than in February and March 2001, as
actually occurred. On a pro forma basis, net revenues for the 2000 Quarter, the
2001 Period and the 2000 Period would have been $20.5 million, $41.7 million and
$40.5 million, respectively, as compared to actual net revenues in the
respective periods of $14.4 million, $38.0 million and $28.4 million. The pro
forma adjustments to net revenues reflect Deka's historical net revenues of $6.1
million for the 2000 Quarter, $3.7 million for the 2001 Period and $12.1 million
for the 2000 Period. The pro forma net revenues, net income and net income per
common share for the 2001 Quarter are unchanged from actual reported amounts.
MICROBasix had no net revenues during 2001 or 2000. The unaudited pro forma net
loss of $709 for the 2000 Quarter and $1.6 million for the 2000 Period
represents a decrease of $820 and $1.7 million, respectively, from the Company's
reported net income of $111,000 for the 2000 Quarter and $113,000 for the 2000
9
Period. The unaudited pro forma net income for the 2001 Period represents an
increase of $18,000 from the Company's reporting net income for the 2001 period.
The pro forma decreases in profitability in the 2000 Quarter and 2000 Period
primarily result from historically inefficient manufacturing processes and
product mix at Deka. The pro forma increase in profitability in the 2001 Period
is primarily attributable to relative reduction in sales of lower margin
products by Deka. The Company expects that efficiencies resulting from adding
the Deka product lines to Microtek's existing infrastructure and other
initiatives will improve margins on Deka products to approximate the
considerably higher margins achieved by Microtek on comparable products sold by
Microtek. The Company expects to realize these margin improvements as it
completes the integration of the Deka operations over the remainder of 2001.
Liquidity and Capital Resources
As of June 30, 2001 the Company's cash and cash equivalents totaled $9.4 million
as compared to $14.4 million at December 31, 2000.
During the 2001 Period, the Company used $3.5 million in operating activities as
compared to $961,000 in the 2000 Period. This increase is attributable to the
Company's expanded operations resulting from the Deka acquisition and working
capital management. Cash used in investing activities in the 2001 Period was
$12.5 million, as compared to $963,000 in the 2000 Period. Investing activities
in the 2001 Period included the Deka and MICROBasix acquisitions which consumed
approximately $12.0 million in cash and purchases of property and equipment of
$562,000. Investing activities in the 2000 Period included $249,000 for the
Company's interest in Consolidated Ecoprogress Technology, Inc. and purchases of
property and equipment of $673,000. During the 2001 Period, cash provided by
financing activities was $11.2 million as compared to $769,000 in the 2000
Period. Borrowings under the Company's Credit Agreement provided $10.7 million
in the 2001 Period. Proceeds from the exercise of stock options provided $1.7
million during the 2000 Period.
The Company maintains a $17.5 million credit agreement (as amended to date, the
"Credit Agreement") with the Chase Manhattan Bank (the "Bank"), consisting of a
revolving credit facility maturing on June 30, 2004. Borrowing availability
under the revolving credit facility is based on the lesser of (i) a percentage
of eligible accounts receivable and inventory or (ii) $17.5 million, less any
outstanding letters of credit issued under the Credit Agreement. As of August
10, 2001, current borrowing availability under the revolving facility was $14.0
million, of which the Company had borrowed $11.0 million. Revolving credit
borrowings bear interest, at the Company's option, at either a floating rate
approximating the Bank's prime rate plus an interest margin, as defined, or
LIBOR plus an interest margin (6.2% at August 10, 2001). There were no
outstanding borrowings under the revolving credit facility at December 31, 2000
and $10.7 million of borrowings at June 30, 2001. At June 30, 2001, the Company
was not in violation of any of its financial covenants under the Credit
Agreement.
Based on its current business plan, the Company expects that cash equivalents
and short term investments on hand, the Company's credit facility, as amended,
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 in 2001 and subsequent
years.
Newly Issued Accounting Standards. In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 141 requires business combinations initiated after June 30,
10
2001 to be accounted for using the purchase method of accounting and prohibits
the use of the pooling-of-interest method. SFAS No. 142 requires that, upon
adoption, amortization of goodwill will cease and instead, the carrying value of
goodwill will be evaluated for impairment on an annual basis. Identifiable
intangible assets will continue to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001,
and will be implemented by the Company on January 1, 2002. The Company is
evaluating the impact of the adoption of these standards and has not yet
determined the effect of adoption on its financial position and results of
operation.
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 of 1995
including, but not limited to, statements relating to forecasted contributions
to revenue resulting from the Deka acquisition, forecasted improvements to gross
margins and the ability of the Company to meet its liquidity and capital
requirements. 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 Annual Report including, without limitation, those described
under "Risk Factors - History of Net Losses", "-Marketing Risks affecting OREX
Products", "-Manufacturing and Supply Risks", "-Protection of Technologies",
"-Competition", "-Risks of Technological Obsolescence", "-Reliance Upon
Distributors", "-Regulatory Risks", "-Environmental Maters", and "-Product
Liability".
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 June 30, 2001, the Company had $11.4 million long-term or
short-term debt bearing interest at floating 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use 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.
11
Item 3. Default Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securityholders
During the period covered by this report, the Company filed with the Securities
and Exchange Commission and delivered to its shareholders the Company's Proxy
Statement for its Annual Meeting of Shareholders held May 16, 2001.
(a) The Company's annual meeting of shareholders was held on May 16, 2001.
(b) The nominees for the Board of Directors of the Company are identified
below.
(c) With respect to the election of directors, the inspector of election
tabulated the following votes:
Nominees for Office Number of Votes Number of Votes Abstention and Broker Nonvotes
- ------------------- ---------------- ---------------- ------------------------------
For Withheld
--- --------
Gene R. McGrevin 36,644,648 248,999 -
Dan R. Lee 36,475,287 418,360 -
Rosdon Hendrix 36,367,742 525,905 -
Kenneth F. Davis 36,372,326 521,321 -
John E. McKinley 36,370,842 522,805 -
Ronald L. Smorada 36,641,463 252,184 -
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.
3.5(4) Second Amendment to Amended and Restated Bylaws of Isolyser
Company, Inc.
4.1(1) Specimen Certificate of Common Stock
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4.2 Amended and Restated Credit Agreement dated as of May 14, 2001, between
the Registrant and The Chase Manhattan Bank, as Agent
- ------------------
(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 an amendment to a current report on Form 8-K on May 23,
2001.
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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 August 14, 2001.
ISOLYSER COMPANY, INC.
By: s/Dan R. Lee
---------------------------------
Dan R. Lee
President & CEO
(principal executive officer)
By: s/R. G. Wilson
---------------------------------
R. G. Wilson
Chief Financial Officer
(principal financial officer)
14