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, 2002 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.)
512 LEHMBERG ROAD
COLUMBUS, MISSISSIPPI 39702
(Address of principal executive offices)
(662) 327-1863
(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 10, 2002
- ----------------------------- ---------------------------
Common Stock, $.001 par value 43,042,184
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISOLYSER COMPANY, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
ASSETS MARCH 31, 2002 DECEMBER 31, 2001
----------------------------------------------------
Current assets
Cash and cash equivalents $ 8,800 $ 10,587
Accounts receivable, net 17,043 16,141
Other receivables 600 587
Inventory, net 26,600 27,022
Prepaid expenses and other assets 750 1,215
----------------------------------------------------
Total current assets 53,793 55,552
----------------------------------------------------
Property and equipment 22,237 21,994
Less accumulated depreciation (15,061) (14,455)
----------------------------------------------------
Property and equipment, net 7,176 7,539
----------------------------------------------------
Intangible assets, net 26,268 26,351
Deferred income taxes 2,018 2,018
Other assets, net 2,979 2,870
----------------------------------------------------
Total assets $ 92,234 $ 94,330
====================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,006 $ 4,934
Accrued expenses 2,402 3,091
Accrued customer rebates 490 490
Current portion of long-term debt 258 260
Deferred licensing revenue 1,070 1,427
Product financing agreement - 404
----------------------------------------------------
Total current liabilities 9,226 10,606
----------------------------------------------------
Long-term debt 9,849 12,649
Other long-term liabilities 1,660 1,487
----------------------------------------------------
Total liabilities 20,735 24,742
----------------------------------------------------
Shareholders' equity
Common stock 43 43
Additional paid-in capital 210,940 210,251
Accumulated deficit (137,308) (138,636)
Cumulative translation adjustment (292) (239)
Unrealized loss on available for sale securities (103) (96)
Unearned shares restricted to employee stock ownership
Plan (60) (60)
----------------------------------------------------
73,220 71,263
Treasury shares, at cost (1,721) (1,675)
----------------------------------------------------
Total shareholders' equity 71,499 69,588
----------------------------------------------------
Total liabilities and shareholders' equity $ 92,234 $ 94,330
====================================================
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
MARCH 31, 2002 MARCH 31, 2001
----------------------- ----------------------
Net sales $ 20,824 $ 15,877
Licensing revenues 357 379
----------------------- ----------------------
Net revenues 21,181 16,256
Cost of goods sold 12,585 9,593
----------------------- ----------------------
Gross profit 8,596 6,663
Operating expenses:
Selling, general and administrative 6,744 5,379
Research and development 163 453
Amortization of intangibles 114 320
----------------------- ----------------------
Total operating expenses 7,021 6,152
----------------------- ----------------------
Income from operations 1,575 511
Interest income 37 113
Interest expense (195) (107)
----------------------- ----------------------
Income before income tax provision 1,417 517
Income tax provision 89 90
----------------------- ----------------------
Net income $ 1,328 $ 427
======================= ======================
Other comprehensive loss:
Foreign currency translation loss (53) (85)
Unrealized loss on available for sale securities (7) (14)
----------------------- ----------------------
Comprehensive income $ 1,268 $ 328
======================= ======================
Net income per common share - basic
and diluted $ 0.03 $ 0.01
======================= ======================
Basic weighted average number of common
shares outstanding 42,074 41,408
======================= ======================
Diluted weighted average number of common
shares outstanding 42,938 41,578
======================= ======================
See notes to condensed consolidated financial statements.
3
ISOLYSER COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
-------------------------------------------------
Cash flows from operating activities:
Net income $ 1,328 $ 427
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 623 558
Amortization of intangibles 114 320
Provision for doubtful accounts 65 10
Licensing revenues (357) (379)
Provision for obsolete and slow moving inventory 43 177
Stock option compensation expense 18 -
Changes in assets and liabilities, net of effects of
acquisitions (950) (1,394)
-------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 884 (281)
-------------------------------------------------
Cash flows from investing activities:
Purchase of and deposits for property and equipment (260) (345)
Acquisitions - (11,983)
-------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (260) (12,328)
-------------------------------------------------
Cash flows from financing activities:
Net (repayments) borrowings under credit agreements (2,793) 6,663
Changes in bank overdraft 223 875
Net repayments under notes payable (413) (155)
Proceeds from exercise of stock options 452 -
Repurchase of treasury stock (46) (8)
Proceeds from issuance of common stock 219 201
-------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (2,358) 7,576
-------------------------------------------------
Effect of exchange rate changes on cash (53) (85)
-------------------------------------------------
Net decrease in cash and cash equivalents (1,787) (5,118)
Cash and cash equivalents at beginning of period 10,587 14,379
-------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,800 $ 9,261
=================================================
See notes to condensed consolidated financial statements.
4
ISOLYSER COMPANY, INC.
NOTES TO CONDENSED 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, 2001 (the "Annual
Report").
2) Inventories are stated at the lower of cost or market and are summarized as
follows:
(in thousands) MARCH 31, 2002 DECEMBER 31, 2001
----------------------------- -------------------------
Raw materials and supplies $ 13,011 $ 13,504
Work in process 709 890
Finished goods 14,996 14,634
----------------------------- -------------------------
28,716 29,028
Reserves for slow moving and
obsolete inventories (2,116) (2,006)
----------------------------- -------------------------
Inventory, net $ 26,600 $ 27,022
============================= =========================
At March 31, 2002 and December 31, 2001, 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 allocation of the total purchase price of
approximately $11.6 million resulted in an excess of purchase price over the
fair value of the net assets acquired (goodwill) of approximately $3.3 million.
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
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, 2001:
5
THREE MONTHS ENDED
(in thousands, except per share data) MARCH 30, 2002 MARCH 31, 2001
-------------- --------------
Net revenues $21,181 $20,006
Net income 1,328 436
Net income per common share -
Basic and diluted $ 0.03 $ 0.01
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 (5.25% at March
31, 2002) or LIBOR plus an interest margin (4.16% at March 31, 2002). There were
outstanding borrowings under the revolving credit facility of $9.6 million at
March 31, 2002 and $12.4 million at December 31, 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. In addition, the Company is not permitted to pay any
dividends. At March 31, 2002, the Company was in compliance with 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
864,000 and 170,000 dilutive stock options outstanding for the three months
ended March 31, 2002 and March 31, 2001, respectively. Dilutive potential common
shares are calculated in accordance with the treasury stock method, which
assumes that proceeds from the exercise of all options are used to repurchase
common shares at market value. The number of shares remaining after the exercise
proceeds are exhausted represents the potentially dilutive effect of the
options.
6) On February 11, 2000, the Company paid $249,000 for approximately 7.5%
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
("SFAS") No. 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, 2002 was
$146,000.
6
7) At December 31, 2001, the Company had restructuring reserves of $101,000.
Additions to and charges against the reserves totaled $54,000 and $9,000,
respectively, during the three months ended March 31, 2002, leaving a balance of
$146,000 in the reserves at March 31, 2002. The activity is shown below:
DECEMBER 31, MARCH 31,
(in thousands) 2001 2002
DESCRIPTION BALANCE ADDITIONS DEDUCTIONS BALANCE
- ----------- ------------ ----------- ------------ ------------
Severance and consulting
arrangements $ 26 $ 54 $ (9) $ 71
Impaired equipment reserve 75 - - 75
------------ ----------- ------------ ------------
Total $ 101 $ 54 $ (9) $ 146
============ =========== ============ ============
Severance and vacation benefits for 19 employees totaling $54,000 were
accrued during the quarter ending March 31, 2002.
8) Due to the Company's federal net operating loss carryforwards, the Company's
income tax provision for the three months ended March 31, 2002 and 2001 consists
primarily of state and foreign income taxes. At March 31, 2002, the Company had
federal and state net operating loss carryforwards of $86.7 million and $72.9
million, respectively, of which $2.2 million relates to compensation expense
associated with the exercise of employee stock options. The operating loss
carryforwards expire on various dates beginning in 2011 through 2020.
9) In July 2001, the Financial Accounting Standards Board ("FASB") issued 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. The application of SFAS No. 141 did
not affect any of the Company's previously reported amounts in goodwill or other
intangible assets. SFAS No. 142 requires that the amortization of goodwill cease
prospectively upon adoption and instead, the carrying value of goodwill be
evaluated using an impairment approach. Identifiable intangible assets will
continue to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (see below). SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001, and was implemented by the Company on January
1, 2002. The Company is required to complete the initial step of a transitional
impairment test within six months of adoption of SFAS No. 142 and to complete
the final step of the transitional impairment test by the end of the fiscal
year. Any impairment loss resulting from the transitional impairment test would
be recorded as a cumulative effect of a change in accounting principle for the
quarter ended June 30, 2002. Subsequent impairment losses will be reflected in
operating income in the consolidated statements of operations. Management does
not believe that a material adjustment will be necessary upon completion of its
initial assessment. The information presented below could be adjusted based on
the results of this initial assessment.
The Company's goodwill and intangible assets as of March 31, 2002 and
December 31, 2001 are summarized as follows:
7
MARCH 31, 2002 DECEMBER 31, 2001
----------------------------- ----------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
(in thousands) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ---------- ------------ ------------- ------------
Goodwill $ 29,953 $7,488 $ 29,953 $7,488
Customer lists 586 68 586 62
Covenants not to compete 575 159 575 124
Patent and license agreements 3,877 1,753 3,847 1,701
Other 887 142 887 122
------- ------ ------- ------
Total $ 35,878 $9,610 $ 35,848 $9,497
======== ====== ======== ======
The following financial information is presented as if SFAS No. 142 was
adopted at the beginning of the quarter ended March 31, 2001:
THREE MONTHS ENDED
(in thousands, except per share data) MARCH 31, 2001
--------------
Net income, as reported $ 427
Goodwill amortization 240
-----
Adjusted net income $ 667
=====
Net income per common share - basic and diluted:
As reported $ 0.01
Goodwill amortization 0.01
------
As adjusted $ 0.02
======
Amortization expense related to intangible assets was $114,000 and $76,000
for the three months ended March 31, 2002 and 2001, respectively. Following is
the estimated annual amortization expense subsequent to December 31, 2001:
AMORTIZATION
YEAR EXPENSE
---- -------
2002-2004 $ 454,000
2005 431,000
2006 287,500
2007-2011 281,000
2012 161,500
2013 75,000
2014-2015 70,000
2016 24,000
10) In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Although SFAS No. 144 supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, it retains most of the concepts of that standard, except that it
eliminates the requirement to allocate goodwill to long-lived assets for
impairment testing purposes and it requires that a long-lived asset to be
abandoned or exchanged for a similar asset be considered held and used until it
is disposed (i.e., the depreciable life should be revised until the asset is
actually abandoned or exchanged). Also, SFAS No. 144 includes the basic
provisions of Accounting Principles Board ("APB") Opinion No. 30, Reporting the
Results of Operations - Reporting the Effect of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for a presentation of discontinued operations in the income
statement but broadens that presentation to include a component of an entity
8
rather than a segment of a business, where that component can be clearly
distinguished from the rest of the entity. The provisions of SFAS No. 144
generally are to be applied prospectively. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, with earlier application encouraged.
The Company's adoption of SFAS No. 144 on January 1, 2002 did not have a
material effect on the Company's consolidated financial position or results of
operations.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net revenues for the three months ended March 31, 2002 (the "2002 Quarter") were
$21.2 million, an increase of $4.9 million or 30.3 percent over the $16.3
million of net revenues reported for the three months ended March 31, 2001 (the
"2001 Quarter"). Excluding licensing revenues associated with the amortization
of the $10.5 million payment by Allegiance allocated to the Company's Supply and
License Agreement with Allegiance, net revenues in the 2002 Quarter were $20.8
million as compared to $15.9 million in the 2001 Quarter, an increase of 31.2
percent. The increase in net revenues is attributable to Microtek's acquisition
of the drape and CleanOp product lines of Deka in the 2001 Quarter, internal
growth in Microtek's core product revenues and expansion of Microtek's product
offerings.
For the 2002 Quarter, Microtek's net revenues totaled $20.5 million, an increase
of $4.9 million or 31.5 percent over net revenues of $15.6 million reported in
the 2001 Quarter. Microtek's domestic revenues, which were $17.7 million or 86.4
percent of Microtek's total net revenues in the 2002 Quarter, increased by $3.8
million or 27.6 percent over the 2001 Quarter. Microtek's domestic revenues are
generated through two primary channels or customer categories, hospital branded
and contract manufacturing (commonly referred to as OEM). Included in the
Company's OEM revenues are sales of products to custom procedure tray companies
and other "non-branded" or private label customers. Hospital branded revenues
were 53.3 percent and OEM revenues were 46.7 percent of total domestic revenues
in the 2002 Quarter as compared to 63.4 percent and 36.6 percent, respectively,
in the 2001 Quarter. Hospital branded revenues in the 2002 Quarter increased by
approximately $635,000 to $9.4 million from $8.8 million in the 2001 Quarter.
The most significant contributor to the increase in hospital branded revenues
was the CleanOp product line acquired from Deka. Additionally, Microtek's core
hospital branded revenues demonstrated moderate internal growth in the 2002
Quarter as compared to the 2001 Quarter. Slightly offsetting these increases was
a decline in safety product revenues in the 2002 Quarter which resulted
primarily from increased competitive pressures. OEM revenues in the 2002 Quarter
increased by $3.2 million to $8.3 million from $5.1 million in the 2001 Quarter,
an increase of 62.8 percent. The significant contributors to the increase in OEM
revenues in the 2002 Quarter were sales of the angiography drape and equipment
drape products acquired from Deka along with internal growth of greater than 10
percent.
Microtek's international revenues, which accounted for the remaining 13.6
percent of its 2002 Quarter net revenues, were $2.8 million for the 2002
Quarter, an increase of $1.1 million or 63.5 percent over the 2001 Quarter. The
improvements in the 2002 Quarter are attributable to international revenues
stemming from the Deka acquisition and internal growth in excess of 20 percent.
OTI's net revenues were $599,000 in the 2002 Quarter versus $593,000 in the 2001
Quarter. Licensing revenues in the 2002 Quarter were $357,000 as compared to
$379,000 in the 2001 Quarter. The Company will cease to recognize the non-cash
licensing revenues in December 2002. Included in OTI's net revenues for the 2002
Quarter was approximately $89,000 related to its nuclear operations. The
Company's commercialization efforts and relationships within the nuclear power
9
industry continue to strengthen with continued favorable customer response to
product usage of the OREXTM protective clothing.
Gross margins in the 2002 Quarter were 40.6 percent and are consistent with the
margins of 41.0 percent recorded in the 2001 Quarter.
Operating expenses as a percentage of net revenues in the 2002 Quarter were 33.1
percent, down from 37.8 percent in the 2001 Quarter. Selling, general and
administrative expenses were $6.7 million or 31.8 percent of net revenues in the
2002 Quarter, versus $5.4 million or 33.1 percent of net revenues in the 2001
Quarter. The overall increase in the absolute dollar amount of selling, general
and administrative expenses is due in part to fixed selling expenses related to
product lines acquired from Deka and increases in variable selling costs
resulting from increased net revenues in the 2002 Quarter. The improvements in
selling, general and administrative expenses as a percentage of net revenues in
2002 result from increased revenues and cost control and expense reduction
efforts, particularly in corporate overhead expenses.
The Company has begun the process of transferring most of the sales and
marketing responsibilities for its OREX nuclear product line to Eastern
Technologies, Inc. ("ETI"). ETI serves as the exclusive licensee of OREX
LaunderableTM products and non-exclusive licensee of Certified SolubleTM
products in the United States and Canada. ETI also serves as the exclusive
operator of processing services to the nuclear power industry for these products
in that territory. This transition of the management of the sales and marketing
portion of the OREX nuclear power business to ETI is intended to reduce the
Company's operating expenses and better align expenses with expected revenues
for this business opportunity. The Company intends to continue to support ETI in
developing this business opportunity.
Research and development expenses decreased by $290,000 to $163,000 in the 2002
Quarter as compared to the 2001 Quarter due to significant reductions in product
development costs. The reduction in research and development expenses reflects
the Company's more narrow focus on new market opportunities in the nuclear power
industry for its OREX Degradable products.
Amortization of intangibles in the 2002 Quarter was $114,000, a decrease of
$206,000 from the 2001 Quarter. This decrease results primarily from the
Company's adoption of SFAS No. 142 on January 1, 2002, at which time the Company
ceased to amortize goodwill and instead will evaluate the carrying value of its
goodwill using an impairment approach. Identifiable intangible assets will
continue to be amortized over their useful lives and reviewed for impairment on
a periodic basis. Had the provisions of SFAS No. 142 been in effect for the 2001
Quarter, amortization of intangibles in the 2001 Quarter would have decreased by
approximately $240,000. The decrease attributable to non-amortization of
goodwill in the 2002 Quarter was offset slightly by the amortization of
identifiable intangible assets acquired in the Deka and MICROBasix acquisitions
that were completed in the 2001 Quarter.
Income from operations for the 2002 Quarter was $1.6 million, versus $511,000 in
the 2001 Quarter. For the 2002 Quarter, Microtek's operating profit was $1.8
million, a 45.0 percent increase over the operating profit of $1.2 million
recorded in the 2001 Quarter. The operating losses recorded by the Company's OTI
division in the 2002 Quarter were $147,000, which represents a 76.3 percent
improvement over the $622,000 in operating losses recorded in the 2001 Quarter.
Interest expense, net of interest income, was $158,000 in the 2002 Quarter as
compared to interest income, net of interest expense, of $6,000 in the 2001
Quarter. The increase in net interest expense is the result of higher interest
expense in 2002 and lower interest income on cash and cash equivalents which are
10
attributable to borrowings on the Company's line of credit facility and lower
cash balances during the 2002 Quarter.
The Company's provision for income taxes in the 2002 Quarter reflects an expense
of $89,000. Due to the Company's federal net operating loss carryforwards, this
expense consists primarily of state and foreign income taxes.
The resulting net income for the 2002 Quarter was $1.3 million, or $0.03 per
basic and diluted share. These results reflect significant improvement over the
$427,000, or $0.01 per basic and diluted share, for the 2001 Quarter.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, the Company's cash and cash equivalents totaled $8.8
million as compared to $10.6 million at December 31, 2001.
During the 2002 Quarter, the Company's operating activities provided cash of
$884,000 as compared to cash used in operating activities of $281,000 in the
2001 Quarter. The increase in cash provided by operating activities in the 2002
Quarter is attributable to the Company's increased profitability in the 2002
Quarter and working capital management. Cash used in investing activities in the
2002 Quarter was $260,000, as compared to $12.3 million in the 2001 Quarter.
Investing activities in the 2002 Quarter consisted of the purchase of property
and equipment. Investing activities in the 2001 Quarter included the Deka and
MICROBasix acquisitions which consumed approximately $12.0 million in cash and
purchases of property and equipment of $345,000. During the 2002 Quarter, cash
used in financing activities was $2.4 million. Repayments under the Company's
Credit Agreement and other long-term debt agreements in the 2002 Quarter totaled
$3.2 million. Included in this amount was a lump sum payment to Thantex of
$341,000 under the product financing agreement described in the Company's Annual
Report. This payment satisfied in full the Company's remaining obligation under
this agreement. During the 2002 Quarter, the Company received $671,000 in
proceeds from the exercise of stock options and issuance of stock. Cash provided
by financing activities in the 2001 Quarter was $7.6 million which consisted
primarily of borrowings under the Company's Credit Agreement of $6.7 million.
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. Outstanding
borrowings under the revolving credit facility were $9.6 million and $12.4
million at March 31, 2002 and December 31, 2001, respectively. As of March 31,
2002, the Company had additional borrowing availability under the revolving
facility of $5.6 million. As of May 10, 2002, the Company's borrowing
availability under the revolving facility was $15.2 million, of which the
Company had borrowed $8.9 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 (5.25% at May 10, 2002) or LIBOR plus an interest
margin (4.16% at May 10, 2002). At March 31, 2002, the Company was in compliance
with 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
11
future developments and increased working capital requirements may require
additional debt financing or issuance of common stock in 2002 and subsequent
years.
CRITICAL ACCOUNTING POLICIES.
While the listing below is not inclusive of all of the Company's accounting
policies, the Company's management believes that the following policies are
those which are most critical and embody the most significant management
judgments and the uncertainties affecting their application and the likelihood
that materially different amounts would be reported under different conditions
or using different assumptions. These critical policies are:
Revenue Recognition. The Company's revenues are derived from the sale of its
products and are recognized at the time of shipment (i) when persuasive evidence
of a sale arrangement exists, (ii) delivery has occurred, (iii) the price is
fixed and determinable, and (iv) collectibility of the associated receivable is
reasonably assured. As discussed below, significant management judgments and
estimates must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
the Company's revenues for any period if management made different judgments or
utilized different estimates.
All sales of the Company's products are evidenced by a binding purchase order as
evidence of a sale arrangement. Sales through the Company's distributors are
evidenced by a master agreement which governs the relationship together with a
binding purchase order on a transaction by transaction basis. Delivery generally
occurs when the Company's products are delivered to a common carrier.
At the time of a sale transaction, the Company assesses whether the related
sales price is fixed and determinable based on the payment terms associated with
the transaction. Sales prices due within the Company's normal payment terms,
which are 30 to 60 days from the invoice date for its domestic customers and 90
to 120 days from the invoice date for international customers, are considered
fixed and determinable. The Company does not generally extend payment terms
outside its normal guidelines. The Company also assesses whether collection is
reasonably assured at the time of the sale transaction based on a number of
factors, including past transaction history with the customer and the
credit-worthiness of the customer.
Sales Returns and Other Allowances and Allowance for Doubtful Accounts. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Specifically, management must make estimates of potential future product returns
related to current period product revenues. The Company's sales arrangements do
not generally include acceptance provisions or clauses. Additionally, the
Company does not typically grant its distributors or other customers price
protection rights or rights to return products bought, other than normal and
customary rights of return for defects in materials or workmanship, and is not
obligated to accept product returns for any other reason. Actual returns have
not historically been significant. Management analyzes historical returns,
current economic trends and changes in customer demand when evaluating the
adequacy of its sales returns and other allowances.
Similarly, the Company's management must make estimates of the uncollectibility
of its accounts receivables. Management specifically analyzes accounts
receivable, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in its customers' payment
terms when evaluating the adequacy of its allowance for doubtful accounts.
12
The Company's accounts receivables at March 31, 2002 totaled $17.0 million, net
of the allowance for doubtful accounts of $957,000.
Inventory Valuation. The preparation of the Company's financial statements
requires careful determination of the appropriate dollar amount of the Company's
inventory balances. Such amount is presented as a current asset in the Company's
balance sheet and is a direct determinant of cost of goods sold in the statement
of operations and therefore has a significant impact on the amount of net income
reported in an accounting period. The basis of accounting for inventories is
cost, which is the sum of expenditures and charges, both direct and indirect,
incurred to bring the inventory quantities to their existing condition and
location. The Company's inventories are stated at the lower of cost or market,
with cost determined using the first-in, first-out ("FIFO") method, which
assumes that inventory quantities are sold in the order in which they are
manufactured or purchased. The Company utilizes standard costs as a management
tool. The Company's standard cost valuation of its inventories is adjusted at
regular intervals to reflect the approximate cost of the inventory under FIFO.
The determination of the indirect charges and their allocation to the Company's
work-in-process and finished goods inventories is complex and requires
significant management judgment and estimates. Material differences may result
in the valuation of the Company's inventories and in the amount and timing of
the Company's cost of goods sold and resulting net income for any period if
management made different judgments or utilized different estimates.
On a periodic basis, management reviews its inventory quantities on hand for
obsolescence, physical deterioration, changes in price levels and the existence
of quantities on hand which may not reasonably be expected to be used or sold
within the normal operating cycles of the Company's operations. To the extent
that any of these conditions are believed to exist or the utility of the
inventory quantities in the ordinary course of business is no longer as great as
their carrying value, a reserve against the inventory valuation is established.
To the extent that this reserve is established or increased during an accounting
period, an expense is recorded in the Company's statement of operations,
generally in cost of good sold. Significant management judgment is required in
determining the amount and adequacy of this reserve. In the event that actual
results differ from management's estimates or these estimates and judgments are
revised in future periods, the Company may need to establish additional reserves
which could materially impact the Company's financial position and results of
operation.
As of March 31, 2002, the Company's inventories totaled $26.6 million, net of
reserves for slow moving and obsolete inventories of $2.1 million. Management
believes that the Company's inventory valuation, together with the recorded
reserves for slow moving and obsolete inventories, results in carrying the
inventory at the lower of cost or market.
Accounting for Income Taxes. In conjunction with preparing the Company's
consolidated financial statements, management is required to estimate the
Company's income tax liability in each of the jurisdictions in which the Company
operates. This process involves estimating the Company's actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as goodwill amortization, for tax and accounting
purposes. These differences result in deferred tax assets or liabilities which
are reflected in the Company's consolidated balance sheet. Management must also
assess the likelihood that the Company's deferred tax assets will be recovered
from future taxable income. To the extent that management believes that recovery
is not likely, a valuation allowance must be established and reviewed in each
accounting period. Increases in the valuation allowance in an accounting period
requires that the Company record an expense within its tax provision in its
consolidated statement of operations.
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Significant management judgment is required in determining the Company's
provision for income taxes, its deferred tax assets and liabilities and any
valuation allowance recorded against the Company's net deferred tax assets. At
March 31, 2002, the Company's net deferred tax assets totaled $2.0 million. The
Company has recorded a valuation allowance of $40.4 million as of March 31,
2002, due to uncertainties related to the Company's ability to utilize some of
its deferred tax assets, primarily consisting of net operating loss
carryforwards, before they expire. The valuation allowance is based on
management's estimates of taxable income by jurisdiction in which the Company
operates and the period over which the deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or these estimates
are adjusted in future periods, the Company may need to adjust this valuation
allowance which could materially impact the Company's financial position and
results of operation.
Valuation of Long-Lived and Intangible Assets and Goodwill. The Company assesses
the impairment of identifiable intangibles, long-lived assets and related
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors that are considered by management in
performing this assessment include, but are not limited to, the following:
- The Company's performance relative to historical or projected future
operating results;
- The Company's intended use of acquired assets or the Company's
strategy for its overall business; and
- Industry or economic trends.
In the event that the carrying value of intangibles, long-lived assets and
related goodwill is determined to be impaired, such impairment is measured using
a discount rate determined by management to be commensurate with the risk
inherent in the Company's current business model. At March 31, 2002, the net
book value of goodwill approximated $22.5 million and the net book value of
other intangible assets approximated $3.8 million.
As discussed in the footnotes to the condensed consolidated financial
statements, on January 1, 2002, the Company implemented Statement of Financial
Account Standard ("SFAS") No. 142, Goodwill and Other Intangible Assets, and as
a result, will cease to amortize approximately $22.5 million of goodwill but
will continue to amortize other intangible assets. Goodwill amortization for the
full year of 2001 and the 2001 Quarter amounted to approximately $1.1 million,
or $0.026 per share, and $240,000, or $0.006 per share, respectively. In lieu of
amortization, the Company will be required to perform an initial impairment
review of its goodwill in 2002 and an impairment review thereafter at least
annually. The Company expects to complete its initial impairment review in the
second quarter of 2002 and currently does not expect to record an impairment
charge upon completion of this review. However, there can be no assurance that a
material impairment charge will not be recorded at the time that this review is
completed.
FORWARD LOOKING STATEMENTS
Statements made in this Quarterly Report include forward-looking statements made
under the provisions of the Private Securities Litigation Reform Act of 1995
including, but not limited to, expected adjustments to the Company's financial
statements upon completion of the transitional impairment tests under SFAS No.
142, expected amortization expenses in 2002 and future periods, forecasted
reductions to operating expenses associated with the transition of sales and
marketing responsibilities of the OTI nuclear business to Eastern Technologies,
Inc., the ability of the Company to meet its liquidity and capital requirements,
and management judgments about future events in the application of its critical
accounting policies as described under "Critical Accounting Policies" above. The
Company's actual results could differ materially from such forward-looking
14
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", "-Reliance upon Microtek", "-Competition", "-Product
Liability", "-Stock Price Volatility", "-Dependence on Key Personnel",
"-Anti-takeover Provisions", "-Low Barriers to Entry for Competitive Products",
"-Potential Erosion of Profit Margins", "-Risks of Completing Acquisitions",
"-Small Sales and Marketing Force", "-Reliance upon Distributors", "-Microtek
Regulatory Risks", "-Risks of Obsolescence", "-Reduced OREX Market Potential",
"-OREX Commercialization Risks", "-OREX Manufacturing and Supply Risks", "-Risks
Affecting Protection of Technology", "-Risks of Technological Obsolescence" and
"-OTI Regulatory Risks". We do not undertake to update our forward-looking
statements to reflect future events or circumstances.
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, 2002, the Company had $10.1 million long-term or
short-term debt bearing interest at floating rates. Because these rates are
variable, a 1% increase in interest rates would result in additional interest
expense of approximately $30,000 per quarter and a 1% reduction in interest
rates would result in reduced interest expense of approximately $30,000 per
quarter.
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.
On January 18, 2002, the Company issued 50,000 shares of its common stock for
consideration consisting of $50,000 in cash plus services provided and to be
provided under a consulting agreement for investor relations services. The
securities were purchased by two principals of the Company's investor relations
advisor in a private transaction. Exemption from the registration provisions of
the Securities Act for this transaction was claimed under Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder on the basis
that such transaction did not involve any public offering, the purchasers were
sophisticated with access to the kind of information registration would provide
and that such purchasers acquired such securities without a view to distribution
thereof.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
15
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(3) Amended and Restated Bylaws of Isolyser Company, Inc.
4.1(1) Specimen Certificate of Common Stock
- ------------------
(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 April 23, 2002.
(b) The Company filed a Current Report on Form 8-K on April 23, 2002 reporting
under Item 5 thereof an amendment to the Company's Amended and Restated
Bylaws.
16
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 13, 2002.
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)
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