<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 September 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
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(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
November 9, 1998
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 September 30, 1998 (unaudited)
and December 31, 1997 (audited) 3
Statement of Operations for the three and nine
months ended September 30, 1998 (unaudited) and
1997 (unaudited) 4
Statement of Cash Flows for the nine months ended
September 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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 420,116 $ 710,778
Short-term investments -- 99,208
Accounts receivable, net of allowance for doubtful accounts
of $8,584 in 1998 and $8,068 in 1997 854,570 802,400
Costs and estimated losses in excess of billings on
uncompleted contracts 4,529 7,155
Inventory 327,672 332,367
Other 59,505 28,892
----------- -----------
Total current assets 1,666,392 1,980,800
Property and equipment, net 906,858 928,079
Patents, net 159,168 147,296
Interest receivable from related parties 204,135 170,151
----------- -----------
Total assets $ 2,936,553 $ 3,226,326
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable and capital lease obligations, current $ 2,160 $ 17,050
Accounts payable and accrued expenses 471,636 707,781
Accounts payable to related parties 2,194 5,381
----------- -----------
Total current liabilities 475,990 730,212
Note payable and capital lease obligations -- 67,665
----------- -----------
Total liabilities 475,990 797,877
----------- -----------
Mandatorily redeemable Class B Common Stock,
1,200,000 shares authorized, no shares
issued or outstanding at September 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
September 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 September
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 (2,883,825) (2,915,939)
----------- -----------
Total shareholders' equity 2,460,563 2,428,449
----------- -----------
Total liabilities and shareholders' equity $ 2,936,553 $ 3,226,326
=========== ===========
</TABLE>
Page 3 of 14
<PAGE> 4
KYZEN CORPORATION
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STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales $ 1,512,766 $ 1,475,254 $ 4,438,296 $ 4,066,316
Cost of sales 648,842 684,899 1,904,684 1,958,020
----------- ----------- ----------- -----------
Gross profit 863,924 790,355 2,533,612 2,108,296
Operating costs and expenses
Selling, marketing, general and
administrative expenses 735,649 718,194 2,226,394 2,219,178
Research and development expenses 101,475 106,518 322,672 352,325
----------- ----------- ----------- -----------
Total operating expenses 837,124 824,712 2,549,066 2,571,503
----------- ----------- ----------- -----------
Operating income (loss) 26,800 (34,357) (15,454) (463,207)
Other income (expense):
Interest income 16,215 19,610 52,579 63,099
Interest expense (1,795) (467) (5,011) (8,155)
----------- ----------- ----------- -----------
Total other income (expense) 14,420 19,143 47,568 54,944
----------- ----------- ----------- -----------
Net income (loss) $ 41,220 $ (15,214) $ 32,114 $ (408,263)
=========== =========== =========== ===========
Earnings per share - basic $ 0.01 $ (0.00) $ 0.01 $ (0.08)
=========== =========== =========== ===========
Earnings per share - diluted $ 0.01 $ (0.00) $ 0.01 $ (0.08)
=========== =========== =========== ===========
Weighted average shares outstanding
- basic 5,006,681 5,006,594 5,006,681 5,004,505
Weighted average shares outstanding
- diluted 5,085,271 5,006,594 5,088,079 5,004,505
</TABLE>
Page 4 of 14
<PAGE> 5
KYZEN CORPORATION
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STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 32,114 $(408,263)
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization 203,262 156,141
Decrease (increase) in accounts receivable (52,170) 1,750
Decrease in costs and estimated losses in excess of billings on
uncompleted contracts 2,626 45,968
Decrease (increase) in inventory 4,695 (274,530)
Decrease (increase) in other current assets (30,613) 18,179
Increase in interest receivable from related parties (33,984) (33,984)
Increase (decrease) in accounts payable and accrued expenses (239,332) 120,048
--------- ---------
Net cash used by operating activities (113,402) (374,691)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments 99,208 428,647
Purchase of fixed assets (170,039) (156,722)
Purchase of patent rights and related expenditures (23,874) (35,750)
--------- ---------
Net cash provided (used) by investing activities (94,705) 236,175
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock -- 1,281
Payment on note payable (82,555) (3,182)
--------- ---------
Net cash used by financing activities (82,555) (1,901)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (290,662) (140,417)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 710,778 741,820
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 420,116 $ 601,403
========= =========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash used for interest payments was $5,011 for the nine months ended September
30,1998 and $8,155 for the nine months ended September 30, 1997. The Company
paid no income taxes for the nine months ended September 30, 1998 or the nine
months ended September 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 were conducted within one operating segment during the
nine months ended September 30, 1998 and 1997. Sales to customers outside the
United States totaled $196,637 in the third quarter 1998 and $288,995 in the
third quarter 1997, representing approximately 13% and 17% of net sales,
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 third quarter 1998 and 1997 and the nine months ended September 30,
1998 and 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. However,
the Company has recently been informed of the closing of a facility in December
1998 which represents approximately 5% of the Company's sales in the first nine
months of 1998. The Company is aware this notification was made to comply with
Federal law requiring such notification prior to anticipated closing of plants.
The Company is also aware of the fact that this customer has been attempting to
sell this facility to competitors within his marketplace. The Company is
anticipating that this customer will cease purchasing products in the fourth
quarter of 1998 and the Company is uncertain as to whether or not sales will be
made to this customer or its possible acquirer in 1999 and beyond. The Company
believes the loss of this customer may have a negative effect on the Company's
revenues and earnings in 1999.
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
Page 6 of 14
<PAGE> 7
KYZEN CORPORATION
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NOTES TO UNAUDITED FINANCIAL STATEMENTS
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.
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 of patent costs amounted to $64,683 as of September 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 that no impairment existed at September 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 $42,921 for the quarter ended September 30, 1998 and
$46,471 for the quarter ended September 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.
Page 7 of 14
<PAGE> 8
KYZEN CORPORATION
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NOTES TO UNAUDITED FINANCIAL STATEMENTS
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 and
nine months ended September 30, 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
three and nine months ended September 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 September 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 numerators for both basic EPS and diluted EPS were
the same for the period ending September 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 nine months ended September 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 September 30, 1998; its results of operations for the
three and nine month periods ended September 30, 1998 and 1997; and its cash
flows for the nine months ended September 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 September 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 will adopt
the provisions of this Statement effective January 1, 2000. As the Company has
not engaged, nor plans to engage in derivative or hedging activities, adoption
of this Statement is not expected to have a significant impact on the Company's
financial condition or results of operations.
Page 8 of 14
<PAGE> 9
KYZEN CORPORATION
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PART I (CONT.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Net sales for the quarter ended September 30, 1998 from all business activities
increased approximately 3% or $37,512 to $1,512,766. 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 58% to $49,154 during the third 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 September 30, 1998 increased 9% or $73,569 to
$863,924, as compared to $790,355 in the third quarter of 1997. This $73,569
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 54% in the third quarter of 1997 to 57% in the third
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
September 30, 1998 increased 2% or $17,455 to $735,649 as compared to $718,194
for the third quarter of 1997.
Research and development expenses for the quarter ended September 30, 1998
decreased 5% or $5,043 to $101,475 from $106,518 for the quarter ended September
30, 1997. This decrease is attributed to lower expenses related to supplies
incurred in the third quarter of 1998 versus the same quarter in 1997.
Operating income for the quarter ended September 30, 1998 improved by $61,157 to
income of $26,800 from a loss of $34,357 for the quarter ended September 30,
1997. This improvement is due primarily to increased chemical product sales and
higher gross margins from the sales of chemicals in the third quarter of 1998
over the third quarter of 1997.
Interest income for the quarter ended September 30, 1998 decreased 17% to
$16,215 from $19,610 for the third quarter 1997. This $3,395 decrease is due to
lower cash balances and short-term investments during the third quarter of 1998
as a result of the investment of cash into the operations of the business.
Interest expense for the third quarter 1998 increased 284% to $1,795 from $467
in the third quarter of 1997.
Net income for the quarter ended September 30, 1998 increased by $56,434 to an
income of $41,220, from a loss of $15,214 for the quarter ended September 30,
1997. This increase is due primarily to increased chemical product sales and
higher gross margins from the sales of chemicals in the third quarter of 1998
over the third quarter of 1997.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Net sales for the nine months ended September 30, 1998 from all business
activities increased approximately 9% or $371,980 to $4,438,296. 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 55% to $132,523 during the first nine 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 nine months ended September 30, 1998 increased 20% or
$425,316 to $2,533,612, as compared to $2,108,296 in the first nine 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 52% in the first nine months of 1997 to 57%
in the first nine 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 nine months
ended September 30, 1998 increased $7,216 to $2,226,394 as compared to
$2,219,178 for the first nine months of 1997. This increase reflects the
Company's focus on curtailing growth in expenses during the first nine months of
1998.
Research and development expenses for the nine months ended September 30, 1998
decreased 8% or $29,653 to $322,672 from $352,325 for the nine months ended
September 30, 1997. This decrease resulted from lower purchases of certain
research and development materials and supplies in the first nine months of 1998
versus expenditures that were incurred in the first nine months of 1997.
Operating loss for the nine months ended September 30, 1998 decreased 97% or
$447,753 to a loss of $15,454 from a loss of $463,207 for the nine months ended
September 30, 1997. This decrease is due primarily to increased chemical product
sales, higher gross margins from the sales of chemicals and the reduction of
expenses in the first nine months of 1998 over the first nine months of 1997.
Interest income for the nine months ended September 30, 1998 decreased 17% to
$52,579 from $63,099 for the first nine months of 1997. This $10,520 decrease is
due to lower cash and short-term investment balances during the first nine
months of 1998 as a result of the investment of cash into the operations of the
business.
Interest expense for the first nine months of 1998 decreased 39% to $5,011 from
$8,155 in the first nine months of 1997. The decrease of $3,144 in interest
expense reflects the Company's repayment of its term loan obligation during the
period.
Net income for the nine months ended September 30, 1998 improved by $440,377 to
$32,114, from a loss of $408,263 for the nine months ended September 30, 1997.
This increase is due primarily to increased chemical product sales and higher
gross margins in the first nine months of 1998 over the first nine months 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 September 30, 1998, the Company had working capital of $1,190,402,
compared to $1,250,588 as of December 31, 1997, representing a decrease of
$60,186 or 5% 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 nine months of 1998, offset by $32,144 of net income earned during the
first nine months of 1998.
The Company is currently negotiating with several lenders to obtain a credit
facility to replace the credit facility terminated by the Company in April 1998,
(the "Credit Facility"). There can be no assurance, however, that the
Page 10 of 14
<PAGE> 11
KYZEN CORPORATION
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PART I (CONT.)
Company will be able to obtain another credit facility on terms favorable to the
Company to replace the terminated Credit Facility.
Cash used by operations of $113,402 in the first nine months of 1998 represented
a $261,289 or a 70% decrease over cash used by operations of $374,691 during the
same period in 1997. This decrease resulted from net income in the first nine
months of 1998 versus net losses in the same period in 1997, increased
depreciation, maintaining of comparable inventory levels in 1998 to 1997, and
decreases in accounts payable as compared to the same period in 1997.
Cash used by investing activities of $94,705 in the nine months ended September
30, 1998 represented a decrease of $330,880 as compared to cash provided by
investing activities during the nine months ended September 30, 1997 of
$236,175. This change was due primarily to the liquidation of the short-term
investments during the first quarter of 1998, partially offset by higher fixed
asset purchases for the completion of the Company's laboratories and Cleaning
Applications and Evaluation Centers in 1998.
Cash used by financing activities of $82,555 in the nine months ended September
30, 1998 represented an increase of $80,654 or 4,243% from cash used by
financing activities of $1,901 during the nine month period ended September 30,
1997. This difference was due to repayment of the Credit Facility made during
the quarter ended June 30, 1998.
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 September 30, 1999. The
Company's cash requirements for the remainder of 1998 and beyond will depend
primarily upon the level of sales of chemical products, product development,
product sourcing, 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, deterioration of customer base, financial condition 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.
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. However,
the Company has recently been informed of the closing of a facility in December
1998 which represents approximately 5% of the Company's sales in the first nine
months of 1998. The Company believes this notification was made to comply with
Federal law requiring such notification prior to anticipated closing of plants
and that this customer has attempted to sell this facility to competitors within
its marketplace. The Company is anticipating that this customer will cease
purchasing products in the fourth quarter of 1998 and the Company is uncertain
as to whether or not sales will be made to this customer or its possible
acquirer in 1999 and beyond. The Company expects the loss of this customer to
have a negative effect on the Company's revenues and earnings in 1999.
INTERNATIONAL TRADE DEVELOPMENTS
In 1998, manufacturers in the Peoples Republic of China have become significant
suppliers to the Company. The Company expects to import up to approximately 30%
of the Company's 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 will be under
review by the United States Government in 1999. 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 a portion of
these raw materials domestically, and the Company has contingency plans in case
of negative developments in
Page 11 of 14
<PAGE> 12
KYZEN CORPORATION
- --------------------------------------------------------------------------------
PART I (CONT.)
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.
YEAR 2000
Many computer systems (including application software and operating systems) and
embedded chip technologies will not accurately interpret dates after December
31, 1999. The year 2000 century change 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) affect the Company.
The Company is in the process of evaluating its internal computing and
communications systems and believes such systems will 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 expects to complete its assessment of these systems by
the end of the third quarter 1999.
The Company is also in the process of evaluating non-computational systems such
as embedded chip technology, microprocessors and specific function chips.
Because of the relatively simple nature of the Company's product manufacturing
process and products, 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 expects to complete its assessment of these systems by
the end of the third quarter 1999.
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 one 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. The failure of a material vendor
or supplier to accommodate the century change could cause significant delays in
the Company's manufacturing process or the delivery of products to its customers
as a result of for example, inventory shortages and shipping delays. The failure
of any material customer to accommodate the century change could cause
significant payment delays and could have a material adverse effect on the
Company's sales. At the present time the Company has no contingency plan to
cover such year 2000 century change issues, but intends to adopt such a plan by
the fourth quarter 1999.
The Company estimates it has spent less than $5,000 to date on its assessment of
vendors and suppliers, and in assessment and modification of the Company's
systems to accommodate the year 2000 century change. The Company expects future
costs for assessment and modification for year 2000 century change to be
insignificant. The Company is currently working to upgrade some of its software
used in database management and electronic communications. The Company is making
this change based on the need to have better and improved software performance
and considers this change not to be year 2000 compliance driven. All vendors of
these upgrades have represented to the Company that their products are year 2000
compliant. After installation of these upgrades, the Company plans to test them
to further verify year 2000 compliance.
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
None.
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 under the Securities Exchange Act of 1934. The
persons named as proxies in the proxy statement may exercise discretionary
authority to vote on any proposals received after such date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
Exhibit 27 Financial Data Schedule. (submitted in electronic format
for use of Commission only).
(b) Reports on Form 8-K
During the third quarter of 1998 the Company filed no reports on Form 8-K.
</TABLE>
- --------------------------------------------------------------------------------
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 November 12, 1998 /s/ Kyle J. Doyel
------------------------------ -------------------------------------
(Signature)
Kyle J. Doyel
President and Chief Executive Officer
Date November 12, 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 SEPTEMBER
30, 1998-KYZEN CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 420,116 420,116
<SECURITIES> 0 0
<RECEIVABLES> 862,463 862,463
<ALLOWANCES> 8,584 8,584
<INVENTORY> 327,672 327,672
<CURRENT-ASSETS> 1,666,392 1,666,392
<PP&E> 1,591,230 1,591,230
<DEPRECIATION> 684,372 684,372
<TOTAL-ASSETS> 2,936,553 2,936,553
<CURRENT-LIABILITIES> 475,990 475,990
<BONDS> 0 0
0 0
0 0
<COMMON> 50,068 50,068
<OTHER-SE> 2,460,563 2,460,563
<TOTAL-LIABILITY-AND-EQUITY> 2,936,553 2,936,553
<SALES> 1,512,766 4,438,296
<TOTAL-REVENUES> 1,512,766 4,438,296
<CGS> 648,842 1,904,684
<TOTAL-COSTS> 648,842 1,904,684
<OTHER-EXPENSES> 837,124 2,549,066
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,736 6,954
<INCOME-PRETAX> 41,220 32,114
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 41,220 32,114
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 41,220 32,114
<EPS-PRIMARY> 0.01 0.01
<EPS-DILUTED> 0.01 0.01
</TABLE>
