<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1998
---------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _____________________________
Commission file number 0-26434
---------------------------------------------------------
Kyzen Corporation
- --------------------------------------------------------------------------------
(Exact name of the small business issuer as
specified in its charter)
Utah 87-0475115
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
430 Harding Industrial Drive, Nashville, TN 37211
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (615) 831-0888
----------------------------------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
[X] Yes [ ] No
- ---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
[ ] Yes [ ] No
- ---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
5,006,681 shares of Class A Common Stock,
$0.01 par value, outstanding as of August 3, 1998
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Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
---- ----
Page 1 of 14
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I Financial Information
Item 1. Financial Statements:
Balance Sheet as of June 30, 1998 (unaudited) and
December 31, 1997 (audited) 3
Statement of Operations for the three and six-months ended
June 30, 1998 (unaudited) and 1997 (unaudited) 4
Statement of Cash Flows for the six-months ended
June 30, 1998 (unaudited) and 1997 (unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
Page 2 of 14
<PAGE> 3
KYZEN CORPORATION
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BALANCE SHEET
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 485,041 $ 710,778
Short-term investments -- 99,208
Accounts receivable, net of allowance for doubtful accounts
of $9,094 in 1998 and $8,068 in 1997 715,312 802,400
Costs and estimated losses in excess of billings on
uncompleted contracts 4,529 7,155
Inventory 375,386 332,367
Other 47,534 28,892
----------- -----------
Total current assets 1,627,802 1,980,800
Property and equipment, net 986,161 928,079
Patents, net 148,934 147,296
Interest receivable from related parties 192,807 170,151
----------- -----------
Total assets $ 2,955,704 $ 3,226,326
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable and capital lease obligations, current $ 3,699 $ 17,050
Accounts payable and accrued expenses 518,457 707,781
Accounts payable to related parties 14,205 5,381
----------- -----------
Total current liabilities 536,361 730,212
Note payable and capital lease obligations -- 67,665
----------- -----------
Total liabilities 536,361 797,877
----------- -----------
Mandatorily redeemable Class B Common Stock,
1,200,000 shares authorized, no shares
issued or outstanding at June 30, 1998
and December 31, 1997, respectively
Shareholders' equity:
Preferred Stock, $0.001 par value,
10,000,000 shares authorized, no
shares issued or outstanding at
June 30, 1998 and December 31,
1997, respectively
Class A Common Stock, $0.01 par value,
30,000,000 shares authorized,
5,006,681 and 5,006,681 shares
issued and outstanding at June 30,
1998 and December 31, 1997,
respectively
50,068 50,068
Additional paid-in capital 5,294,633 5,294,633
Treasury stock, at cost (313) (313)
Accumulated deficit (2,925,045) (2,915,939)
----------- -----------
Total shareholders' equity 2,419,343 2,428,449
----------- -----------
Total liabilities and shareholders' equity $ 2,955,704 $ 3,226,326
=========== ===========
</TABLE>
Page 3 of 14
<PAGE> 4
KYZEN CORPORATION
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STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales $ 1,498,340 $ 1,303,444 $ 2,925,530 $ 2,591,062
Cost of sales 639,816 621,011 1,255,842 1,273,121
----------- ----------- ----------- -----------
Gross profit 858,524 682,433 1,669,688 1,317,941
Operating costs and expenses
Selling, marketing, general and
administrative expenses 752,751 730,092 1,490,745 1,500,984
Research and development expenses 113,184 102,661 221,197 245,807
----------- ----------- ----------- -----------
Total operating expenses 865,935 832,753 1,711,942 1,746,791
----------- ----------- ----------- -----------
Operating loss (7,411) (150,320) (42,254) (428,850)
Other income (expense):
Interest income 19,686 19,915 36,364 43,489
Interest expense (1,231) (7,400) (3,216) (7,688)
----------- ----------- ----------- -----------
Total other income (expense) 18,455 12,515 33,148 35,801
----------- ----------- ----------- -----------
Net income (loss) $ 11,044 $ (137,805) $ (9,106) $ (393,049)
=========== =========== =========== ===========
Earnings per share - basic $ 0.00 $ (0.03) $ (0.00) $ (0.08)
=========== =========== =========== ===========
Earnings per share - diluted $ 0.00 $ (0.03) $ (0.00) $ (0.08)
=========== =========== =========== ===========
Weighted average shares outstanding
- basic 5,006,681 5,006,348 5,006,681 5,003,342
Weighted average shares outstanding
- diluted 5,087,890 5,006,348 5,006,681 5,003,342
</TABLE>
Page 4 of 14
<PAGE> 5
KYZEN CORPORATION
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STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,106) $(393,049)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 121,651 101,352
Non-cash interest charge -- --
Decrease in accounts receivable 87,088 93,601
Decrease (increase) in costs and estimated losses in excess of
billings on uncompleted contracts 2,626 (1,941)
Increase in inventory (43,018) (302,633)
(Increase) decrease in other current assets (18,642) 6,315
Increase in interest receivable from related parties (22,656) (22,656)
Increase (decrease) in accounts payable and accrued expenses (180,501) 112,366
--------- ---------
Net cash used by operating activities (62,558) (406,645)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments 99,208 428,628
Purchase of fixed assets (169,672) (96,554)
Purchase of patent rights and related expenditures (11,699) (11,254)
--------- ---------
Net cash provided (used) by investing activities (82,163) 320,820
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock -- 1,219
Payment on note payable (81,016) (2,716)
--------- ---------
Net cash used by financing activities (81,016) (1,497)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (225,737) (87,322)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 710,778 741,820
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 485,041 $ 654,498
========= =========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash used for interest payments was $3,218 for the six-months ended June 30,1998
and $7,688 for the six-months ended June 30, 1997. The Company paid no income
taxes for the six-months ended June 30, 1998 or the six-months ended June 30,
1997.
Page 5 of 14
<PAGE> 6
KYZEN CORPORATION
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NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Kyzen(R) Corporation ("Kyzen" or the "Company") manufactures and markets
chemical solutions and processes used in high-technology cleaning applications,
including electronic assemblies and precision metal and plastic components where
precision cleaning processes are required. The Company also manufactures and
markets peripheral equipment such as process control systems and chemical
handling systems designed to enhance the use by the Company's customers of its
chemical solutions. These products and services may be sold as a package, as a
cleaning process or as separate items that can be integrated into the customer's
existing cleaning process. The Company was incorporated in Utah in 1990. Its
headquarters are located at 430 Harding Industrial Dr., Nashville, TN 37211,
where its telephone number is (615) 831-0888, and its fax number is (615)
831-0889.
The Company's operations are conducted within one business segment during 1998.
Sales to customers outside the United States totaled $232,805 in the second
quarter 1998 and $194,303 in the second quarter 1997, representing approximately
16% of net sales in both 1998 and 1997 respectively for the three-month periods
then ended.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers securities with an original maturity of three months or
less to be cash equivalents.
SHORT-TERM INVESTMENTS
By Company policy, short-term investments consist primarily of investment grade
commercial paper, direct obligations of the U.S. government and its agencies and
other short-term investment funds. The Company has classified all of its
investments in debt and equity securities as trading securities as defined by
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Debt and Equity Securities." In accordance with SFAS No. 115, the
Company records its investments at fair value and recognizes unrealized holding
gains and losses in earnings. Unrealized gains and losses recognized in earnings
during the second quarter 1998 and the year 1997 were not significant.
Fair value is determined by the most recently traded price of the security at
the balance sheet date. Net realized gains or losses are determined on the
specific identification cost method.
CONCENTRATION OF CREDIT RISK
The Company sells its products to customers involved in a variety of industries
including electronics, optics and computers. Kyzen performs continuing credit
evaluations of its customers and does not require collateral. Historically, the
Company has not experienced significant losses related to individual customers
or groups of customers in any particular industry or geographic area.
REVENUE RECOGNITION
Revenue from chemical products or services is recognized based upon shipment of
products or performance of services. Revenues and profits are recorded using the
percentage of completion method for certain contracts based on the product type,
contract size and duration of the time to completion. The percentage of
completion is determined by relating the actual costs of work performed to date
to the current estimated total cost of the respective contracts. Revenues and
profits on all other contracts are recorded as shipment is made. If estimated
total costs on any of these contracts indicate a loss, the entire amount of the
estimated loss is recognized immediately. Costs reduced by estimated losses in
excess of billings on uncompleted contracts, as reflected on the accompanying
balance sheet, represent revenues recognized in excess of amounts billed.
COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" as of January 1, 1998. This Statement requires that certain transactions
historically recorded through the statement of shareholders equity be presented
in the financial statements as other comprehensive income. During the periods
presented, the Company did not have any transactions that gave rise to other
comprehensive income; therefore, comprehensive and net income are equivalent.
Page 6 of 14
<PAGE> 7
KYZEN CORPORATION
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NOTES TO UNAUDITED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values of cash, accounts receivable and accounts payable approximate
fair value due to the short-term maturities of these assets and liabilities. The
fair value of the Company's note payable was not significantly different than
its carrying amount based upon the applicable interest rate environment.
INVENTORIES
Inventories are valued at the lower of cost or market value with cost determined
using the weighted average, first in, first out (FIFO) method.
INCOME TAXES
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the income tax basis of the Company's assets and
liabilities.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives (2 to 12 years) of the respective assets.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the estimated useful life of the asset or the lease term.
PATENT COSTS
Patent costs, including the purchase of patent rights and legal costs incurred
related to issued and pending patents, are amortized using the straight-line
method over the useful lives of the patents, not exceeding 17 years. Accumulated
amortization amounted to $62,742 as of June 30, 1998 and $52,681 as of December
31, 1997.
IMPAIRMENT OF VALUE
Impairment of accounting value is measured on the basis of anticipated
undiscounted cash flows from operations. Based upon a review of its assets, the
Company determined no impairment existed at June 30, 1998 or December 31, 1997.
RESEARCH AND DEVELOPMENT COSTS
The Company is involved in research and development activities relating to new
product development and new uses for its chemicals. The Company expenses
research and development costs as incurred.
ADVERTISING COSTS
Costs incurred for producing and publishing advertising are expensed in the
period incurred and totaled $41,536 for the quarter ended June 30, 1998 and
$32,707 for the quarter ended June 30, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EARNINGS PER SHARE DATA
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share," in the
quarter ending December 31, 1997. SFAS No. 128 requires the presentation of
basic and diluted earnings per share ("EPS") on the face of the statement of
operations. In accordance with the provisions of SFAS No. 128, the Company
calculates basic EPS as income available to common shareholders divided by the
weighted average number of shares outstanding during the year. Diluted EPS is
calculated using the "if converted method" for convertible securities and the
treasury stock method for options and warrants as prescribed by Accounting
Principles Board Opinion No. 15. This Statement has been applied,
retrospectively, to all periods presented.
SFAS No. 128 also requires the Company to disclose a reconciliation of the
numerators and denominators used in basic and diluted EPS. Based on the
Company's net losses and capital structure reported for the three-months ended
March 31, 1998 and for the year 1997, there was no difference in the amounts
used in the numerators and denominators for the purposes of calculating basic
EPS and diluted EPS for those periods. The Company reported net income for the
quarter
Page 7 of 14
<PAGE> 8
KYZEN CORPORATION
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NOTES TO UNAUDITED FINANCIAL STATEMENTS
ending June 30, 1998. In addition, some shares outstanding were valued at option
prices that were below the average daily fair market value of the shares. As a
result, the diluted EPS denominator used to compute basic EPS and diluted EPS
differed for the period ending June 30, 1998. The diluted EPS denominator
increased to include the additional number of common shares that would have been
outstanding if the dilutive potential common shares had been issued. The
numerator for both basic EPS and diluted EPS were the same for the period ending
June 30, 1998.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements have been prepared without an
audit, and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the Company believes that
the disclosures herein are adequate to make the information presented not
misleading. These statements should be read in conjunction with the Company's
financial statements for the fiscal year ended December 31, 1997. The results of
operations for the three and six-months ended June 30, 1998 are not necessarily
indicative of results for the full fiscal year.
In the opinion of management, the accompanying interim financial statements
contain all adjustments necessary for a fair presentation of the Company's
financial position as of June 30, 1998; its results of operations for the three
and six-month periods ended June 30, 1998 and 1997; and its cash flows for the
six-months ended June 30, 1998 and 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
adopted the provisions of this Statement effective January 1, 1998. Based upon a
review of its operations, management believes that the Company operates in only
one reportable segment at June 30, 1998.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits." SFAS No. 132 revises and
standardizes employers' disclosures about pension and other postretirement
benefit plans, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. The Company adopted the provisions
of this Statement effective January 1, 1998. Adoption of this Statement did not
have a material impact on the Company's financial condition or results of
operations.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. The Company adopted the
provisions of this Statement effective January 1, 1998. The Company has not
engaged in derivative or hedging activities for the period ending June 30, 1998
and for the year 1997. Adoption of this Statement did not have an impact on the
Company's financial condition or results of operations.
Page 8 of 14
<PAGE> 9
KYZEN CORPORATION
- --------------------------------------------------------------------------------
PART I (CONT.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF QUARTERS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Net sales for the quarter ended June 30, 1998 from all business activities
increased approximately 15% or $194,896 to $1,498,340. This increase is due to
increased sales volume of the Company's chemical cleaning products to existing
customers as well as sales to new customers who are converting to the Company's
products. Sales of equipment, processes and peripheral systems decreased by
approximately 52% to $54,564 during the second quarter 1998, versus the same
period in 1997 reflecting the Company's focus on smaller projects in this
product line.
Gross profit for the quarter ended June 30, 1998 increased 26% or $176,091 to
$858,524, as compared to $682,433 in the second quarter of 1997. This $176,091
increase is attributable to increased sales volume of the Company's cleaning
products, as well as improved overall gross margin from selling a greater mix of
higher margin chemical products. Gross profit margins from all business
activities increased from 52% in the second quarter of 1997 to 57% in the second
quarter of 1998, reflecting a change in product mix, sales of higher margin
products and better economies of scale provided by the larger sales volume of
chemical products.
Selling, marketing, general and administrative expenses for the quarter ended
June 30, 1998 increased 3% or $22,659 to $752,751 as compared to $730,092 for
the second quarter of 1997. This increase reflects increased general and
administrative costs associated with the increased use of contract labor and
consultants in the Company's accounting area during the second quarter of 1998.
Research and development expenses for the quarter ended June 30, 1998 increased
10% or $10,523 to $113,184 from $102,661 for the quarter ended June 30, 1997.
This increase resulted from certain research and development expenses that were
incurred in the second quarter of 1998 related to the purchase of experimental
materials used in developmental tests in the Company's new Nashville Cleaning
Applications and Evaluation Center.
Operating loss for the quarter ended June 30, 1998 decreased 95% or $142,909 to
a loss of $7,411 from a loss of $150,320 for the quarter ended June 30, 1997.
This decrease is due primarily to increased chemical product sales, and higher
gross margins in the second quarter of 1998 over the second quarter of 1997.
Interest income for the quarter ended June 30, 1998 decreased 1% to $19,686 from
$19,915 for the second quarter 1997. This $229 decrease is due to lower cash
balances and lower short-term investments during the second quarter of 1998 as a
result of the investment of cash into the operations of the business.
Interest expense for the second quarter 1998 decreased 83% to $1,231 from $7,400
in the second quarter of 1997. The decrease of $6,169 in interest expense
reflects the Company's full payment of its term loan debt obligation during the
quarter.
Net income for the quarter ended June 30, 1998 increased by $148,849 to an
income of $11,044, from a loss of $137,805 for the quarter ended June 30, 1997.
This increase is due primarily to increased chemical product sales, and higher
gross margins in the second quarter of 1998 over the second quarter of 1997.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Net sales for the six-months ended June 30, 1998 from all business activities
increased approximately 13% or $334,468 to $2,925,530. This increase is due to
increased sales volume of the Company's chemical cleaning products to existing
customers as well as sales to new customers who are converting to the Company's
products. Sales of equipment, processes and peripheral systems decreased by 53%
to $83,369 during the first six-months of 1998, versus the same period in 1997
reflecting the Company's focus on smaller projects in this product line.
Gross profit for the six-months ended June 30, 1998 increased 27% or $351,747 to
$1,669,688, as compared to $1,317,941 in the first six-months of 1997. This
increase is attributable to increased sales volume of the Company's cleaning
products, as well as improved overall gross margin from selling a greater mix of
higher margin chemical products. Gross profit margins from all business
activities increased from 51% in the first six-months of 1997 to 57% in the
first six-months of 1998, reflecting a change in product mix, sales of higher
margin products and better economies of scale provided by the larger sales
volume of chemical products.
Page 9 of 14
<PAGE> 10
KYZEN CORPORATION
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PART I (CONT.)
Selling, marketing, general and administrative expenses for the six-months ended
June 30, 1998 decreased 1% or $10,239 to $1,490,745 as compared to $1,500,984
for the first six-months of 1997. This decrease reflects the Company's focus on
curtailing growth in expenses during the first six-months of 1998.
Research and development expenses for the six-months ended June 30, 1998
decreased 10% or $24,610 to $221,197 from $245,807 for the six-months ended June
30, 1997. This decrease resulted from lower purchases of certain research and
development materials and supplies in the first six-months of 1998 versus
expenditures that were incurred in the first quarter and six-months of 1997.
Operating loss for the six-months ended June 30, 1998 decreased 90% or $386,596
to a loss of $42,254 from a loss of $428,850 for the six-months ended June 30,
1997. This decrease is due primarily to increased chemical product sales, higher
gross margins and the slight reduction of expenses in the first six-months of
1998 over the first six-months of 1997.
Interest income for the six-months ended June 30, 1998 decreased 16% to $36,364
from $43,489 for the first six-months of 1997. This $7,125 decrease is due to
lower cash balances during the first half of 1998 as a result of the investment
of cash into the operations of the business.
Interest expense for the first six-months of 1998 decreased 58% to $3,216 from
$7,688 in the first six-months of 1997. The decrease of $4,470 in interest
expense reflects the Company's full payment of its term loan debt obligation
during the period.
Net loss for the six-months ended June 30, 1998 decreased 98% or $383,943 to a
loss of $9,106, from a loss of $393,049 for the six-months ended June 30, 1997.
This decrease is due primarily to increased chemical product sales, and higher
gross margins in the first half of 1998 over the first half of 1997.
FORWARD-LOOKING STATEMENTS
Management has included certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. When used, statements which are
not historical in nature, including the words "anticipate," "estimate,"
"should," "expect," "believe," "intend" and similar expressions are intended to
identify forward-looking statements. Such statements are, by their nature,
subject to certain risks and uncertainties. Among the factors that could cause
actual results to differ materially from those projected are the following:
business conditions and the general economy as they affect interest rates;
business conditions as they affect manufacturers of chemical raw materials; the
federal, state and local regulatory environment; availability of debt and equity
capital with favorable terms and conditions; availability of new expansion and
acquisition opportunities; changes in the financial condition or corporate
strategy of the Company's primary customers; and the ability of the Company to
develop new competitive product lines. Actual results, events and performance
may differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to release publicly the result
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds have been the remaining proceeds from its
initial public offering in 1995 and borrowings on a term loan. The Company's
primary uses of funds are the funding of current operations, research and
development of new product lines, purchase of capital equipment, construction
and expansion of the Cleaning Applications and Evaluation Centers and sales and
marketing activities.
As of June 30, 1998, the Company had working capital of $1,091,441, compared to
$1,250,588 as of December 31, 1997, representing a decrease of $159,147, or 13%
from 1997. This decrease resulted primarily from the funding of current
operations, the purchase and construction of fixed assets, repayment of
long-term debt and the purchase of patent rights and related expenditures during
the first six-months of 1998.
In April 1997, the Company obtained a line of credit from a commercial bank in
the amount of $500,000 secured by the Company's accounts receivable and a cash
balance (the "Credit Facility"). On November 13, 1997 the Credit Facility was
reduced to $420,000 and the Company obtained a term loan of $80,000 for the
financing of certain improvements to the Company's offices, laboratories and
demonstration facilities (the "Term Loan"). This Term
Page 10 of 14
<PAGE> 11
KYZEN CORPORATION
- --------------------------------------------------------------------------------
PART I (CONT.)
Loan had a stated rate of interest of 10% and requires monthly interest and
principal payments of $2,039 through December 2001. As of April 1, 1998, the
balance outstanding under the Term Loan was $74,036. On April 12, 1998 the
Company repaid the balance outstanding and terminated the Term Loan.
As a result of its operating losses, the Company was in violation of certain of
its financial debt covenants under the Credit Facility at December 31, 1997 and
at March 31, 1998. The Company received waivers of these covenants from its
lender under the Credit Facility through December 31, 1997. At December 31, 1997
and March 31, 1998, the Company had no balances outstanding under the Credit
Facility. On April 12, 1998, the Company terminated the Credit Facility and the
lender released all security agreements thereunder. The Company is currently
negotiating with several lenders to obtain a replacement credit facility. There
can be no assurance, however, that the Company will be able to obtain another
credit facility on terms favorable to the Company to replace the Credit
Facility.
Cash used by operations of $62,558 in the first six-months of 1998 represented a
$344,087 or an 85% decrease over cash used by operations of $406,645 during the
same period in 1997. This decrease resulted from lower operating losses,
decreases in accounts payable and increases in accounts receivable as compared
to the same period in 1997.
Cash used by investing activities of $82,163 in the six-months ended June 30,
1998 represented a $402,983 change in cash position over cash provided by
investing activities during the six-months ended June 30, 1997 of $320,820. This
increase was due primarily to the liquidation of short-term investments during
the first quarter of 1998, and partially offset by higher fixed asset purchases
for completion of the Company's laboratories and Cleaning Applications and
Evaluation Centers.
Cash used by financing activities of $81,016 in the six-months ended June 30,
1998 represented an increase of $79,519 or 5,312% from cash used by financing
activities of $1,497 during the six-month period ended June 30, 1997. This
difference was due to repayment of the Term Loan made during the quarter ended
June 30, 1997.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations and expansion plans, that the current cash balances
together with projected cash flow from operations will be sufficient to satisfy
its contemplated cash requirements at least through December 31, 1998. The
Company's cash requirements for 1998 and beyond will depend primarily upon the
level of sales of chemical products, product development, sales and marketing
expenditures, timing of expansion plans and capital expenditures. In the event
the Company's plans change, or its assumptions change or prove to be inaccurate
(due to unanticipated expenses, delays, or otherwise), the Company could be
required to seek additional financing from public or private debt and equity
markets prior to such time. There can be no assurance, however, that these
sources will be available to the Company on favorable terms, and unfavorable
markets could limit the Company's ability to obtain additional financing.
Further, there can be no assurance that the Company will obtain a credit
facility on favorable terms to replace the Credit Facility if financing of the
Company's cash requirements becomes necessary. Additionally, the Company plans
to continue to investigate potential acquisition candidates that are consistent
with the Company's growth strategies, which would create additional financing
needs for the Company.
INTERNATIONAL TRADE DEVELOPMENTS
In 1998, manufacturers in the Peoples Republic of China have become major
suppliers to the Company. In 1998, the Company may import up to approximately
30% of its purchases of raw materials from China. The United States has
threatened trade sanctions of up to $2 billion if China does not increase its
efforts to stop piracy and other intellectual property violations. In addition,
annual renewal of China's most-favored-nation trading status is under review by
the United States. Failure of the United States government to continue to grant
most-favored-nation treatment to China could raise duties, thereby increasing
the cost of certain of the Company's raw materials. The Company has historically
and continues to obtain these raw materials domestically, and the Company has
contingency plans in case of negative developments in Chinese sources. There can
be no assurance, however, that such developments will not have a material
adverse effect on the Company's financial condition and results of operations.
Page 11 of 14
<PAGE> 12
KYZEN CORPORATION
- --------------------------------------------------------------------------------
PART I (CONT.)
YEAR 2000
Many computer systems will not accurately interpret dates after December 31,
1999. The year 2000 issue can directly (in its own computer systems) or
indirectly (if its suppliers' and customers' systems are not able to accommodate
the year 2000 century change.
The Company has evaluated its internal computing and communications systems and
believes such systems will all accommodate the year 2000 century change. Because
of the relatively simple nature of the Company's information systems, management
believes any impact on such systems and modifications required resulting from
the year 2000 and beyond will not have a material adverse effect on the
Company's financial condition or results of operations.
The Company is also evaluating major vendors, and suppliers of goods and
services to the Company and its major customers. The Company is currently
uncertain as to whether or not all such vendors, suppliers and customers will be
able to accommodate the year 2000 century change. Although management believes
that failure of any such vendor or supplier or customer to accommodate the year
2000 century change should not have a material adverse effect on the Company's
financial condition or results of operations, the inability of a significant
vendor or supplier, such as a provider of utilities, to accommodate the year
2000 century change could have a material adverse effect on all customers of
such vendor or supplier, including the Company. Further, the inability of a
significant customer to accommodate the year 2000 century change could have a
material adverse effect on the Company's sales.
Page 12 of 14
<PAGE> 13
KYZEN CORPORATION
- --------------------------------------------------------------------------------
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held at the Company's Headquarters at 430
Harding Industrial Drive, Nashville, Tennessee, on April 24, 1998. The
shareholders took the following action: The shareholders elected two directors
to serve until the Annual Meeting of Shareholders in 2001. The shareholders
present in person or by proxy cast the following numbers of votes in connection
with the election of directors, resulting in the election of both nominees:
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld
--------- ------------- --------------
<S> <C> <C> <C>
Kyle J. Doyel 3,458,534 41,060 0
Larry A. Lofgreen 3,349,788 149,806 0
</TABLE>
ITEM 5. OTHER INFORMATION
The deadline for Shareholder proposals, other than those to be included in the
Proxy Statement for the 1999 Annual Meeting of Shareholders will be February 8,
1999, pursuant to Rule 14a-4.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
Exhibit 27 Financial Data Schedule. (submitted in electronic format for
use of Commission only).
(b) Reports on Form 8-K
During the second quarter of 1998 the Company filed no reports on Form 8-K.
- --------------------------------------------------------------------------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KYZEN CORPORATION
- --------------------------------------------------------------------------------
(Registrant)
Date August 3, 1998 /s/ Kyle J. Doyel
---------------------------- --------------------------------------
(Signature)
Kyle J. Doyel
President and Chief Executive Officer
Date August 3, 1998 /s/ Thomas M. Forsythe
---------------------------- --------------------------------------
(Signature)
Thomas M. Forsythe
Treasurer and Chief Accounting Officer
Page 13 of 14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1998-KYZEN CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 485,041
<SECURITIES> 0
<RECEIVABLES> 724,406
<ALLOWANCES> 9,094
<INVENTORY> 375,384
<CURRENT-ASSETS> 1,627,802
<PP&E> 1,590,863
<DEPRECIATION> 604,701
<TOTAL-ASSETS> 2,955,704
<CURRENT-LIABILITIES> 536,361
<BONDS> 0
0
0
<COMMON> 50,068
<OTHER-SE> 2,369,275
<TOTAL-LIABILITY-AND-EQUITY> 2,955,704
<SALES> 1,498,340
<TOTAL-REVENUES> 1,498,340
<CGS> 639,816
<TOTAL-COSTS> 639,816
<OTHER-EXPENSES> 865,935
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,231
<INCOME-PRETAX> 11,044
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,044
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1998-KYZEN CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 485,041
<SECURITIES> 0
<RECEIVABLES> 724,406
<ALLOWANCES> 9,094
<INVENTORY> 375,384
<CURRENT-ASSETS> 1,627,802
<PP&E> 1,590,863
<DEPRECIATION> 604,701
<TOTAL-ASSETS> 2,955,704
<CURRENT-LIABILITIES> 536,361
<BONDS> 0
0
0
<COMMON> 50,068
<OTHER-SE> 2,369,275
<TOTAL-LIABILITY-AND-EQUITY> 2,955,704
<SALES> 2,925,530
<TOTAL-REVENUES> 2,925,530
<CGS> 1,255,842
<TOTAL-COSTS> 1,255,842
<OTHER-EXPENSES> 1,711,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,216
<INCOME-PRETAX> (9,106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,106)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
