<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, 1999
-----------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
-------------------- -------------------------
Commission file number 000-26434
---------------------------------------------------------
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 November 12, 1999
- --------------------------------------------------------------------------------
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
Page 1 of 12
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I Financial Information
Item 1. Financial Statements:
Balance Sheet as of September 30, 1999 (unaudited) and
December 31, 1998 3
Statement of Operations for the three and nine months ended
September 30, 1999 (unaudited) and 1998 (unaudited) 4
Statement of Cash Flows for the nine months ended
September 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 12
</TABLE>
Page 2 of 12
<PAGE> 3
KYZEN CORPORATION
BALANCE SHEET
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 422,905 $ 523,915
Accounts receivable, net of allowance for doubtful accounts of
$7,744 in 1999 and $8,160 in 1998 833,064 831,717
Inventory 395,677 345,898
Other current assets 56,434 46,093
----------- -----------
Total current assets 1,708,080 1,747,623
Property and equipment, net 717,499 861,521
Patents, net 207,067 177,150
Interest receivable from related parties, net 141,189 215,463
----------- -----------
Total assets $ 2,773,835 $ 3,001,757
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ -- $ 593
Accounts payable and accrued expenses 458,931 503,951
Accounts payable to related parties -- 1,261
----------- -----------
Total current liabilities 458,931 505,805
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 September --
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 September 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 5,294,633 5,294,633
Treasury stock, at cost (313) (313)
Accumulated deficit (3,029,484) (2,848,436)
----------- -----------
Total shareholders' equity 2,314,904 2,495,952
----------- -----------
Total liabilities and shareholders' equity $ 2,773,835 $ 3,001,757
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
Page 3 of 12
<PAGE> 4
KYZEN CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $ 1,419,364 $1,512,766 $ 4,449,675 $ 4,438,296
Cost of sales 615,717 648,842 1,890,383 1,904,684
----------- ---------- ----------- -----------
Gross profit 803,647 863,924 2,559,292 2,533,612
Operating costs and expenses:
Selling, marketing, general and
administrative expenses 748,393 735,649 2,364,323 2,226,394
Research and development expenses 99,993 101,475 303,587 322,672
----------- ---------- ----------- -----------
Total operating expenses 848,386 837,124 2,667,910 2,549,066
----------- ---------- ----------- -----------
Operating income (loss) (44,739) 26,800 (108,618) (15,454)
Other income (expense) 4,797 14,420 (72,430) 47,568
----------- ---------- ----------- -----------
Net income (loss) $ (39,942) $ 41,220 $ (181,048) $ 32,114
=========== ========== =========== ===========
Earnings per share - basic $ (0.01) $ 0.01 $ (0.04) $ 0.01
=========== ========== =========== ===========
Earnings per share - diluted $ (0.01) $ 0.01 $ (0.04) $ 0.01
=========== ========== =========== ===========
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 5,085,271 5,006,681 5,088,079
</TABLE>
The accompanying notes are an integral part of these financial statements
Page 4 of 12
<PAGE> 5
KYZEN CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(181,048) $ 32,114
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization 214,590 203,262
Increase in accounts receivable (1,347) (52,170)
Decrease in costs and estimated losses in excess of billings on
uncompleted contracts -- 2,626
Decrease (increase) in inventory (49,779) 4,695
Increase in other current assets (10,341) (30,613)
Decrease (increase) in interest receivable from related parties 74,274 (33,984)
Decrease in accounts payable and accrued expenses (46,281) (239,332)
--------- ---------
Net cash provided (used) by operating activities 68 (113,402)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments -- 99,208
Purchase of fixed assets (58,771) (170,039)
Purchase of patent rights and related expenditures (41,714) (23,874)
--------- ---------
Net cash used by investing activities (100,485) (94,705)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on capital lease (593) --
Payment on note payable -- (82,555)
--------- ---------
Net cash used by financing activities (593) (82,555)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (101,010) (290,662)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 523,915 710,778
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 422,905 $ 420,116
========= =========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
There was no cash used for interest payments for the nine months ended September
30, 1999 and $5,011 was used in the nine months ended September 30, 1998. The
Company paid no income taxes for the nine months ended September 30, 1999 or the
nine months ended September 30, 1998.
The accompanying notes are an integral part of these financial statements
Page 5 of 12
<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 nine months ended September 30, 1999 and the nine months ended
September 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 $158,624 or 11% of net sales in
the three months ended September 30, 1999 and $196,637 or 13% of net sales in
the three months ended September 30, 1998. For the nine months ended September
30, 1999, net sales to customers outside the United States totaled $529,512 or
12% of net sales compared to $614,268 or 14% of net sales for the nine months
ended September 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 September 30, 1999 and the interim statements of
operations and of cash flows for the three and nine months ended September 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.
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 nine months ended September 30, 1999
and the Company's net losses for the period, 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. 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.
Page 6 of 12
<PAGE> 7
KYZEN CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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 income (loss) during the periods presented.
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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Raw materials $260,486 $194,242
Work in process 1,705 1,705
Finished goods 133,486 149,951
-------- --------
Total inventory $395,677 $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 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.
Page 7 of 12
<PAGE> 8
KYZEN CORPORATION
PART I (CONT.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Net sales for the quarter ended September 30, 1999 decreased approximately 6% or
$93,402 to $1,419,364 as compared to net sales of $1,512,766 in the third
quarter of 1998. This decrease is primarily the result of lower international
sales, slower demand for the Company's products resulting from lower production
levels by the Company's customers in the electronics market, consolidation and
relocation by certain customers of their cleaning lines to new facilities and
the loss of a domestic customer that closed its production facility. This
customer represented approximately 5% of net sales for the quarter ended
September 30, 1998 and provided no sales for the quarter ended September 30,
1999.
Gross profit for the quarter ended September 30, 1999 decreased 7% or $60,277 to
$803,647 as compared to $863,924 in the third quarter of 1998. This decrease is
attributable to decreased net sales of the Company's products as described
above. Gross profit margins remained constant at 57% for the third quarters of
both 1999 and 1998.
Selling, marketing, general and administrative expenses for the quarter ended
September 30, 1999 increased 2% or $12,744 to $748,393 as compared to $735,649
for the quarter ended September 30, 1998. This increase reflects additional
costs related to the extension of the expiration date of the Company's
outstanding Warrants and the preparation and filing of a form S-3 registration
statement to register shares issuable upon the exercise of the Company's
Warrants and Underwriter Warrants.
Research and development expenses for the quarter ended September 30, 1999
decreased 2% or $1,482 to $99,993 from $101,475 for the quarter ended September
30, 1998. This decrease resulted from changes in research and development
personnel and allocation of such personnel to sales activities in the quarter
ended September 30, 1999.
Operating loss for the quarter ended September 30, 1999 increased 267% or
$71,539 to a loss of $44,739 from an income of $26,800 for the quarter ended
September 30, 1998. This increase is due to lower sales and increased sales,
marketing, general and administrative expenses in the third quarter of 1999
compared with the third quarter of 1998.
Other income for the quarter ended September 30, 1999 was $4,797 compared to
other income for the quarter ended September 30, 1998 of $14,420. The 67%
decrease reflects a reduction in interest recorded on notes receivable from
former employees.
Net loss for the quarter ended September 30, 1999 increased 197% or $81,162 to a
loss of $39,942, from income of $41,220 for the quarter ended September 30,
1998. This increase is due to non-recurring corporate expenses on general and
administrative items indicated above combined with decreased net sales for the
quarter ended September 30, 1999 compared to the quarter ended September 30,
1998.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Net sales for the nine months ended September 30, 1999 increased less than 1% or
$11,379 to $4,449,675 from sales of $4,438,296 for the nine months ended
September 30, 1998. This increase is the result of a 3% net increase in domestic
chemical sales, which for the nine-month period in 1999 includes the loss of a
customer that represented approximately 5% of the Company's revenues in the
first nine-month period of 1998. International sales for the nine months of 1999
decreased approximately 14% compared to the same period in 1998. A factor in
this decrease is the relocation of certain customers' cleaning lines to new
facilities causing a temporary reduction in the need for the Company's products.
Management believes contributing factors to this increase in net sales, which
are lower than historical increases, is slower economic conditions and
production levels for the Company's customers in the electronic assembly market
in 1999 compared to the same period in 1998. In addition, consolidation of
production processes within certain customers has impacted sales by reducing the
required volume for cleaning their product.
Gross profit for the nine months ended September 30, 1999 increased
approximately 1% or $25,680 to $2,559,292, as compared to $2,533,612 in the nine
months ended September 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 raw
material purchases that lower overall cost per unit. Gross profit margins
increased from 57% in the first nine months of 1998 to 58% in the first nine
months of 1999, reflecting the better economies of scale provided by the larger
sales volume of chemical products.
Page 8 of 12
<PAGE> 9
KYZEN CORPORATION
PART I (CONT.)
Selling, marketing, general and administrative expenses for the nine months
ended September 30, 1999 increased 6% or $137,929 to $2,364,323 as compared to
$2,226,394 for the nine months ended September 30, 1998. This increase reflects
increased spending on corporate items such as the Company's Annual Report to
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 extension of the expiration date of
the Company's outstanding Warrants, the preparation and filing of a Form S-3
registration statement to register shares issuable upon the exercise of the
Company's Warrants and the Underwriter Warrants.
Research and development expenses for the nine months ended September 30, 1999
decreased 6% or $19,085 to $303,587 from $322,672 for the nine months ended
September 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 nine months
ended September 30, 1999.
Operating loss for the nine months ended September 30, 1999 increased 603% or
$93,164 to a loss of $108,618 from a loss of $15,454 for the nine months ended
September 30, 1998. This increase is due to increased administration expenses in
the nine-month period of 1999 compared with the same nine-month period in 1998.
Other income for the nine months ended September 30, 1999 decreased 252% or
$119,998 to an expense of $72,430, from income of $47,568 for the nine months
ended September 30, 1998. This change is the result of management's decision to
record a non-cash charge of approximately $88,000 due to collectibility concerns
on notes receivable from certain former employees and a reduction in interest
recorded on notes receivable from former employees.
Net loss for the nine months ended September 30, 1999 increased 664% or $213,132
to a loss of $181,048, from an income of $32,084 for the nine months ended
September 30, 1998. This increase is due to non-recurring corporate expenses and
a non-cash charge of approximately $88,000 in the first nine months of 1999
partially offset by higher sales and margins when compared to the same
nine-month period in 1998.
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; changes in the Company's existing and
targeted marketplaces; the ability of the Company to obtain financing or equity
capital with favorable terms and conditions; the availability of new 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, purchases of raw material and sales and
marketing activities.
As of September 30, 1999, the Company had working capital of $1,249,149 compared
to $1,241,818 as of December 31, 1998, representing an increase of $7,331 or 1%
from 1998. This increase reflects the positive cash flows from operations during
the nine months ended September 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
Page 9 of 12
<PAGE> 10
KYZEN CORPORATION
PART I (CONT.)
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 $68 in the nine months ended September 30, 1999
represented a $113,470 increase over cash used by operations of $113,402 during
the same period in 1998. This increase resulted from non-cash depreciation and
amortization charges, along with changes in interest receivable from related
parties, offset by a higher net loss in the nine months ended September 30, 1999
as compared with a moderate net income during the same period in 1998. Included
in the net loss for the nine months ended September 30, 1999 is approximately
$102,535 of non-cash expenses for impairment of interest receivable on notes
receivable to the Company from former employees.
Cash used by investing activities of $100,485 in the nine months ended September
30, 1999 represented a $5,780 or 6% increase from cash used by investing
activities during the nine months ended September 30, 1998 of $94,705. This
increase was the result of an increase of $17,840 in expenditures on patents
during the nine months ended September 30, 1999 compared with the same nine
month period in 1998. The increased patent expenses were offset by lower fixed
asset purchases in the first nine 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 nine months ended September 30,
1999 represented a decrease of $81,962 in expenditures of cash used by financing
activities of $82,555 during the nine months ended September 30, 1998. This
decrease resulted from the repayment of a note payable in the first nine 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 September 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 or 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. 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.
RECENT BUSINESS DEVELOPMENTS
On October 5, 1999, the Company was awarded a U.S. patent entitled "Cleaning
Compositions and Methods for Cleaning Resin and Polymeric Materials used in
Manufacture." The technology disclosed in this patent is intended to be applied
to the cleaning of articles used in the manufacture of ophthalmic lenses. The
Company believes this patent provides the Company with a competitive advantage
for optical cleaning, primarily in the area of high refractive index polymers.
The Company's sales to the optical marketplace have taken longer to develop than
management expected due to extended testing and product modification required by
customers in 1999. Management believes that sales to the optical market should
grow in the next 6 to 12 months, as the products are implemented into
production, although there can be no assurance that sales growth can be achieved
in that period of time.
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 the outsourcing trend may result in more
consolidation of cleaning processes. This consolidation may have the short-term
effect of 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
toward 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.
Page 10 of 12
<PAGE> 11
KYZEN CORPORATION
PART I (CONT.)
INTERNATIONAL TRADE DEVELOPMENTS
In 1998, manufacturers in the Peoples Republic of China became significant
suppliers to 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 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 has recently completed its evaluation of its internal computing,
communication and non-computational systems and believes such systems will, in
all material respects, 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 century change
will not have a material adverse effect on the Company's financial condition or
results of operations.
The Company has also completed its evaluation of 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 resulting from the year 2000 and beyond will not have a material
adverse effect on the Company's financial condition or results of operations.
The Company is 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 the 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 in the fourth quarter of
1999. Any such contingency plans would be highly focused on strategies
concerning appropriate levels of current assets (inventory and cash) at the end
of the fourth quarter of 1999 and the first quarter of 2000.
The Company estimates it has spent less than $15,000 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 has upgraded and is currently working to complete the
upgrade of 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.
Page 11 of 12
<PAGE> 12
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
Effective July 19, 1999, Mr. Larry A. Lofgreen resigned from the Company's Board
of Directors for undisclosed reasons. Mr. Lofgreen did not indicate any
disagreement with the Company on any matter relating to the Company's
operations, policies or practices.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
Exhibit 27 Financial Data Schedule.
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, 1999 /s/ Kyle J. Doyel
------------------------- --------------------------------------------
(Signature)
Kyle J. Doyel
President and Chief Executive Officer
Date November 12, 1999 /s/ Thomas M. Forsythe
------------------------- --------------------------------------------
(Signature)
Thomas M. Forsythe
Treasurer and Chief Accounting Officer
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1999-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-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 422,905 422,905
<SECURITIES> 0 0
<RECEIVABLES> 833,064 833,064
<ALLOWANCES> 7,744 7,744
<INVENTORY> 395,677 395,677
<CURRENT-ASSETS> 1,708,080 1,708,080
<PP&E> 1,687,746 1,687,746
<DEPRECIATION> 970,247 970,247
<TOTAL-ASSETS> 2,773,835 2,773,835
<CURRENT-LIABILITIES> 458,931 458,931
<BONDS> 0 0
0 0
0 0
<COMMON> 50,068 50,068
<OTHER-SE> 2,314,904 2,314,904
<TOTAL-LIABILITY-AND-EQUITY> 2,773,835 2,773,835
<SALES> 1,419,364 4,449,675
<TOTAL-REVENUES> 1,419,364 4,449,675
<CGS> 615,717 1,890,383
<TOTAL-COSTS> 615,717 1,890,383
<OTHER-EXPENSES> 848,386 2,667,910
<LOSS-PROVISION> 7,744 7,744
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (39,942) (181,048)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (39,942) (181,048)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (39,942) (181,048)
<EPS-BASIC> (0.01) (0.04)
<EPS-DILUTED> (0.01) (0.04)
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