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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 31, 1996
-or-
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
---------------- ----------------
Commission file number: 0-19524
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TECNOL MEDICAL PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1516861
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
7201 INDUSTRIAL PARK BLVD.
--------------------------
FORT WORTH, TEXAS 76180
------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (817) 581-6424
--------------
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 the past 90 days.
Yes X No
------- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
19,957,491 shares common stock, par value $.001, as of October 10, 1996
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TECNOL MEDICAL PRODUCTS, INC.
FORM 10-Q INDEX
PART I FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets as of
December 2, 1995, and August 31, 1996 . . . . . . . . . 3
Condensed Consolidated Statements of Income for the Quarters
and Year-to-Date Periods Ended September 2, 1995, and
August 31, 1996 . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the
Year-to-Date Periods Ended September 2, 1995,
and August 31, 1996 . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Interim
Financial Statements . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 10
PART II OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . 14
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Dec. 2, Aug. 31,
1995 1996
ASSETS ------------ ------------
------ (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 230,401 $ 7,107,957
Accounts receivable, net of allowance
for doubtful accounts of $857,000 in 1995
and $2,270,000 in 1996 22,712,480 21,664,612
Inventories 34,007,789 27,163,759
Prepaid income taxes -- 1,040,973
Other current assets 2,567,580 2,904,451
------------ ------------
Total current assets 59,518,250 59,881,752
NET PROPERTY, PLANT AND EQUIPMENT 43,505,530 47,975,476
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $2,290,000 in 1995 and $3,275,000 in 1996 35,194,066 39,087,418
Other purchased intangible assets, net of
accumulated amortization of $2,432,000 in
1995 and $2,974,000 in 1996 1,061,102 911,741
Patents and trademarks, net of accumulated
amortization of $476,000 in 1995 and $653,000
in 1996 2,278,506 2,706,260
Other 1,882,196 1,764,406
------------ ------------
Total other assets 40,415,870 44,469,825
------------ ------------
Total assets $143,439,650 $152,327,053
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements
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TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
Dec. 2, Aug. 31,
1995 1996
------------ ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,830,532 $ 7,236,807
Bank line of credit borrowings 3,530,000 --
Accrued expenses 2,911,498 4,400,870
Income taxes payable 372,343 --
Current maturities of long-term debt 2,771,610 3,733,916
------------ ------------
Total current liabilities 14,415,983 15,371,593
LONG-TERM DEBT, net of current maturities 13,000,581 10,032,189
DEFERRED INCOME TAXES 5,480,589 4,966,589
------------ ------------
Total liabilities 32,897,153 30,370,371
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,000,000
shares authorized, no shares issued -- --
Common stock, $.001 par value, 50,000,000
shares authorized, 21,091,021 shares issued
in 1995 and 21,116,980 shares issued in 1996 21,091 21,117
Additional paid-in capital 27,601,899 27,832,382
Retained earnings 87,754,688 98,985,567
------------ ------------
115,377,678 126,839,066
Less-treasury stock, at cost:
1,157,052 shares in 1995 and 1,159,489 shares in 1996 3,481,994 3,529,197
Less-unearned employee stock ownership shares,
90,000 shares in 1995 and 1996 1,353,187 1,353,187
------------ ------------
Total stockholders' equity 110,542,497 121,956,682
------------ ------------
Total liabilities and stockholders' equity $143,439,650 $152,327,053
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements
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TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
QUARTERS AND YEAR-TO-DATE PERIODS ENDED SEPTEMBER 2, 1995, AND AUGUST 31, 1996
Quarter Ended Year-To-Date
------------------------------ ------------------------------
Sept. 2, Aug. 31, Sept. 2, Aug. 31,
1995 1996 1995 1996
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
NET SALES $ 26,282,957 $ 35,970,954 $ 89,381,643 $ 107,552,956
COST OF GOODS SOLD 15,835,203 22,373,285 48,362,098 62,269,172
------------- ------------- ------------- -------------
Gross profit 10,447,754 13,597,669 41,019,545 45,283,784
SELLING EXPENSES 5,760,634 5,539,635 16,663,598 17,470,851
GENERAL AND ADMINISTRATIVE EXPENSES 2,072,995 3,211,113 5,896,884 7,227,971
RESEARCH AND DEVELOPMENT EXPENSES 325,934 412,157 1,161,849 1,273,577
------------- ------------- ------------- -------------
Income from operations 2,288,191 4,434,764 17,297,214 19,311,385
OTHER INCOME (EXPENSE):
Interest income 7,040 28,799 53,999 122,274
Interest expense (337,998) (153,384) (991,216) (753,874)
Litigation settlement expense -- (550,000) -- (550,000)
Other, net (383,296) (564,951) (1,123,760) (1,268,938)
------------- ------------- ------------- -------------
Total other income (expense) (714,254) (1,239,536) (2,060,977) (2,450,538)
------------- ------------- ------------- -------------
Income before provision
for income taxes 1,573,937 3,195,228 15,236,237 16,860,847
PROVISION FOR INCOME TAXES 579,048 1,063,824 5,595,642 5,629,968
------------- ------------- ------------- -------------
NET INCOME $ 994,889 $ 2,131,404 $ 9,640,595 $ 11,230,879
============= ============= ============= =============
Net income per common and common
equivalent share $ 0.05 $ 0.11 $ 0.48 $ 0.56
============= ============= ============= =============
Weighted average number of common and
common equivalent shares outstanding 20,154,793 20,163,764 20,106,594 20,153,648
============= ============= ============= =============
See accompanying Notes to Condensed Consolidated Financial Statements
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TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
YEAR-TO-DATE PERIODS ENDED SEPTEMBER 2, 1995, AND AUGUST 31, 1996
Year to Date
----------------------------
Sept. 2, Aug. 31,
1995 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,640,595 $ 11,230,879
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,412,809 3,160,381
Amortization 1,498,349 1,703,845
Increase (decrease) in deferred income taxes 210,000 (514,000)
Net change in assets and liabilities, excluding acquisitions-
Accounts receivable 4,734,249 1,047,868
Other current assets (518,873) (336,871)
Inventories (8,862,470) 7,396,551
Accounts payable 720,270 2,156,276
Accrued expenses (44,323) 1,487,046
Income taxes payable (1,510,120) (1,413,316)
------------ ------------
Total adjustments (360,109) 14,687,780
------------ ------------
Net cash provided by operating activities 9,280,486 25,918,659
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (7,689,596) (7,230,327)
Cash paid for acquisitions, net of cash acquired (1,360,088) (5,169,463)
Expenditures for patents and trademarks (348,171) (605,353)
Increase in other assets (1,764,152) (18,180)
------------ ------------
Net cash used in investing activities (11,162,007) (13,023,323)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank line of credit 2,245,000 (3,530,000)
Proceeds from bank loan -- 5,500,000
Principal payments on long-term debt (2,775,519) (8,171,086)
Net proceeds from exercise of stock options 453,724 183,306
------------ ------------
Net cash used in financing activities (76,795) (6,017,780)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,958,316) 6,877,556
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 2,559,997 230,401
------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 601,681 $ 7,107,957
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,053,496 $ 972,376
Income taxes $ 7,131,739 $ 7,779,663
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of note for acquisition of assets $ -- $ 665,000
See accompanying Notes to Condensed Consolidated Financial Statements
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TECNOL MEDICAL PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the generally accepted accounting principles
for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the quarter and year-to-date periods ended August 31,
1996 are not necessarily indicative of the results that may be expected for the
fiscal year ending November 30, 1996.
The Company's fiscal year is the fifty-two or fifty-three week period ending
on the Saturday nearest to November 30. The quarter and year-to-date periods
ended September 2, 1995, and August 31, 1996 each include thirteen and
thirty-nine weeks, respectively. The fiscal year ending November 30, 1996,
will include 52 weeks.
NOTE 2 -- NET INCOME PER SHARE
The following table reconciles the number of common shares shown as
outstanding on the consolidated balance sheet with the number of common and
common equivalent shares used in computing primary net income per share:
Quarter Year-to-Date
Sept. 2, Aug. 31, Sept. 2, Aug. 31,
1995 1996 1995 1996
---------- ---------- ---------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
Common shares outstanding 19,918,473 19,957,491 19,918,473 19,957,491
Effect of using weighted average common
and common equivalent shares
outstanding during the period (4,614) (916) (21,233) (11,595)
Effect of using weighted average
unearned ESOP shares (101,250) (71,250) (108,750) (78,750)
Effect of assuming exercise of
outstanding stock options based on the
treasury stock method 342,184 278,439 318,104 286,502
---------- ---------- ---------- ----------
Shares used in computing primary net
income per share 20,154,793 20,163,764 20,106,594 20,153,648
========== ========== ========== ==========
Primary and fully diluted net income per share are not materially different.
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TECNOL MEDICAL PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
Net income per common and common equivalent share was computed by dividing
net income by the weighted average number of shares of common stock and common
stock equivalents outstanding during the periods. Stock options are the only
common stock equivalents.
NOTE 3 -- LONG-TERM DEBT
Long-term debt at December 2, 1995, and August 31, 1996, consists of the
following:
Dec. 2, Aug. 31,
1995 1996
----------- -----------
Industrial Revenue Bonds $ 3,600,000 $ 3,600,000
Bank term loans 11,537,500 9,025,000
Other installment obligations 634,691 1,141,105
----------- -----------
15,772,191 13,766,105
Less-current maturities (2,771,610) (3,733,916)
----------- -----------
$13,000,581 $10,032,189
=========== ===========
NOTE 4 -- INVENTORIES
Inventories at December 2, 1995, and August 31, 1996, consist of the
following:
Dec. 2, Aug. 31,
1995 1996
----------- -----------
Raw materials $16,162,047 $13,444,502
Work-in-process 1,008,336 2,172,222
Finished goods 16,837,406 11,547,035
----------- -----------
$34,007,789 $27,163,759
=========== ===========
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 2, 1995, and August 31, 1996,
consists of the following:
Dec. 2, Aug. 31,
1995 1996
----------- -----------
Land $ 6,108,588 $ 6,118,717
Buildings and improvements 13,787,825 14,303,214
Automotive equipment 2,825,575 2,842,665
Manufacturing equipment 30,771,624 34,607,996
Office furniture and equipment 7,829,785 9,138,711
Construction-in-progress 3,138,329 5,080,750
----------- -----------
64,461,726 72,092,053
Less accumulated depreciation (20,956,196) (24,116,577)
----------- -----------
$43,505,530 $47,975,476
=========== ===========
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The Company increased the useful life on certain manufacturing equipment
from 10 years to 20 years, reducing depreciation expense on these machines by
approximately $600,000 for the nine month period of fiscal year 1996 as
compared to the nine month period of fiscal year 1995.
NOTE 6 -- CONTINGENCIES
On August 21, 1995, a class action lawsuit was filed in the United States
District Court for the Northern District of Texas against the Company and
several executive officers of the Company. The suit was brought by a
stockholder on his own behalf and on behalf of other persons who purchased the
Company's stock from January 10, 1995, to July 17, 1995. The suit claimed that
the defendants disseminated false and misleading statements to the investing
public with respect to a 1995 inventory reduction in the Company's products
taken by the Company's largest distributor, resulting in an artificially high
price for Company stock. On August 29, 1996, the Company and the individual
defendants tentatively agreed to settle the lawsuit for a total payment of $2.2
million. The agreement provides that approximately $550,000 of the settlement
amount will be paid by the Company and the balance will be paid by the
Company's directors' and officers' insurance carrier. The agreement is subject
to documentation and court approval.
The Company is a party to certain other litigation and claims arising out of
the conduct of its business. While the final outcome of any litigation cannot
be determined with certainty, management believes that the final outcome of any
current litigation will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This analysis of the Company's operations encompassing the quarter and
year-to-date periods ended September 2, 1995, and August 31, 1996, should be
considered in conjunction with the condensed consolidated balance sheets,
statements of operations and statements of cash flows.
Results of Operations
Net sales increased 36.9% from $26.3 million in the third quarter of fiscal
1995 to $36.0 million in the third quarter of fiscal 1996. In the third quarter
of fiscal 1995, the Company's largest distributor decreased its inventory of
the Company's products resulting in a reduction of sales for the Hospital
Products division of approximately $6.2 million. If sales in the third quarter
of fiscal 1995 had not been reduced by this unusual amount, the increase in
total Company sales for the third quarter of fiscal 1996 compared to the third
quarter of fiscal 1995 would have been approximately 10.7%. For the nine month
period, net sales increased 20.3% from $89.4 million in fiscal 1995 to $107.6
million in fiscal 1996. The growth in net sales was principally the result of
increases in unit sales of existing products, new product introductions and
increased sales from contract manufacturing. The Company experienced
significant sales increases in its Specialty Markets and Industrial/Safety
divisions for the third quarter of fiscal 1996 compared to the third quarter of
fiscal 1995 (21.9% and 18.5%, respectively) and the nine month period of fiscal
1996 compared to the nine month period of fiscal 1995 (24.2% and 29.3%,
respectively). The increase in sales for the Hospital Products division of
43.9% for the third quarter of fiscal 1996 as compared to the third quarter of
fiscal 1995 and of 14.1% for the nine month period in fiscal 1996 as compared
to the nine month period of fiscal 1995 should be considered in light of the
fact that sales were lower than normal for the third quarter of fiscal 1995.
Based on information received from distributors, management estimates that U.S.
Hospital purchases of the Company's Hospital Products division products from
distributors increased approximately 3% for the nine month period of fiscal
1996 as compared to the nine month period of fiscal 1995. The International
division experienced a sales increase of 12.5% for the third quarter of fiscal
1996 compared to the third quarter of fiscal 1995 and a sales increase of 9.0%
for the nine month period of fiscal 1996 compared to the nine month period of
fiscal 1995. Sales for the Orthopedic Products division increased 4.3% for
the third quarter of fiscal 1996 and decreased 1.0% for the nine month period
in fiscal 1996 as compared to fiscal 1995. The Orthopedic Products division
lost sales during fiscal 1996 in certain low margin SPORTS SUPPORTS(R)
products as prices were raised to increase overall profitability. In
addition, contract manufacturing generated sales of approximately $2.7 million
in the third quarter of fiscal 1996 and $6.9 million for the nine month period
of fiscal 1996 compared to approximately $82,000 for the third quarter of
fiscal 1995 and $338,000 for the nine month period of fiscal 1995.
The gross profit margin decreased from 39.8% in the third quarter of fiscal
1995 to 37.8% in the third quarter of fiscal 1996. For the nine month period,
the gross profit margin decreased from 45.9% in fiscal 1995 to 42.1% in fiscal
1996. The decrease in the gross profit margin during fiscal 1996 compared to
fiscal 1995 is primarily due to unabsorbed overhead costs associated with lower
production levels as the Company reduced its finished goods inventory,
inefficiencies of transitioning labor-intensive products to its Mexican
manufacturing facility, transition costs from the Sparta wound care
acquisition, and anticipated lower margins associated with contract
manufacturing (which represents 7.5% of total Company net sales for the third
quarter of fiscal 1996
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and 6.4% for the nine month period of fiscal 1996 as compared to 0.4% for
fiscal 1995). Additionally, the Company increased the reserve for obsolete
inventory during the third quarter of fiscal 1996 after performing a detailed
review of slow moving inventory. Adjustments to inventory recorded during the
third quarter of fiscal 1996, the majority of which were related to potentially
obsolete inventory, amounted to approximately $1 million. Gross profit margin
was positively impacted as the Company increased the useful life on certain
manufacturing equipment from 10 years to 20 years, reducing depreciation
expense on these machines by approximately $600,000 for the nine month period
of fiscal 1996 as compared to the nine month period of fiscal year 1995. The
Company expects gross profit margin to improve in fiscal 1997 as compared to
fiscal 1996 as higher anticipated production levels would provide more
efficient coverage of overhead expenses, the transition of labor-intensive
products to the Mexican manufacturing facility has been substantially
completed, the Sparta wound care operations are expected to transition to Texas
in the fourth quarter of fiscal 1996, and blood pressure cuff production is
expected to be automated. The expected improvement in gross profit margin will
be offset somewhat by an expected increase in contract manufacturing sales
which provide a lower gross profit margin than sales to distributors; however,
these sales require minimal selling expense.
Selling expenses decreased 3.8% from $5.8 million in the third quarter of
fiscal 1995 to $5.5 million in the third quarter of fiscal 1996. For the nine
month period, selling expenses increased 4.8% from $16.7 million in fiscal 1995
to $17.5 million in fiscal 1996. As a percentage of net sales, selling
expenses have decreased from 21.9% of net sales in the third quarter of fiscal
1995 to 15.4% of net sales in the third quarter of fiscal 1996 and decreased
from 18.6% in the first nine months of fiscal 1995 to 16.2% in the first nine
months of fiscal 1996. The decrease in selling expenses as a percentage of net
sales is primarily due to the fixed nature of most of these expenses as the
Company did not increase the number of its sales territories, and contract
manufacturing sales required minimal selling expenses.
General and administrative expenses increased 54.9% from $2.1 million in the
third quarter of fiscal 1995 to $3.2 million in the third quarter of fiscal
1996. During the third quarter of fiscal 1996, the Company incurred additional
bad debt expense of approximately $1.1 million attributable to rebate disputes
anticipated to result in uncollectible accounts receivable and the insolvency
of an Italian distributor. For the nine month period, general and
administrative expenses have increased 22.6% from $5.9 million in fiscal 1995
to $7.2 million in fiscal 1996. As a percentage of net sales, general and
administrative expenses were 7.9% in the third quarter of 1995 (6.6% in the
first nine months of 1995) compared to 8.9% in the third quarter of 1996 (6.7%
in the first nine months of 1996). Research and development expenses increased
by 26.5% from approximately $326,000 in the third quarter of fiscal 1995 to
approximately $412,000 in the third quarter of fiscal 1996. For the nine month
period, research and development expenses increased 9.6% from $1.2 million in
fiscal 1995 to $1.3 million in fiscal 1996.
Income from operations increased 93.8% from $2.3 million in the third
quarter of fiscal 1995 to $4.4 million in the third quarter of fiscal 1996.
The third quarter of fiscal year 1995 was negatively affected by the Company's
largest distributor reducing its inventory of the Company's products. For the
nine month period, income from operations increased 11.6% from $17.3 million in
fiscal 1995 to $19.3 million in fiscal 1996. Operating margin increased from
8.7% in the third quarter of fiscal year 1995 to 12.3% in the third quarter of
fiscal year 1996. For the nine month period, operating margin decreased from
19.4% in fiscal year 1995 to 18.0% in fiscal year 1996. The
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decrease in operating margin for the nine month period is primarily a result of
the decrease in gross profit margin and the increase in bad debt expense
previously discussed.
Other income (expense) represented expense of approximately $1,240,000 in
the third quarter of fiscal 1996, compared to expense of approximately $714,000
in the third quarter of fiscal 1995. During the third quarter of fiscal year
1996, the Company tentatively agreed to settle a class action lawsuit brought
against the Company and certain of its senior executives (see Part II, Item 1.
Legal Proceedings). In connection with the settlement agreement, which is
subject to documentation and court approval, the Company reserved and expensed
$550,000. For the nine month period, other expense totaled approximately $2.5
million in fiscal 1996, compared to approximately $2.1 million in fiscal 1995.
The Company has incurred lower interest expense, as certain long-term debt has
been repaid; and incurred increased amortization expense related to purchased
assets during fiscal 1996. Amortization expense included in other income
(expense) was approximately $396,000 in the third quarter of fiscal 1995,
compared to approximately $497,000 in the third quarter of fiscal 1996. For
the nine month period, this amortization expense was approximately $1,196,000
in 1995, compared to approximately $1,490,000 in 1996.
Tecnol's effective income tax rate decreased from 36.7% for the nine month
period of fiscal 1995 to 33.4% for the nine month period of fiscal 1996. This
decrease was primarily due to a revision in estimated reserves required for
federal income taxes.
Net income increased from $995,000 in the third quarter of fiscal 1995 to
$2.1 million in the third quarter of 1996 as a result of the foregoing factors.
For the nine month period, net income increased 16.5% from $9.6 million in
fiscal 1995 to $11.2 million in fiscal 1996. Net income per share increased
from $0.05 in the third quarter of fiscal 1995 to $0.11 in the third quarter of
fiscal 1996. For the nine month period, net income per share increased 16.7%
from $0.48 in fiscal 1995 to $0.56 in fiscal 1996.
There have been recent legislative proposals designed to significantly
reform the way health care services are provided in the United States. The
Company cannot predict whether any significant legislation will be enacted into
law or, if enacted, what effect the legislation will have on its business.
There are also changes in the structure and business methods within the health
care industry, initiated by the private sector through managed care and other
strategies. The objective of some of these changes is to reduce costs of
health care. These changes include changes in the methods and strategies used
in the sales, marketing, distribution and purchasing of medical devices. The
Company cannot quantify what effect, if any, these changes will have on its
business.
Liquidity and Capital Resources
The Company believes that cash flow from operations, together with existing
cash and cash equivalents and periodic utilization of its line of credit, will
be sufficient to meet working capital requirements and normal capital
expenditures for at least the next twelve months. The Company is currently in
the process of evaluating its facilities requirements for manufacturing,
warehousing of inventory, engineering, product development and office space.
Additions to or renovations of existing facilities are currently being
considered. During fiscal 1995, the Company paid approximately $1.8 million
for 25 acres of land to build a new distribution facility. Construction of this
facility is anticipated to take 18 months. The Company has entered into an
interim lease of distribution space and has deferred construction of the
distribution center while adequate interim
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space remains available. The distribution facility is currently in the design
phase and the cost has not yet been determined. The Company is planning to
build a second manufacturing facility in Mexico to be in operation by mid
fiscal 1997. The cost of this facility, including land, is estimated to be
approximately $2,000,000. The Company may use long-term financing for these
facilities projects and any acquisition opportunities that may arise.
The Company's working capital decreased from $45.1 million at the end of
fiscal 1995 to $44.5 million at August 31, 1996. Net cash generated by
operating activities for the fiscal year-to-date period ended August 31, 1996,
totaled $25.9 million. For the nine month period of fiscal 1996, cash
generated by operating activities, together with $5.5 million from borrowings
under a bank loan, was used to finance a $5.2 million acquisition, $7.2 million
in capital expenditures, repayment of long-term debt of $8.2 million, and $3.5
million repayment of the bank line of credit. Net cash and cash equivalents at
August 31, 1996, totaled approximately $7.1 million. Accounts receivable
decreased from $22.7 million at the end of fiscal 1995 to $21.7 million at
August 31, 1996, as the Company has increased collection efforts and increased
the reserve for uncollectible accounts. The decrease in inventory from $34.0
million on December 2, 1995, to $27.2 million on August 31, 1996, is due to
higher sales and lower production levels as the Company continued efforts to
reduce its inventory.
On August 31, 1996, the Company had no amounts outstanding and $10,000,000
available under its bank line of credit. The line of credit expires March 12,
1997. The Company also had $4,950,000 available under a reducing revolving
bank line of credit.
Forward-Looking Statements
Statements, either written or oral, which express the Company's expectation
for the future with respect to financial performance or operating strategies
can be identified as forward-looking statements. These statements are made to
provide the public with management's assessment of the Company's business.
Caution must be taken to consider these statements in light of the following
factors and assumptions: current and contemplated cost-containment measures
will be successfully implemented; products in development will be introduced
successfully and on schedule; the Company will make acquisitions which
contribute to profitability; key distributors will make purchases at the same
level as their sales; demand for the Company's products will follow recent
growth trends; the Company will continue to expand into markets other than U.S.
hospitals; competitors will not introduce new products which will substantially
reduce Tecnol's market share in its most significant product lines; conversion
from standard face masks to specialty face masks will continue in the markets
Tecnol serves; and the Company will continue to manufacture high quality
products at competitive costs and maintain or increase product pricing. In the
event any of the above factors and assumptions do not occur as management
anticipates, actual results could differ materially from the expectations
expressed in the forward-looking statements.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
On August 21, 1995, a lawsuit styled Brian Freeman v. Vance M. Hubbard,
Kirk Brunson, Valerie A. Hubbard, David Radunsky, Paul N. Brost, Douglas J.
Inman, James H. Weaver and Tecnol Medical Products, Inc., Case No. 4-95
CV-617-Y, was filed in the United States District Court for the Northern
District of Texas, Fort Worth Division. By an order dated November 30, 1995,
Paul N. Brost, Douglas J. Inman and James H. Weaver were dismissed as
defendants from the suit. All remaining individual defendants are executive
officers and directors of the Company. The suit is a class action brought by a
stockholder on his own behalf and on behalf of all other persons who purchased
the stock of the Company during the period beginning on January 10, 1995, and
ending on July 17, 1995. The suit seeks an unspecified amount of damages,
claiming that the defendants disseminated false and misleading statements to
the investing public with respect to a 1995 inventory reduction in the
Company's products taken by the Company's largest distributor, resulting in an
artificially high price for Company stock. On August 29, 1996, the Company and
the individual defendants tentatively agreed to settle the lawsuit for a total
payment of $2.2 million. The agreement provides that approximately $550,000 of
the settlement amount will be paid by the Company and the balance will be
covered by the Company's directors' and officers' insurance carrier. The
agreement is subject to documentation and court approval.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - The following exhibits are filed as part of this report:
10(a)(3) Amendment to 1991 Tecnol Stock Option Plan adopted June
20, 1996
** 10(k) Jeffrey A. Nick Incentive Stock Option, Trade Secret,
Invention and Non-Competition Agreement dated November
20, 1995
10(o)(1) Form of Incentive Stock Option, Trade Secret, Invention
and Non-Competition Agreement
27 Financial Data Schedule
** Management contract or compensatory plan or arrangement.
(b) No reports on Form 8-K were filed during the quarter ended August 31,
1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECNOL MEDICAL PRODUCTS, INC.
---------------------------------------
(Registrant)
Date: October 11, 1996 /s/David Radunsky
------------------- ---------------------------------------
DAVID RADUNSKY, Chief Operating Officer
Date: October 11, 1996 /s/Jeffrey A. Nick
------------------- ---------------------------------------
JEFFREY A. NICK, Vice President Finance
and Accounting
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INDEX TO EXHIBITS
Exhibit
Number Description
- --------- -----------
10(a)(3) Amendment to 1991 Tecnol Stock Option Plan adopted June
20, 1996
** 10(k) Jeffrey A. Nick Incentive Stock Option, Trade Secret,
Invention and Non-Competition Agreement dated November
20, 1995
10(o)(1) Form of Incentive Stock Option, Trade Secret, Invention
and Non-Competition Agreement
27 Financial Data Schedule
** Management contract or compensatory plan or arrangement.