<PAGE> 1
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 30, 1997
-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
---------------
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.
20,011,695 shares common stock, par value $.001, as of October 2, 1997
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TECNOL MEDICAL PRODUCTS, INC.
FORM 10-Q INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION.............................................. 3
Item 1. Financial Statements............................................... 3
Condensed Consolidated Balance Sheets as of
November 30, 1996, and August 30, 1997............................. 3
Condensed Consolidated Statements of Income for the Quarters and
Year-to-Date Periods Ended August 31, 1996, and August 30, 1997.... 5
Condensed Consolidated Statements of Cash Flows for the
Year-to-Date Periods Ended August 31, 1996, and August 30, 1997.... 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 6. Exhibits and Reports on Form 8-K.................................. 14
SIGNATURES.................................................................. 14
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Nov. 30, Aug. 30,
1996 1997
----------------- ------------------
ASSETS (unaudited)
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,355,033 $ 11,129,064
Accounts receivable, net of allowance
for doubtful accounts of $1,497,000 in 1996
and $2,062,000 in 1997 24,858,157 24,435,232
Inventories 32,036,334 33,720,927
Prepaid expenses 620,807 930,717
Other current assets 3,497,720 3,743,697
---------------- ------------------
Total current assets 65,368,051 73,959,637
NET PROPERTY, PLANT, AND EQUIPMENT 48,671,113 54,389,065
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $3,609,000 in 1996 and $4,632,000 in 1997 39,618,824 38,903,105
Other purchased intangible assets, net of
accumulated amortization of $3,140,000 in
1996 and $3,519,000 in 1997 772,257 442,462
Patents and trademarks, net of accumulated
amortization of $728,000 in 1996 and $975,000
in 1997 3,358,266 3,653,622
Other 1,711,193 1,895,211
---------------- ------------------
Total other assets 45,460,540 44,894,400
---------------- ------------------
Total assets $ 159,499,704 $ 173,243,102
================ ==================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
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TECNOL MEDICAL PRODUCTS,INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
Nov. 30, Aug. 30,
1996 1997
---------------- ----------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 7,800,378 $ 9,422,288
Accrued expenses 4,662,419 5,181,306
Income taxes payable 719,042 1,265,128
Current maturities of long-term debt 3,641,287 3,611,562
---------------- ----------------
Total current liabilities 16,823,126 19,480,284
LONG-TERM DEBT, net of current maturities 9,264,736 5,755,542
DEFERRED INCOME TAXES 6,179,599 5,256,899
---------------- ----------------
Total liabilities 32,267,461 30,492,725
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 21,172,403 shares issued in 1997 21,117 21,173
Additional paid-in capital 27,886,864 28,542,360
Retained earnings 103,755,583 118,653,140
---------------- ----------------
131,663,564 147,216,673
Less-treasury stock, at cost:
1,159,489 shares in 1996 and 1,161,646 shares in 1997 3,529,197 3,564,172
Less-unearned employee stock ownership shares,
60,000 shares in 1996 and 1997 902,124 902,124
---------------- ----------------
Total stockholders' equity 127,232,243 142,750,377
---------------- ----------------
Total liabilities and stockholders' equity $ 159,499,704 $ 173,243,102
================ ================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
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TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
QUARTERS AND YEAR-TO-DATE PERIODS ENDED AUGUST 31, 1996, AND AUGUST 30, 1997
<TABLE>
<CAPTION>
Quarter Ended Year-to-Date
------------------------------ --------------------------------
Aug. 31, Aug. 30, Aug. 31, Aug. 30,
1996 1997 1996 1997
------------ ------------ ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 35,970,954 $ 38,946,531 $ 107,552,956 $ 116,142,020
COST OF GOODS SOLD 22,373,285 21,573,350 62,269,172 64,150,329
------------ ------------ ------------- -------------
Gross profit 13,597,669 17,373,181 45,283,784 51,991,691
SELLING EXPENSES 5,539,635 6,288,135 17,470,851 18,561,506
GENERAL AND ADMINISTRATIVE EXPENSES 3,145,701 2,613,156 7,013,782 7,364,098
AMORTIZATION OF INTANGIBLES 562,058 511,132 1,703,845 1,615,134
RESEARCH AND DEVELOPMENT EXPENSES 412,157 514,258 1,273,577 1,413,860
------------ ------------ ------------- -------------
Income from operations 3,938,118 7,446,500 17,821,729 23,037,093
OTHER INCOME (EXPENSE):
Interest income 28,799 141,262 122,274 291,976
Interest expense (153,384) (36,686) (753,874) (225,127)
Litigation settlement expense (550,000) -- (550,000) --
Other, net (68,305) 8,668 220,718 5,559
------------ ------------ ------------- -------------
Total other income (expense) (742,890) 113,244 (960,882) 72,408
------------ ------------ ------------- -------------
Income before provision
for income taxes 3,195,228 7,559,744 16,860,847 23,109,501
PROVISION FOR INCOME TAXES 1,063,824 2,751,423 5,629,968 8,211,944
------------ ------------ ------------- -------------
NET INCOME $ 2,131,404 $ 4,808,321 $ 11,230,879 $ 14,897,557
============ ============ ============= =============
Net income per common and common
equivalent share $ 0.11 $ 0.24 $ 0.56 $ 0.74
============ ============ ============= =============
Weighted average number of common and
common equivalent shares outstanding 20,163,764 20,410,668 20,153,648 20,240,643
============ ============ ============= =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Year-to-Date Periods Ended August 31, 1996, and August 30, 1997
<TABLE>
<CAPTION>
Year-to-Date
------------------------------
Aug. 31 Aug 30,
1996 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,230,879 $ 14,897,557
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,160,381 3,417,517
Amortization 1,703,845 1,615,134
Decrease in deferred income taxes (514,000) (922,700)
Net change in assets and liabilities, excluding acquisitions-
Accounts receivable 1,047,868 398,832
Inventories 7,396,551 (1,869,007)
Other current assets (336,871) (555,887)
Accounts payable 2,156,276 1,658,900
Accrued expenses 1,487,046 518,887
Income taxes payable (1,413,316) 546,086
------------ ------------
Total adjustments 14,687,780 4,807,762
------------ ------------
Net cash provided by operating activities 25,918,659 19,705,319
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (7,230,327) (9,374,359)
Cash paid for acquisitions, net of cash acquired (5,169,463) --
Expenditures for patents and trademarks (605,353) (548,146)
Increase in other assets (18,180) (237,421)
------------ ------------
Net cash used in investing activities (13,023,323) (10,159,926)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in bank line of credit (3,530,000) --
Proceeds from bank loan 5,500,000 --
Principal payments on long-term debt (8,171,086) (3,391,939)
Net proceeds from exercise of stock options 183,306 620,577
------------ ------------
Net cash used in financing activities (6,017,780) (2,771,362)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,877,556 6,774,031
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 230,401 4,355,033
------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 7,107,957 $ 11,129,064
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 972,376 $ 668,194
Income taxes $ 7,779,663 $ 7,797,850
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of note for acquisition of assets $ 665,000 $ --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE> 7
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 30,
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 and year-to-date
periods ended August 31, 1996, and August 30, 1997, each include thirteen and
thirty-nine weeks, respectively. 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:
<TABLE>
<CAPTION>
Quarter Year-to-Date
----------------------------- ----------------------------
August 31, August 30, August 31, August 30,
1996 1997 1996 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Common shares outstanding 19,957,491 20,010,757 19,957,491 20,010,757
Effect of using weighted average common
and common equivalent shares outstanding
during the period (916) (10,882) (11,595) (22,655)
Effect of using weighted average unearned
ESOP shares (71,250) (41,250) (78,750) (48,750)
Effect of assuming exercise of
outstanding stock options based on the
treasury stock method 278,439 452,043 286,502 301,291
----------- ----------- ----------- -----------
Shares used in computing primary net
income per share 20,163,764 20,410,668 20,153,648 20,240,643
=========== =========== =========== ===========
</TABLE>
Primary and fully diluted net income per share are not materially different
7
<PAGE> 8
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.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 128 (SFAS 128), "Earnings per Share." This
Statement establishes and simplifies standards for computing and presenting
earnings per share. The Company will be required to adopt SFAS No. 128 the
first quarter of fiscal year 1998. SFAS 128 replaces primary and fully diluted
earnings per share with basic and diluted earnings per share. The Company does
not expect the adoption of SFAS No. 128 to have a material impact on earnings
per share.
NOTE 3 -- LONG-TERM DEBT
Long-term debt at November 30, 1996, and August 30, 1997, consists of the
following:
<TABLE>
<CAPTION>
Nov. 30, August 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Industrial Revenue Bonds $ 3,600,000 $ 3,400,000
Bank Term Loans 8,187,500 5,675,000
Other installment obligations 1,118,523 292,104
--------------- ------------
12,906,023 9,367,104
Less-current maturities (3,641,287) (3,611,562)
--------------- ------------
$ 9,264,736 $ 5,755,542
=============== ============
</TABLE>
NOTE 4 -- INVENTORIES
Inventories at November 30, 1996, and August 30, 1997, consist of the
following:
<TABLE>
<CAPTION>
Nov. 30, August 30,
1996 1997
-------------- ---------------
<S> <C> <C>
Raw materials $ 15,212,956 $ 15,056,232
Work-in-progress 1,983,973 2,406,018
Finished goods 14,839,405 6,258,677
-------------- ---------------
$ 32,036,334 $ 33,720,927
============== ===============
</TABLE>
8
<PAGE> 9
NOTE 5 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at November 30, 1996, and August 30,
1997, consists of the following:
<TABLE>
<CAPTION>
Nov. 30, August 30,
1996 1997
------------- --------------
<S> <C> <C>
Land $ 6,247,752 $ 6,617,559
Buildings and improvements 14,563,836 14,958,979
Automotive equipment 2,913,496 2,875,872
Manufacturing equipment 36,510,853 40,658,512
Office furniture and equipment 9,267,496 10,169,844
Construction-in-progress 4,446,416 7,317,008
------------ ------------
Less accumulated depreciation 73,949,849 82,597,774
(25,278,736) (28,208,709)
------------ ------------
$ 48,671,113 $ 54,389,065
============ ============
</TABLE>
NOTE 6 -- RECLASSIFICATION
Prior to August 30, 1997, the Company classified amortization expense
related to goodwill and noncompete agreements as other expense and amortization
expense related to other purchased intangible assets and patents and trademarks
as general and administrative expense. Beginning in the third quarter of fiscal
1997, all amortization expense is shown as a component of operating income.
This change in classification has no effect on reported net income. These
amounts in prior period financial statements have been reclassified to conform
to the current year presentation.
NOTE 7 -- SUBSEQUENT EVENT
On September 4, 1997, Tecnol entered into a definitive agreement with
Kimberly-Clark Corporation ("Kimberly-Clark") and Vanguard Acquisition Corp., a
wholly-owned subsidiary of Kimberly-Clark ("Sub"), which provides for the
merger of Sub with and into Tecnol, with Tecnol surviving as a wholly-owned
subsidiary of Kimberly-Clark. Pursuant to the terms and conditions of the
agreement, each share of Tecnol stock (other than shares of Tecnol stock owned
directly or indirectly by Tecnol or Kimberly-Clark, which will be canceled)
will be converted into 0.42 of a share of Kimberly-Clark common stock. The
merger is subject to certain conditions, including approval by holders of a
majority of shares of Tecnol stock and certain regulatory approvals.
Kimberly-Clark is a leading global manufacturer and marketer of personal care,
consumer tissue, and away-from-home products. The merger is expected to take
place by the end of 1997.
9
<PAGE> 10
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 August 31, 1996, and August 30, 1997, should be
considered in conjunction with the condensed consolidated balance sheets,
statements of income and statements of cash flows.
Results of Operations
Net sales increased 8.3% from $36.0 million in the third quarter of fiscal
1996 to $38.9 million in the third quarter of fiscal 1997. For the nine month
period, net sales increased 8.0% from $107.6 million in fiscal 1996 to $116.1
million in fiscal 1997. The growth in net sales was principally the result of
increases in unit sales of existing products and, to a lesser extent, new
product introductions and increased sales from contract manufacturing. The
International Division experienced a sales increase of approximately 1.6% for
the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996
and an increase of 9.9% for the nine month period of 1997 compared to the nine
month period of 1996. Sales of the U.S. Hospital Division increased 9.7% for
the third quarter of fiscal 1997 as compared to the third quarter of fiscal
1996 and increased 6.9% for the nine month period in fiscal 1997 as compared to
fiscal 1996. Sales of the Specialty Markets Division increased 14.2% for the
third quarter of fiscal 1997 as compared to the third quarter of fiscal 1996
and increased 8.4% for the nine month period in fiscal 1997 as compared to
fiscal 1996. The Orthopedic Division experienced a sales increase of 13.6% for
the third quarter of fiscal 1997 as compared to the third quarter of fiscal
1996 and a sales increase of 6.3% for the nine month period in fiscal 1997 as
compared to fiscal 1996. Sales of the Industrial Products Division increased
15.4% for the third quarter of fiscal 1997 as compared to the third quarter of
fiscal 1996 and increased 2.7% for the nine month period in fiscal 1997 as
compared to fiscal 1996. Contract manufacturing generated sales of
approximately $2.4 million in the third quarter of fiscal 1997 compared to
approximately $2.7 million for the third quarter of fiscal 1996. For the nine
month period, contract manufacturing sales increased 20.1% from $6.9 million in
fiscal 1996 to $8.3 million in fiscal 1997.
The gross profit margin increased from 37.8% in the third quarter of
fiscal 1996 to 44.6% in the third quarter of fiscal 1997. Gross profit margin
in the third quarter of fiscal 1996 was lower in part due to adjustments made
to inventory which amounted to approximately $1 million, the majority of which
were related to potentially obsolete inventory. For the nine month period, the
gross profit margin increased from 42.1% in fiscal 1996 to 44.8% in fiscal
1997. Gross profit margin was positively impacted by efficiency gains created
by a decrease in manufacturing employee turnover, reduction of overtime hours
worked, and an improvement in manufacturing quality. This positive impact was
partially offset by an increase in contract manufacturing, which provides a
lower gross profit margin than sales to distributors. Operating margin from
contract manufacturing is consistent with the corporate average, as minimal
selling expenses are incurred.
Selling expenses increased 13.5% from $5.5 million in the third quarter of
fiscal 1996 to $6.3 million in the third quarter of fiscal 1997. For the nine
month period, selling expenses increased 6.2% from $17.5 million in fiscal 1996
to $18.6 million in fiscal 1997. As a percentage of net sales, selling expenses
increased from 15.4% of net sales in the third quarter of fiscal 1996 to 16.1%
of net sales in the third quarter of fiscal 1997 and decreased from 16.2% in
the first nine months of fiscal 1996 to 15.9% in the first nine months of 1997.
The Company did not increase the number of sales
10
<PAGE> 11
territories or sales professionals as total sales increased. Additionally, the
increase in contract manufacturing has been accomplished with minimal sales
support.
General and administrative expenses decreased 16.9% from $3.1 million in the
third quarter of fiscal 1996 to $2.6 million in the third quarter of fiscal
1997. 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 5.0% from $7.0 million in fiscal 1996 to
$7.4 million in fiscal 1997. As a percentage of net sales, general and
administrative expenses were 8.7% in the third quarter of fiscal 1996 (6.5% in
the first nine months of 1996) compared to 6.7% in the third quarter of fiscal
1997 (6.3% in the first nine months of 1997).
Income from operations increased 89.1% from $3.9 million in the third
quarter of fiscal 1996 to $7.4 million in the third quarter of fiscal 1997 as a
result of the foregoing factors. For the nine month period, income from
operations increased 29.3% from $17.8 million in fiscal 1996 to $23.0 million
in fiscal 1997. Operating margin increased from 10.9% in the third quarter of
fiscal 1996 to 19.1% in the third quarter of fiscal 1997. For the nine month
period, operating margin increased from 16.6% in fiscal 1996 to 19.8% in fiscal
1997.
Other income (expense) represented expense of approximately $743,000 in
the third quarter of fiscal 1996, compared to income of approximately $113,000
in the third quarter of fiscal 1997. 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. In connection with
the settlement agreement the Company reserved and expensed $550,000. For the
nine month period, other expense totaled approximately $961,000 in fiscal 1996,
compared to income of approximately $72,000 in fiscal 1997. The Company has
incurred lower interest expense, as certain long-term debt has been repaid.
Interest income has increased as the Company's cash balance has increased.
Tecnol's effective income tax rate increased from 33.3% in the third
quarter of fiscal 1996 (33.4% for the first nine months of fiscal 1996) to
36.4% in the third quarter of fiscal 1997 (35.5% for the first nine months of
fiscal 1997). The effective tax rate for the first nine months of 1996 is lower
than the statutory rate due to revisions in estimated reserves required for
federal income taxes. The Company expects the effective tax rate to be
approximately 36.5% for the remainder of fiscal 1997.
Net income increased 125.6% from $2.1 million in the third quarter of 1996
to $4.8 million in the third quarter of 1997 as a result of the foregoing
factors. For the nine month period, net income increased 32.6% from $11.2
million in fiscal 1996 to $14.9 million in fiscal 1997. Net income per share
increased 118.2% from $0.11 in the third quarter of fiscal 1996 to $0.24 in the
third quarter of fiscal 1997. For the nine month period, net income per share
increased 32.1% from $0.56 in fiscal 1996 to $0.74 in 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
11
<PAGE> 12
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 the foreseeable
future.
Tecnol owns 25 acres of land in Fort Worth, Texas on which the Company
plans to build a central distribution facility for finished goods, with
completion expected in fiscal 1998 at an estimated cost of $10 million. These
plans are subject to change as a result of the recent agreement to merge with
Kimberly-Clark. The Company owns approximately 10 acres of land in Acuna,
Mexico, on which the Company is nearing completion of 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. The
Company is nearing completion of a project to add space for engineering and
product development to its headquarters building and is also planning to add
approximately 56,000 square feet to its headquarters building in order to add
additional manufacturing space. The estimated cost for both projects is $4.45
million, with completion expected in 1998. The size of the addition, and the
estimated cost, is subject to change as a result of the recent agreement to
merge with Kimberly-Clark. The Company may use long-term bank financing, or
alternative financing if more desirable, 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 $54.5 million at August 30, 1997. Net cash generated by
operating activities for the nine months ended August 30, 1997, totaled $19.7
million. For the nine month period of fiscal 1997, cash generated by operating
activities was used to repay approximately $3.4 million of long-term debt and
to purchase approximately $9.4 million of property, plant, and equipment. Net
cash and cash equivalents at August 30, 1997, totaled approximately $11.1
million.
On August 30, 1997, the Company had no amount outstanding and $12,500,000
available under its bank line of credit. The line of credit, which carries an
interest rate of prime on all funds drawn, expires March 14, 1998. On August
30, 1997, the Company also had $3,850,000 available under a reducing revolving
bank line of credit (at prime interest rate).
Subsequent Event
On September 4, 1997, Tecnol entered into a definitive agreement with
Kimberly-Clark Corporation ("Kimberly-Clark") and Vanguard Acquisition Corp., a
wholly-owned subsidiary of Kimberly-Clark ("Sub"), which provides for the
merger of Sub with and into Tecnol, with Tecnol surviving as a wholly-owned
subsidiary of Kimberly-Clark. Pursuant to the terms and conditions of the
agreement, each share of Tecnol stock (other than shares of Tecnol stock owned
directly or indirectly by Tecnol or Kimberly-Clark, which will be canceled)
will be converted into 0.42 of a share of Kimberly-Clark common stock. The
merger is subject to certain conditions, including approval by holders of a
majority of shares of Tecnol stock and certain regulatory approvals.
12
<PAGE> 13
Kimberly-Clark is a leading global manufacturer and marketer of personal care,
consumer tissue, and away-from-home products. The merger is expected to take
place by the end of 1997.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 128 (SFAS 128), "Earnings per Share." This
Statement establishes and simplifies standards for computing and presenting
earnings per share. The Company will be required to adopt SFAS No. 128 the
first quarter of fiscal year 1998. SFAS 128 replaces primary and fully diluted
earnings per share with basic and diluted earnings per share. The Company does
not expect the adoption of SFAS No. 128 to have a material impact on earnings
per share.
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.
13
<PAGE> 14
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:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended August 30, 1997.
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 14, 1997 /s/Jeffrey A. Nick
------------------------------------------
JEFFREY A. NICK, Vice President Finance and
Accounting
Duly Authorized Officer and Chief Financial
Officer
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 FINANCIAL DATA SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TECNOL
MEDICAL PRODUCTS, INC. 10Q FILING FOR 3RD QTR OF FISCAL YEAR 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-29-1997
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-30-1997
<CASH> 11,129,064
<SECURITIES> 0
<RECEIVABLES> 24,435,232
<ALLOWANCES> 2,062,000
<INVENTORY> 33,720,927
<CURRENT-ASSETS> 73,959,637
<PP&E> 82,597,774
<DEPRECIATION> 28,208,709
<TOTAL-ASSETS> 173,243,102
<CURRENT-LIABILITIES> 19,480,284
<BONDS> 5,755,542
0
0
<COMMON> 21,173
<OTHER-SE> 142,729,204
<TOTAL-LIABILITY-AND-EQUITY> 173,243,102
<SALES> 38,946,531
<TOTAL-REVENUES> 38,946,531
<CGS> 21,573,350
<TOTAL-COSTS> 21,573,350
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,686
<INCOME-PRETAX> 7,559,744
<INCOME-TAX> 2,751,423
<INCOME-CONTINUING> 4,808,321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,808,321
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
