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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 March 1, 1997
-or-
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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------------------------------.
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.
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FORT WORTH, TEXAS 76180
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(Address of principal executive offices)
Registrant's telephone number, including area code: (817) 581-6424
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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.
19,976,074 shares common stock, par value $.001, as of April 8, 1997
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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
November 30, 1996, and March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income for the Quarters
Ended March 2, 1996, and March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the Quarters
Ended March 2, 1996, and March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Interim Financial Statements . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Nov. 30, Mar. 1,
1996 1997
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,355,033 $ 7,698,842
Accounts receivable, net of allowance
for doubtful accounts of $1,497,000 in 1996
and $1,414,000 in 1997 24,858,157 26,032,419
Inventories 32,036,334 31,875,159
Prepaid expenses 620,807 667,234
Other current assets 3,497,720 3,591,197
------------ ------------
Total current assets 65,368,051 69,864,851
NET PROPERTY, PLANT, AND EQUIPMENT 48,671,113 50,023,878
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $3,609,000 in 1996 and $3,950,000 in 1997 39,618,824 39,766,178
Other purchased intangible assets, net of
accumulated amortization of $3,140,000 in
1996 and $3,280,000 in 1997 772,257 631,342
Patents and trademarks, net of accumulated
amortization of $728,000 in 1996 and $811,000
in 1997 3,358,266 3,392,677
Other 1,711,193 1,718,317
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Total other assets 45,460,540 45,508,514
------------ ------------
Total assets $159,499,704 $165,397,243
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements
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TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
Nov. 30, Mar. 1,
1996 1997
------------ ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,800,378 $ 8,893,408
Accrued expenses 4,662,419 3,520,788
Income taxes payable 719,042 3,058,831
Current maturities of long-term debt 3,641,287 4,125,726
------------ ------------
Total current liabilities 16,823,126 19,598,753
LONG-TERM DEBT, net of current maturities 9,264,736 7,462,035
DEFERRED INCOME TAXES 6,179,599 5,969,599
------------ ------------
Total liabilities 32,267,461 33,030,387
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, 21,116,980 shares issued
in 1996 and 21,135,563 shares issued in 1997 21,117 21,136
Additional paid-in capital 27,886,864 28,097,452
Retained earnings 103,755,583 108,679,589
------------ ------------
131,663,564 136,798,177
Less-treasury stock, at cost:
1,159,489 shares in 1996 and 1997 3,529,197 3,529,197
Less-unearned employee stock ownership shares,
60,000 shares in 1996 and 1997 902,124 902,124
------------ ------------
Total stockholders' equity 127,232,243 132,366,856
------------ ------------
Total liabilities and stockholders' equity $159,499,704 $165,397,243
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements
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TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
QUARTERS ENDED MARCH 2, 1996, AND MARCH 1, 1997
Quarter Ended
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Mar. 2, Mar. 1,
1996 1997
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(unaudited) (unaudited)
NET SALES $ 35,243,621 $ 37,310,507
COST OF GOODS SOLD 19,578,729 20,728,710
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Gross profit 15,664,892 16,581,797
SELLING EXPENSES 5,688,696 5,900,710
GENERAL AND ADMINISTRATIVE EXPENSES 2,068,259 2,339,475
RESEARCH AND DEVELOPMENT EXPENSES 457,991 410,263
------------ ------------
Income from operations 7,449,946 7,931,349
OTHER INCOME (EXPENSE):
Interest income 5,469 85,159
Interest expense (385,795) (108,946)
Amortization expense and other, net (457,520) (483,767)
------------ ------------
Total other income (expense) (837,846) (507,554)
------------ ------------
Income before provision
for income taxes 6,612,100 7,423,795
PROVISION FOR INCOME TAXES 2,277,974 2,499,789
------------ ------------
NET INCOME $ 4,334,126 $ 4,924,006
============ ============
Net income per common and common
equivalent share $ 0.22 $ 0.25
============ ============
Weighted average number of common and
common equivalent shares outstanding 20,127,562 20,083,764
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements
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TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTERS ENDED MARCH 2, 1996, AND MARCH 1, 1997
Quarter Ended
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Mar. 2, Mar. 1,
1996 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,334,126 $ 4,924,006
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,306,165 1,077,360
Amortization 578,665 568,293
Decrease in deferred income taxes (200,000) (210,000)
Net change in assets and liabilities, excluding acquisitions-
Accounts receivable (5,598,633) (1,198,345)
Inventories 1,798,281 (23,241)
Other current assets (324,778) (139,904)
Accounts payable 2,510,327 1,130,030
Accrued expenses (741,605) (1,141,639)
Income taxes payable 657,437 2,339,789
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Total adjustments (14,141) 2,402,343
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Net cash provided by operating activities 4,319,985 7,326,349
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (2,324,480) (2,669,024)
Cash paid for acquisitions, net of cash acquired (5,169,463) --
Expenditures for patents and trademarks (22,269) (117,636)
Increase in other assets (716) (235,204)
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Net cash used in investing activities (7,516,928) (3,021,864)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in bank line of credit (2,055,000) --
Proceeds from bank loan 5,500,000 --
Principal payments on long-term debt (220,959) (1,171,283)
Net proceeds from exercise of stock options 54,175 210,607
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Net cash provided by (used in) financing activities 3,278,216 (960,676)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 81,273 3,343,809
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 230,401 4,355,033
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CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 311,674 $ 7,698,842
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SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 314,571 $ 210,117
Income taxes $ 1,820,537 $ 370,000
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 ended March 1, 1997, are not necessarily
indicative of the results that may be expected for the fiscal year ending
November 29, 1997.
The Company's fiscal year is the fifty-two or fifty-three week period ending
on the Saturday nearest to November 30. The quarter periods ended March 2,
1996, and March 1, 1997, each include thirteen weeks. The fiscal year ending
November 29, 1997, 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
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Mar. 2, Mar. 1,
1996 1997
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(unaudited) (unaudited)
Common shares outstanding 19,939,517 19,976,074
Effect of using weighted average common and common equivalent
shares outstanding during the period (2,552) (2,367)
Effect of using weighted average unearned ESOP shares (86,250) (56,250)
Effect of assuming exercise of outstanding stock options based on
the treasury stock method 276,847 166,307
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Shares used in computing primary net income per share 20,127,562 20,083,764
=========== ===========
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 November 30, 1996, and March 1, 1997, consists of the
following:
Nov. 30, Mar. 1,
1996 1997
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Industrial Revenue Bonds $ 3,600,000 $ 3,400,000
Bank term loans 8,187,500 7,350,000
Other installment obligations 1,118,523 837,761
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12,906,023 11,587,761
Less-current maturities (3,641,287) (4,125,726)
------------ ------------
$ 9,264,736 $ 7,462,035
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NOTE 4 -- INVENTORIES
Inventories at November 30, 1996, and March 1, 1997, consist of the
following:
Nov. 30, Mar. 1,
1996 1997
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Raw materials $15,212,956 $15,036,450
Work-in-process 1,983,973 2,775,226
Finished goods 14,839,405 14,063,483
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$32,036,334 $31,875,159
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NOTE 5 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at November 30, 1996, and March 1, 1997,
consists of the following:
Nov. 30, Mar. 1,
1996 1997
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Land $ 6,247,752 $ 6,591,555
Buildings and improvements 14,563,836 14,588,472
Automotive equipment 2,913,496 3,008,625
Manufacturing equipment 36,510,853 36,254,613
Office furniture and equipment 9,267,496 9,392,416
Construction-in-progress 4,446,416 6,544,293
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73,949,849 76,379,974
Less accumulated depreciation (25,278,736) (26,356,096)
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$48,671,113 $50,023,878
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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 three months
ended March 2, 1996, and March 1, 1997, 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 5.9% from $35.2 million in the first quarter of fiscal
1996 to $37.3 million in the first quarter of fiscal 1997. 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 International division experienced a significant sales
increase of approximately 21% for the first quarter of fiscal 1997 compared to
the first quarter of fiscal 1996. Sales of the U.S. Hospital and Industrial
Products divisions for the first quarter of fiscal 1997 were consistent with
the first quarter of fiscal 1996. Sales of the Orthopedic and Specialty
Markets divisions reflected slight decreases for the first quarter of fiscal
1997 compared to the first quarter of fiscal 1996. Contract manufacturing
generated sales of approximately $2.6 million in the first quarter of fiscal
1997 compared to approximately $1.3 million for the first quarter of fiscal
1996.
The gross profit margin was 44.4% for the first quarter of fiscal 1997 and
the first quarter of fiscal 1996. Gross profit margin was negatively impacted
by approximately 1.0% due to sales increases in contract manufacturing, as
contract manufacturing provides a lower gross profit margin than sales to
distributors. Contract manufacturing represented approximately 7.0% of total
sales in the first quarter of fiscal 1997 compared to 3.8% of total net sales
in the first quarter of fiscal 1996. Operating income from contract
manufacturing is consistent with the corporate average, as minimal selling
expenses are required. The negative impact to gross profit margin from
increased contract manufacturing was offset by improvements in manufacturing
productivity resulting from reduced turnover of employees and less overtime
incurred, along with efficiencies gained from moving all wound care production
to Texas. Additionally, gross profit margin was positively impacted as the
Company increased the useful life on certain manufacturing equipment from 10
years to 20 years during the second quarter of fiscal 1996, reducing
depreciation expense on these machines by approximately $200,000 for the first
quarter of fiscal 1997 as compared to the first quarter of fiscal year 1996.
Selling expenses increased 3.7% from $5.7 million in the first quarter of
fiscal 1996 to $5.9 million in the first quarter of fiscal 1997. As a
percentage of net sales, selling expenses decreased from 16.1% of net sales in
the first quarter of fiscal 1996 to 15.8% of net sales in the first quarter of
fiscal 1997. 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 require minimal selling expenses.
General and administrative expenses increased 13.1% from $2.1 million in the
first quarter of fiscal 1996 to $2.3 million in the first quarter of fiscal
1997. As a percentage of net sales, general and administrative expenses were
5.9% in the first quarter of 1996 compared to 6.3% in the first quarter of
1997. Research and development expenses decreased by 10.4% from approximately
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$458,000 in the first quarter of fiscal 1996 to approximately $410,000 in the
first quarter of fiscal 1997.
Income from operations increased 6.5% from $7.4 million in the first quarter
of fiscal 1996 to $7.9 million in the first quarter of fiscal 1997. Operating
margin increased from 21.1% in the first quarter of fiscal year 1996 to 21.3%
in the first quarter of fiscal year 1997.
Other income (expense) represented expense of approximately $508,000 in the
first quarter of fiscal 1997, compared to expense of approximately $838,000 in
the first quarter of fiscal 1996. The Company has incurred lower interest
expense, as certain long-term debt and borrowings under the line of credit have
been repaid. Amortization expense included in other income (expense) was
approximately $489,000 in the first quarter of fiscal 1996, compared to
approximately $482,000 in the first quarter of fiscal 1997.
Tecnol's effective income tax rate decreased from 34.5% in the first quarter
of fiscal 1996 to 33.7% in the first quarter of fiscal 1997. The effective tax
rates for the first quarter of fiscal 1997 and 1996 are lower than the
statutory rate due to revisions in estimated reserves required for federal
income taxes. Net income in the first quarter of 1997 was favorably impacted
by $0.01 per share due to a decrease in the Company's income tax reserves. The
Company expects the effective tax rate to be approximately 36.5% for the
remainder of 1997.
Net income increased 13.6% from $4.3 million in the first quarter of fiscal
1996 to $4.9 million in the first quarter of fiscal 1997 as a result of the
foregoing factors. Net income per share increased 13.6% from $0.22 in the first
quarter of fiscal 1996 to $0.25 in the first quarter of fiscal 1997.
Over the past few years, legislation designed to significantly reform the
way health care services are provided in the United States has been proposed.
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 hospital group purchasing
organizations, managed care, and other strategies. The objective of some of
these changes is to reduce costs of health care, including the hospital cost of
medical devices. 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, existing cash, 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.
Tecnol owns 25 acres of land in Fort Worth, Texas on which the Company has
begun construction of a central distribution facility for finished goods, with
completion expected in fiscal 1998 at an estimated cost of $10 million. In
early 1997, the Company purchased approximately 10 acres of land in Acuna,
Mexico, on which the Company has entered into a contract to build a 91,000
square foot facility to be used for office space, manufacturing, and
warehousing. The cost of the land and this facility is expected to be
approximately $3.5 million. Construction of this facility began in early 1997
and is expected to be completed by the end of fiscal 1997. During fiscal 1997,
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the Company is planning to add approximately 54,000 square feet to its
headquarters building in order to add engineering, product development,
manufacturing, and office space at an estimated cost of $4 to $5 million.
Additionally during 1997, the Company is planning to remodel existing space and
add approximately 75,000 square feet to the facility located less than one mile
from Tecnol's corporate headquarters at an estimated cost of $2 million. The
Company may use long-term financing for these facilities projects and any
acquisition opportunities that may arise.
The Company's working capital increased from $48.5 million at the end of
fiscal 1996 to $50.3 million at March 1, 1997. Net cash generated by operating
activities for the quarter ended March 1, 1997, totaled $7.3 million. Cash
generated by operating activities was used to repay approximately $1.2 million
of long-term debt and to purchase approximately $2.7 million of property,
plant, and equipment. Net cash and cash equivalents at March 1, 1997, totaled
approximately $7.7 million.
On March 1, 1997, the Company had no amounts outstanding and $10,000,000
available under its bank line of credit. The line of credit was renewed and
the total amount increased to $12,500,000 on March 12, 1997. The line of
credit expires March 14, 1998. On March 1, 1997, the Company also had
$4,400,000 available under a reducing revolving bank line of credit.
Cautionary Information Regarding 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 the context in which
they are made, including assumptions which are explicitly or implicitly
included in the statements, and 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 or pricing in its 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 do not occur as management
anticipates, actual results could differ materially from the expectations
expressed in the forward-looking statements. The Company may or may not update
information contained in previously released forward-looking statements and
does not assume the duty to do so.
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - The following exhibits are filed as part of this report:
** 10(k) Jeffrey A. Nick Incentive Stock Option, Trade Secret,
Invention and Non-Competition Agreement dated
December 20, 1996
27 Financial Data Schedule
** Management contract or compensatory plan or arrangement.
(b) No reports on Form 8-K were filed during the quarter ended March 1, 1997.
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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: April 14, 1997 /s/David Radunsky
----------------------- ----------------------------------------
DAVID RADUNSKY, Chief Operating Officer
Date: April 14, 1997 /s/Jeffrey A. Nick
----------------------- ----------------------------------------
JEFFREY A. NICK, Vice President Finance
and Accounting
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
** 10(k) Jeffrey A. Nick Incentive Stock Option, Trade Secret,
Invention and Non-Competition Agreement dated
December 20, 1996
27 Financial Data Schedule
** Management contract or compensatory plan or arrangement.
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