SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 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 May 14, 1997
Common Stock, $.001 par value 39,242,669
433441.1
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ISOLYSER COMPANY, INC.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Assets March 31, 1997 December 31, 1996
- ------ -------------- -----------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents...................... $18,147 $20,925
Accounts receivable, net....................... 27,671 27,691
Inventories, net............................... 64,750 63,757
Prepaid expenses and other assets................... 2,917 2,629
-------------- -------------
Total current assets........................... 113,485 115,002
-------------- -------------
Property, plant and equipment....................... 89,446 88,289
Less accumulated depreciation.................. (14,111) (12,279)
-------------- -------------
Net property, plant and equipment.......... 75,335 76,010
-------------- -------------
Assets held for sale................................ 1,642 1,642
Intangibles and other assets, net................... 57,225 58,281
-------------- -------------
$247,687 $250,935
============== =============
</TABLE>
433441.1
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<PAGE>
ISOLYSER COMPANY, INC.
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
<S> <C> <C>
Current installments of long term debt.......... $ 4,323 $ 4,497
Accounts payable................................ 9,336 10,982
Bank overdraft.................................. 1,770 3,229
Accrued expenses................................ 6,369 5,975
-------------- --------------
Total current liabilities.................. 21,798 24,683
-------------- --------------
Long-term debt, excluding current installments...... 49,726 47,028
Other liabilities................................... 392 420
-------------- --------------
50,118 47,448
-------------- --------------
Total liabilities.......................... 71,916 72,131
-------------- --------------
Shareholders' equity
Common stock................................... 39 39
Additional paid in-capital..................... 203,840 203,346
Accumulated deficit............................ (25,738) (21,825)
Unearned shares restricted to employee
stock ownership plan........................... (360) (360)
-------------- --------------
177,781 181,200
Treasury shares................................ (2,010) (2,397)
-------------- --------------
Total shareholders' equity................. 175,771 178,804
-------------- --------------
Total liabilities and shareholders' equity.......... $ 247,687 $ 250,935
============== ==============
</TABLE>
See accompanying notes.
433441.1
3
<PAGE>
ISOLYSER COMPANY, INC.
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Net sales.............................................. $ 40,003 $ 40,145
Cost of goods sold..................................... 30,846 28,665
------------- -------------
Gross profit.................................. 9,157 11,481
Operating expenses:
Selling & marketing............................... 6,902 6,305
General & administrative.......................... 3,632 3,107
Research & development............................ 768 372
Amortization of intangibles....................... 956 1,041
------------- -------------
Total operating expenses...................... 12,258 10,824
------------- -------------
Income (loss) from operations.......................... (3,101) 656
Interest income........................................ 228 641
Interest expense....................................... (1,020) (573)
Losses in joint venture................................ (14) (18)
------------- --------------
Income (loss) before income tax expense................ (3,906) 705
Estimated tax expense.................................. 4 268
------------- --------------
Net income (loss)...................................... $ (3,910) $ 437
============= ==============
Net income (loss) per common share..................... $ (0.10) $ .01
============ ==============
Weighted average number of common shares
outstanding............................................ 38,828 38,735
============= =============
</TABLE>
See accompanying notes.
433441.1
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<PAGE>
ISOLYSER COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(in thousands) Three months ended Three months ended
March 31, 1997 March 31, 1996
Cash flows from operating activities:
<S> <C> <C>
Net income (loss).................................................................. $ (3,910) $ 437
Net income for Microtek Medical, Inc. for December 1995............................ 0 27
Adjustments to reconcile net income (loss) in operating activities:
Depreciation....................................................................... 1,834 2,037
Amortization....................................................................... 956 1,041
Provision for doubtful accounts.................................................... 57 9
Loss on disposal of property, plant and equipment.................................. 6 0
Changes in assets and liabilities, net of acquisitions............................. (2,500) (9,630)
---------- ---------
Net cash used in operating activities.............................................. (3,557) (6,079)
---------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment net of acquisitions..................... (1,166) (5,019)
Acquisitions -- net of cash acquired............................................... 0 (1,175)
---------- ----------
Net cash used in investing activities................................................... (1,166) (6,194)
---------- ----------
Cash flows from financing activities:
Net borrowings under credit agreements............................................. 2,524 3,101
Changes in bank overdraft.......................................................... (1,459) 89
Proceeds form exercised stock options.............................................. 574 506
Proceeds from issuance of stock.................................................... 306 119
Direct costs relating to issuance of common stock.................................. 0 (14)
---------- ----------
Net cash provided from financing activities............................................. 1,945 3,800
---------- ----------
Net decrease in cash and cash equivalents............................................... (2,778) (8,472)
Cash and cash equivalents at beginning of period........................................ 20,925 54,819
---------- ---------
Cash and cash equivalents at end of period.............................................. $ 18,147 $ 46,346
========== =========
</TABLE>
See accompanying notes.
433441.1
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<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 at December 31, 1996.
(2) On August 30, 1996 the Company acquired Microtek Medical, Inc.
("Microtek") and, in connection therewith, issued 7,722,965 shares of common
stock for all of Microtek's outstanding common stock. Microtek designs,
manufactures and sells a broad range of surgical and medical supplies. The
merger was accounted for as a pooling of interests and, accordingly, the
Company's financial statements for the three months ended March 31, 1996 have
been restated to include the results of Microtek.
In connection with the merger, Microtek changed its fiscal year end
from November 30 to December 31 which conforms to Isolyser's fiscal year end.
Microtek's separate results for fiscal year 1996 have been restated to a
December 31 year end.
(3) At March 31, 1997, the Company was not in compliance with the
restrictive covenant of its credit facility pertaining to net income. This
existing covenant violation was waived by the Company's lenders on May 13, 1997.
(4) In February 1997, SFAS 128, "Earnings Per Share", was issued and is
effective for interim and annual periods ending after December 15, 1996. This
Statement simplifies the standards for computing earnings per share ("EPS")
previously found in APB Opinion 15, "Earnings Per Share" ("APB 15"), by
replacing the presentation of primary EPS with basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed similarly to fully
diluted EPS under APB 15. The Company intends to adopt this Statement in the
fourth quarter of 1997. Application of SFAS 128 to each of the three month
periods included herein would have no impact on the EPS calculation.
(5) Certain prior period amounts have been reclassified for
comparative purposes.
433441.1
6
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The Company's consolidated statements of operations for the three months ended
March 31, 1996 have been restated to include the operating results of Microtek
which was acquired in a pooling of interests transaction on August 30, 1996.
Net sales for the three months ended March 31, 1997 (the "1997 Quarter") were
$40.0 million compared to $40.1 million for the three months ended March 31,
1996 (the "1996 Quarter). The sales mix for the 1997 Quarter included a 13.6%
increase in sales of procedure trays and related products, a 9.6% increase in
Microtek sales and a 15.6% decrease in White Knight sales. Sales of safety
products decreased by 9.5% in the 1997 Quarter as compared to the 1996 Quarter
due to timing differences in purchase orders. The decline in White Knight sales
may be attributable to the acquisition in July, 1996 of Sterile Concepts, a
significant customer of White Knight, by Maxxim, which is a product competitor
of the Company. 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. Sales by Microtek
during the first quarter were adversely affected by a decision made during the
fourth quarter to immediately change the method of selling Microtek products by
switching to direct sales through the Company's sales force and immediately
cease sales through independent representatives as part of a strategy to seek to
promote long term sales growth.
Included in the foregoing sales figures are $2.1 million in sales of OREX
Degradables during the 1997 Quarter as compared to $1.6 million during each of
the 1996 Quarter and the quarter ended December 31, 1996. Management believes
that this small increase in OREX Degradable sales is attributable to having only
a small group of hospitals converted to using degradable versus traditional
products. Management believes that the rate of growth in OREX sales has been
adversely affected by delays in bringing new OREX catalog items to market in
quantities sufficient for commercial supply and product performance or quality
concerns for certain of the Company's OREX Degradables products. While
management believes that the Company's group of OREX products currently includes
substantially all non-woven products most often used in the operating room, the
Company does not yet manufacture for commercial sale OREX Degradables film or
thermoformed and extruded products such as bowls, basins and utensils. Sales of
OREX Degradables during the 1997 Quarter 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 Degradables 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 currently
undertaking a thorough review and analysis of the market position of OREX
Degradables within
433441.1
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<PAGE>
its various market potentials. As a part of such review and analysis, the
Company plans to implement appropriate adjustments to its marketing plan to seek
to improve the Company's operating results in connection with the sale of OREX
Degradables. 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 on Form
10-K for the year ended December 31, 1996 (the "Annual Report") including,
without limitation, those described in such Annual Report under "Risk Factors --
Risks of New Products", and "-- Manufacturing and Supply Risks".
Gross profit for the 1997 Quarter was $9.1 million as compared to $11.5 million
for the 1996 Quarter, a decline of 20.2%. The decline is primarily attributed to
excess capacity of the Company's 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, the Company sold product from existing inventory,
further negatively affecting margin. Pending increased utilization of the
Company's existing manufacturing capacity at its Abbeville and Arden
manufacturing plants and adjusting pricing of OREX Degradables to take into
account disposal cost savings over traditional products, the overhead of the
Company incurred through its Abbeville and Arden plants will continue to
negatively impact profit margins. In addition to the effect of OREX Degradables
on gross margins, the decline in White Knight sales created excess capacity,
adversely affecting gross margin.
Selling and marketing expenses were $6.9 million or 17.2 percent of net sales in
the 1997 Quarter as compared to $6.3 million or 15.7 percent in the 1996
Quarter. The increase in sales and marketing expenses was primarily due to
increased distribution costs related to the movement of the Company's drape and
gown operation located in Acuna to Apson, Mexico, and increased salaries and
benefits.
General and administrative expenses were $3.6 million or 9.2 percent of net
sales in the 1997 Quarter as compared to $3.1 million or 7.7 percent of net
sales in the 1996 Quarter. The increase in general and administrative expenses
was primarily due to increased consulting fees, audit fees and costs related to
the Company's corporate office.
Research and development expenses were $558,000 or 1.4 percent of net sales in
the 1997 Quarter as compared to $297,000 or 0.7 percent of net sales in the 1996
Quarter. This increase in research and development expense was primarily
attributed to the Company's development of fiber and compounding technology.
Amortization of intangibles was $956,000 during the 1997 Quarter as compared to
$1.0 million during the 1996 Quarter.
433441.1
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<PAGE>
Interest income was $228,000 in the 1997 Quarter as compared to $641,000 in the
1996 Quarter. 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 $1.0 million in the 1997 Quarter as compared to $573,000
during the 1996 Quarter. The increase in interest expense is primarily
attributed to the Company's acquisition of OREX Degradable inventory and
manufacturing capabilities during 1996.
Provisions for income taxes reflect an expense for the 1997 Quarter of $4,000
compared to a tax expense of $268,000 for the 1996 Quarter. The effective tax
rate in the 1997 Quarter differs from the statutory rate due primarily to the
amortization of a portion of goodwill which is not deductible for tax purposes.
At March 31, 1997, the Company had a net operating loss of $11.5 million which,
if not utilized, expires through 2012.
The resulting net loss was $3.9 million in the 1997 Quarter as compared to net
income of $437,000 in the 1996 Quarter.
Liquidity and Capital Resources
At March 31, 1997 the Company's cash and cash equivalents totaled $18.1 million
as compared to $20.9 million at December 31, 1996.
During the 1997 Quarter, the Company used $3.6 million of cash in operating
activities as compared to $6.1 million in the 1996 Quarter. The use of cash
during the 1997 Quarter is attributable to a combination of the Company's
operating loss, an increase in inventory and a reduction in accounts payable.
The Company used $1.2 million in investing activities during the 1997 Quarter as
compared to $6.2 million during the 1996 Quarter. The use of cash during the
1997 Quarter was primarily attributable to several computer software
implementations in progress.
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 March 31, 1997 was
approximately $5.1 million. Outstanding borrowings under the revolving credit
facility were approximately $32.0 million at March 31, 1997. Outstanding
borrowings under the term loan facility were $14.0 million at March 31, 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 March 31, 1997. At March
31, 1997, the Company was not in compliance with the net income covenant
contained in the Credit Agreement. This covenant violation was waived on May 13,
1997. No assurances can be provided that other 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. Any unwaived default by
the Company under the Credit Agreement would be expected
433441.1
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<PAGE>
to have a material adverse effect upon the Company. At March 31, 1997,
outstanding indebtedness under the Credit Agreement exceeded the Company's cash
and cash equivalents.
Based upon its current business plan, the Company currently expects that cash
equivalents and short term investments on hand, the Company's existing credit
facility and funds budgeted to be generated from operations will be adequate to
meet its liquidity and capital requirements through 1997. Currently unforeseen
future developments and increased working capital requirements may require
additional debt financing or issuances of common stock in 1997 and subsequent
years. There can be no assurances that the Company could obtain any required
additional debt financing or successfully consummate an issuance of common stock
on terms favorable to the Company, if at all.
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.
433441.1
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<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
During the quarter for which this report is filed, there were no
material modifications in the instruments defining the rights of shareholders.
During the quarter for which this report is filed, none of the rights evidenced
by the shares of the Company's common stock were materially limited or qualified
by the issuance or modification of any other class of securities. During the
quarter for which this report is filed, the Company sold no equity securities of
the Company that were not registered under the Securities Act of 1933, as
amended.
Item 3. Defaults Upon Senior Securities
At March 31, 1997, the Company was not in compliance with the
restrictive covenant of its credit facility pertaining to net income. This
existing covenant violation was waived by the Company's lenders on May 13, 1997.
Item 4. Submission of Matters to a Vote of Securityholders
None.
Item 5. Other Information
None.
433441.1
11
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
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
- ------------------
<FN>
(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.
</FN>
</TABLE>
(b) No current reports on Form 8-K were filed during the quarter for which this
report is filed.
433441.1
12
<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 May 15, 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)
433441.1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF ISOLYSER COMPANY, INC. AS OF MARCH 31, 1997 AND
THE RELATED CONSOLIDATED STATEMENTS OF EARNINGS AND CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 18147
<SECURITIES> 0
<RECEIVABLES> 29426
<ALLOWANCES> 1755
<INVENTORY> 64750
<CURRENT-ASSETS> 113485
<PP&E> 89446
<DEPRECIATION> 14111
<TOTAL-ASSETS> 247687
<CURRENT-LIABILITIES> 21798
<BONDS> 49726
0
0
<COMMON> 39
<OTHER-SE> 177742
<TOTAL-LIABILITY-AND-EQUITY> 247687
<SALES> 40003
<TOTAL-REVENUES> 40003
<CGS> 30846
<TOTAL-COSTS> 30846
<OTHER-EXPENSES> 12258
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1020
<INCOME-PRETAX> (3906)
<INCOME-TAX> 4
<INCOME-CONTINUING> (3910)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3910)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
