SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended SEPTEMBER 30, 1997 Commission File No. 0-24866
------------------ -------
ISOLYSER COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Georgia 58-1746149
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
650 Engineering Drive
Technology Park
Norcross, Georgia 30092
(Address of principal executive offices)
(770) 582-6363
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at November 13, 1997
- ----- --------------------------------
Common Stock, $.001 par value 39,380,152
489587.2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISOLYSER COMPANY, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1997 DECEMBER 31, 1996
------ -------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 9,477 $ 20,925
Accounts receivable-net 27,437 27,691
Inventories 44,590 62,824
Prepaid expenses and other assets 5,215 3,562
-------------------------------------------
Total Current Assets 86,719 115,002
-------------------------------------------
Property, plant and equipment 93,258 88,289
Less accumulated depreciation (18,617) (12,279)
-------------------------------------------
Net property, plant, and equipment 74,641 76,010
-------------------------------------------
Assets held for sale 1,739 1,642
Intangibles and other assets, net 55,660 58,281
-------------------------------------------
$ 218,759 $ 250,935
===========================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current installments of long term debt $ 40,165 $ 4,497
Accounts payable 10,244 10,982
Bank overdraft 251 3,229
Accrued expenses 6,938 5,975
------------------------------------------
Total current liabilities 57,598 24,683
------------------------------------------
Long term debt, excluding current installments 5,403 47,028
Other liabilities 337 420
------------------------------------------
Total liabilities 63,338 72,131
------------------------------------------
Shareholders' equity
Common stock 40 39
Additional paid in capital 203,739 203,346
Retained earnings (46,492) (21,840)
Cumulative translation adjustment 117 15
Unearned shares restricted to employee stock
ownership plan (360) (360)
-----------------------------------------
157,044 181,200
Treasury shares (1,623) (2,396)
-----------------------------------------
Total shareholders' equity 155,421 178,804
-----------------------------------------
$ 218,759 $ 250,935
=========================================
</TABLE>
See accompanying notes.
489587.2
-2-
<PAGE>
ISOLYSER COMPANY, INC.
Condensed Consolidated Statement of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997SEPTEMBER 30, 1996
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 41,877 $ 41,956 $ 124,314 $ 122,981
Cost of goods sold 46,492 31,666 110,300 88,515
--------------------------------------------------------------------------
Gross profit ( 4,615) 10,290 14,014 34,466
Operating expenses:
Selling & marketing 6,316 7,178 19,898 20,247
General & administrative 3,843 3,481 11,339 9,868
Research & development 595 580 1,982 1,534
Amortization of intangibles 961 1,083 2,878 3,196
Merger costs 3,232 - 3,341
Restructuring cost - 1,390 - 1,390
--------------------------------------------------------------------------
Total operating expenses 11,715 16,943 36,097 39,575
--------------------------------------------------------------------------
Loss from operations (16,330) (6,653) (22,083) (5,109)
Interest income 118 337 458 1,467
Interest expense (946) (689) (2,977) (1,899)
Losses in joint venture (14) (19) (33) (60)
--------------------------------------------------------------------------
Income (loss) before income tax expense (17,171) (7,024) (24,635) (5,601)
Income tax expense (benefit) 6 (489) 17 228
--------------------------------------------------------------------------
Income (loss) before extraordinary items $ (17,177) $ (6,535) $ (24,652) $ (5,829)
--------------------------------------------------------------------------
Extraordinary loss for refinancing of credit
facilities, net of tax benefit of $214 $ - $ 578 $ - $ 575
--------------------------------------------------------------------------
Net loss $ (17,177) $ (7,107) $ (24,652) $ (6,404)
Net loss per common share $ (0.44) $ (0.185) $ (0.63) $ (0.165)
==========================================================================
Weighted average number of common shares
outstanding 39,308 38,484 39,240 38,769
==========================================================================
</TABLE>
See accompanying notes.
489587.2
-3-
<PAGE>
ISOLYSER COMPANY, INC.
Condensed Statement of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (24,652) $ (6,405)
Net income for Microtek Medical, Inc. for December 1995 - 27
Adjustments to reconcile net income
(loss) to net cash (used in) provided by
operating activities:
Depreciation 5,571 5,297
Amortization 2,879 3,189
Provision for doubtful accounts 206 27
Loss on disposal of property, plant & equipment (27) -
Changes in assets and liabilities, net of acquisitions 16,617 (25,875)
-----------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: 594 (23,740)
-----------------------------------------
Cash flows from investing activities
Additions to property, plant and equipment net of acquisitions (4,273) (16,273)
Acquisitions, net of cash acquired - (5,874)
-----------------------------------------
NET CASH USED IN INVESTING ACTIVITIES: (4,273) (22,147)
-----------------------------------------
Cash flows from financing activities:
Net borrowings under credit agreements (5,957) 10,937
Changes in bank overdraft (2,978) 284
Proceeds from exercised stock options 574 1,787
Proceeds from issuance of stock 333 118
Direct costs relating to issuance of common stock 269 (20)
-----------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES: (7,769) 13,106
-----------------------------------------
Net decrease in cash and cash equivalents (11,448) (32,781)
Cash and cash equivalents at beginning of period 20,925 54,819
-----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,477 22,038
=========================================
</TABLE>
See accompanying notes.
489587.2
-4-
<PAGE>
ISOLYSER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) In the opinion of management, the information furnished reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods. Results for the interim periods are not
necessarily indicative of results to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 (the "Annual
Report").
(2) Inventories are stated at the lower of cost or market and are
summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, 1997 December 31, 1996
Raw materials and supplies $ 26,767,000 $ 20,936,000
Work in process 6,865,700 23,267,000
Finished goods 34,489,700 29,346,000
--------------------- -------------------
Total 68,122,300 73,549,000
Excess, slow moving and obsolete
inventory (23,517,800) (10,041,000)
Reserve for LIFO inventory (14,900) (684,000)
--------------------- -------------------
Total $ 44,589,600 $ 62,824,000
--------------------- -------------------
</TABLE>
The first-in first-out ("FIFO") valuation method is used to determine the cost
of inventories except for inventories held by the Company's subsidiary, White
Knight Healthcare, Inc. ("White Knight"). White Knight uses the last-in
first-out ("LIFO") inventory valuation method. At September 30, 1997 and
December 31, 1996, LIFO inventories approximated $24,146,000 and $28,324,000
respectively.
(3) At September 30, 1997, the Company was not in compliance with the
covenants of its credit facility pertaining to net income and net worth. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
(4) Loss per common share is computed using the weighted average number of
common shares outstanding during the respective periods. There is no significant
difference between primary and fully diluted per share amounts for these
periods.
(5) Certain prior period amounts have been reclassified for comparative
purposes.
489587.2
-5-
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Net sales for the three months ended September 30, 1997 (the "1997 Quarter")
were $41.9 million compared to $42 million for the three months ended September
30, 1996 (the "1996 Quarter"). Net sales for the nine months ended September 30,
1997 (the "1997 Period") were $124.3 million compared to $123 million for the
nine months ended September 30, 1996 (the "1996 Period"), an increase of 1.1%.
Net sales during the 1997 Quarter and 1997 Period over the corresponding periods
of 1996 reflect the 7.3% and 13.6% increase in sales of procedure trays and
related products, respectively, the 7.1% and 10.2% increase in sales of
specialty drape and related products, respectively, and the 15.5% and 8.6%
increase in sales of safety products, respectively. The Company believes that
increased sales for procedure trays, safety products and specialty drapes are
primarily attributable to a combination of new business development and
increased product usage by existing customers. Management anticipates that sales
of procedure trays and related products will be adversely affected during the
fourth quarter by the Company's implementation of and conversion to an upgraded
manufacturing system at the Company's procedure tray operation during the fourth
quarter of 1997, which is the continuation of an implementation process begun in
the third quarter of 1997. Sales of the Company's pack and gown products
declined 26.1% and 24.8% during the 1997 Quarter and 1997 Period over the
corresponding periods of the previous year, respectively. The decline in sales
of pack and gown healthcare products is attributable in significant part to the
acquisition in July, 1996 of Sterile Concepts, a significant customer of the
Company, by Maxxim, which is a product competitor of the Company in the pack and
gown business. While Sterile Concepts remains contractually obligated to
purchase from the Company a yearly minimum of $5.1 million of products until
June 30, 1998, such acquisition is expected to continue to adversely affect the
Company's sales for the remainder of 1997 and future periods. The Company also
attributes its reduced sales of pack and gown products to a declining market for
the Company's pack and gown products.
As the Company previously reported in its Annual Report, the State of California
is reviewing the regulatory restrictions currently in effect on customer
landfilling of LTS-treated waste in California. The Company has also been made
aware that other states, including Florida and Georgia, are reviewing regulatory
restrictions applicable on customer landfilling of LTS-treated waste in those
states, possibly as a result of certain efforts of a product competitor. To
date, these regulatory review processes have had no discernable impact on sales
of safety products. In the event such processes result in further restrictions
on the landfilling of such waste, such restrictions could adversely affect the
Company's sales of LTS. Gross margin on sales of LTS for the 1997 Quarter and
Period were in excess of 10% of corporate gross margin for such periods.
Included in the foregoing sales figures are $1.5 million in sales of OREX
Degradables during the 1997 Quarter and $5.5 million during the 1997 Period,
unchanged from the corresponding periods of 1996. Management believes that this
flat growth rate in OREX Degradable sales is
489587.2
-6-
<PAGE>
attributable to having only a small group of hospitals converted to using
degradable versus traditional product and that the Company's ability to convert
additional hospitals to degradable products has been adversely affected by
product performance and quality concerns and delays in bringing OREX catalog
items to market. The Company does not yet manufacture for commercial sale OREX
Degradables film (and related laminates of OREX film products with non-woven
products) or thermoformed and extruded products (such as bowls and basins).
Sales of OREX Degradables during the 1997 Quarter and Period did not contribute
any gross profits to the Company's operating results. Management believes the
Company will continue to fail to receive profitable margins on sales of OREX
Degradables pending a combination of selling OREX in greater volumes, the
operation of the Company's OREX manufacturing plants at higher efficiencies and
increasing the unit price for OREX Degradables to an amount which takes into
account the disposal cost savings provided by such products. The Company is
undertaking a thorough review and analysis of the market position of its OREX
Degradables and related modifications to its OREX operations and growth plans,
and has accordingly deemphasized the Company's sales efforts on OREX products on
a temporary basis. The Company's future performance will depend to a substantial
degree upon market acceptance of and the Company's ability to successfully
manufacture, market, deliver and expand its OREX Degradables line of products at
acceptable profit margins. The Company's ability to achieve such objectives is
subject to a number of risks described in the Company's Annual Report including,
without limitation, those described in such Annual Report under "Risk Factors -
Risks of New Products" and "-Manufacturing and Supply Risks".
At September 30, 1997, the Company recorded $44.6 million of inventory on its
balance sheet, net of a reserve of $23.5 million for excess, slow moving and
obsolete inventory. Based on information available to the Company (such as,
without limitation, the quality and aging of and current sales rates for the
Company's inventories, their expected useful life, and existing reserves
recorded with respect to such inventory) and judgments and estimates made by the
Company concerning future events (such as, without limitation, the prices and
volumes at which the Company will be able to dispose of such inventory), the
Company regularly evaluates the net amounts recorded by the Company for its
inventory to ensure that such amount fairly states the value of such inventory
in accordance with generally accepted accounting principles. The ability of the
Company to make accurate judgments and estimates necessary to establish the fair
value of its inventory is inherently subject to certain risks which are
exacerbated in the case of the Company's OREX inventories by the novel aspects
of the Company's OREX products and absence of a significant prior operating
history with respect to such products. Various of these risks are described in
the Company's Annual Report including, without limitation, those described in
such Annual Report under "Risk Factors - Risks of New Products" and
"Manufacturing and Supply Risks". As a part of the Company's processes for
recording the net value of the Company's inventories at September 30, 1997, the
Company recorded a $13.0 million reserve for potentially excess OREX
inventories.
Gross profit (loss) for the 1997 Quarter and 1997 Period was ($4.6) million and
$14.0 million, respectively, compared to $10.3 million and $34.5 million for the
1996 Quarter and 1996 Period, respectively. Included in cost of goods sold for
the 1997 Quarter and Period is the aforementioned reserve of $13.0 million for
potentially excess inventories. Exclusive of such
489587.2
-7-
<PAGE>
reserve, gross profit for the 1997 Quarter and Period would have been $8.4
million and $27.0 million, respectively. Included in cost of goods sold for the
1996 Quarter and Period are charges of $531,000 for inventory shrinkage related
to product quality deficiencies in the OREX non-woven manufacturing operation,
and a $1 million reserve for slow moving and potentially obsolete inventory
throughout the Company. In addition to the impact of nonrecurring charges for
inventory reserves, the decline in gross margin is primarily due to excess
capacity of the Company's Abbeville and Arden OREX manufacturing facilities.
During the latter portions of 1996, the Company reduced production at its
Abbeville and Arden manufacturing plants to more closely align production with
product demand. During the 1997 Quarter and 1997 Period, the Company sold
product from existing inventory, increasing excess capacities and further
negatively affecting margin. Pending increased utilization of the Company's
existing manufacturing capacity at its Abbeville and Arden manufacturing plants,
the overhead of the Company incurred through such plants will continue to
negatively impact profit margin. In an effort to improve short-term operating
results and cash flow, the Company has decided to explore the possibilities of
converting a portion of these capacities to manufacture on a short-term basis
traditional woven and non-woven products such as polyester and polypropolene.
The Company does not anticipate entering into long-term manufacturing
commitments for traditional products. So long as the Company does not enter into
long-term manufacturing commitments for traditional products, any such
conversion should not affect the ability of the Company to satisfy its
requirements for OREX Degradable products. There can be no assurances that the
Company will be able to increase utilization of the Company's manufacturing
capacity at its Abbeville and Arden manufacturing plants, either for the
manufacture of OREX Degradables or traditional products. Gross margin was
negatively affected by other factors during the 1997 Quarter and Period, as
compared to comparable periods in 1996. These other factors include a decline in
sales by the Company's pack and gown operations as a result of the loss of a
significant customer and a general decline in that business which created excess
capacity, and start-up expenses incurred by the Company and excess capacity
associated with its Jacksonville distribution and manufacturing facility and its
Empalme, Mexico manufacturing facility.
Consistent with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of," the Company has reviewed the carrying value of the Company's Abbeville and
Arden manufacturing plants. Based on forecasted usage of such plants, the
Company believes that it would be inappropriate under generally accepted
accounting principles to record any impairment charges with respect to such
assets. If, however, the Company were in the future to determine to dispose of
such assets or new information or improved judgments resulted in a reduction of
the Company's forecasted usage of such plants causing the plants to be
considered to be impaired, the Company would be required to record an impairment
loss equal to the excess of the carrying value of such assets over their fair
value, thereby adversely affecting operating results.
Selling and marketing expenses were $6.3 million or 15.1% of net sales in the
1997 Quarter compared to $7.2 million or 17.1% of net sales in the 1996 Quarter.
Selling and marketing expenses were $19.9 million or 16.0% of net sales in the
1997 Period compared to $20.2 million
489587.2
-8-
<PAGE>
or 16.5% of net sales in the 1996 Period. The decrease during the 1997 Quarter
is a result of decreased salaries and benefits associated with reducing the
Company's sales and marketing personnel.
General and administrative expenses were $3.8 million or 9.2% of net sales in
the 1997 Quarter compared to $3.5 million or 8.3% of net sales in the 1996
Quarter. General and administrative expenses were $11.3 or 9.1% of net sales in
the 1997 Period compared to $9.9 million or 8.0% of net sales in the 1996
Period. The increase in general and administrative expenses was primarily
attributed to costs related to several software and hardware installations, and
costs related to the Company's corporate office.
Research and development expenses were $595,000 or 1.4% of net sales in the 1997
Quarter compared to $580,000 or 1.4% of net sales in the 1996 Quarter. Research
and development expenses were $2.0 million or 1.6% of net sales in the 1997
Period compared to $1.5 million or 1.2% of net sales in the 1996 Period. The
increase in research and development expense was primarily attributed to the
Company's development of fiber and compounding technology.
Amortization of intangibles in the 1997 Quarter and 1996 Quarter was $961,000
and $1.1 million, respectively. Amortization of intangibles in the 1997 Period
and 1996 Period was $2.9 million and $3.2 million, respectively.
The resulting loss from operations during the 1997 Quarter was $16.3 million as
compared to loss from operations of $6.7 million during the 1996 Quarter. Loss
from operations was $22.1 million for the 1997 Period as compared to loss from
operations of $5.1 million during the 1996 Period. Included in loss from
operations during the 1997 Quarter and Period is $13.0 million in inventory
reserves. Included in loss from operations during the 1996 Quarter and Period
are $1.5 million in inventory write-offs and reserves, $1.4 million in
restructuring charges associated with the Microtek merger and $3.2 million in
the 1996 Quarter and $3.3 million in the 1996 Period of nonrecurring costs
associated with such merger. After excluding these non-recurring expenses, the
resulting loss from operations for the 1997 Quarter was $3.3 million compared to
$500,000 for the 1996 Quarter, and $9.1 million in the 1997 Period compared to
operating income in the 1996 Period of $1.2 million.
Interest income was $118,000 in the 1997 Quarter compared to $337,000 in the
1996 Quarter, and $458,000 in the 1997 Period compared to $1.5 million in the
1996 Period. The decrease in interest income is primarily attributed to a
reduction of the Company's cash position as a result of the acquisition of OREX
Degradable inventory and manufacturing capabilities during 1996.
Interest expense was $946,000 in the 1997 Quarter compared to $689,000 in the
1996 Quarter, and $3.0 million in the 1997 Period compared to $1.9 million in
the 1996 Period. The increase in interest expense is primarily attributed to the
Company's acquisition of OREX Degradable inventory and manufacturing
capabilities during 1996.
489587.2
-9-
<PAGE>
Provision for income taxes reflect an expense for the 1997 Quarter of $6,000
compared to a tax benefit of $489,000 for the 1996 Quarter. The provision for
income taxes reflects an expense for the 1997 Period of $17,000 as compared to
an expense of $228,000 for the 1996 Period.
The resulting net loss was $17.2 million for the 1997 Quarter compared to net
loss of $7.1 million for the 1996 Quarter. The net loss was $24.7 million for
the 1997 Period as compared to net loss of $6.4 million for the 1996 Period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's cash and equivalents totaled $9.5 million
as compared to $20.9 million at December 31, 1996.
During the 1997 Period, the Company generated $594,000 of cash in operating
activities as compared to a cash use of $23.7 million in the 1996 Period. Cash
generated during the 1997 Quarter and Period is primarily attributable to better
management of working capital. The Company used $4.3 million in investing
activities during the 1997 Period, primarily for several computer hardware and
software implementations, as compared to $22.1 million used in investing
activities during the 1996 Period. During the 1997 Period, the Company used $7.8
million in cash for financing activities as compared to cash provided by
financing activities of $13.1 million during the 1996 Period. The Company's use
of cash during the 1997 Period for financing activities is primarily due to a
net reduction of debt of $8.9 million between December 31, 1996 and September
30, 1997.
As more fully described in the Company's Annual Report, the Company has a $55
million credit agreement (the "Credit Agreement") consisting of a $40 million
revolving credit facility maturing on August 31, 1999 and a $15 million term
loan facility maturing on August 31, 2001. Current additional borrowing
availability under the revolving credit facility at September 30, 1997 was
approximately $8.6 million. Outstanding borrowings under the revolving credit
facility were approximately $24.5 million at September 30, 1997. Outstanding
borrowings under the term loan facility were $13 million at September 30, 1997.
The Credit Agreement provides for the issuance of up to $3 million in letters of
credit. Outstanding letters of credit were $50,000 at September 30, 1997. At
September 30, 1997, the Company was in violation of covenants contained in the
Credit Agreement concerning net income and net worth primarily as a result of
additional inventory reserves recorded at September 30, 1997. The Company has
requested but has not yet received a waiver from its lenders with respect to
such violation and has accordingly classified its indebtedness under the Credit
Agreement as short-term debt in the accompanying balance sheet. No assurances
can be provided that the Company will obtain a waiver of the covenant
violations, and the failure to obtain such waiver would have a material adverse
effect upon the Company. At September 30, 1997, outstanding indebtedness under
the Credit Agreement exceeded the Company's cash and cash equivalents. The
Company has violated certain financial covenants contained in its Credit
Agreement in its prior three fiscal quarters and obtained waivers of such
violations. No assurances can be provided that violations of covenants contained
in the Company's Credit Agreement will not occur in the future or, if such
violations occur, that those violations will be waived. In addition, such Credit
Agreement
489587.2
-10-
<PAGE>
currently requires the Company to operate during 1998 on a monthly basis with a
positive net income. While the Company's lenders have agreed to discuss with the
Company a modification of such covenant, no assurances can be provided that such
covenant will be modified or that the Company will not default in the future
under its Credit Agreement. Any unwaived default by the Company under the Credit
Agreement would be expected to have a material adverse effect upon the Company.
Based upon its current business plan and assuming the continued availability of
its existing credit facility, the Company currently expects that cash
equivalents and short term investments on hand, the Company's existing credit
facility and funds budgeted to be generated from operations will be adequate to
meet its liquidity and capital requirements over the next year. Currently
unforeseen future developments and increased working capital requirements may
require additional debt financing or issuance of common stock in subsequent
years. There can be no assurances that the Company could obtain any required
additional debt financing or successfully consummate an issuance of common stock
on terms favorable to the Company, if at all.
Statements made in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, including those in the immediately
preceding paragraph, include forward- looking statements made under the
provisions of the Private Securities Litigation Reform Act. The Company's actual
results could differ materially from such forward-looking statements and such
results will be affected by risks described in the Company's Annual Report
including, without limitation, those described in the Annual Report under "Risk
Factors - Limited Operating History; Net Losses", "-Risks of New Products",
"-Risks of Expansion", "-Manufacturing & Supply Risks" and "-Liquidity Risks".
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation and proceedings in the
ordinary cause of business. Management believes that pending litigation matters
will not have a material adverse effect on the Company's financial position or
results of operations.
489587.2
-11-
<PAGE>
ITEM 2. CHANGES IN SECURITIES
During the quarter for which this report is filed, there have been no
material modifications in the instruments defining the rights of shareholders.
During the quarter for which this report is filed, none of the rights evidenced
by the shares of the Company's common stock have been materially limited or
qualified by the issuance or modifications of any other class of securities.
During the quarter for which this report is filed, the Company sold no equity
securities of the Company that were not registered under the Securities Act of
1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At September 30, 1997, the Company was not in compliance with the covenants
of its credit facility pertaining to net income and net worth. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
- ----------- -----------
3.1(1) Articles of Incorporation of Isolyser Company, Inc.
3.2(2) Articles of Amendment to Articles of Incorporation of Isolyser
Company, Inc.
3.3(1) Amended and Restated Bylaws of Isolyser Company, Inc.
3.4(3) First Amendment to Amended and Restated Bylaws of Isolyser
Company, Inc.
3.5(4) Second Amendment to Amended and Restated Bylaws of Isolyser
Company, Inc.
4.1(1) Specimen Certificate of Common Stock
27.1 Financial Data Schedule
489587.2
-12-
<PAGE>
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-83474).
(2) Incorporated by reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
(3) Incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K filed July 29, 1996.
(4) Incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K filed December 20, 1996.
(b) No current reports on Form 8-K were filed during the quarter
for which this report is filed.
489587.2
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this quarterly report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized on November 14, 1997.
ISOLYSER COMPANY, INC.
By:/s/ Gene R. McGrevin
Gene R. McGrevin
President
(principal executive officer)
By:/s/ Peter A. Schmitt
Peter A. Schmitt
Chief Financial Officer
(principal financial officer)
-14-
489587.2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED FINANCIAL STATEMENTS CONTAINED IN ITS REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000929299
<NAME> ISOLYSER COMPANY, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,477<F1>
<SECURITIES> 0
<RECEIVABLES> 27,437<F2>
<ALLOWANCES> 0
<INVENTORY> 44,590
<CURRENT-ASSETS> 86,719
<PP&E> 93,259
<DEPRECIATION> 18,617
<TOTAL-ASSETS> 218,759
<CURRENT-LIABILITIES> 57,598
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 155,381
<TOTAL-LIABILITY-AND-EQUITY> 218,759
<SALES> 124,314
<TOTAL-REVENUES> 0
<CGS> 110,300
<TOTAL-COSTS> 110,300
<OTHER-EXPENSES> 36,097
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,977
<INCOME-PRETAX> (24,635)
<INCOME-TAX> 17
<INCOME-CONTINUING> (24,652)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,652)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
<FN>
<F1> INCLUDES CASH EQUIVALENTS.
<F2> ACCOUNTS RECEIVABLE ARE SHOWN NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS.
</FN>
</TABLE>
