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, 1998 Commission File No. 0-24866
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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 May 12, 1998
- ----- ---------------------------
Common Stock, $.001 par value 39,958,300
547812.2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISOLYSER COMPANY, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
ASSETS MARCH 31, 1998 DECEMBER 31, 1997
------ ----------------------------------------
Current Assets
Cash and cash equivalents $ 9,813 $ 9,299
Accounts receivable, net 15,430 13,909
Inventories 30,091 32,067
Prepaid expenses and other assets 1,588 1,745
Assets held for sale 35,081 35,751
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Total Current Assets 92,003 92,771
--------- ---------
Property, plant and equipment 39,115 37,622
Less accumulated depreciation (18,260) (17,630)
--------- ---------
Property, plant, and equipment, net 20,855 19,992
Intangibles and other assets, net 31,124 31,571
--------- ---------
$ 143,982 $ 144,334
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long term debt $ 3,647 $ 4,610
Accounts payable 7,793 10,108
Bank overdraft 483 -
Accrued expenses 4,861 5,644
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Total current liabilities 16,784 20,362
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Long term debt, excluding current installments 41,705 37,546
Other liabilities 286 309
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Total liabilities 58,775 58,217
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Shareholders' equity
Common stock 39 39
Additional paid in capital 203,017 203,601
Retained earnings (117,031) (115,743)
Cumulative translation adjustment (102) (103)
Unearned shares restricted to employee stock ownership plan (300) (300)
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85,623 87,494
Treasury shares (416) (1,377)
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Total shareholders' equity 85,207 86,117
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$ 143,982 $ 144,334
========= =========
See accompanying notes.
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ISOLYSER COMPANY, INC.
Condensed Consolidated Statement of Operations
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------------------------------
Net sales $ 41,230 $ 40,003
Costs of goods sold 30,588 30,846
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Gross profit 10,642 9,157
Operating expenses:
Selling & marketing 6,122 6,902
General & administrative 3,668 3,632
Research & development 681 768
Amortization of intangibles 527 956
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Total operating expenses 10,998 12,258
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Loss from operations (356) (3,101)
Interest income 92 228
Interest expense (950) (1,020)
Gain (loss) in joint venture 3 (13)
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Loss before income tax expense (1,211) (3,906)
Income tax expense 76 4
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Net loss $ (1,287) $ (3,910)
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Net loss per common share - Basic and Diluted $ (0.03) $ (0.10)
========== =========
Weighted average number of common shares outstanding 39,512 38,828
========== =========
See accompanying notes.
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ISOLYSER COMPANY, INC.
Condensed Statement of Cash Flows
(in thousands)
(unaudited)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
----------------------------------------
Cash flows from operating activities:
Net loss $ (1,287) $ (3,910)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 965 1,834
Amortization 527 956
Provision for doubtful accounts 66 57
Loss on disposal of property, plant & equipment 10 6
Changes in assets and liabilities (1,956) (2,500)
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NET CASH USED IN OPERATING ACTIVITIES: (1,675) (3,557)
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Cash flows from investing activities
Additions to property, plant and equipment (1,651) (1,166)
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NET CASH USED IN INVESTING ACTIVITIES: (1,651) (1,166)
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Cash flows from financing activities:
Net borrowings under credit agreements 3,270 2,524
Changes in bank overdraft 194 (1,459)
Proceeds from exercised stock options - 574
Proceeds from issuance of stock 255 306
Issuance of stock to 401(k) Plan 121 -
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NET CASH PROVIDED BY FINANCING ACTIVITIES: 3,840 1,945
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Net increase (decrease) in cash and cash equivalents 514 (2,778)
Cash and cash equivalents at beginning of period 9,299 20,925
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,813 $ 18,147
======== =========
See accompanying notes.
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ISOLYSER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) In the opinion of management, the information furnished reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods. Results for the interim periods are not
necessarily indicative of results to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 (the "Annual
Report").
2) Inventories are stated at the lower of cost or market and are summarized as
follows:
MARCH 31, 1998 DECEMBER 31, 1997
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Raw materials and supplies $ 23,543,000 $ 24,121,000
Work in process 3,950,000 4,456,000
Finished goods 24,681,000 25,901,000
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Total 52,174,000 54,478,000
Reserve for excess, slow moving and
obsolete inventory (22,083,000) (22,411,000)
------------ ------------
Total $ 30,091,000 $ 32,067,000
============ ============
At March 31, 1998 and December 31, 1997 the net OREX inventory is
approximately $6,326,000 and $7,500,000 respectively.
3) On February 25, 1998, the Company approved a plan to dispose of its OREX
manufacturing facilities and White Knight subsidiary. Accordingly, the net
assets of these entities at March 31, 1998 and December 31, 1997 are classified
as held for sale in the accompanying consolidated balance sheets, and are
comprised of the following:
MARCH 31, 1998 DECEMBER 31, 1997
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Assets:
Accounts receivable $ 9,348,000 $ 8,848,000
Inventory 11,942,000 13,085,000
Prepaid expense and other assets 1,067,000 186,000
Property and equipment, net 19,794,000 19,980,000
Other assets 280,000 286,000
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Total assets $42,431,000 $42,385,000
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547812.2
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MARCH 31, 1998 DECEMBER 31, 1997
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Liabilities:
Accounts payable $ 3,317,000 $ 2,247,000
Bank overdraft 219,000 508,000
Accrued liability 1,905,000 2,044,000
Long-term debt 1,909,000 1,836,000
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Total liabilities 7,350,000 6,635,000
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Net assets held for sale $ 35,081,000 $ 35,750,000
=========== ==========
The Company anticipates disposing of these entities in 1998.
The following represents the results of operations of the above noted assets and
White Knight for the quarters ended March 31, 1998 and December 31, 1997:
QUARTER ENDED QUARTER ENDED
MARCH 31, 1998 DECEMBER 31, 1997
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Net sales $ 11,592,474 $ 13,357,000
Net loss (1,850,927) (1,882,000)
Net loss per share - basic and diluted (0.05) (0.05)
------------ ------------
4) Loss per common share is computed using the weighted average number of common
shares outstanding during the respective periods. There is no difference between
basic and diluted weighted average and per share amounts for these periods.
5) In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income". Effective January 1, 1998, the Company adopted
SFAS 130. Management believes the pronouncement does not significantly impact
the presentation of the Company's consolidated financial statements.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Net sales for the three months ended March 31, 1998 ( the "1998 Quarter") were
$41.2 million compared to $40.0 million for the three months ended March 31,
1997 ( the "1997 Quarter"). Sales of custom procedure trays and related products
increased 22.0% in the 1998 Quarter as compared to the 1997 Quarter. This
increase is primarily attributable to the relief of backlog
547812.2
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created by the reduction of production during the Company's implementation of
and conversion to an upgraded manufacturing system during the fourth quarter of
1997, and new business. Sales of Microtek products increased 2.8% in the 1998
Quarter as compared to the 1997 Quarter, primarily attributable to increased
market penetration at the hospital level. Sales of safety products declined
18.5% in the 1998 Quarter as compared to the 1997 Quarter, due to a substantial
reduction in purchases of LTS products by Allegiance, the primary distributor of
such products, and recent adverse regulatory developments. While the Company
plans to introduce a new LTS product to preserve its market share created by
LTS, the Company's ability to do so is subject to obtaining federal registration
of such product. The Company expects that its operating results will continue to
be adversely affected by reduced sales of LTS, and no assurances can be provided
that the Company will be able to maintain its market share on such products by
the registration and introduction of a new LTS product. White Knight sales
declined 14.2% in the 1998 Quarter as compared to the 1997 Quarter, due to a
competitor's purchase of a significant customer and the Company's decision to
de-emphasize marketing of White Knight products in favor of higher margin
products sold by its other subsidiaries. Sterile Concepts, a significant
customer of White Knight, was acquired by Maxxim, which is a product competitor
of the Company, in 1996. While Sterile Concepts remains contractually obligated
to purchase a yearly minimum of $5.1 million of products until June 30, 1998,
the Company expects that Sterile Concepts will no longer purchase White Knight
products. The Company is negotiating with Maxxim for a new supply agreement for
the sale of other products of the Company in settlement of the outstanding
obligations of Sterile Concepts to White Knight. No assurances can be provided
that the Company will be able to complete any such settlement negotiations. In
February 1998, the Company announced plans to sell its White Knight subsidiary,
which, if consummated, would significantly reduce the Company's net sales. See
"Risk Factors - Risks of Planned Divestitures" in the Company's Annual Report.
Included in the foregoing sales figures are $1.8 million in sales of OREX
Degradables during the 1998 Quarter as compared to $2.1 million in the 1997
Quarter. Sales of OREX Degradables in the 1998 Quarter did not contribute any
gross profits to the Company's operating results. During 1997, the Company
substantially reduced its selling and marketing efforts to increase sales of
OREX Degradables and instead focused on preserving its existing base of
hospitals purchasing OREX Degradables and evaluating means to exploit the market
position of OREX Degradables within its various market potentials. The Company
to date has not achieved any gross profits on its 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 objective is subject to risks
including the risks described in the Company's Annual Report under "Risk
Factors."
Gross profit in the 1998 Quarter was $10.6 million, or 25.8% of net sales as
compared to $9.2 million in the 1997 Quarter, or 22.9% of net sales. The 16.2%
improvement in gross profit is attributable to increased gross profits at the
Company's custom procedure tray and Microtek divisions on increased sales,
commencing utilization of manufacturing capacity at the Company's Abbeville
manufacturing plant for the production of traditional products on a short-term
basis,
547812.2
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and reduced depreciation expense due to impairment reserves recorded during the
fourth quarter of 1997.
Selling, general and administrative expenses were $9.8 million or 23.7% of net
sales in the 1998 Quarter as compared to $10.5 million or 26.3% of net sales in
the 1997 Quarter. The reduction in selling, general and administrative expense
is primarily attributed to implementation of the Company's operating plan that
focused on reorganizing marketing and sales efforts to achieve reductions in
selling and marketing expenses.
Research and development expenses were $681,000 in the 1998 Quarter or 1.7% of
net sales as compared to $768,000 in the 1997 Quarter or 1.9% of net sales. The
decline in research and development expense is primarily attributed to a decline
in expenses incurred in the development of fiber technology.
Amortization of intangibles was $527,000 in the 1998 Quarter as compared to
$956,000 in the 1997 Quarter. The decline in amortization expense was due to
charges recorded during the fourth quarter of 1997 for the impairment of White
Knight's carrying value.
The resulting loss from operations was $356,000 in the 1998 Quarter as compared
to a $3.1 million loss from operations in the 1997 Quarter.
Interest expense, net of interest income, was $858,000 in the 1998 Quarter as
compared to $792,000 in the 1997 Quarter. The increase in interest expense is
attributed to increases in the Company's borrowing interest rate combined with
lower interest income as a result of lower cash balances during the 1998
Quarter, offset by reduced interest expense as a result of reduced borrowings
during 1997.
Provision for income taxes reflect an expense of $76,000 in the 1998 Quarter as
compared to an expense of $4,000 in the 1997 Quarter.
The resulting net loss was $1.3 million for the 1998 Quarter as compared to a
net loss of $3.9 million for the 1997 Quarter.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's cash and equivalents totaled $9.8 million as
compared to $9.3 million at December 31, 1997.
During the 1998 Quarter, the Company used $1.7 million of cash in operating
activities as compared to a cash use of $3.6 million in the 1997 Quarter. The
use of cash in the 1998 Quarter is attributable to a combination of the
Company's operating loss, increases in accounts receivable as a result of an
incremental increase in sales of $5.6 million in the 1998 Quarter as compared to
the fourth quarter of 1997 and a decrease in accounts payable as a result of the
fourth quarter
547812.2
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1997 build-up of inventory at the Company's custom procedure tray division due
to systems conversion. The Company used $1.7 million in investing activities
during the 1998 Quarter as compared to $1.2 million used during the 1997
Quarter. This use of cash during the 1998 Quarter was primarily attributable to
several computer software implementations in progress. During the 1998 Quarter,
the Company generated approximately $3.8 million in cash from financing
activities, primarily through increasing indebtedness under the Company's
revolving line of credit, compared to cash provided by financing activities
approximating $1.9 million in the 1997 Quarter.
As more fully described in the Company's Annual Report on Form 10-K, 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 March 31, 1998 was
approximately $4.2 million. Outstanding borrowings under the revolving credit
facility were approximately $28.6 million at March 31, 1998. Outstanding
borrowings under the term loan facility were $11.8 million at March 31, 1998.
The Credit Agreement provides for the issuance of up to $3 million in letters of
credit. Outstanding letters of credit were $50,000 at March 31, 1998. In March
1998, the Bank and the Company amended the Credit Agreement to revise certain
covenants. While the Company does not currently anticipate that it will violate
the covenants of the Credit Agreement in the future, no assurances can be
provided that these or other violations of covenants contained in the Company's
Credit Agreement will not occur in the future or that, if such violations occur,
that the Bank will not elect to pursue its remedies under the Credit Agreement.
Any unwaived default by the Company under the Credit Agreement would be expected
to have a material adverse effect upon the Company. At March 31, 1998,
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 1998. Currently unforeseen
future developments and increased working capital requirements may require
additional debt financing or issuance of common stock in 1998 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 under "Risk Factors - Limited
Operating History; Net Losses", "-Risks of New Products", "Risks of Expansion",
"-Manufacturing & Supply Risks" and "Liquidity Risks".
547812.2
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ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
547812.2
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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 were no material
modifications in the instruments defining the rights of shareholders. During the
quarter for which this report is filed, none of the rights evidenced by the
shares of the Company's common stock were materially limited or qualified by the
issuance or modification of any other class of securities. During the quarter
for which this report is filed, the Company sold no equity securities of the
Company that were not registered under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
- ----------- -----------
3.1(1) Articles of Incorporation of Isolyser Company, Inc.
3.2(2) Articles of Amendment to Articles of Incorporation of
Isolyser Company, Inc.
3.3(1) Amended and Restated Bylaws of Isolyser Company, Inc.
3.4(3) First Amendment to Amended and Restated Bylaws of Isolyser
Company, Inc.
547812.2
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3.5(4) Second Amendment to Amended and Restated Bylaws of Isolyser
Company, Inc.
4.1(1) Specimen Certificate of Common Stock
10.1 Employment Agreement dated as of January 1, 1998, between
the Company and Terence N. Furness
10.2 Employment Agreement dated as of February 1, 1998, between
the Company and Migirdic Nalbantyan
27.1 Financial Data Schedule
- ------------------
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) No current reports on Form 8-K were filed during the quarter for which
this report is filed.
547812.2
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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 May 13, 1998.
ISOLYSER COMPANY, INC.
By:/s/ Terence N. Furness
---------------------------------
Terence N. Furness
President & CEO
(principal executive officer)
By:/s/ Peter A. Schmitt
---------------------------------
Peter A. Schmitt
Chief Financial Officer
(principal financial officer)
547812.2
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