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, 1999 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.)
4320 International Boulevard
Technology Park
Norcross, Georgia 30093
(Address of principal executive offices)
(770) 806-9898
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at May 14, 1999
- ----- ---------------------------
Common Stock, $.001 par value 40,077,412
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ISOLYSER COMPANY, INC.
Condensed Consolidated Balance Sheets
(in thousands)
March 31, 1999 December 31, 1998
------------------------ --------------------------
Assets unaudited
Current assets:
Cash and cash equivalents $ 5,801 $ 7,325
Accounts receivable, net 22,105 18,118
Inventories, net 24,652 23,647
Prepaid expenses and other assets 1,791 1,413
Net assets held for sale 8,000 9,873
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Total current assets 62,349 60,376
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Property and equipment 31,407 31,072
Less accumulated depreciation (16,504) (15,511)
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Property and equipment, net 14,903 15,561
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Intangibles and other assets, net 33,315 33,581
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$ 110,567 $ 109,518
======================= =========================
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt $ 9,596 $ 9,395
Accounts payable 7,281 6,247
Bank overdraft 548 361
Accrued expenses 5,839 5,250
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Total current liabilities 23,264 21,253
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Long term debt 18,624 19,376
Deferred rent 191 214
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Total liabilities 42,079 40,843
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Shareholders' equity
Common stock 40 40
Additional paid-in capital 203,492 203,364
Accumulated deficit (134,347) (133,980)
Cumulative translation adjustment (23) (75)
Unearned shares restricted to employee stock
ownership plan (240) (240)
----------------------- -------------------------
68,922 69,109
Treasury shares, at cost (434) (434)
----------------------- -------------------------
Total shareholders' equity 68,488 68,675
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$ 110,567 $ 109,518
======================= =========================
See accompanying notes
ISOLYSER COMPANY, INC.
Condensed Consolidated Statement of Operations
(in thousands, except per share data)
(unaudited)
Three months ended Three months ended
March 31, 1999 March 31, 1998
----------------------- ---------------------------
Net sales $ 34,769 $ 41,230
Cost of goods sold 23,799 30,588
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Gross profit 10,970 10,642
Operating expenses:
Selling, general and administrative 9,651 9,790
Research and development 455 681
Amortization of intangibles 452 527
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Total operating expenses 10,558 10,998
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Income (loss) from operations 412 (356)
Interest income 51 92
Interest expense (625) (950)
Income from joint venture - 3
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Loss before income tax provision (162) (1,211)
Income tax provision 205 76
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Net loss $ (367) $ (1,287)
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Other comprehensive income (loss)
Foreign currency translation gain $ 51 $ 1
---------------------- --------------------------
Comprehensive loss $ (316) $ (1,286)
====================== ==========================
Net loss per common share - Basic and Diluted $ (0.01) $ (0.03)
Weighted average number of common shares
outstanding 39,836 39,512
====================== ==========================
See accompanying notes.
ISOLYSER COMPANY, INC.
Condensed Statement of Cash Flows
(in thousands)
(unaudited)
Three months ended Three months ended
March 31, 1999 March 31, 1998
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Cash flows from operating activities:
Net loss $ (367) $ (1,287)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 982 965
Amortization 441 527
Provision for doubtful accounts 33 66
Loss on disposal of property and equipment -- 10
Changes in assets and liabilities (1,881) (1,956)
------------------------ -------------------------
Net cash used in operating activities (792) (1,675)
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Cash flows from investing activities:
Additions to property and equipment (400) (1,651)
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Net cash used in investing activities (400) (1,651)
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Cash flows from financing activities:
Net (repayment) borrowings under credit (543) 3,270
agreements
Increase in bank overdraft 469 194
Proceeds from the issuance of common stock 128 255
Issuance of common stock pursuant to 401(k)
Plan -- 121
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Net cash provided by financing activities 54 3,840
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Net (decrease) increase in cash and cash
equivalents (1,138) 514
Cash and cash equivalents at beginning of period 7,325 9,299
------------------------ -------------------------
Cash and cash equivalents at end of period (1) $ 6,187 $ 9,813
======================== =========================
Comments
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(1) Cash and cash equivalents at March 31, 1999 includes $386,000
of cash classified as net assets held for sale.
See accompanying notes.
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 period ended December 31, 1998.
2) Inventories are stated at the lower of cost or market and are summarized as
follows:
March 31, 1999 December 31, 1998
------------------------------ ----------------------------
Raw Materials and Supplies $ 18,227,000 $ 16,959,000
Work in Process 1,770,000 1,747,000
Finished Goods 21,155,000 21,864,000
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Total 41,152,000 40,570,000
Reserve for excess, slow moving obsolete inventory (16,500,000) (16,923,000)
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Total $ 24,652,000 $ 23,647,000
============================== ============================
At March 31, 1999 and December 31, 1998 the net OREX inventory is approximately
$4,597,000 and $4,920,000 respectively.
3) The net assets of the White Knight subsidiary at March 31, 1999 and the White
Knight subsidiary and the Company's former headquarters at December 31, 1998 are
classified as held for sale in the accompanying condensed consolidated financial
statements, and are comprised of the following:
March 31, 1999 December 31, 1998
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Assets:
Cash $ 386,000 $ -
Accounts Receivable 3,760,000 3,589,000
Inventory 5,440,000 6,744,000
Prepaid expense and other assets 55,000 71,000
Property and equipment, net - 2,000,000
Other assets 63,000 73,000
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Total Assets 9,704,000 12,447,000
March 31, 1999 December 31, 1998
------------------------------- ----------------------------
Liabilities:
Accounts payable $ 946,000 $ 1,441,000
Bank overdraft 282,000 361,000
Accrued expenses 463,000 786,000
Long-term debt 13,000 16,000
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Total liabilities 1,704,000 2,604,000
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Net assets held for sale $ 8,000,000 $ 9,873,000
=============================== ============================
The Company anticipates disposing of White Knight in 1999.
The following represents the results of operations of the above noted entities
for the three months ended March 31, 1999 and 1998:
1999 1998
------------------------------ ----------------------------
Net Sales $6,636,000 $11,592,000
Net Loss (401,000) (1,850,927)
Net Loss Per Share - Basic and Diluted (0.01) (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.
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, 1999 (the "1999 Quarter") were
$34.8 million compared to $41.2 million for the three months ended March 31,
1998 (the "1998 Quarter"), a decrease of 15.5%. Excluding from the 1998 Quarter
net sales of the Company's White Knight Industrial, SafeWaste and Struble &
Moffitt businesses which were disposed of during 1998, net sales for the 1999
Quarter decreased 6.0% as compared to the 1998 Quarter. Sales of custom
procedure trays and related products declined 21.2% in the 1999 Quarter as
compared to the 1998 Quarter. This decline was primarily attributed to relief of
backlog in the 1998 Quarter with no comparable backlog in the 1999 quarter, and
competition with other procedure tray companies and group purchasing
organizations. Sales of Microtek products increased 18.3% during the 1999
Quarter as compared to the 1998 Quarter primarily as a result of increased sales
from a short term manufacturing contract arrangement with a customer and new
business. Sales of safety products increased 15.7% during the 1999 Quarter as
compared to the 1998 Quarter as a result of substantially increased purchases
from a distributor. The decline in sales at the Company's White Knight division
of 8.6% during the 1999 Quarter was primarily due to the Company's decision to
de-emphasize marketing of White Knight products in favor of higher margin
products sold by its other subsidiaries. The Company has announced plans to sell
White Knight which, if consummated, would significantly reduce the Company's net
sales. See "Risk Factors - Risks of Planned Divestitures" in the Company's
Annual Report on Form 10-K for the period ended December 31, 1998 (the "Annual
Report").
Included in the foregoing sales figures are $800,000 in sales of OREX
Degradables during the 1999 Quarter as compared to $1.8 million in the 1998
Quarter. Sales of OREX Degradables during the 1999 Quarter and 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. During 1998, the Company substantially revised its strategy to
commercialize its OREX products. As a result of these efforts, the Company is in
the process of introducing new degradable products to the healthcare industry
under the mark Enviroguard which uses a hydroentanglement manufacturing process
to produce a spunlaced fabric. The Company's future performance will depend to a
substantial degree upon market acceptance of and the Company's ability to
successfully manufacture, market, deliver and expand its OREX Degradables line
of products at acceptable profit margins. There can be no assurances that OREX
Degradables will achieve or maintain substantial acceptance in their target
markets. See "Risk Factors --Limited and Operating History; Net Losses," "-Risks
of New Products" and "-Manufacturing and Supply Risks" in the Company's Annual
Report.
Gross profit in the 1999 Quarter was $11.0 million or 31.6% of net sales as
compared to $10.6 million or 25.8% of net sales in the 1998 Quarter. The
improvement in gross profit is attributable to improved gross profit at the
Company's Microtek subsidiary as a result of increased sales as well as sales
mix, and reduced manufacturing costs associated with the sale of the Company's
Arden and Abbeville OREX manufacturing facilities in August 1998 and October
1998, respectively.
Selling, general and administrative expenses were $9.7 million or 27.8% of net
sales in the 1999 Quarter as compared to $9.8 million or 23.7% of net sales in
the 1998 Quarter. The percentage increase is primarily due to costs associated
with the Company's Enviroguard product and increased commissions as a result of
more profitable sales mix.
Research and development expenses were $455,000 in the 1999 Quarter or 1.3% of
net sales as compared to $681,000 or 1.7% of net sales in the 1998 Quarter. The
decline in research and development expense is primarily related to reduced
costs associated with the development and registration of the Company's LTS Plus
product as well as reduced development cost associated with the introduction of
the Company's Enviroguard product line.
Amortization of intangibles was $452,000 in the 1999 Quarter as compared to
$527,000 in the 1998 Quarter. The decline in amortization expense was due to the
sale of the Company's White Knight Industrial business during 1998.
The resulting income from operations was $412,000 in the 1999 Quarter as
compared to a $356,000 loss from operations in the 1998 Quarter.
Interest expense, net of interest income, was $574,000 in the 1999 Quarter as
compared to $858,000 in the 1998 Quarter. The decline in interest expense is
attributed to reduced interest expense as a result of reduced borrowings during
the 1999 Quarter offset by increases in the Company's borrowing interest rate
combined with lower interest income as a result of lower cash balances during
the 1999 Quarter.
Provision for income taxes reflects an expense of $205,000 for the 1999 Quarter
as compared to an expense of $76,000 in the 1998 Quarter.
The resulting net loss was $367,000 for the 1999 Quarter as compared to a net
loss of $1.3 million for the 1998 Quarter.
Liquidity and Capital Resources
At March 31, 1999, the Company's cash and equivalents totaled $6.2 million
including $386,000 in cash at the Company's White Knight subsidiary classified
as assets held for sale, as compared to $7.3 million at December 31, 1998.
During the 1999 Quarter, the Company used $792,000 of cash in operating
activities as compared to a use of $1.7 million in the 1998 Quarter. The use of
cash in the 1999 Quarter is primarily attributable to increased accounts
receivable and inventory as a result of an approximate $2.2 million increase in
net sales in the 1999 Quarter as compared to the fourth quarter of 1998,
partially offset by lower net losses and increases in accruals and accounts
payable. The Company used $400,000 in investing activities during the 1999
Quarter as compared to $1.7 million used during the 1998 Quarter. The decline in
cash used in investing activities is due to substantial completion of the
Company's investment in information systems at its Microtek and MedSurg
subsidiaries. During the 1999 Quarter, the Company provided approximately
$54,000 in cash from financing activities compared to $3.8 million in the 1998
Quarter.
As more fully described in the Company's Annual Report, the Company maintains a
$28 million credit agreement (as amended to date, the "Credit Agreement")
consisting of a revolving credit facility maturing on June 30, 2000. Current
additional borrowing availability under the revolving credit facility at March
31, 1999 was approximately $2 million. Outstanding borrowings under the
revolving credit facility were approximately $22.7 million at March 31, 1999.
The Credit Agreement provides for the issuance of up to $3 million in letters of
credit. Outstanding letters of credit were $94,000 at March 31, 1999. In March
1999, the Bank and the Company amended the Credit Agreement to reduce the credit
facility, revise certain covenants and extend the term of the facility. The
Company is required by the Credit Agreement to reduce its revolving facility
borrowings by approximately $7.5 million from balance existing at March 31, 1999
by September 30, 1999. At March 31, 1999, the Company was in compliance with the
covenants contained in its Credit Agreement.
On March 31, 1999, the Company disposed of its former corporate headquarters for
proceeds of approximately $1.9 million. These proceeds were subsequently used to
reduce outstanding borrowings under the Company's Credit Agreement.
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, funds budgeted to be generated from operations and proceeds from sales
of assets will be adequate to meet its liquidity and capital requirements
through 1999. Currently unforeseen future developments and increased working
capital requirements may require additional debt financing or issuance of common
stock in 1999 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.
Year 2000 Issue
Many companies are affected by the year 2000 issue, which could cause equipment
reliant upon computer applications to fail or create erroneous results due to
the failure of computer programs to correctly identify the year 2000 after
December 31, 1999.
During 1996, as part of a program to install improved information systems on a
Company-wide basis, the Company initiated a conversion from existing management
information software to programs that are year 2000 compliant. In the fourth
quarter of 1997, the Company's MedSurg operations completed substantially all of
its conversion to a year 2000 compliant system, with certain minor conversions
to be completed in third quarter, 1999. The Company's Microtek operations
substantially completed such conversion in September 1998. The Company's
corporate operations are scheduled to complete such conversion by June, 1999. If
the Company does not sell its remaining White Knight business, the Company has
scheduled to complete such conversion for the White Knight business by third
quarter, 1999. Costs incurred to date for such conversions approximate $7.9
million of which $2.5 million have been expensed with $5.4 million representing
capital expenditures. The Company estimates that costs remaining to be incurred
before scheduled completion of such conversion will be approximately $93,000,
all of which are expected to be capitalized. The Company has begun, but not
completed, a program to evaluate year 2000 compliance of non-information
technology assets. The Company has scheduled to complete compliance solutions on
such assets by third quarter 1999, and estimates related costs at less than
$200,000. Other than such costs, the Company does not believe its efforts to
become year 2000 compliant will have a material adverse impact upon the Company.
Estimated costs to be incurred and the schedule to become year 2000 compliant
are subject to uncertainties and risks (including, for example, failure to
timely identify and correct non-compliant systems, encountering unanticipated
delays or impediments to conversion and disruptions of ordinary business
operations), and the failure of the Company to complete such conversion within
budget and on schedule could adversely affect the Company.
The Company is not currently aware of any of its customers, product users,
suppliers or other vendors which are non-compliant with year 2000 in a manner
which would have an adverse effect upon the Company or its operations; however,
the Company has not yet completed its inquiries to third parties concerning
their compliance with the year 2000 issue. The Company plans to complete such
inquiries in the second and third quarters of 1999. The Company continues to
evaluate the potential impact upon the Company of noncompliance with year 2000
issues by third parties with which the Company deals. The Company's customers
are primarily healthcare institutions or vendors to such institutions.
The Company has not adopted a specific contingency plan to address year 2000
non-compliance issues. The Company's experience in installing replacement
information systems has caused the Company to become familiar with the
consequences of reliance on such technology and short term solutions for
temporary interruptions to such systems. If the Company experiences critical
interruptions to its information systems or technologies, the Company will be
required to engage additional clerical services and would expect to incur
additional distribution expenses which could have a material adverse effect on
the Company's operating results.
The statements made under this caption are Year 2000 Readiness Disclosure under
the Year 2000 Information and Readiness Disclosure Act.
Forward Looking Statements
Statements made in this Management's Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking statements made
under the provisions of the Private Securities Litigation Reform Act. The
Company's actual results could differ materially from such forward-looking
statements and such results will be affected by risks described in the Company's
Annual Report on Form 10-K including, without limitation, those described under
"Risk Factors - Limited Operating History; Net Losses", "-Risks of New
Products", "-Risks of Planned Divestitures", "-Manufacturing & Supply Risks" and
"-Liquidity Risks".
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
The Company's greatest sensitivity on 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, 1999, $22.7 million of the Company's long-term and short-term debt
bears interest at floating rates. Because these rates are variable, an increase
in interest rates would result in additional interest expense and a reduction in
interest rates would result in reduced interest expense.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
During the quarter for which this report is filed, there were no material
modifications in the instruments defining the rights of shareholders. During the
quarter for which this report is filed, none of the rights evidenced by the
shares of the Company's common stock were materially limited or qualified by the
issuance or modification of any other class of securities. During the quarter
for which this report is filed, the Company sold no equity securities of the
Company that were not registered under the Securities Act of 1933, as amended.
Item 3. Default Upon Senior Securities
Not applicable.
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.
3.5(4) Second Amendment to Amended and Restated Bylaws of Isolyser Company,
Inc.
4.1(1) Specimen Certificate of Common Stock
27.1 Financial Data Schedule
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(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.
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 17, 1999.
ISOLYSER COMPANY, INC.
By: /s/ MIGIRDIC NALBANTYAN
-------------------------------
Migirdic Nalbantyan
President & CEO
(principal executive officer)
By: /s/ PETER A. SCHMITT
--------------------------------
Peter A. Schmitt
Chief Financial Officer
(principal financial officer)