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, 1997 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.)
650 Engineering Drive
Technology Park
Norcross, Georgia 30092
(Address of principal executive offices)
(770) 582-6363
(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 14, 1997
Common Stock, $.001 par value 39,242,669
462968.1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ISOLYSER COMPANY, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
June 30, 1997 December 31, 1996
------------------ -----------------------
Assets
Current assets
Cash and cash equivalents $ 10,275 $ 20,925
Accounts receivable-net 26,771 27,691
Inventories 61,723 62,824
Prepaid expenses and other assets 4,023 3,562
------------------ -----------------------
Total Current Assets 102,792 115,002
------------------ -----------------------
Property, plant and equipment 91,920 88,289
Less accumulated depreciation (16,695) (12,279)
------------------ -----------------------
Net property, plant, and equipment 75,225 76,010
------------------ -----------------------
Assets held for sale 1,655 1,642
Intangibles and other assets, net 56,560 58,281
------------------ -----------------------
$ 236,232 $ 250,935
------------------ -----------------------
Liabilities and Shareholders' Equity
Current liabilities
Current installments of long term debt $ 3,534 $ 4,497
Accounts payable 8,855 10,982
Bank overdraft 849 3,229
Accrued expenses 6,786 5,975
------------------ -----------------------
Total current liabilities 20,024 24,683
------------------ -----------------------
Long term debt, excluding current installments 43,409 47,028
Other liabilities 365 420
------------------ -----------------------
Total liabilities 63,798 72,131
------------------ -----------------------
Shareholders' equity
Common stock 39 39
Additional paid in capital 203,763 203,346
Retained earnings (29,315) (21,840)
Cumulative translation adjustment 107 15
Unearned shares restricted to employee stock ownership plan (360) (360)
------------------ -----------------------
174,234 181,200
Treasury shares (1,800) (2,396)
------------------ -----------------------
Total shareholders' equity 172,434 178,804
------------------ -----------------------
$ 236,232 $ 250,935
================== =======================
See accompanying notes.
462968.1
2
ISOLYSER COMPANY, INC.
Condensed Consolidated Statement of Operations
(in thousands, except per share data)
(unaudited)
Three months Three months Six months Six months
ended ended ended ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
----------------- ------------------ -------------------- -----------------
Net sales $ 42,434 $ 40,879 $ 82,437 $ 81,026
Cost of goods sold 32,962 28,184 63,808 56,849
----------------- ------------------ -------------------- -----------------
Gross profit 9,472 12,695 18,629 24,177
Operating expenses:
Selling & marketing 6,680 6,764 13,581 13,069
General & administrative 3,864 3,281 7,497 6,387
Research & development 619 582 1,387 954
Amortization of intangibles 961 1,072 1,917 2,113
Merger costs - 109 - 109
----------------- ------------------ -------------------- -----------------
Total operating expenses 12,124 11,808 24,382 22,632
----------------- ------------------ -------------------- -----------------
Income (loss) from operations (2,652) 887 (5,753) 1,545
Interest income 111 490 340 1,130
Interest expense (1,012) (637) (2,031) (1,210)
Losses in joint venture (6) (23) (20) (41)
----------------- ------------------ -------------------- -----------------
Income (loss) before income tax expense (3,559) 717 (7,464) 1,424
Estimated tax expense 7 449 11 718
----------------- ------------------ -------------------- -----------------
Net income (loss) $ (3,566) $ 268 $ (7,475) $ 706
================= ================== ==================== =================
Net income (loss) per common share $ (0.09) $ 0.01 $ (0.19) $ 0.02
----------------- ------------------ -------------------- -----------------
Weighted average number of common
shares outstanding 39,252 39,089 39,214 38,912
================= ================== ==================== =================
See accompanying notes.
462968.1
3
ISOLYSER COMPANY, INC.
Condensed Statement of Cash Flows
(in thousands)
(unaudited)
Six months ended Six months ended
June 30, 1997 June 30, 1996
-------------------- ----------------------
Cash flows from operating activities:
Net income (loss) $ (7,475) $ 706
Net income for Microtek Medical, Inc. for December 1995 ---- 27
Adjustments to reconcile net income (loss) in operating activities:
Depreciation 3,650 3,635
Amortization 1,917 2,114
Provision for doubtful accounts 173 18
Loss on disposal of property, plant & equipment (27) ----
Changes in assets and liabilities, net of acquisitions (87) (19,074)
-------------------- ----------------------
Net cash used in operating activities: (1,849) (12,574)
-------------------- ----------------------
Cash flows from investing activities
Additions to property, plant and equipment net of acquisitions (2,852) (11,728)
Acquisitions, net of cash acquired ---- (5,874)
-------------------- ----------------------
Net cash used in investing activities: (2,852) (17,602)
-------------------- ----------------------
Cash flows from financing activities:
Net borrowings under credit agreements (4,582) 8,074
Changes in bank overdraft (2,380) (155)
Proceeds from exercised stock options 574 1,695
Proceeds from issuance of stock 306 119
Direct costs relating to issuance of common stock 133 (20)
-------------------- ----------------------
Net cash provided from financing activities: (5,949) 9,713
-------------------- ----------------------
Net increase (decrease) in cash and cash equivalents (10,650) (20,463)
Cash and cash equivalents at beginning of period 20,925 54,819
-------------------- ----------------------
Cash and cash equivalents at end of period $ 10,275 $ 34,356
==================== ======================
See accompanying notes.
462968.1
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 at December 31, 1996.
(2) On August 30, 1996 the Company acquired Microtek Medical, Inc.
("Microtek") and, in connection therewith, issued 7,722,965 shares of common
stock for all of Microtek's outstanding common stock. Microtek designs,
manufactures and sells a broad range of surgical and medical supplies. The
merger was accounted for as a pooling of interests and, accordingly, the
Company's financial statements for the quarter and six months ended June 30,
1996 have been restated to include the results of Microtek.
(3) In connection with the merger, Microtek changed its fiscal year end
from November 30 to December 31 which conforms to Isolyser's fiscal year end.
Microtek's separate results for fiscal year 1996 have been restated to a
December 31 year end.
(4) Inventories are stated at the lower of cost or market and are
summarized as follows:
June 30, 1997 December 31, 1996
------------------------- ---------------------------
Raw materials and supplies $ 26,842,000 $ 20,936,000
Work in process 7,570,000 23,267,000
Finished goods 36,695,000 29,346,000
------------------------- ---------------------------
Total 71,107,000 73,549,000
------------------------- ---------------------------
Slow moving and obsolete inventory (9,532,000) (10,041,000)
Reserve for LIFO inventory 148,000 (684,000)
------------------------- ---------------------------
Total $ 61,723,000 $ 62,824,000
========================= ===========================
The first-in first-out ("FIFO") valuation method is used to determine the cost
of inventories except for inventories held by the Company's subsidiary, White
Knight Healthcare, Inc. ("White Knight"). White Knight uses the last-in
first-out ("LIFO") inventory valuation method. At June 30, 1997 and December 31,
1996, LIFO inventories approximated $26,896,000 and $28,324,000, respectively.
462968.1
5
(5) Loss per common share is computed using the weighted average number
of common shares outstanding during the respective periods. There is no
significant difference between primary and fully diluted per share amounts for
these periods.
(6) At June 30, 1996, the Company was not in compliance with the
restrictive covenants of its credit facility pertaining to net income and net
worth. This existing covenant violation was waived by the Company's lenders on
August 12, 1997.
(7) Certain prior period amounts have been reclassified for comparative
purposes.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The Company's consolidated statements of operations for the three and six months
ended June 30, 1996 have been restated to include the operating results of
Microtek which was acquired in a pooling of interests transaction on August 30,
1996.
Net sales for the three months ended June 30, 1997 (the "1997 Quarter") were
$42.4 million compared to $40.9 million for the three months ended June 30, 1996
(the "1996 Quarter"), an increase of 3.7%. Net sales for the six months ended
June 30, 1997 (the "1997 Period") were $82.4 million compared to $81.0 million
for the six months ended June 30, 1996 (the "1996 Period"), an increase of 1.7%.
The increase in net sales in the 1997 Quarter and 1997 Period over the
corresponding periods of 1996 reflects the 20.5% and 17.2% increase in sales of
procedure trays and related products, respectively, the 14.2% and 12.0% increase
in sales of Microtek products, respectively, the 26.5% and 5.2% increase in
sales of safety products, respectively, offset by a 26.2% and 24.3% decline in
sales of White Knight products. The Company believes that these increased sales
for procedure trays and Microtek products are primarily attributable to a
combination of new business development and increased product usage by existing
customers, while the increased sales of safety products is primarily due to
timing of distributor orders. Management anticipates that sales of procedure
trays and related products will be adversely affected during the third quarter
by the Company's implementation of and conversion to an upgraded manufacturing
system at the Company's MedSurg division during the third quarter of 1997. The
decline in White Knight sales may be attributable to the acquisition in July,
1996 of Sterile Concepts, a significant customer of White Knight, by Maxxim,
which is a product competitor of the Company. While Sterile Concepts remains
contractually obligated to purchase from the Company a yearly minimum of $5.1
million of products until June 30, 1998, such acquisition is expected to
continue to adversely affect the Company's sales for the remainder of 1997 and
future periods. For the twelve months ended June 30, 1997, Sterile Concepts had
purchased substantially less than its yearly minimum purchase requirement for
such twelve months.
462968.1
6
As the Company previously reported in its Annual Report on Form 10-K for the
year ended December 31, 1996 (the "Annual Report"), the State of California is
reviewing the regulatory restrictions currently in effect on customer
landfilling of LTS-treated waste in California. The Company was recently made
aware that other states, including Florida and Georgia, are reviewing regulatory
restrictions applicable to customer landfilling of LTS-treated waste in those
states, possibly as a result of certain efforts of a product competitor. To
date, these regulatory review processes have had no discernable impact on sales
of safety products. In the event such processes result in further restrictions
on the landfilling of such waste, such restrictions could adversely affect the
Company's sales of LTS. Gross margins on sales of LTS for the 1997 Quarter and
Period were in excess of 10% of corporate gross margin for such periods.
Included in the foregoing sales figures are $2.5 million in sales of OREX
Degradables during the 1997 Quarter and $4.7 million during the 1997 Period as
compared to $2.4 million and $4.0 million during the corresponding period of
1996. Management believes that this small increase in OREX Degradable sales is
attributable to having only a small group of hospitals converted to using
degradable versus traditional product. Management believes that the rate of
growth in OREX sales has been adversely affected by delays in bringing new OREX
catalog items to market in quantities sufficient for commercial supply and
product performance or quality concerns for certain of the Company's OREX
Degradable products. While management believes that the Company's group of OREX
Products currently include substantially all non-woven products most often used
in the operating room, the Company does not yet manufacture for commercial sale
OREX Degradables film or thermoformed and extruded products such as bowls,
basins and utensils. Sales of OREX Degradables during the 1997 Quarter and
Period did not contribute any gross profits to the Company's operating results.
Management believes the Company will continue to fail to receive profitable
margins on sales of OREX Degradables pending a combination of selling OREX in
greater volumes, the operation of the Company's OREX manufacturing plants at
higher efficiencies and increasing the unit price for OREX Degradables to an
amount which takes into account the disposal cost savings provided by such
products. The Company is currently undertaking a thorough review and analysis of
the market position of OREX Degradables within its various market potentials. As
a part of such review and analysis, the Company plans to implement appropriate
adjustments to its marketing plan to seek to improve the Company's operating
results in connection with the sale of OREX Degradables. The Company's future
performance will depend to a substantial degree upon market acceptance of and
the Company's ability to successfully manufacture, market, deliver and expand
its OREX Degradables line of products at acceptable profit margins. The
Company's ability to achieve such objectives is subject to a number of risks
described in the Company's Annual Report including, without limitation, those
described in such Annual Report under "Risk Factors - Risks of New Products",
and "-Manufacturing and Supply Risks".
Gross profit for the 1997 Quarter and 1997 Period was $9.5 million and $18.6
million, respectively, compared to $12.7 million and $24.2 million for the 1996
Quarter and 1996 Period, respectively. The decline is primarily attributed to
excess capacity of the Company's OREX manufacturing facilities. During the
latter portions of 1996, the Company reduced production at its Abbeville and
Arden manufacturing plants to more closely align production with
462968.1
7
product demand. During the 1997 Quarter and 1997 Period, the Company sold
product from existing inventory, further negatively affecting margin. Pending
increased utilization of the Company's existing manufacturing capacity at its
Abbeville and Arden manufacturing plants and adjusting pricing of OREX
Degradables to take into account disposal cost savings over traditional
products, the overhead of the Company incurred through its Abbeville and Arden
plants will continue to negatively impact profit margins. There can be no
assurances that the Company will be able to increase utilization of the
Company's manufacturing capacity at its Abbeville and Arden manufacturing
plants. In addition to the effect of OREX Degradables on gross margins, the
decline in White Knight sales created excess capacity, adversely affecting gross
margin.
Selling and marketing expenses were $6.7 million or 15.8% of net sales in the
1997 Quarter compared to $6.8 million or 16.6% of net sales in the 1996 Quarter.
Selling and marketing expenses were $13.6 million or 16.5% of net sales in the
1997 Period compared to $13.1 million or 16.2% of net sales in the 1996 Period.
The decrease during the 1997 Quarter is a result of decreased salaries and
benefits associated with reducing the Company's sales and marketing personnel,
and reduced distribution costs. Included in selling and marketing expenses
during the 1997 Quarter was $392,000 in severance costs associated with the
reduction of the Company's sales and marketing personnel.
General and administrative expenses were $3.9 million or 9.1% of net sales in
the 1997 Quarter compared to $3.3 million or 8.0% of net sales in the 1996
Quarter. General and administrative expenses were $7.5 million or 9.1% of net
sales in the 1997 Period compared to $6.4 million or 7.9% of net sales in the
1996 Period. The increase in general and administrative expenses was primarily
attributed to costs related to several software and hardware installations, and
costs related to the Company's corporate office.
Research and development expenses were $619,000 or 1.5% of net sales in the 1997
Quarter compared to $582,000 or 1.4% of net sales in the 1996 Quarter. Research
and development expenses were $1.4 million or 1.7% of net sales in the 1997
Period compared to $954,000 or 1.2% of net sales in the 1996 Period. The
increase in research and development expense was primarily attributed to the
Company's development of fiber and compounding technology.
Amortization of intangibles in the 1997 Quarter and 1996 Quarter were $961,000
and $1.1 million, respectively. Amortization of intangibles in the 1997 Period
and 1996 Period were $1.9 million and $2.1 million, respectively.
The resulting loss from operations during the 1997 Quarter was $2.7 million as
compared to income from operations of $887,000 during the 1996 Quarter. Loss
from operations was $5.8 million for the 1997 Period as compared to income from
operations of $1.5 million during the 1996 Period.
462968.1
8
Interest income was $111,000 in the 1997 Quarter compared to $490,000 in the
1996 Quarter, and $340,000 in the 1997 Period compared to $1.1 million in the
1996 Period. The decrease in interest income is primarily attributed to a
reduction of the Company's cash position as a result of the acquisition of OREX
Degradable inventory and manufacturing capabilities during 1996.
Interest expense was $1.0 million in the 1997 Quarter compared to $637,000 in
the 1996 Quarter, and $2.0 million in the 1997 Period compared to $1.2 million
in the 1996 Period. The increase in interest expense is primarily attributed to
the Company's acquisition of OREX Degradable inventory and manufacturing
capabilities during 1996.
Provision for income taxes reflect an expense for the 1997 Quarter of $7,000
compared to a tax expense of $449,000 for the 1996 Quarter. The provision for
income taxes reflects an expense for the 1997 Period of $11,000 as compared to
an expense of $717,000 for the 1996 Period.
The resulting net loss was $3.6 million for the 1997 Quarter compared to net
income of $268,000 for the 1996 Quarter. The net loss was $7.5 million for the
1997 Period as compared to net income of $706,000 for the 1996 Period.
Liquidity and Capital Resources
At June 30, 1997, the Company's cash and equivalents totaled $10.3 million as
compared to $20.9 million at December 31, 1996.
During the 1997 Period, the Company used $1.8 million of cash in operating
activities as compared to $12.6 million in the 1996 Period. This use of cash
during the 1997 Period is attributable to a combination of the Company's
operating loss and a reduction in accounts payable. The Company used $2.9
million in investing activities during the 1997 Period as compared to $17.6
million during the 1997 Period. This use of cash during the 1997 Quarter was
primarily attributable to several computer software implementations that will
continue into 1998.
As more fully described in the Company's Annual Report, the Company has a $55
million credit agreement (the "Credit Agreement") consisting of a $40 million
revolving credit facility maturing on August 31, 1999 and a $15 million term
loan facility maturing on August 31, 2001. Current additional borrowing
availability under the revolving credit facility at June 30, 1997 was
approximately $11.9 million. Outstanding borrowings under the revolving credit
facility were approximately $25.9 million at June 30, 1997. Outstanding
borrowings under the term loan facility were $13.5 million at June 30, 1997. The
Credit Agreement provides for the issuance of up to $3 million in letters of
credit. Outstanding letters of credit were $50,000 at June 30, 1997. At June 30,
1997, the Company was not in compliance with the net income and net worth
covenants contained in the Credit Agreement. This violation was waived on August
12, 1997. In connection with the waiver of such violation, certain financial
covenants were modified and, if availability of additional borrowing capacity
under the revolving credit facility falls below $10
462968.1
9
million for 30 consecutive days, then the otherwise applicable rate of interest
under the Credit Agreement increases by .25%. No assurances can be provided that
other violations of covenants contained in the Company's Credit Agreement will
not occur in the future or, if such violations occur, that those violations will
be waived. Any unwaived default by the Company under the Credit Agreement would
be expected to have a material adverse effect upon the Company. At June 30,
1997, outstanding indebtedness under the Credit Agreement exceeded the Company's
cash and cash equivalents.
Based upon its current business plan, the Company currently 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 through 1997. Currently unforeseen
future developments and increased working capital requirements may require
additional debt financing or issuances of common stock in 1997 and subsequent
years. 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.
Statements made in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, including those in the immediately
preceding paragraph, 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 Annual Report
including, without limitation, those described in the Annual Report under "Risk
Factors -- Limited Operating History; Net Losses","-- Risks of New Products",
"-- Risks of Expansion", "-- Manufacturing & Supply Risks" and "-- Liquidity
Risks".
Item 3
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
462968.1
10
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
During the quarter for which this report is filed, there have been 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 have been 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. Defaults Upon Senior Securities
At June 30, 1997, the Company was not in compliance with the
restrictive covenants of its credit facility pertaining to net income and net
worth. This existing violation was waived by the Company's lenders on August 12,
1997.
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 (the "Commission") and delivered to its shareholders the
Company's Proxy Statement for Annual Meeting of Shareholder held May 29, 1997
(the "Proxy Statement").
(a) The Company's Annual Meeting of Shareholders was held on May 29,
1997.
(b) The Board of Directors of the Company as previously reported to
the Commission was re-elected in its entirety.
(c) With respect to each matter (as more fully described in the Proxy
Statement) voted upon at the meeting, the inspector of election tabulated the
following votes:
462968.1
11
(i) Election of Directors
Number of Votes Number Votes Abstentions and
Nominee for Office For Withheld Broker Non-Votes
Gene R. McGrevin 30,882,237 771,997 -0-
Travis W. Honeycutt 30,849,279 804,955 -0-
Dan R. Lee 30,891,516 762,718 -0-
Rosdon Hendrix 30,867,162 787,072 -0-
Kenneth F. Davis 30,903,623 750,611 -0-
Olivia F. Kirtley 30,923,293 730,941 -0-
(ii) Proposal to Amend Isolyser's Stock Option Plan
Abstentions and
For Against Broker Non-Votes
25,769,665 4,350,992 1,533,577
(d) There was no solicitation subject to Rule 14a-11 of Regulation 14A
under the Securities Exchange Act of 1934.
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 of the Amended and Restated Bylaws of
Isolyser Company, Inc.
462968.1
12
3.5(4) Second Amendment to Amended and Restated Bylaws of
Isolyser Company, Inc.
4.1(1) Specimen Certificate of Common Stock
4.2 Sixth Amendment of Stock Option Plan
27.1 Financial Data Schedule
- ------------------
<FN>
(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 the Company's Current Report on Form
8-K filed on 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) No current reports on Form 8-K were filed during the quarter
for which this report is filed.
</FN>
462968.1
13
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, 1997.
ISOLYSER COMPANY, INC.
By: /s/ Gene R. McGrevin
Gene R. McGrevin
President
(principal executive officer)
By: /s/ Peter A. Schmitt
Peter A. Schmitt
Chief Financial Officer
(principal financial officer)
462968.1
14