<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
------------------------------------------------
[ ] 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)
Tennessee 87-0475115
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
430 Harding Industrial Drive, Nashville, TN 37211 (615) 831-0888
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code) (Issuer's telephone
number)
- --------------------------------------------------------------------------------
(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 Common Stock, $0.01 par
value, outstanding as of July 23, 1999
- --------------------------------------------------------------------------------
Transitional Small Business Disclosure Format (Check one): [ ] Yes [ X ] No
Page 1 of 18
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I Financial Information
Item 1. Financial Statements:
Balance Sheet as of June 30, 1999 (unaudited) and
December 31, 1998 (audited) 3
Statement of Operations for the three and six months ended
June 30, 1999 (unaudited) and 1998 (unaudited) 4
Statement of Cash Flows for the six months ended
June 30, 1999 (unaudited) and 1998 (unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
Page 2 of 18
<PAGE> 3
KYZEN CORPORATION
BALANCE SHEET
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 543,036 $ 523,915
Accounts receivable, net of allowance for doubtful accounts of
$7,525 in 1999 and $8,160 in 1998 756,742 831,717
Inventory 376,860 345,898
Other current assets 36,710 46,093
----------- -----------
Total current assets 1,713,348 1,747,623
Property and equipment, net 783,386 861,521
Patents, net 196,905 177,150
Interest receivable from related parties, net 134,735 215,463
----------- -----------
Total assets $ 2,828,374 $ 3,001,757
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ -- $ 593
Accounts payable and accrued expenses 453,400 503,951
Accounts payable to related parties -- 1,261
----------- -----------
Total current liabilities 453,400 505,805
Mandatorily redeemable Class B Common Stock, $0.001 par
value, 1,500,000 shares authorized, no shares issued or
outstanding at December 31, 1998 --
Mandatorily redeemable Class C Common Stock, $0.001 par value,
1,000,000 shares authorized, no shares issued or outstanding
at December 31, 1998 --
Shareholders' equity:
Preferred Stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding at June 30, 1999 --
Preferred Stock, $0.001 par value, 10,000,000 shares
authorized, no shares issued or outstanding at December
31, 1998 --
Common Stock, $0.01 par value, 40,000,000 shares
authorized, 5,006,781 shares issued and 5,006,681
shares outstanding at June 30, 1999 50,068
Class A Common Stock, $0.01 par value, 30,000,000
shares authorized, 5,006,781 shares issued and
5,006,681 shares outstanding at December 31, 1998 50,068
Additional paid-in capital 5,314,762 5,294,633
Treasury stock, at cost (313) (313)
Accumulated deficit (2,989,543) (2,848,436)
----------- -----------
Total shareholders' equity 2,374,974 2,495,952
----------- -----------
Total liabilities and shareholders' equity $ 2,828,374 $ 3,001,757
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
Page 3 of 18
<PAGE> 4
KYZEN CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $ 1,426,217 $ 1,498,340 $ 3,030,311 $ 2,925,530
Cost of sales 601,296 639,816 1,274,667 1,255,842
----------- ----------- ----------- -----------
Gross profit 824,921 858,524 1,755,644 1,669,688
Operating costs and expenses:
Selling, marketing, general and
administrative expenses 848,515 752,751 1,615,929 1,490,745
Research and development expenses 99,830 113,184 203,595 221,197
----------- ----------- ----------- -----------
Total operating expenses 948,345 865,935 1,819,524 1,711,942
----------- ----------- ----------- -----------
Operating loss (123,424) (7,411) (63,880) (42,254)
Other income (expense) 5,180 18,455 (77,226) 33,148
----------- ----------- ----------- -----------
Net income (loss) $ (118,244) $ 11,044 $ (141,106) $ (9,106)
=========== =========== =========== ===========
Earnings per share - basic $ (0.02) $ 0.00 $ (0.03) $ (0.00)
=========== =========== =========== ===========
Earnings per share - diluted $ (0.02) $ 0.00 $ (0.03) $ (0.00)
=========== =========== =========== ===========
Weighted average shares outstanding
- basic 5,006,681 5,006,681 5,006,681 5,006,681
Weighted average shares outstanding
- diluted 5,006,681 5,087,890 5,006,681 5,006,681
</TABLE>
The accompanying notes are an integral part of these financial statements
Page 4 of 18
<PAGE> 5
KYZEN CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(141,106) $ (9,106)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 141,804 121,651
Non-cash stock compensation charge 20,129 --
Decrease in accounts receivable 74,975 87,088
Decrease in costs and estimated losses in excess of billings on
uncompleted contracts -- 2,626
Increase in inventory (30,962) (43,018)
Decrease (increase) in other current assets 9,383 (18,642)
Decrease (increase) in interest receivable from related parties 80,728 (22,656)
Decrease in accounts payable and accrued expenses (51,813) (180,501)
--------- ---------
Net cash provided (used) by operating activities 103,138 (62,558)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments -- 99,208
Purchase of fixed assets (55,994) (169,672)
Purchase of patent rights and related expenditures (27,430) (11,699)
--------- ---------
Net cash used by investing activities (83,424) (82,163)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long term debt (593) --
Payment on note payable -- (81,016)
--------- ---------
Net cash used by financing activities (593) (81,016)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,121 (225,737)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 523,915 710,778
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 543,036 $ 485,041
========= =========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
There was no cash used for interest payments for the six months ended June 30,
1999 and $3,218 was used in the six months ended June 30, 1998. The Company paid
no income taxes for the six months ended June 30, 1999 or the six months ended
June 30, 1998.
The accompanying notes are an integral part of these financial statements
Page 5 of 18
<PAGE> 6
KYZEN CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
BACKGROUND
Kyzen(R) Corporation ("Kyzen" or the "Company") was formed to develop
environmentally safe chemical solutions to replace ozone-depleting solvents. The
Company manufacturers 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 peripheral equipment such as process
control systems and chemical handling systems that enhance the use of the
Company's chemical solutions. Sales of such equipment totaled 3% of net sales in
both the six months ended June 30, 1999 and the six months ended June 30, 1998.
Typically, these products are sold as separate items and are integrated into a
cleaning process by the customer or by the Company as part of a contract
service. The Company's operations are located in Nashville, Tennessee and
Manchester, New Hampshire.
The Company's operations are conducted within one reportable segment. Net sales
to customers outside the United States totaled $189,371 or 13% of net sales in
the three months ended June 30, 1999 and $232,805 or 16% of net sales in the
three months ended June 30, 1998. For the six months ended June 30, 1999, net
sales to customers outside the United States totaled $370,888 or 12% of net
sales compared to $417,631 or 14% of net sales for the six months ended June 30,
1998. No single customer or foreign country accounted for more than 10% of net
sales during the periods presented.
INTERIM FINANCIAL STATEMENTS
The interim balance sheet at June 30, 1999 and the interim statements of
operations and of cash flows for the three and six months ended June 30, 1999
and 1998 are unaudited, and certain information and footnote disclosure related
thereto, normally included in the financial statements prepared in accordance
with generally accepted accounting principles, have been omitted, although
management believes that the disclosures herein are adequate to make information
presented not misleading. Management believes that the unaudited interim
financial statements were prepared following the same policies and procedures
used in preparation of the audited financial statements and all adjustments,
consisting only of normal recurring adjustments to fairly present the financial
position, results of operations and cash flows with respect to the interim
financial statements, have been included. These statements should be read in
conjunction with the Company's financial statements for the year ended December
31, 1998, which are included in the Company's Annual Report on Form 10-KSB/A
dated June 3, 1999. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
EARNINGS PER SHARE
In accordance with the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS No. 128"), the Company calculates basic
earnings per share as income available to common shareholders divided by the
weighted average number of shares outstanding during the period. Diluted
earnings per share 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. 25 ("APB No. 25"). SFAS No. 128 has
been applied to all periods presented.
SFAS No. 128 requires the Company to disclose a reconciliation of the numerators
and denominators used in basic and diluted earnings per share. Based upon the
Company's capital structure throughout the six months ended June 30, 1999 and
1998 and the Company's net losses for such periods, there are no differences in
the amounts used in the numerators and denominators for purposes of calculating
basic and diluted earnings per share. As a result, basic and diluted earnings
per share are equivalent for each of the periods presented.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" on January 1, 1998. This Statement requires the
presentation of comprehensive income and its components in the financial
statements. The Company did not have any components of comprehensive income
other than its net loss during the periods presented.
Page 6 of 18
<PAGE> 7
KYZEN CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
INCOME TAXES
No benefit or provision for income taxes is recorded for the periods presented
as the Company has significant net operating loss carryforwards and future
realization is uncertain.
NOTE 2 INVENTORY
The following table details the components of inventory:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Raw materials $237,437 $194,242
Work in process 17,602 1,705
Finished goods 121,821 149,951
-------- --------
Total inventory $376,860 $345,898
======== ========
</TABLE>
NOTE 3 SHAREHOLDER RIGHTS PLAN
In January 1999, the Board of Directors of the Company adopted a Shareholder
Rights Plan (the "Plan"). Under the terms of the Plan, the Company declared a
dividend of preferred stock purchase rights (the "Rights") which generally
become exercisable upon the earlier of ten days following a public announcement
that a person or group has acquired 15% or more of the Company's Common Stock or
ten days following the announcement of a tender offer which would result in a
person or group acquiring 15% or more of the Company's Common Stock. The Rights
entitle the registered holder of one share of Common Stock to purchase from the
Company one one-hundredth of a share of Series A Junior Participating Preferred
Stock of the Company, $0.01 par value per share, at a purchase price of $5.00
per Right (the "Purchase Price"), subject to certain adjustments. The Rights
expire at the close of business on January 15, 2009 unless earlier redeemed or
extended by the Company.
Under certain circumstances, the Plan allows each holder of Common Stock, other
than the acquiring person or group, to receive upon exercise the number of
shares of Common Stock having a value equal to two times the Purchase Price.
NOTE 4 PREFERRED AND COMMON STOCK
On April 28, 1999, shareholders of the Company approved the redomestication of
the Company from Utah to Tennessee and the amendment and restatement of the
Company's articles of incorporation. The amended and restated articles of
incorporation authorize the issuance of 40,000,000 shares of Common Stock, $0.01
par value per share, and 10,000,000 shares of Preferred Stock, $0.01 par value
per share, including up to 100,000 shares of Series A Junior Participating
Preferred Stock, $0.01 par value per share. The changes to the Company's
articles of incorporation were effective May 12, 1999.
NOTE 5 EXTENSION OF WARRANTS
On April 9, 1999, the Board of Directors of the Company authorized the extension
of the expiration date of the Company's outstanding Common Stock purchase
warrants (each a "Warrant") from August 4, 2000 to August 4, 2002. Each Warrant
entitles the holder to purchase one share of the Company's Common Stock at an
exercise price of $5.00 per share, subject to adjustment. On June 30, 1999,
1,650,000 Warrants remained outstanding.
Page 7 of 18
<PAGE> 8
KYZEN CORPORATION
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF QUARTERS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Net sales for the quarter ended June 30, 1999 decreased approximately 5% or
$72,123 to $1,426,217. This decrease is primarily the result of lower
international sales and the loss of a domestic customer that closed its
production facility. This customer represented approximately 5% of net sales for
the quarter ended June 30, 1998 and provided no sales for the quarter ended June
30, 1999. These lower sales were offset by higher sales to existing and new
customers resulting in insignificant growth for the quarter ended June 30, 1999
versus the quarter ended June 30, 1998. Management believes contributing factors
to this insignificant growth are slow economic conditions in the electronic
assembly market in the second quarter of 1999 versus the same period in 1998,
and the shifting of anticipated orders, including orders from two significant
customers, from June 1999 to July 1999 to accommodate normal plant shutdowns of
some of our customers for summer holidays.
Gross profit for the quarter ended June 30, 1999 decreased 4% or $33,603 to
$824,921 as compared to $858,524 in the second quarter of 1998. This decrease is
attributable to decreased sales volume of the Company's cleaning products as
described above. Gross profit margins increased from 57% in the second quarter
of 1998 to 58% in the second quarter of 1999, reflecting sales of higher margin
chemical products.
Selling, marketing, general and administrative expenses for the quarter ended
June 30, 1999 increased 13% or $95,764 to $848,515 as compared to $752,751 for
the quarter ended June 30, 1998. This increase reflects increased spending on
corporate items such as the Company's Annual Report to Shareholders and Annual
Meeting of Shareholders, investor relations, and non-recurring legal expenses
associated with the Company's redomestication from Utah to Tennessee, the
preparation of documents to register shares issuable upon the exercise of the
Company's Warrants and Underwriter Warrants and extension of the expiration date
of the Company's outstanding Warrants. In addition, a non-cash expense of
approximately $20,129 was recorded to reflect the value of options granted to
non-employee directors as required under a recent FASB Interpretation of APB No.
25.
Research and development expenses for the quarter ended June 30, 1999 decreased
12% or $13,354 to $99,830 from $113,184 for the quarter ended June 30, 1998.
This decrease resulted from changes in research and development personnel and
allocation of such personnel to sales activities in the quarter ended June 30,
1999.
Operating loss for the quarter ended June 30, 1999 increased 1,565% or $116,013
to a loss of $123,424 from a loss of $7,411 for the quarter ended June 30, 1998.
This increase is due to decreased sales and increased corporate expenses in the
second quarter of 1999 compared with the second quarter of 1998.
Other income for the quarter ended June 30, 1999 was $5,180 compared to other
income for the quarter ended June 30, 1998 of $18,455. The 72% decrease reflects
lower interest recorded on notes receivable from former employees.
Net loss for the three months ended June 30, 1999 increased by $129,288 to a
loss of $118,244, from income of $11,044 for the three months ended June 30,
1998. This increase is due to non-recurring corprorate expenses on general and
administrative items indicated earlier combined with decreased sales volume for
the three months ended June 30, 1999 compared to the three months ended June 30,
1998.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Net sales for the six months ended June 30, 1999 increased approximately 4% or
$104,781 to $3,030,311 from sales of $2,925,530 for the six months ended June
30, 1998. This increase is the result of a 6% net increase in domestic chemical
sales, which for the six-month period in 1999, includes the loss of a customer
that represented approximately 5% of the Company's revenues in the first
six-month period of 1998. International sales for the six-month period in 1999
were down approximately 11% compared to the same period in 1998. Management
believes contributing factors to this reduction are slower economic conditions
for the Company's customers in the electronic assembly market in 1999 compared
to the same period in 1998.
Gross profit for the six months ended June 30, 1999 increased 5% or $85,956 to
$1,755,644, as compared to $1,669,688 in the first six months ended June 30,
1998. This increase is attributable to increased sales volume of the Company's
cleaning products, and higher margins as the result of greater efficiencies with
handling larger volume production and
Page 8 of 18
<PAGE> 9
KYZEN CORPORATION
PART I (CONT.)
raw material purchases that lower overall cost per unit. Gross profit margins
increased from 57% in the first six months of 1998 to 58% in the first six
months of 1999, reflecting the better economies of scale provided by the larger
sales volume of chemical products.
Selling, marketing, general and administrative expenses for the six months ended
June 30, 1999 increased 8% or $125,184 to $1,615,929 as compared to $1,490,745
for the first six months of 1998. This increase reflects increased spending on
corporate items such as the Company's Annual Report to Shareholders and Annual
Meeting of Shareholders, investor relations and non-recurring legal expenses
associated with the Company's adoption of a Shareholder Rights Plan, the
Company's redomestication from Utah to Tennessee, the preparation of documents
to register shares issuable upon the exercise of the Company's Warrants and the
Underwriter Warrants and the extension of the expiration date of the Company's
outstanding Warrants. In addition, a non-cash expense of approximately $20,129
was recorded to reflect the value of options granted to non-employee directors
as required under a recent FASB Interpretation of APB No. 25.
Research and development expenses for the six months ended June 30, 1999
decreased 8% or $17,602 to $203,595 from $221,197 for the six months ended June
30, 1998. This decrease resulted from changes in research and development
personnel and allocation of such personnel to sales activities and reduced
purchases of experimental materials and supplies in the six-months ended June
30, 1999.
Operating loss for the six months ended June 30, 1999 increased 51% or $21,626
to a loss of $63,880 from a loss of $42,254 for the six months ended June 30,
1998. This increase is due to increased corporate expenses in the six-month
period of 1999 compared with the same six-month period in 1998.
Other income for the six months ended June 30, 1999 decreased 333% or $110,374
to an expense of $77,226 from income of $33,148 for the six months ended June
30, 1998. This change is the result of management's decision to record a
non-cash charge of approximately $87,181 due to collectibility concerns on a
note receivable from certain former employees and a reduction in interest on
notes receivable from former employees.
Net loss for the six months ended June 30, 1999 increased 1,450% or $132,000 to
a loss of $141,106, from a loss of $9,106 for the six months ended June 30,
1998. This increase is due to non-recurring corprorate expenses and a non-cash
charge of approximately $88,000 in the first six months of 1999 partially offset
by higher sales and margins when compared to the same six month period in 1998.
RECENT BUSINSESS DEVELOPMENTS
The Company has recently created an Internet e-commerce site to sell the
Company's high technology cleaning products. The site is designed to make it
easier for the Company's customers to order products using the Internet thereby
improving communications between the Company and its existing customer base. The
site is also designed to provide the Company with a new sales channel for new
products and market niches that may result in more cost-effective sales compared
to the Company's traditional method of using direct salespeople.
Recent developments in the electronic assembly marketplace indicate a trend for
manufacturers to outsource their production to contract manufacturers. The
Company has traditionally sold both to original equipment manufacturers and
contract manufacturers and this trend may result in more consolidation of
cleaning processes. This consolidation may have some short-term effect on
shrinking the overall cleaning market. In addition because contract
manufacturers use a number of production and cleaning techniques, cleaning
opportunities may shift from larger applications using in-line conveyorized
machines to smaller applications using batch cleaning processes. This trend
towards batch cleaning processes may also be accelerated by the growth in more
miniaturized electronic products. The Company has historically participated in
the batch cleaning market, and the Company anticipates continuing to emphasize
the development of new products and processes for this growing segment of the
marketplace.
FORWARD-LOOKING STATEMENTS
Management has included in this report certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities 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; changes in the
import and export rules, regulations and tariffs as they apply to countries
where the Company conducts its business; the ability of the Company to obtain
financing or equity capital with favorable terms and conditions; the
availability of new
Page 9 of 18
<PAGE> 10
KYZEN CORPORATION
PART I (CONT.)
expansion and acquisition opportunities; changes in the financial condition or
corporate strategy of the Company's primary customers; the failure of the
Company's significant suppliers or customers to accommodate the year 2000
century change 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 results 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 cash flows from operations. The Company's
primary uses of funds are the funding of 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, 1999, the Company had working capital of $1,259,948 compared to
$1,241,818 as of December 31, 1998, representing an increase of $18,130 or 1%
from 1998. This increase reflects the positive cash flows from operations during
the six months ended June 30, 1999.
The Company is currently negotiating with a lender to obtain a credit facility
to replace the credit facility terminated by the Company in April 1998.
Management of the Company expects a replacement credit facility will be in place
by the end of 1999. There can be no assurance, however, that the Company will be
able to obtain another credit facility or that, if obtained, it will be on terms
favorable to the Company.
Cash provided by operations of $103,138 in the six months ended June 30, 1999
represented a $165,696 increase over cash used by operations of $62,558 during
the same period in 1998. This increase resulted from non-cash charges such as
depreciation, the write-off of a portion of the interest receivable from former
officers, the grant of stock options to directors and decreased receivables and
was offset by decreased accounts payable and accrued expense levels and higher
net loss in the six months ended June 30, 1999 compared with the same period in
1998. Included in the net loss for the six months ended June 30, 1999 is
approximately $102,535 of non-cash expenses for impairment of interest
receivable on notes receivable to the Company from former employees and for
stock option grants made to non-employee directors during the period.
Cash used by investing activities of $83,424 in the six months ended June 30,
1999 represented a $1,261 or 2% increase from cash used by investing activities
during the six months ended June 30, 1998 of $82,163. This increase was the
result of an increase of $15,731 in expenditures on patents during the six
months ended June 30, 1999 compared with the same six months in 1998. The
increased patent expenses were offset by lower fixed asset purchases in the
first six months of 1999. In 1998, the Company was completing its expansion of
facilities in Nashville and used proceeds from short-term investments to pay for
a portion of the expansion.
Cash used by financing activities of $593 in the six months ended June 30, 1999
represented a decrease of $80,423 in expenditures of cash used by financing
activities of $81,016 during the six months ended June 30, 1998. This decrease
resulted from the repayment of a note payable in the six months of 1998.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations and expansion plans, that its current cash balances
together with projected cash flow from operations will be sufficient to satisfy
its contemplated cash requirements at least through June 30, 2000. The Company's
cash requirements beyond that date will depend primarily on the level of sales
of chemical products, product development, sales and marketing expenditures,
timing of acquisitions, if any, and timing of expansion plans and capital
expenditures, if any. 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 or that, if obtained, it will be on
favorable terms to replace the credit facility terminated by the Company in
April 1998. Failure to obtain financing on terms favorable to the Company could
have a material adverse effect on the Company's financial condition and results
of operations. Additionally, the Company continues to investigate potential
acquisition candidates that are consistent with the Company's growth strategies,
which would create additional financing needs for the Company.
Page 10 of 18
<PAGE> 11
KYZEN CORPORATION
PART I (CONT.)
INTERNATIONAL TRADE DEVELOPMENTS
In 1998, manufacturers in the Peoples Republic of China became significant
suppliers of the Company. In 1999, the Company expects to import up to
approximately 35% of its raw material purchases 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 Normal Trade Relations status is under
review by the United States government in 1999. Failure of the United States
government to continue to grant Normal Trade Relations status to China could
increase duties and increase the cost of some of the Company's raw materials or
make them completely unavailable. The Company obtains a portion of these raw
materials domestically and has contingency plans if Chinese sources are no
longer able to provide these raw materials. These potential developments could
cause a reduction in production, sales and revenues or at least could cause an
increase in the cost of the Company's raw materials.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 SFAS No. 133 effective January 1, 2001. As the Company has not
engaged, and does not plan to engage, in derivative or hedging activities,
management anticipates that adoption of SFAS No. 133 will not have an impact on
the Company's financial condition or results of operations.
YEAR 2000 READINESS DISCLOSURE
Many computer systems (including application software and operating systems)
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 currently evaluating its internal computing, communication and
non-computational 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
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 the Company's 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. Management expects to complete its assessment of these systems by
the end of the third quarter of 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 the
failure of any one vendor, 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, or a key chemical producer,
such as a producer of alcohol used in many of the Company's cleaning
formulations, 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 problems such as
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 net sales. At the present time,
the Company has no contingency plan to cover such year 2000 century change
issues, but management intends to adopt such a plan by the fourth quarter of
1999.
The Company estimates it has spent less than $10,000 on its assessment of
vendors and suppliers and in its 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 the 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 driven by year 2000 compliance issues. All
vendors of these upgrades have represented to the Company that their products
are year 2000 compliant. After installation of these upgrades, which is
anticipated to occur by the end of the third quarter 1999, the Company plans to
test them to further verify year 2000 compliance.
Page 11 of 18
<PAGE> 12
KYZEN CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 12, 1999 the Company amended and restated its articles of incorporation
(the "Restated Articles"). Pursuant to the Restated Articles, each outstanding
share of Class A Common Stock, $0.01 par value per share, was reclassified,
redesignated and reconstituted into one share of Common Stock, $0.01 par value
per share (the "Common Stock"). The Restated Articles eliminated the series of
Class B Common Stock, $0.001 par value per share, and Class C Common Stock,
$0.001 par value per share. The Restated Articles authorize up to 40,000,000
shares of Common Stock and 10,000,000 shares of Preferred Stock, $0.01 par value
per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 28, 1999 the Company held its Annual Meeting of Shareholders with the
results as follows:
Proposal 1 - Election of Directors
<TABLE>
<CAPTION>
For Against Abstain
-------------------------------------------------
<S> <C> <C> <C>
Janet Korte Baker 3,595,343 0 12,000
Michael L. Bixenman 3,595,343 0 12,000
John A. Davis III 3,595,343 0 12,000
</TABLE>
Proposal 2: - Approval of Amendment and Restatement of Articles of Incorporation
<TABLE>
<CAPTION>
For Proposal 2 Against Proposal 2 Abstain
---------------------------------------------------------------------------------
<S> <C> <C>
2,511,966 70,650 1,024,727
</TABLE>
Proposal 3: - Approval of Amendment and Restatement of Bylaws
<TABLE>
<CAPTION>
For Proposal 3 Against Proposal 3 Abstain
---------------------------------------------------------------------------------
<S> <C> <C>
2,510,066 75,050 1,022,227
</TABLE>
Proposal 4: - Approval of Reincorporation of the Company
<TABLE>
<CAPTION>
For Proposal 4 Against Proposal 4 Abstain
---------------------------------------------------------------------------------
<S> <C> <C>
2,557,566 37,150 1,012,627
</TABLE>
ITEM 5. OTHER INFORMATION
Effective July 19, 1999, Mr. Larry A. Lofgreen resigned from the Company's Board
of Directors. Mr. Lofgreen resigned for undisclosed reasons. In his resignation,
Mr. Lofgreen did not indicate any disagreement with the Company on any matter
relating to the Company's operations, policies or practices.
Page 12 of 18
<PAGE> 13
KYZEN CORPORATION
PART II (CONT.)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
Exhibit 10.1 Form of Amendment No. 1 to Employment Agreements with
certain officers of the Company:
(a) Kyle J. Doyel
(b) Michael L. Bixenman
(c) Thomas M. Forsythe
(d) Thomas J. Herrmann
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
On June 2, 1999, the Company filed a Form 8-K reporting the Company's
reincorporation from Utah to Tennessee, effective May 26, 1999, and the
authorization by the Board of Directors to extend the expiration date of
the Company's outstanding Warrants from August 4, 2000 to August 4, 2002.
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 July 29, 1999 /s/ Kyle J. Doyel
------------------------------- --------------------------------------
(Signature)
Kyle J. Doyel
President and Chief Executive Officer
Date July 29, 1999 /s/ Thomas M. Forsythe
------------------------------- --------------------------------------
(Signature)
Thomas M. Forsythe
Treasurer and Chief Accounting Officer
Page 13 of 18
<PAGE> 14
KYZEN CORPORATION
EXHIBITS
EXHIBIT INDEX AND EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
Exhibit 10.1 Form of Amendment No.1 to Employment Agreements with
certain officers of the Company:
(a) Kyle J. Doyel
(b) Michael L. Bixenman
(c) Thomas M. Forsythe
(d) Thomas J. Herrmann
Exhibit 27 Financial Data Schedule.
Page 14 of 18
<PAGE> 1
KYZEN CORPORATION
EXHIBITS
EXHIBIT 10.1
FORM OF AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement is made and entered into
as of the 15th day of June 1999, by and between Kyzen Corporation, a Tennessee
corporation ("Employer") and the employee named in Paragraph 1 of the attached
Employment Agreement ("Employee").
WHEREAS, Employer and Employee entered into an Employment Agreement,
dated ______________, 199_ (the "Employment Agreement"); and
WHEREAS, Employer and Employee desire to amend the Employment Agreement
as set forth herein;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Amendment to Employment Agreement Section 2 is deleted in its entirety
and replaced with the following:
2. Term a) The initial term of this Agreement shall begin on
________________, 199_ , and shall continue for a period
of one year.
b) Thereafter, this agreement shall continue for successive
one-year terms unless and until it is terminated by a
minimum of sixty (60) days written notice from either
party to the other party prior to the end of the
then-current term (the "Employment Term"); provided,
however, that in the event of a "Termination Upon a Change
in Control," as hereinafter defined, the following shall
occur:
(i) Employee shall immediately be paid (A) all accrued
salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance
with the applicable plans), any benefits under any plans
of Employer in which Employee is a participant to the full
extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses
incurred by Employee in connection with his duties
hereunder, all to the date of termination, and (B) for the
remainder of the existing Employment Term and for a period
of two years thereafter, Employee shall be entitled to
receive semi-monthly severance payments equal to salary
payment which otherwise would have been paid to Employee
pursuant to this Agreement;
(ii) In the event that Employee is not otherwise entitled
to fully exercise all awards granted to Employee under the
Kyzen Corporation 1994 Stock Option Plan (the "Plan"), or
any successor plan, and the Plan or the successor plan
does not otherwise provide for acceleration of
exerciseability upon the occurrence of the Change in
Control described herein, such awards shall become
immediately exercisable upon a Change in Control; and
(iii) Employee shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under
any plans of Employer in which Employee is a participant
to the full extent of Employee's rights under such plans,
including any perquisites provided under this Agreement,
through the remainder of the Employment Term; provided,
however, that the benefits under any such plans of
Employer in which Employee is a participant, including any
such perquisites, shall cease upon Employee's obtaining
other employment. If necessary to provide such benefits to
Employee, Employer shall, at its election, either: (A)
amend its employee benefit plans to provide the benefits
described in this paragraph (b) (iii), to the extent that
such is permissible under the nondiscrimination
requirements and other provisions of the Internal Revenue
Code of 1986 (the "Code") and the provisions of the
Employee Retirement Income Security Act of 1974, or (B)
provide separate benefit arrangements or cash payments so
that Employee receives amounts equivalent thereto, net of
tax consequences.
c) "Termination Upon a Change in Control" shall mean either
(i) a termination by Employer of Employee's employment
with Employer following a "Change in Control" (as
hereinafter defined) or (ii) resignation by Employee
following a "Change in Control" (as hereinafter defined)
if such resignation follows Employer's assignment of
Employee to a position that is not reasonably equivalent
in responsibility or compensation or in the same location
to Employee's responsibility, compensation or location
prior to the "Change in Control" (as hereinafter defined).
Page 15 of 18
<PAGE> 2
KYZEN CORPORATION
EXHIBITS
d) "Change in Control" shall mean (I) the date on which
Employer first determine that any person and all other
persons which constitute a group, within the meaning of
Section 13(d)(3) of the Exchange Act, have acquired (after
the effective date of this Amendment) direct of indirect
beneficial ownership, within the meaning of Rule 13d-3
under the Exchange Act, of fifteen percent (15%) or more
of Employer's outstanding securities, who or which
together with all Affiliates and Associates of such
Person, shall be the Beneficial Owner of 15% or more of
the Common Shares of the Company then outstanding, but
shall not include: (a) the Company, (b) any Subsidiary of
the Company, (c) any employee benefit plan of the Company
or any Subsidiary of the Company, or (d) any entity
holding Common shares for or pursuant to the terms of any
such plan and e) Christopher B. Cannon ("Cannon") based on
his beneficial ownership of Common Shares of the Company
on January 15, 1999; provided, however that if Cannon,
together with all Affiliates and Associates of Cannon (the
"Cannon Group"), shall become the Beneficial Owner of more
than the Permissible Amount (defined as the number of
Common Shares of the Company beneficially owned at any
time by the Cannon Group expressed as a percentage of the
outstanding Common Shares of the Company set forth below):
<TABLE>
<CAPTION>
Percentage of the Outstanding Common Shares of the Company
Beneficially Owned by the Cannon Group Permissible Amount
-----------------------------------------------------------------------------------------
<S> <C>
22.4% or greater 25%
More than 17.5% but less than 22.4% 23%
More than 15% but less than 17.5% 18%
15% or less 15%
</TABLE>
of Common Shares of the Company then outstanding or (II)
the first day on which a majority of the members of the
Board of Directors are not Continuing Directors.
e) Continuing Director's shall mean, as of any date
determination, any member of the Board of Directors who
(I) was a member of the Board of Directors on January 1,
1994, (ii) has been a member of the Board of Directors for
the two years immediately preceding such date of
determination, or (iii) was nominated for election or
elected to the Board of Directors with the affirmative
vote of the greater of (A) a majority of the Continuing
Directors who were members of the Board of Directors at
the time of such nomination or election or (B) at least
four Continuing Directors.
2. Definitions. Unless otherwise defined herein, terms shall have the
meanings ascribed to them in the Employment Agreement.
3. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be considered an original, but all which
together shall be and constitute one and the same Amendment.
4. Other Provisions. Except as amended hereby, the Employment Agreement shall
remain unmodified and in full force and effect.
5. Effectiveness. This Amendment shall be effective when it has been executed
by Employer and Employee. This Amendment shall binding upon, and shall inure to
the benefit of, the parties and their heirs, representatives, successors and
assigns.
IN WITNESS WHEREOF, the undersigned have hereunto signed this Amendment
No. 1 to Employment Agreement
KYZEN CORPORATION
By:
----------------------------- ----------------------------------
(Employee's Signature)
Title:
--------------------------- ----------------------------------
(Employee's Typed or Printed Name)
Page 16 of 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999--KYZEN CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 543,036 543,036
<SECURITIES> 0 0
<RECEIVABLES> 756,742 756,742
<ALLOWANCES> 7,525 7,525
<INVENTORY> 376,860 376,860
<CURRENT-ASSETS> 1,713,348 1,713,348
<PP&E> 1,684,967 1,684,967
<DEPRECIATION> 901,582 901,582
<TOTAL-ASSETS> 2,828,374 2,828,374
<CURRENT-LIABILITIES> 453,400 453,400
<BONDS> 0 0
0 0
0 0
<COMMON> 50,068 50,068
<OTHER-SE> 2,374,974 2,374,974
<TOTAL-LIABILITY-AND-EQUITY> 2,828,374 2,828,374
<SALES> 1,426,217 3,030,311
<TOTAL-REVENUES> 1,426,217 3,030,311
<CGS> 601,296 1,274,666
<TOTAL-COSTS> 601,296 1,274,666
<OTHER-EXPENSES> 948,345 1,819,524
<LOSS-PROVISION> 7,525 7,525
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (118,244) (141,106)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (118,244) (141,106)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (118,244) (141,106)
<EPS-BASIC> (0.02) (0.03)
<EPS-DILUTED> (0.02) (0.03)
</TABLE>
