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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 Commission File Number: 0-24866
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ISOLYSER COMPANY, INC.
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(Exact Name of registrant as specified in its charter)
GEORGIA 58-1746149
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(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4320 INTERNATIONAL BOULEVARD
NORCROSS, GEORGIA 30093
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(Address of principal executive offices) (Zip Code)
(770) 806-9898
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
common stock, $.001 par value per share
stock purchase rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by nonaffiliates of the
registrant based on the sale trade price of the common stock as reported on The
Nasdaq Stock Market on March 17, 2000, was approximately $220 million. For
purposes of this computation, all officers, directors and 5% beneficial owners
of the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors or 5% beneficial owners are,
in fact, affiliates of the registrant.
At March 17, 2000, there were outstanding 41,297,234 shares of the registrant's
common stock, $.001 par value per share.
Documents incorporated by reference: Certain exhibits provided in Part IV are
incorporated by reference from the Company's Registration Statements on Form S-1
(File Nos. 33-83474 and 33-97086), Registration Statement on Form S-4 (File No.
333-7977), Registration Statement on Form S-8 (File Nos. 33-85668), annual
reports on Form 10-K for the periods ended December 31, 1994, December 31, 1995,
December 31, 1996, December 31, 1997, and December 31, 1998, quarterly reports
on Form 10-Q for the period ended March 31, 1998, and September 30, 1999,
Schedule 14A filed on April 14, 1999, and current reports on Form 8-K dated May
31, 1995, September 18, 1995, June 4, 1996, August 30, 1996, December 19, 1996,
August 11, 1998, June 29, 1999 and July 12, 1999.
Note: The discussions in this Form 10-K contain forward-looking statements
that involve risks and uncertainties. The actual results of Isolyser Company,
Inc. and subsidiaries (the "Company") could differ significantly from those set
forth herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Business", particularly
"Business - Risk Factors", and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as those discussed
elsewhere in this Form 10-K. Statements contained in this Form 10-K that are not
historical facts are forward-looking statements that are subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. A number
of important factors could cause the Company's actual results for 2000 and
beyond to differ materially from those expressed or implied in any forward-
looking statements made by, or on behalf of, the Company. These factors include,
without limitation, those listed in "Business - Risk Factors" in this Form 10-K.
PART I.
ITEM 1. BUSINESS
General
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Isolyser Company, Inc. ("Isolyser" or the "Company") believes that it is
the first company to offer high performance contamination control materials and
products coupled with engineered systems for the treatment and disposal of those
materials and products. Isolyser engineers these materials to achieve superior
product performance and savings in disposal costs through the environmentally
sensitive treatment of contaminated waste materials to minimize the amount of
waste and costs to dispose of regulated waste. The Company focuses upon markets
requiring high performance materials subject to regulatory requirements such as
hospital operating rooms, the nuclear industry, metal painting operations in the
automotive and aerospace industries, and clean room and pharmaceutical product
manufacturing. Isolyser takes a life cycle approach to engineering its materials
and treatment and disposal systems for those materials including material
performance requirements, waste management analysis, regulatory compliance and
life cycle cost management.
The Company's healthcare products provide patient care and safety benefits,
including protection from cross-infection, by providing Point-of-Generation(TM)
treatment of potentially infectious and hazardous waste. The Company believes
that its products benefit the environment by reducing the volume of solid waste
while significantly reducing the disposal costs of such waste. In this way,
Isolyser offers protection from potentially infectious and hazardous waste for
patients, staff, the public and the environment. Similar to the healthcare
industry, some industrial markets, such as metal painting operations in the
automotive and aerospace industries and the nuclear industry, operate heavily
regulated "controlled environments". Any product or service that is supplied to
these markets must satisfy detailed materials and product performance
specifications, as well as comply with regulations for the disposal of hazardous
waste. In these and many other demanding industrial markets, Isolyser's
technology of materials, products and engineered treatment and disposal systems
offers a unique combination of product features and end-user benefits including
life cycle cost management and ecological advantages.
The Company currently has two operating units: OREX Technologies
International ("OTI"), a division of Isolyser, and Microtek Medical, Inc.
("Microtek"), an Isolyser subsidiary. Isolyser has also formed a Corporate
Development Group to evaluate investment opportunities which might enhance
development and commercialization of Isolyser's technology.
Business Strategy
The Company's goal is to become a leading developer and provider of high
performance materials and integrated technology systems for the treatment and
disposal of those materials in markets subject to environmental or regulatory
control. The Company intends to improve its operating results through the
commercialization of its OREX(R) Degradable products, increased focus upon the
infection control business of Microtek, and continued new product development.
Commercializing OREX Degradables. The Company seeks to commercialize its
OREX Degradable products by improving the product to better satisfy customer
needs and provide added value within a range of markets. The Company seeks to
achieve these goals through offering materials with superior product performance
and contamination control characteristics, while reducing material costs on a
life cycle basis from materials purchasing through disposal, and accomplishing
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the foregoing in an ecologically beneficial way. To expand its resources, the
Company from time to time seeks to enter into strategic alliances with third
parties to more rapidly commercialize OREX Degradables. There can be no
assurance that OREX Degradables will achieve or maintain substantial acceptance
in their target markets. See "Risk Factors - History of Net Losses" and
"-Marketing Risks Affecting OREX Products".
Increased Focus on Infection Control Businesses. The Company seeks to
increase sales and earnings from its infection control business by enhancing
marketing and distribution efforts both domestically and internationally,
introducing new products, increasing direct sales representation, employing
tele-sales agents for added sales coverage, and capitalizing on low-cost
manufacturing opportunities in the Dominican Republic and Mexico.
Continuing New Product Development. The Company plans to continue to
improve, develop and introduce new and innovative products to the marketplace
designed to promote cost-effective achievement of occupational safety,
environmental protection and regulatory compliance objectives through continued
research and development. In addition, the Company will continue to substantiate
the safety and effectiveness of its products with testing and seek regulatory
approval for use of its products where applicable. See "Risk Factors - Marketing
Risks Affecting OREX Products" and "- Regulatory Risks".
Products and Markets
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A recent history of degradable products
Throughout the 1980's and early 1990's a plethora of companies launched
materials and products with environmentally sensitive features and benefits
throughout North America, Europe and Japan. These products typically made claims
concerning their biodegradability under appropriate conditions.
In most cases, these products were unsuccessful for some or all of the
following reasons. First, the materials and their end-use products were
significantly more expensive than their conventional competitors. Second, some
of these materials encountered manufacturing processing difficulties. Third,
products manufactured using these materials offered no end-use performance
advantages, and finally, the products lacked the biodegradable product
segregation and disposal infrastructure that would enable the end user to
dispose of them cost effectively, in an environmentally responsible manner.
These products offered few, if any, performance advantages, and were almost
invariably consigned to a conventional landfill, where they had no opportunity
to biodegrade. Few of these products are commercially available today.
Isolyser seeks to avoid these obstacles to successful degradable products
in several ways. First, Isolyser seeks wherever possible to offer materials and
end-use products at or close to cost parity with conventional competitors,
unless the value proposition of the material or product creates a significantly
greater value for the end user. Second, OREX Degradables materials have been
specifically engineered to process to degrade materials in a simple way. Third,
Orex Degradables technology has demonstrated significant potential to create
added value for the end user through improved product performance in use, when
compared with conventional competitive material. Fourth, Isolyser specifically
targets markets with waste streams that experience high disposal costs to apply
the OREX technology. Through use of this strategy, the Company seeks to achieve
for its customary significant life cycle cost savings in the handling, treatment
and disposal of infectious or contaminated waste. In these applications, the
unique hot water dissolution of the OREX technology permits the cost-effective
treatment of a wide range of contaminants. Fifth, Isolyser adopts an integrated
systems approach to the supply of its environmentally beneficial technology into
these market sectors. The Company provides products and services including:
materials, products, together with engineered treatment and disposal systems for
the handling and disposal of contaminated waste. Isolyser takes a life cycle
approach to engineering its materials and treatment and disposal systems for
those materials including material performance requirements, waste management
analysis, regulatory compliance and life cycle cost management. Finally, OREX
Degradables ultimately rely upon the wastewater system infrastructure and its
associated publicly owned treatment works for the biodegradation of OREX
products. This infrastructure enables the end-user to fulfill the promise of
materials and products with degradable properties.
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OREX Degradables and Enviroguard
OREX Degradables and Enviroguard(TM) are a combination of materials and
products that provide protection to people and the environment while providing
cost effective solutions to the problems associated with solid waste reduction
and disposal. OREX Degradables are manufactured from two generations of hot
water dispersible materials which can be configured into an array of materials
and products. The materials include woven and nonwoven fabrics; resin; film and
hard plastics and profile extruded materials. Woven fabrics converted into
healthcare products include operating room towels, absorbent gauze and
laparotomy sponges. Nonwoven fabrics converted into healthcare products include
surgical gowns, patient drapes, mop heads and surgical head wear. Film may be
converted into products including fluid collection bags, packaging materials and
equipment drapes. Resin may be extruded and thermoformed or injection molded
into items such as syringes, bowls, instruments and tubing. Combinations of
materials may be configured into composites such as operating room back table
covers. Products suitable for the hygiene industry including diapers and
underpads may also be manufactured using OREX Degradables materials. Products
for a wide range of other market sectors generically known as industrial markets
include wiping substrates; mops; protective apparel and other items of personal
protective equipment. OREX Degradables perform like traditional disposable and
reusable products; however, unlike traditional products, OREX Degradables can be
degraded or dissolved in hot water in a specially designed OREX Processor after
use for safe disposal through the municipal sewer system or other specialty
engineered treatment and disposal systems. Enviroguard is the Company's
trademark for a spunlaced OREX Degradables fabric that is softer, more flexible
and cooler than earlier generation OREX products. See "Risk Factors - History of
Net Losses", "- Marketing Risks Affecting OREX Products", "- Manufacturing and
Supply Risks" and "- Regulatory Risks".
The Company was initially focused on delivering OREX Degradables to the
healthcare industry. In connection with the Company's sale of its MedSurg
business to Allegiance, on July 12, 1999, Isolyser granted Allegiance an
exclusive worldwide license to manufacture, use and sell products made with
Isolyser's proprietary degradable materials for use in healthcare applications.
Under the terms of the license, Isolyser will be the sole supplier to Allegiance
of OREX degradable materials for use in the healthcare field provided Isolyser
satisfies its supply obligations. Allegiance is committed to purchase a certain
minimum quantity of Enviroguard fabric, subject to reduction if Isolyser fails
to obtain regulatory approvals for the dissolution of material in certain
scheduled markets within certain scheduled timeframes. If Allegiance fails to
satisfy its purchase commitment, the license becomes non-exclusive. Allegiance
has agreed to pay Isolyser a royalty equal to a percentage of the net sales
price of product sold by Allegiance to customers who use the product dissolution
technology. The license has an initial term expiring at the end of 2002. In the
event of the acquisition of more than 50% of the outstanding capital stock of
Isolyser or the sale of all or substantially all Isolyser's assets by a person
or entity not affiliated with Isolyser, the license extends for three years
following the date of such change in control and becomes non-exclusive.
Management also believes that the technology used to develop OREX
Degradables has the potential for broad commercial applications beyond the
healthcare industry where protection from potentially infectious or hazardous
waste and reduction of solid waste is important, such as the nuclear power
industry. Under an agreement dated June 14, 1999, the Company has granted RJ
Hanlon Company, Inc. a three year license providing for exclusive global
distribution rights to covers manufactured from OREX film for robots used in
automotive paint operations and non-exclusive rights for the distribution and
sale of OREX specialty wipes in the North American automobile industry. RJ
Hanlon has manufactured and sold custom designed covers for the automobile
industry for approximately twenty years. The OREX robot covers recently passed
independent laboratory tests for cleanliness and paint operation compatibility
for two North American automobile manufacturers. The Company has also negotiated
an agreement to pool resources with other strategic partners to market OREX
materials to the nuclear power industry. To date, no sales have been made by
Isolyser to the automotive painting or nuclear power industry. The Company
actively works to develop the use of OREX Degradables in these industries. See
"Risk Factors - Marketing Risks Affecting OREX Products".
Unlike traditional disposable products that must be disposed of through
either incineration or landfill, OREX Degradables may be disposed of at the
Point-of-Generation by dissolving or degrading the product through processing
the OREX material in hot water. Disposal in this manner reduces the need for
storage, handling and off-site transportation of waste, reduces the potential
for cross-infection, reduces the total volume of solid waste and facilitates
regulatory compliance. It is also designed to facilitate life-cycle cost
reduction and environmentally responsible disposal of waste. The processing of
OREX materials may involve special engineering requirements depending upon the
industry in which the processing technology is being used. For example, the
healthcare industry's processing of OREX largely involves the disposal of blood
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with or without infectious disease contamination. In this industry, the Company
uses an OREX processor similar to a commercial washing machine to process the
material for disposal through the municipal sewer system. An industry standard
method for disposal of blood, with or without infectious disease contamination,
is through the municipal sewer system. While the Company makes no claims or
representations in its product advertising or labeling that the disposal method
for OREX Degradables renders the disposal matter non-infectious, independent
test results indicate that dissolving OREX Degradables in hot water inactivates
in excess of 99% of tested microorganisms. Disposal in this manner is not
subject to federal regulation but may be regulated by state and local sewage
treatment plants to the extent that sewer discharges from hospitals or other
facilities may interfere with the proper functioning of such plants. Based on
product testing and available research, the Company believes that OREX
Degradables manufactured from PVA will not interfere with the proper functioning
of sewage treatment plants. Based on such testing and research, the Company has
obtained over 100 written and verbal non-binding concurrences and is in the
process of seeking additional non-binding concurrences with the Company's
conclusions from local authorities. While the Company is undertaking evaluation
of OREX Degradables manufactured from polymers other than PVA, no assurances can
be provided that such non-PVA based OREX will not interfere with the proper
functioning of sewage treatment plants. The processing of OREX materials in the
automotive paint and nuclear power industries involves separate engineering
requirements. In the automotive industry, paint and solvent contaminated waste
is classified as hazardous and incurs a high cost of disposal. OTI has developed
a processing and wastewater treatment system that renders OREX Degradables
materials non-hazardous accompanied by a reduction in hazardous waste disposal
costs. Based on industry tests conducted to date, this method of waste
management complies with automotive wastewater treatment and permitting
requirements. In the nuclear industry, OTI has teamed with a strategic alliance
partner to implement a disposal technology incorporating OTI dissolution
technology that accelerates the biodegradation of OREX Degradables combined with
a sophisticated separation technology to isolate the radioactive contaminants.
The combined technology results in an outfall of carbon dioxide and water while
providing a substantial reduction in radioactive waste volume. See "Government
Regulation" and "Risk Factors - Regulatory Risks".
Management has not been satisfied with the Company's performance to date in
manufacturing and selling OREX Degradables. In particular, the Company has
failed to achieve profitable margins on sales of OREX products. Accordingly, the
Company has sought to improve its operating results by, among other things,
reducing its marketing efforts directed towards the sale of OREX Degradables,
divesting itself of underperforming assets, reducing the amount of its debt, and
forming the OTI business unit to provide increased focus on OREX commercial
development. As a result of the Company's sale of its selling, marketing and
manufacturing facilities previously used for OREX products, OTI now engages in
the strategy of relying upon third parties for such selling, marketing and
manufacturing functions. See "- Marketing and Distribution", "- Manufacturing
and Supplies"; "Risk Factors - History of Net Losses", "- Marketing Risks
affecting OREX Products" and "-Manufacturing and Supply Risks".
Infection Control Products
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In 1998 the Company formed a business unit called the Infection Control
Group which consists primarily of the equipment drape, fluid control and safety
products manufactured by the Company's subsidiary, Microtek Medical, Inc.
("Microtek"). Consistent with its niche market strategy, Microtek is actively
engaged in the development of new products and the refinement of its existing
products to respond to the needs of its customers and the changing technology of
the medical products industry. Many of the Company's product innovations have
been generated from requests by the Company's customers and health care
professionals for products to be custom designed to address specified problems
in the operating room environment. The Company also monitors trends in the
health care industry and performs market research in order to evaluate new
product ideas. No assurance can be given that any new product will be
successfully developed or that any newly developed product will achieve or
sustain market acceptance.
Microtek designs, manufactures and markets two principal product lines for
use in niche markets of the healthcare industry. First, Microtek's infection
control products consist of more than 1,500 specially designed drapes for use in
draping operating room equipment during surgical procedures. This equipment
includes, for example, microscopes, ultrasound probes, endoscopic video cameras,
x-ray cassettes, imaging equipment, lasers and handles attached to surgical
lights. In addition to reducing the risk of cross-infection, these products
increase operating room efficiency by reducing the need to sterilize equipment
between procedures. These disposable sterile products are generally made from
plastic film containing features designed for the operating room environment,
such as low glare and anti-static features. During 1999 the Company completed
its development of a complete line of plastic (film) patient drapes that include
a full line of adhesive incise drapes including a subset of adhesive drapes that
have an anti-microbial agent incorporated into the film. The anti-microbial
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incise drapes are patented and are a joint development of the Company and
Microban Products Company and are marketed under the trade names of Microtek
Medical and Microban(R). Microtek's second principal product line, fluid-control
products, are specially designed disposable pouches which are attached to a
surgical patient drape (called a substrate), which is placed around the
operative site. For instance, Microtek manufactures a specialty pouch for knee
arthroscopy. This pouch captures not only the bodily fluids that are discharged
from the knee but also the sterile saline that is infused into the operative
site during the arthroscopic procedure. Microtek's fluid control product line
primarily consists of more than 200 different plastic disposable collection
pouches.
For 1997, 1998 and 1999, sales of Microtek products accounted for
approximately 27%, 33% and 59% of the Company's total revenues, respectively.
Included in such sales figures are $8.5 million, $8.6 million and $6.8 million
of export sales by Microtek during 1997, 1998 and 1999, respectively. The
reduction in export sales for 1999 is primarily due to the reclassification of
former export sales as domestic sales due to a change in shipping destination.
The Company offers several other lines of products for the management of
potentially infectious and hazardous waste. The leading lines of these safety
products are described below.
Liquid Treatment System (LTS) is a super-absorbent powder which converts
potentially infectious liquid waste into a solid waste suitable for landfill
disposal, subject to applicable regulatory requirements. LTS is typically added
to a suction canister or other fluid collection device in which blood or other
body and irrigation fluids are collected during surgery or in wound drainage
after surgery. LTS converts liquid waste into a solid waste, thereby
facilitating handling, transportation and disposal. Regardless of whether LTS is
disposed of in landfills or through incineration or other special process, LTS
provides advantageous occupational safety benefits by Point-of-Generation
treatment of potentially infectious liquid waste. See "- Government Regulation".
Sharps Management System (SMS) is designed to encapsulate and physically
disinfect contaminated sharps (such as needles, syringes, scalpels, etc.) at the
Point-of-Generation. The product consists of a puncture- and spill-resistant
plastic container partially filled with a bathing solution for encapsulation.
When full, a small amount of catalyst powder is added. The catalyst creates a
chemical reaction which heats the container and solidifies the contents, thus
encapsulating the sharps and reducing the risk of accidental punctures. The
container of SMS treated sharps is suitable for handling, transportation and
disposal.
The Company also manufactures and markets various other products. In April,
1996, Microtek purchased the Venodyne division of Advanced Instruments, Inc.
which manufactures and markets pneumatic pumps and disposable compression
sleeves for use in reducing deep vein thrombosis. Sales of these products have
not been material to the Company's results of operations.
The Company acquired Microtek in a pooling of interests transaction as of
September 1, 1996, and the Company's financial statements prior to the
acquisition date have accordingly been restated to include Microtek's financial
statements. Microtek is a Delaware corporation which, prior to the Microtek
acquisition, operated independently following its spin-off from Teknamed
Corporation, a medical products company, in 1984.
Procedure Trays
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In July 1999, the Company sold to Allegiance its procedure tray business
formerly operated through the Company's MedSurg subsidiary. Procedure trays are
sterilized packs which include all components (traditionally conventional
disposable or reusable medical products such as laparotomy sponges, drapes and
suction tubing) used in medical (primarily surgical) procedures. For 1997, 1998
and 1999, sales of procedure trays and related products accounted for
approximately 37%, 40% and 28% of the Company's total revenue, respectively. As
a result of the sale of MedSurg, the Company no longer sells procedure trays.
White Knight
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Effective May 31, 1999 the Company sold its White Knight subsidiary.
Through White Knight, the Company formerly manufactured and marketed non-woven
infection control products and protective apparel for use primarily in the
healthcare industry.
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Net sales by the Company through White Knight in 1997, 1998 and 1999
represented 30%, 25% and 13%, respectively, of the Company's total revenue.
Included in such sales figures are $3.3 million, $2.5 million and $17,000 of
export sales by White Knight during 1997, 1998 and 1999, respectively.
Marketing and Distribution
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Substantially all of the Company's sales in 1999 were made to the
healthcare market.
As a part of a restructuring plan begun in 1997 and completed in 1999, the
Company substantially reduced its sales force. As of December 31, 1999, the
Company's marketing and sales force consisted of 44 sales representatives, seven
field sales managers, four home office sales managers, seven marketing managers
and 16 persons in customer support.
The Company is dependent upon a few large distributors for the distribution
of its products. The Company's top three customers accounted for approximately
22% of the Company's total revenues during 1999. Of these customers, only
Allegiance accounted for over 10% of the Company's total sales during 1999. Due
to the exclusive worldwide nature of the license granted by Isolyser to
Allegiance, the Company will depend exclusively upon Allegiance during the term
of that license for sales of OREX and Enviroguard products to healthcare
markets. Because distribution of medical products is heavily dependent upon
large distributors, the Company anticipates that it will remain dependent upon
these customers and others for the distribution of its products. If the efforts
of the Company's distributors prove unsuccessful, or if such distributors
abandon or limit their distribution of the Company's products, the Company's
sales may be materially adversely affected. See "Risk Factors - Reliance Upon
Distributors".
The Company sells its equipment drapes and fluid control products through
distributors and custom procedure tray companies. The Company also markets
certain of its products to other manufacturers on a "non-branded" or private
label basis. For example, the Company's fluid control pouches are sold to
manufacturers of substrates, and the Company's equipment drapes are sold to
manufacturers of the equipment for which such drapes were designed.
The Company's total export sales during 1997, 1998 and 1999 were $11.8
million, $11.1 million and $7.0 million, respectively. Outside the United
States, the Company markets its products principally through a network of
approximately 175 different dealers and distributors. As of December 31, 1999,
the Company also had two sales representatives operating in international
markets, and maintains an office and warehouse distribution center near
Manchester, England and an office for one of its sales representatives and
support personnel in Luxembourg, Europe.
Isolyser sells its LTS product line under a non-exclusive distribution
agreement with Allegiance, a leader in the sale of suction canisters and related
apparatus. The agreement expires February 28, 2001 and is subject to renewal for
one-year terms thereafter unless otherwise terminated. The Company also
distributes LTS through other national distributors.
To further expand its marketing resources, the Company from time to time
seeks to enter into strategic alliances with third parties such as specialty
equipment manufacturers and other non-competitive companies which would enable
it to sell various of its products. While the Company from time to time engages
in such discussions, the Company provides no assurances that any such strategic
alliances will be consummated or, if consummated, that any such alliance will be
favorable to the Company.
Manufacturing and Supplies
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OREX is manufactured from a family of organic, degradable polymers that
dissolve or disperse in hot water and degrade in the wastewater system or in
custom designed OREX processing equipment. Woven and nonwoven products are
manufactured using PVA-based polymer chemistry. PVA is a safe material used
widely in a variety of consumer products such as eye drops, cosmetics and cold
capsules. The Company has more recently begun to develop and commercialize the
use of a second generation polymer system known generically as its Novel
Degradable Polymer or NDP-system. This system is currently being developed for
the manufacture of OREX Degradables film, composites of film with nonwoven
fabric, and extruded, thermoformed or injection molded solid plastic items. This
NDP family of polymers dissolves or disperses and then degrades in a processing
step which is initiated by the action of hot water at an elevated pH. The
Company currently obtains its PVA raw materials from various foreign suppliers.
Risks exist in obtaining the quality and quantity of PVA at a price that will
allow the Company to be competitive with manufacturers of conventional
disposable and reusable products. Prevailing prices of PVA have adversely
7
affected the Company's manufacturing costs for its OREX products. PVA resin from
Japan, Taiwan and certain producers in China are subject to anti-dumping duties
if imported into the United States. See "Risk Factors - Manufacturing and Supply
Risks".
Until 1997, the Company had followed a strategy of capital equipment
purchases and acquisitions to expand and vertically integrate the Company's
manufacturing capabilities, thereby enabling the Company to manufacture and
convert into finished goods many OREX Degradables internally. The Company
acquired OREX Degradables material manufacturing plants as a part of this
expansion strategy. In 1998, the Company sold its OREX materials manufacturing
plants. These plants were used by the Company to convert PVA fiber into OREX
nonwoven roll goods and towels. In connection with the sale, the Company sold
4.5 million pounds of excess PVA fiber at a price of $.45 per pound under an
agreement pursuant to which the Company agreed to repurchase 2.6 million pounds
of such fiber (either as fiber or converted goods) over a four year period at a
cost of $.80 per pound of fiber. Through 1999, the Company has paid $636,000 for
such fiber. See "Risk Factors - Manufacturing and Supply Risks".
The Company has developed and begun sourcing OREX materials and Enviroguard
fabric using the hydroentangled method of nonwoven roll-good material
manufacturing. This process is neither chemically nor thermally bonded. Through
these roll-good material development and manufacturing efforts, both domestic
and internationally, the Company seeks to reduce the cost of producing OREX
drapes and gowns while simultaneously improving the quality of these products.
The Company currently sources all of these roll goods from outside the United
States. The Company has initially relied on manufacturers in China for its
Enviroguard nonwoven materials and is seeking to reduce its reliance on such
manufacturers by sourcing such materials from manufacturers in other locations.
For example, the Company has recently begun to have a manufacturer located in
Israel supply Enviroguard nonwoven materials.
The Company now relies exclusively on domestic and foreign independent
manufacturers to supply OREX Degradables products to the Company's customers.
The Company uses contractors in the People's Republic of China to manufacture
OREX Degradables sponge products and spunlaced OREX Degradables fabric. The
Company has used various independent parties (both domestically and
internationally) to manufacture various OREX Degradables thermoformed, extruded
and composite products which have not yet been offered for commercial sale by
the Company. The Company's requirements (which to date have been modest) for
OREX Degradables film products are currently being supplied by a contract
manufacturer. The Company has not yet successfully reduced the cost of
manufacturing OREX thermoformed and extruded products and OREX film products to
a sufficient degree to offer such products commercially, although the Company
seeks to use its NDP technology to reduce the cost of manufacturing OREX film
products. See "Risk Factors - Manufacturing and Supply Risks".
The Company manufactures its equipment drapes and fluid control products at
its facilities in Columbus, Mississippi, the Dominican Republic and Empalme,
Mexico. The Company utilizes a facility in Jacksonville, Florida as a
distribution point for receipt and shipment of product and for light
manufacturing. The Company also maintains a distribution facility near
Manchester, England.
The Company currently relies upon independent manufacturers for the
purchase of materials and components for most of its safety products. The
Company uses, and expects to continue to use, vendors of stock items to the
extent possible to control direct material costs for its safety products. The
Company's safety products production facilities located in Columbus, Mississippi
are used for mixing liquid and powdered chemicals, other light manufacturing and
packaging.
Order Backlog
- -------------
At December 31, 1999, the Company's order backlog totaled approximately
$356,000 compared to approximately $2.0 million (in each case net of any
cancellations) at December 31, 1998. All backlog orders at December 31, 1999 are
expected to be filled prior to year end 2000. Backlogs at December 31, 1998
included the Company's procedures tray and White Knight businesses sold during
1999. Microtek typically sells its products pursuant to written purchase orders
which generally may be canceled without penalty prior to shipment of the
product. Accordingly, the Company does not believe that the level of backlog
orders at any date is material or indicative of future results.
8
Technology and Intellectual Property
- ------------------------------------
The Company seeks to protect its technology by, among other means,
obtaining patents and filing patent applications for technology and products
that it considers important to its business. The Company also relies upon trade
secrets, technical know-how and innovation and market penetration to develop and
maintain its competitive position.
The Company holds several patents issued by the U.S. Patent and Trademark
Office concerning methods of disposing of OREX Degradables, including: (1) US
Patent 5,207,837, issued in 1993 and successfully reexamined (B1 6,207,834) by
the U.S. Patent Office in 1996, which covers a method of disposing OREX
Degradables that are configured into a drape, towel, cover, overwrap, gown, head
cover, face mask, shoe covering, sponge, dressing, tape, underpad, diaper, wash
cloth, sheet, pillow cover, or napkin; (2) US Patent 5,181,967, issued in 1993
and successfully reissued (RE 36399) in 1999, and which covers a method of
disposing particular OREX Degradables utensils such as procedure trays,
laboratory ware, and patient care items; (3) US Patent 5,181,966, issued in 1993
and successfully reexamined (B1 5,181,966) in 1996, and which covers a method of
disposing OREX Degradables configured into packaging materials; and (4) a United
States patent application which the Patent Office informed Isolyser in November,
1999 of its intent to issue a patent which patent would cover a method of
disposing PVA garments, linens, drapes and towel.
Isolyser also has several patents which cover particular OREX Degradable
products, including (1) US Patent 5,650,219, which was issued in 1995 and covers
a method of disposing particular OREX Degradables configured into garments,
linens, drapes, and towels; (2) US Patent 5,620,786, issued in 1997 and covers
particular OREX Degradables that are configured into towels, sponges, or gauze;
(3) US Patent 5,268,222, issued in 1993 and covers a composite fabric made with
an OREX Degradable; (4) US Patent 5,885,907, issued in March, 1999, and covers
particular OREX Degradables configured into a towel, sponge, or gauze; (5) US
Patents 5,470,653 and 5,707,731, issued in 1995 and 1998, and which cover mop
heads made from OREX Degradables; and (6) US Patent 5,985,443, issued November,
1999, and which covers the methods of disposing a mop head.
Isolyser also has patents that cover methods of producing OREX Degradables,
including: (1) US Patent 5,871,679, issued in February, 1999, and which covers
methods for producing OREX Degradables that are configured into thermoplastic
films and fabrics; (2) US Patent 5,661,217, issued in 1997, which covers a
method of forming molded packaging and utensils from OREX Degradables, and
methods of forming OREX Degradables films into a packaging, drape, cover,
overwrap, gown, head cover, face mask, shoe cover, CSR wrap, tape, underpad or
diaper; (3) US Patent 5,972,039, issued October, 1999, and which covers methods
for enhancing the absorbency and hand feel of OREX Degradables fabrics; and (4)
US Patent 5,871,679 for producing OREX Degradables that are configured into film
and fabric.
The Company also has several issued patents related to its SMS and LTS
technologies.
The Company currently has several applications pending before the U.S.
Patent and Trademark Office which relate to OREX Degradables. Specifically,
those applications concern (i) a new class of OREX biodegradable polymers, (ii)
methods for enhancing the absorbency and hand feel of OREX Degradables fabrics,
(iii) finishing formulations for OREX Degradables, (iv) a pipeliner manufactured
with OREX Degradables, (v) medical containers made from OREX Degradables, (vi) a
method of absorbing oil with OREX Degradables fabric, (vii) PVA fabric that is
made from the spunlace process, including PVA spunlaced fabrics that are
configured into surgical gowns, drapes, and industrial wipes, (viii) wipes made
from any PVA substrate, (ix) equipment covers made from OREX degradables, (x)
methods of treating industrial and medical waste, and (xi) PVA fabrics that are
coated on both sides for greater repellency. The Company is not aware of any
facts at this time that would indicate that patents sought by these applications
will not be issued; however, no assurances can be provided that patents will
issue from these applications. See "Risk Factors Protection of Technologies."
The Company's U.S. patents expire between 2007 and 2020. The Company files
for foreign counterpart patents on those patents and patent applications which
the Company considers to be material to its business. No assurance can be given
that the various components of the Company's technology protection arrangements
utilized by the Company to protect its technologies, including its patents, will
be successful in preventing others from making products competitive with those
offered by the Company, including OREX Degradables. See "Risk Factors -
Protection of Technologies".
9
Under a five-year license agreement from Microban Products Company entered
into on March 22, 1996, Microtek acquired the exclusive right to incorporate
certain antimicrobial additives in the Company's surgical and equipment drapes
manufactured with film and nonexclusive rights to such additives in non-woven
drape products, subject to the payment of royalties and certain other terms and
conditions specified in the license agreement. Microtek holds a US patent
covering a surgical drape having incorporated therein a broad spectrum
antimicrobial agent which expires in 2010. To date, such license and patent have
not been material to the Company's operations.
The Company has registered as trademarks with the U.S. Patent and Trademark
Office "Isolyser," "OREX", "LTS" and "SMS". In addition, the Company is applying
to register the trademark "Enviroguard" in the U.S. Patent and Trademark Office.
Trademark registrations for "Isolyser", "OREX" and "LTS" have also been granted
in various foreign countries. Microtek maintains registrations of various
trademarks which the Company believes are recognized within their principal
markets.
Competition
The markets in which the Company competes are characterized by competition
on the basis of quality, price, product design and function, environmental
impact, distribution arrangements, service, customer relationship, and
convenience. Many of the Company's competitors have significantly greater
resources than the Company. See "Risk Factors - Competition".
Although the Company is not aware of any products currently available in
the market place which provide the same disposal and degradable benefits as OREX
Degradables and Enviroguard, these products compete with traditional disposable
and reusable products currently marketed and sold by many companies. Single use
disposable (as opposed to reusable) drapes and gowns have been available for
over 25 years and according to a 1992 market study account for over 80% of the
surgical market. Competing manufacturers of traditional disposable medical
products are large companies with significantly greater resources than those of
the Company. These competitors have in many instances followed strategies of
aggressively marketing products competitive with OREX Degradables to buying
groups resulting in increasing cost pressures. These factors have adversely
affected the Company's ability to adjust its prices for its OREX products to
take into account disposal cost savings provided by these products, and have
adversely affected the Company's ability to successfully penetrate potential
customer accounts. See "Risk Factors - Marketing Risks affecting OREX Products"
and "Competition".
The market for the Company's equipment drapes and fluid control products is
also highly competitive, and is dominated by a few large companies such as
Allegiance, Kimberly-Clark Corporation, Johnson & Johnson and 3M Corporation.
Competition for the Company's safety products includes conventional methods
of handling and disposing of medical waste. Contract waste handlers are
competitors which charge premium rates to remove potentially infectious and
hazardous waste and transport it to an incineration or autoclaving site. Many
hospitals utilize their own incinerators to dispose of this waste. In addition,
systems are available that hospitals can purchase for grinding and chemically
disinfecting medical waste at a central location.
The Company believes that its LTS products command a dominant share of a
market that thus far has been marginally penetrated. However, the Company is
aware of a variety of absorber products that are directly competitive with LTS.
Recent regulatory developments have placed LTS at a competitive disadvantage to
a competitor's absorber product. See "- Government Regulation". The Company
estimates that it has only a small (less than 5%) market share for its SMS
products. The market niche for disposal of sharps is dominated by a number of
other companies.
Government Regulation
- ---------------------
The Company is subject to a number of federal, state and local regulatory
requirements which govern the marketing of the Company's products and the use,
treatment and disposal of these products utilized in the patient care process.
In addition, various foreign countries in which the Company's products are
currently being distributed or may be distributed in the future impose
regulatory requirements. See "Risk Factors - Regulatory Risks".
The Company's traditional medical products (including, for example,
equipment drapes), OREX Degradables line of products and SMS products are
regulated by the FDA under medical device provisions of the Federal Food, Drug
and Cosmetic Act (the "FDCA"). FDA regulations classify medical devices into one
10
of three classes, each involving an increasing degree of regulatory control from
Class I through Class III products. Medical devices in these categories are
subject to regulations which require, among other things, pre-market
notifications or approvals, and adherence to good manufacturing practices,
labeling, record-keeping and registration requirements. Patient care devices
which the Company currently markets are classified as Class I or Class II
devices subject to existing 510(k) clearances which the Company believes satisfy
FDA pre-market notification requirements. The FDA has issued to the Company
510(k) clearances on OREX Degradables products for surgical sponges, operating
room towels, drapes, gowns, surgeon's caps, surgeon's vests, shoe covers and
medical bedding. The Company is currently developing, evaluating and testing
certain OREX Degradables film and thermoformed or extruded OREX products
manufactured from non-PVA polymers, and it is possible that new 510(k)
clearances will be required for such products. There can be no assurances as to
when, or if, other such 510(k) clearances necessary for the Company to market
products developed by it in the future will be issued by the FDA. The FDA
inspects medical device manufacturers and distributors, and has broad authority
to order recalls of medical devices, issue stop sale orders, seize non-complying
medical devices, enjoin violations, impose civil and criminal penalties and
criminally prosecute violators.
The FDA also requires healthcare companies to satisfy record-keeping
requirements and the quality system regulation (QSR) which require that
manufacturers have a quality system for the design and production of medical
devices intended for commercial distribution in the United States. Failure to
comply with applicable regulatory requirements, which may be ambiguous or
unclear, can result in fines, civil and criminal penalties, stop sale orders,
loss or denial of approvals and recalls or seizures of products.
Countries in the European Union require that products being sold within
their jurisdictions obtain a CE mark and be manufactured in compliance with
certain requirements. The Company has CE mark approval to sell of its safety and
medical device products in Europe. One of the conditions to obtaining CE mark
status involves the qualification of the Company's manufacturing plants and
corporate offices under certain certification processes. All of the Company's
manufacturing plants and corporate offices have obtained such certifications. To
maintain CE mark approval, the Company has to satisfy continuing obligations
including annual inspections by European notified bodies as well as satisfy
record keeping and other quality assurance requirements. The notified bodies
have the authority to stop the Company's use of the CE mark if the Company fails
to meet these standards. While the Company believes that its operations at these
facilities are in compliance with requirements to maintain CE mark status, no
assurances are provided that such certifications will be maintained or that
other foreign regulatory requirements will not adversely affect the Company's
marketing efforts in foreign jurisdictions.
Under the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"),
any product which claims to kill microorganisms through chemical action must be
registered with the EPA. Any product that makes a claim that it kills
microorganisms exclusively via a physical or mechanical means is regulated as a
physical "device" under FIFRA. Pesticide devices do not require EPA
registration, but are subject to some requirements, including labeling and
record keeping. FIFRA affects primarily the Company's LTS and SMS products. The
Company believes its SMS product qualifies as a physical disinfecting device
under FIFRA, which permits the Company to advertise that such product physically
disinfects microorganisms without EPA registration. LTS is not registered with
the EPA. The Company has marketed LTS in a manner in which the Company believed
complied with FIFRA by not making claims in product labeling or marketing that
LTS treats or disinfects medical waste or kills microorganisms. In 1998 the EPA
announced its position that FIFRA requires that products, such as LTS, which
hold state approvals related to anti-microbial efficacy, such as state approval
for landfill of LTS-treated waste, impliedly make claims about killing
microorganisms which necessitate registration under FIFRA. The Company continues
to sell its LTS products without FIFRA registration, and has met with the EPA
concerning its continuing sale of LTS products and methods to obtain expedited
registration of a new version of LTS under FIFRA. The Company has altered its
marketing of LTS to comply with EPA's new guidance. The Company recently
obtained conditional registration under FIFRA of such new version of LTS. The
Company must still seek numerous state and local registrations of such new LTS
products to allow such product to be landfilled in such places. No assurances
can be provided that the Company will obtain such registration or that prior or
continuing sales of the Company's LTS products may not either be stopped or
subject the Company to penalties or other regulatory action. A product line
marketed by a competitor of the Company's LTS products has been registered under
FIFRA, placing LTS at a competitive disadvantage to such competing product line.
See "Risk Factors - Regulatory Risks" and "- Reliance Upon Distributors".
State and local regulations of the Company's products and services is
highly variable. In certain cases, for example, state or local authorizations
are required to landfill Isolyser's SMS or LTS products, or both. In November,
1997, as a result of a review of an existing approval in California for the
landfilling in California of waste treated by LTS, California authorities
11
revoked such approval. While LTS offers benefits unrelated to landfilling, such
action has adversely affected the Company's ability to sell LTS. The Company is
in the process of obtaining from the state of California approval to landfill
waste treated by a new version of LTS. Certain other states are also reviewing
previously issued approvals to landfill LTS-treated waste within such other
states, but no action has yet been taken as a result of such review processes.
No assurances can be provided that prior regulatory actions or pending
regulatory reviews will not continue to have an adverse effect upon the sales of
the Company's liquid absorbent products. [Status] See "Risk Factors - Reliance
Upon Distributors" and "- Regulatory Risks".
State and local sewage treatment plants regulate the sewer discharge, such
as dissolved OREX Degradables, from commercial facilities to the extent that
such discharges may interfere with the proper functioning of sewage treatment
plants. Based on product testing and available research the Company believes
that OREX Degradables manufactured from PVA will not interfere with the proper
functioning of sewage treatment plants. The Company has obtained from state and
local authorities over 100 written and verbal non-binding concurrences with the
Company's conclusions and continues to pursue additional non-binding
concurrences. While the process of obtaining such concurrences is time consuming
and expensive due to the significant number of such authorities and the
educational and testing processes involved, the Company does not believe that
regulations governing sewage and waste water discharges will prevent the use of
OREX Degradables. While the Company is undertaking evaluation of OREX
Degradables manufactured from polymers other than PVA, no assurances can be
provided that such non-PVA based OREX Degradables will not interfere with the
proper functioning of sewage treatment plants.
As the Company seeks to introduce its OREX products to industries other
than healthcare, the Company will be required to satisfy any applicable
regulatory requirements within such industries for the disposal of contaminated
OREX products. While the user of the Company's products and not the Company is
responsible for complying with these legal requirements, the Company's product
development efforts include analyzing compliance programs to facilitate sales of
the Company's products. For example, the Company is currently developing
products designed for use in the automotive painting industry and the nuclear
power industry. The processing of OREX materials contaminated with paint or
nuclear outfall is classified as hazardous which create significant engineering
challenges including, for example, a technology to separate the processed OREX
materials from the hazardous component of the contaminated materials. The
Company seeks to work with third parties to develop technologies to address
these challenges. With the help of third parties, the Company has engineered
systems to address these challenges which, based on preliminary testing, appears
to separate the hazardous component of other contaminated OREX material in the
processing stage. The Company, however, has not yet begun commercial sale of
these products, during which time additional challenges may be identified as a
part of the Company's efforts to commercialize these technologies.
Regulators at the federal, state and local level have imposed, are
currently considering and are expected to continue to impose regulations on
medical and other waste. No prediction can be made of the potential effect of
any such future regulations, and there can be no assurance that future
legislation or regulations will not increase the costs of the Company's products
or prohibit the sale or use of the Company's products, in either event having an
adverse effect on the Company's business.
Employees
- ---------
As of December 31, 1999, the Company employed approximately 1,311 full-time
employees and approximately 17 people as independent contractor sales
representatives. Of these employees, 78 were employed in marketing, sales and
customer support, 1,053 in manufacturing, 15 in research and development, and
165 in administrative positions. The Company believes its relationship with its
employees is good.
Insurance
The Company maintains commercial general liability protection insurance
which provides coverage with respect to product liability claims. The
manufacture and sale of the Company's products entail an inherent risk of
liability. The Company believes that its insurance is adequate in amount and
coverage. There can be no assurance that any future claims will not exceed
applicable insurance coverage. Furthermore, no assurance can be given that such
liability insurance will be available at a reasonable cost or that the Company
will be able to maintain adequate levels of liability insurance in the future.
In the event that claims in excess of these coverage amounts are incurred, they
could have a material adverse effect on the financial condition or results of
operations of the Company.
12
Environmental Matters
- ---------------------
The Company is not a party to any material environmental regulation
proceedings alleging that the Company has unlawfully discharged materials into
the environment. The Company does not anticipate the need for any material
capital expenditures for environmental control facilities during the next 18 to
24 months.
Risk Factors
- ------------
History of Net Losses.
While the Company reported net income for the year ended December 31, 1999,
the Company has a history of operating at a net loss. For each of the five years
ended December 31, 1998, the Company incurred net losses. The Company attributes
such operating performance in significant part to a failed strategy to
commercialize the Company's OREX Degradables products. The Company has
significantly changed its strategy to commercialize OREX Degradables, reflected
in part by the Company's divestiture of certain assets and businesses. The
Company sold $1.7 million of OREX Degradables products in 1999 and did not
realize any gross profit on those sales. Future investments in OREX Degradables
products or failed commercialization strategies could adversely affect operating
results in the future.
Marketing Risks affecting OREX Products.
Isolyser depends entirely on the efforts and success of Allegiance in
marketing OREX Degradables and Enviroguard products to healthcare markets
because Isolyser granted Allegiance an exclusive worldwide license to these
products in healthcare markets. Allegiance has not yet introduced these products
for commercial sale. If Allegiance does not perform in a manner satisfactory to
Isolyser in marketing these products, Isolyser may nevertheless be required to
await the expiration of that license at the end of 2002 or later to pursue an
alternative strategy to commercialize these products in healthcare markets.
While Allegiance is a leading supplier of disposable products to the healthcare
industry and has promised Isolyser that Allegiance will exercise efforts to
promote the OREX products, the success of OREX products in the healthcare
industry will depend upon numerous factors and is subject to many risks.
Similarly, developing a market in non-healthcare industries for OREX is subject
to many risks. These risks include:
o Because Isolyser does not currently sell significant quantities of
OREX products, commercialization of these products will require the
purchaser and user of these products to change their existing
purchasing patterns;
o To realize the full benefits of OREX Degradables products, users of
these products will be required to change the way in which they
dispose of these products by incorporating the OREX dissolution
process in disposal procedures;
o Isolyser may experience difficulties in its objective to provide a
regular supply of adequate quantities of product having uniformly
acceptable performance qualities which may cause Isolyser to lose
customers;
o Isolyser will need to provide appropriate regulatory and mechanical
support to customers to incorporate the processing technology
necessary to degrade OREX Degradables products after use, and Isolyser
may not be able to obtain regulatory approvals or engineer
satisfactory processing technology to support customers;
o Because Isolyser currently has commercially available only a limited
number of OREX Degradables products and therefore cannot currently
replace all traditional disposable products with OREX Degradables,
potential customers may not yet justify large-scale conversion to OREX
Degradables products;
o Past concerns with prior OREX Degradables product performance or
future deficiencies in performance of Isolyser's products may result
in the inability to convert new customers to OREX products or retain
existing customers;
13
o Long term supply contracts entered into by large hospital chains and
smaller collective buying groups, and corresponding customers in other
industries, may prohibit the successful marketing OREX Degradables to
such customers;
o Competitors may try to sell traditional disposable medical products at
prices which prevent the aggressive marketing and selling OREX
Degradables products; and
o Difficulties may be encountered in obtaining regulatory approvals
necessary to process OREX Degradables.
The Company has no significant experience in marketing OREX Degradable to
industries other than healthcare. In evaluating other industries to develop and
market OREX Degradables products, the Company seeks to identify third parties
which the Company believes have expertise or other strategic characteristics to
help commercialize OREX Degradables in that industry. Contracting with these
third parties may require the Company to grant exclusive rights to the third
party over the OREX technology within the applicable industry. For example, the
Company granted to RJ Hanlon exclusive global distribution rights to covers
manufactured from OREX film for robots used in automotive painting operations.
The license is dated June 14, 1999 and has a term of three years. If the Company
is not satisfied with the performance of RJ Hanlon, the Company may not be able
to cancel the agreement. In addition, marketing of OREX Degradables products in
industries other than the healthcare industry will encounter the same risks
described above for the healthcare industry. Other industries may have special
and additional risks, not currently known to Isolyser. For example, processing
of OREX Degradables used in the automotive paint industry requires special
processing to remove paint as paint is not permitted to flow into municipal
sewer systems.
The Company has not been successful to date in its efforts to obtain
substantial acceptance of its OREX Degradables products in their target markets.
There can be no assurance that the Company's products will achieve or maintain
substantial acceptance in their target markets. In addition to market
acceptance, various factors, including delays in improvements to products and
new product development and commercialization, delays in expansion of
manufacturing capability, new product introductions by competitors, price,
competition, delays in regulatory clearances and delays in expansion of sales
and distribution channels could materially adversely affect the Company's
operations and profitability. See "Business - Products and Markets", "-
Marketing and Distribution", and "Manufacturing and Supplies", and "Risk Factors
- - Manufacturing and Supply Risks".
Manufacturing and Supply Risks.
To relieve itself of the overhead burden associated with owning its own
manufacturing facilities, the Company sold its former OREX manufacturing
facilities and now depends entirely upon third parties to manufacture its OREX
Degradables and Enviroguard products. The Company does not have the ability to
manufacture these products. If the Company is not able to obtain its products
from its manufacturers, if such products do not comply with the specifications
or if the prices at which the Company purchase its products are not competitive
with traditional products, the Company's sales and profits will suffer. The
Company's license with Allegiance requires that it sell Enviroguard fabric to
Allegiance at a fixed cost regardless of costs charged to the Company by its
manufacturers.
The cost for OREX raw materials has been high. The raw material required to
manufacture OREX Degradables woven and non-woven products and Enviroguard is PVA
fiber, and the raw material required to manufacture OREX Degradables film and
thermoformed and extruded items is PVA resin and NDP. The Company obtains its
raw materials from various sources but risks exist in obtaining the quality and
quantity of PVA at a price that will allow the Company to be competitive with
manufacturers of conventional disposable and reuseable products. During 1996, an
anti-dumping order was issued which requires that domestic importers of PVA
resin post import bonds or pay cash deposits in the amount of certain scheduled
anti-dumping margins ranging from 19% to 116% of the raw material cost upon
importing such raw materials. These payments are not required for PVA fiber.
Such anti-dumping order may have resulted in increases to the Company's cost for
raw materials over that which might otherwise have prevailed. The prices for
these raw materials have affected the ability of the Company to be price
competitive with conventional disposable and reuseable products, both reducing
sales and adversely affecting profits.
The Company has entered into a contract requiring that it purchase certain
minimum quantities of PVA fiber at a fixed price over a four year period
expiring in 2002. The total remaining purchase obligation of the Company under
this contract is $1.4 million. The failure of the Company to sell adequate
quantities of OREX Degradables products could adversely affect the ability of
14
the Company to satisfy its obligations under this contract, thereby adversely
affecting the Company's operating results.
The Company does not have significant experience obtaining large,
commercial quantities of OREX Degradables and Enviroguard products to meet its
obligations, and the Company's third party manufacturers have not regularly
manufactured these products in the quantities required for commercial sales. The
Company might have difficulties in receiving adequate quantities of products,
receiving such products on schedule and having such products conform with its
requirements. The Company has entered into a contract with the owner of the
Company's former OREX non-woven roll goods manufacturing facility to supply a
thermobonded version of OREX non-woven roll goods, but does not have a contract
for the continuing supply of OREX Degradables towels. The Company has negotiated
a short-term contract for the continued supply of Enviroguard fabrics from one
supplier in China. The Company does not otherwise maintain contracts with its
suppliers for its OREX Degradables and Enviroguard products. To the extent the
Company does not hold a contract for the supply of its products, the Company may
be at a greater risk in obtaining its products and controlling its costs for
products. Production in China and elsewhere outside the United States exposes
the Company to risks related to currency fluctuations, political instability and
other risks inherent in manufacturing in foreign countries. Certain textiles and
similar products for material (including certain OREX Degradables woven
products) imported from China to the United States are subject to import quotas
which restrict total volume of such items available for import by the Company,
creating risks of limited availability and increased costs for certain OREX
Degradables woven products.
The Company's cost to manufacture OREX Degradable products to date have not
been acceptable. See "Risk Factors - History of Net Losses". There can be no
assurances that the Company will be able to reduce its cost to manufacture such
product. In addition, the Company has various obligations to supply OREX
products at a fixed cost regardless of costs incurred by the Company. For
example, the Company's agreement to supply OREX products to Allegiance provides
for a fixed supply cost. To date, the Company has been unable to manufacture
OREX Degradables film and thermoformed and extruded products at an acceptable
cost. The Company has recently begun to develop the use of new polymers, called
NDP, to test manufacture OREX Degradables film and thermoformed and extruded
products. While the Company has undertaken an evaluation of these new products,
no assurances can be provided that the Company will be successful in
manufacturing on a commercial basis OREX Degradables products from these
polymers or that such products will comply with applicable regulatory
requirements.
The Company's products must be manufactured in compliance with FDA and
other regulatory requirements while maintaining product quality at an acceptable
manufacturing cost. There can be no assurance that manufacturing or quality
control problems will not arise at manufacturing plants used to supply the
Company's products, or that the Company's manufacturers will be able to maintain
the necessary licenses from governmental authorities to continue to manufacture
OREX Degradables products.
The Company has from time to time experienced delays in manufacturing
certain OREX Degradables products. The Company has also from time to time
encountered dissatisfaction with certain quality or performance characteristics
of its products. These delays and quality or performance issues have resulted in
the loss of customers. There can be no assurance that future delays or quality
concerns will not occur or that past customer relations on these products will
not adversely affect future customer relations and operating results.
The Company is continually in the process of making improvements to its
technologies and systems for manufacturing its OREX Degradables products, while
simultaneously marketing and supplying various of these products. From time to
time, the Company has invested in inventory of certain OREX Degradables products
which subsequently have been rendered obsolete by improvements in manufacturing
technologies and systems. There can be no assurances that possible future
improvements in manufacturing processes or products will not render other
inventories of product obsolete, thereby adversely affecting the Company's
financial statements.
The production of the Company's products is based in part upon technology
that the Company believes to be proprietary. The Company has provided this
technology to contract manufacturers, on a confidential basis and subject to use
restrictions, to enable them to manufacture products for the Company. There can
be no assurance that such manufacturers or other recipients of such information
will abide by any confidentiality or use restrictions.
15
Protection of Technologies.
The Company's success will depend in part on its ability to protect its
technologies. The Company relies on a combination of trade secret law,
proprietary know-how, non-disclosure and other contractual provisions and
patents to protect its technologies. Failure to adequately protect its patents
and other proprietary technologies, including particularly the Company's
intellectual property concerning its OREX Degradables, could have a material
adverse effect on the Company and its operations. The Company holds various
issued patents and has various patent applications pending relative to its OREX
Degradables products. See "Business Technology and Intellectual Property".
Although management believes that the Company's patents and patent
applications provide or will provide adequate protection, there can be no
assurance that any of the Company's patents will prove to be valid and
enforceable, that any patent will provide adequate protection for the
technology, process or product it is intended to cover or that any patents will
be issued as a result of pending or future applications. Failure to obtain the
patents pursuant to the Company's patent applications could have a material
adverse effect on the Company and its operations. It is also possible that
competitors will be able to develop materials, processes or products, including
other methods of disposing of contaminated waste, outside the patent protection
the Company has or may obtain, or that such competitors may circumvent, or
successfully challenge the validity of, patents issued to the Company. Although
there is a statutory presumption of a patent's validity, the issuance of a
patent is not conclusive as to its validity or as to the enforceable scope of
the claims of the patent. In the event that another party infringes the
Company's patent or trade secret rights, the enforcement of such right is
generally at the option of the Company and can be a lengthy and costly process,
with no guarantee of success. Further, no assurance can be given that the
Company's other protection strategies such as confidentiality agreements will be
effective in protecting the Company's technologies. Due to such factors, no
assurance can be given that the various components of the Company's technology
protection arrangements utilized by the Company, including its patents, will be
successful in preventing other companies from making products competitive with
those offered by the Company, including OREX Degradables.
Although to date no claims have been brought against the Company alleging
that its technology or products infringe upon the intellectual property rights
of others, there can be no assurance that such claims will not be brought
against the Company in the future, or that any such claims will not be
successful. If such a claim were successful, the Company's business could be
materially adversely affected. In addition to any potential monetary liability
for damages, the Company could be required to obtain a license in order to
continue to manufacture or market the product or products in question or could
be enjoined from making or selling such product or products if such a license
were not made available on acceptable terms. If the Company becomes involved in
such litigation, it may require significant Company resources, which may
materially adversely affect the Company. See "Business Technology and
Intellectual Property".
Competition.
To date, substantially all of the Company's sales have been to the
healthcare industry. The healthcare industry is highly competitive. There are
many companies engaged in the development, manufacturing and marketing of
products and technologies that are competitive with the Company's products and
technologies. Many such competitors are large companies with significantly
greater financial resources than the Company. Sellers and purchasers of medical
products have undergone consolidations in recent years, resulting in increasing
concentration of the market for disposable medical products with a few companies
and increasing cost pressures. This industry trend may place the Company at a
competitive disadvantage. The Company believes that these trends have adversely
affected the Company's ability to adjust its prices for its OREX Degradables
products to take into account disposal cost savings provided by such products,
in addition to adversely affecting the Company's ability to successfully
penetrate potential customer accounts. The market for disposable medical
products is very large and important to the Company's competitors. Certain of
the Company's competitors serve as the sole distributor of products to a
significant number of hospitals.
The Company seeks to sell its OREX Degradables products to industries other
than healthcare, and the Company has virtually no presence in these other
industries at this time. Therefore, the Company will be required to displace
sales of competitive products in these other industries to gain market presence.
There can be no assurance that the Company's competitors will not substantially
increase the resources devoted to the development, manufacturing and marketing
of products competitive with the Company's products. The successful
implementation of such strategy by one or more of the Company's competitors
16
could have a material adverse effect on the Company. See "Business -
Competition".
Risks of Technological Obsolescence.
Many companies are engaged in the development of products and technologies
to address the need for safe and cost-effective disposal of potentially
infectious and hazardous waste. There can be no assurance that superior disposal
technologies will not be developed or that alternative approaches will not prove
superior to the Company's products. The Company's products could be rendered
obsolete by such developments, which would have a material adverse effect on the
Company's operations and profitability.
Reliance Upon Distributors.
The Company has historically relied on large distributors for the
distribution of its products. Hospitals purchase most of their products from a
few large distributors. Of these distributors, only Allegiance accounted for
more than 10% of the Company's total sales during 1999. If the efforts of the
Company's distributors prove unsuccessful, or if such distributors abandon or
limit their distribution of the Company's products, the Company's sales may be
materially adversely affected. Recent regulatory developments regarding the
Company's LTS products described under "Business - Government Regulation" may
have caused Allegiance to substantially reduce its purchases of the Company's
existing LTS products. The Company believes that Allegiance may have begun to
purchase products competitive with those of LTS manufactured by a third party
which have been registered with the Environmental Protection Agency. Until 1996,
Allegiance was the sole distributor for the Company's LTS products and remains
the most significant distributor of such products. Reduction of such purchases
by Allegiance has had a material adverse effect upon the Company's operating
results. Purchases of all products by Allegiance from Microtek during 1999
represented 25.4% of Microtek's 1999 net sales. This includes products
manufactured by Microtek for Allegiance on a temporary basis which represented
10.4% of Microtek's net sales in 1999. Accordingly, Microtek will be required to
replace these sales in order to increase its net sales during 2000 and maintain
operating efficiencies created by larger volume of production in Microtek's
manufacturing facilities. The relationships between the Company and Allegiance
with regard to LTS and the Company's infection control products, as well as the
license granted to Allegiance for OREX products, make the Company substantially
dependent upon Allegiance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Regulatory Risks.
The development, manufacture and marketing of the Company's products are
subject to extensive government regulation in the United States by federal,
state and local agencies including the EPA, the FDA and state and local sewage
treatment plants. Similar regulatory agencies exist in other countries with a
wide variety of regulatory review processes and procedures, concerning which the
Company relies to a substantial extent on the experience and expertise of local
product dealers, distributors or agents to ensure compliance with foreign
regulatory requirements. The process of obtaining and maintaining FDA and any
other required regulatory clearances or approvals of the Company's products is
lengthy, expensive and uncertain, and regulatory authorities may delay or
prevent product introductions or require additional tests prior to introduction.
The FDA has issued to the Company 510(k) clearances on OREX Degradables products
for surgical sponges, operating room towels, drapes, gowns, surgeon's caps,
surgeon's vests, shoe covers and medical bedding. The Company is currently
developing, evaluating and testing certain OREX Degradables film and
thermoformed or extruded OREX products manufactured from non-PVA polymers, and
it is possible that new 510(k) clearances will be required for such products.
There can be no assurance as to when, or if, other such 510(k) clearances
necessary for the Company to market products developed by it in the future will
be issued by the FDA. The FDA also requires healthcare companies to satisfy the
quality system regulation. Failure to comply with applicable regulatory
requirements, which may be ambiguous or unclear, can result in fines, civil and
criminal penalties, stop sale orders, loss or denial of approvals and recalls or
seizures of products. There can be no assurance that changes in existing
regulations or the adoption of new regulations will not occur, which could
prevent the Company from obtaining approval for (or delay the approval of)
various products or could affect market demand for the Company's products.
Developments regarding the Company's LTS products have had and could
continue to have a material adverse effect upon the Company's operating results.
In November, 1997, the State of California revoked its approval for direct
landfill disposal (without sterilization) of LTS-treated waste within such
state. In February 1998 EPA announced a new policy that FIFRA requires that
products, such as LTS, which hold state approvals related to anti-microbial
efficacy, such as state approvals for landfill of LTS-treated waste, impliedly
17
make claims about killing microorganisms which would require that LTS be
registered under FIFRA. LTS has not been registered under FIFRA and, based in
part on meetings by the Company with the EPA, the Company continues to sell LTS
without such registration. The Company now is marketing LTS without relying upon
any state approvals for direct landfill disposal. The Company also is in the
process of seeking expedited registration of a new version of LTS under FIFRA,
and recently obtained conditional approval of registration of such product under
FIFRA by the EPA. The Company must still seek numerous state and local
registrations of such new LTS product to allow such product to be landfilled in
such places. Further, there can be no assurances that the Company will be
successful in obtaining registration of its LTS product. The EPA's change in
policy could cause the Company to become subject to an order to stop sales of
LTS or be subject to fines, penalties or other regulatory enforcement
procedures, any one or more of which could have a material adverse effect on the
Company and its results of operations.
Users of OREX Processors may be subject to regulation by local sewage
treatment plants to the extent that discharges from OREX Processors may
interfere with the proper functioning of such plants. In the Company's license
of OREX Degradables products to Allegiance, the Company has agreed to seek
regulatory approval for the disposal of OREX Degradables by the sanitary sewer
systems in the United States and Canada, the European Community countries and
Japan. If Isolyser fails to obtain such approvals within certain specific
territories within certain specified time frames, Allegiance's minimum purchase
obligation under the license will be reduced. The Company has approached
numerous sewage treatment plants requesting their approval to dispose of OREX
Degradables through the municipal sewer system. Although the Company has
obtained a total of over 100 non-binding written and verbal concurrences from
sewage treatment plants, certain of the founder hospitals and other hospitals
who have indicated an interest in purchasing OREX Degradables and an OREX
Processor are located in municipalities where such approvals have not been, and
may never be, obtained. While the Company is undertaking evaluation of OREX
Degradables manufactured from polymers other than PVA, no assurances can be
provided that such non-PVA based OREX products will not interfere with the
proper functioning of sewage treatment plants thereby adversely affecting the
Company's ability to successfully commercialize such newly developing OREX
Degradables technology. There can be no assurance that disposal of OREX
Degradables in areas where these approvals have not been granted will not result
in fines, penalties or other sanctions against product users or adversely affect
market demand for the Company's products.
Introduction of the Company's OREX Degradables products into non-healthcare
industries will require compliance with additional regulatory requirements.
While the Company seeks to engage the services of companies having expertise in
engineering systems to comply with these regulatory requirements, the Company
may not be able to develop satisfactory solutions to regulatory requirements at
an acceptable cost. Until the Company commences commercial sales of products,
the Company may not be able to anticipate all requirements to successfully
commercialize OREX Degradables in these other industries. Accordingly, no
assurances can be provided that OREX Degradables will be an attractive product
to non-healthcare industries.
Environmental Matters.
The Company is subject to various federal, state, local and foreign
environmental laws and regulations governing the discharge, storage, handling
and disposal of a variety of substances and waste used in or generated by the
Company's operations. There can be no assurance that environmental requirements
will not become more stringent in the future or that the Company will not incur
substantial costs in the future to comply with such requirements or that future
acquisitions by the Company will not present potential environmental
liabilities.
Healthcare Reform.
The federal government and the public have recently focused considerable
attention on reforming the healthcare system in the United States. The current
administration has pledged to bring about a reform of the nation's healthcare
system and, in September 1993, the President outlined the administration's plan
for healthcare reform. Included in the proposal were calls to control or reduce
public and private spending on healthcare, to reform the payment methodology for
healthcare goods and services by both the public (Medicare and Medicaid) and
private sectors, which may include overall limitations on federal spending for
healthcare benefits, and to provide universal access to healthcare. A number of
other healthcare proposals have been advanced by members of both Houses of
Congress. The Company cannot predict the healthcare reforms that ultimately may
be enacted nor the effect any such reforms may have on its business. No
assurance can be given that any such reforms will not have a material adverse
effect on the Company.
18
Product Liability.
The manufacture and sale of the Company's products entail an inherent risk
of liability. Product liability claims may be asserted against the Company in
the event that the use of the Company's products are alleged to have resulted in
injury or other adverse effects, and such claims may involve large amounts of
alleged damages and significant defense costs. Although the Company currently
maintains product liability insurance providing coverage for such claims, there
can be no assurance that the liability limits or the scope of the Company's
insurance policy will be adequate to protect against such potential claims. In
addition, the Company's insurance policies must be renewed annually. While the
Company has been able to obtain product liability insurance in the past, such
insurance varies in cost, is difficult to obtain and may not be available on
commercially reasonable terms in the future, if it is available at all. A
successful claim against the Company in excess of its available insurance
coverage could have a material adverse effect on the Company. In addition, the
Company's business reputation could be adversely affected by product liability
claims, regardless of their merit or eventual outcome. See "Business -
Insurance".
Dependence on Key Personnel.
The Company believes that its ability to succeed will depend to a
significant extent upon the continued services of a limited number of key
personnel, and the ability of the Company to attract and retain key personnel.
The loss of the services of any one or more of these individuals or the failure
to attract and retain such individuals could have a material adverse effect upon
the Company.
Claims Arising from Divestitures.
Over the past two years, the Company has sold several of its former
businesses including the Company's White Knight subsidiary, the Company's
SafeWaste subsidiary, the Company's OREX materials manufacturing facilities and
the Company's procedure tray business. In connection with these sales, the
Company entered into various agreements with purchasers to indemnify the
purchasers against certain matters including without limitation undisclosed
liabilities and breaches of representations and warranties by Isolyser. The
Company is not aware of any claims for indemnification in connection with these
transactions except that Allegiance has made certain claims relative to product
returns of excess inventories, failure to disclose certain lost customer
accounts and failure to complete certain manufacturing assembly services under a
temporary manufacturing contract. Under the terms of the contract with
Allegiance, and in addition to Isolyser's general indemnification obligations to
Allegiance, the Company deposited $3.1 million in escrow at the July 12, 1999
closing and an additional $1.2 million on February 16, 2000, to secure potential
indemnification obligations. The Company has denied that it has any liability to
Allegiance for the matters claimed by Allegiance and remains in discussions with
Allegiance to reach a satisfactory resolution of Allegiance's claims and
maintain a positive overall business relationship with Allegiance. The ultimate
outcome of these claims and discussions remains impossible to predict, and could
be resolved unfavorably to Isolyser.
Anti-Takeover Provisions.
On December 19, 1996, the Company's Board of Directors adopted a
Shareholder Protection Rights Agreement (the "Rights Agreement"). Under the
Rights Agreement, a dividend of one right ("Right") to purchase a fraction of a
share of a newly created class of preferred stock was declared for each share of
common stock outstanding at the close of business on December 31, 1996. The
Rights, which expire on December 31, 2006, may be exercised only if certain
conditions are met, such as the acquisition (or the announcement of a tender
offer the consummation of which would result in the acquisition) of beneficial
ownership of 15 percent or more of the common stock ("15% Acquisition") of the
Company by a person or affiliated group. The Rights, if exercised, would cause
substantial dilution to a person or group of persons that attempts to acquire
the Company without the prior approval of the Board of Directors. The Board of
Directors may cause the Company to redeem the Rights for nominal consideration,
subject to certain exceptions. The Rights Agreement may discourage or make more
difficult any attempt by a person or group of persons to obtain control of the
Company.
ITEM 2. PROPERTIES
The Company maintains approximately 32,000 square feet of office,
manufacturing, production, research and development and warehouse space located
in Norcross, Georgia under a lease which expires December 30, 2001. The Company
consolidated its administrative offices to this Norcross facility during 1998 in
19
connection with the sale of its former administrative offices. The Company also
leases from a local economic development authority a 13,300 square foot
administrative building located in Columbus, Mississippi under a lease which
expires December 31, 2007.
The Company conducts its equipment drape and fluid control manufacturing
business from three locations. In Columbus, Mississippi the Company owns an
80,000 square foot manufacturing building and leases on a month-to-month basis a
25,000 square foot warehouse facility. The Company leases four manufacturing
facilities totaling 59,000 square feet located in the Dominican Republic which
expire at various dates through 2007. The Company leases a 43,000 square foot
facility located in Empalme, Mexico, where it manufactures equipment drape and
fluid control products. Such lease expires February 1, 2001.
The Company also leases approximately 69,000 square feet of warehouse and
distribution space in Jacksonville, Florida. The Company uses this facility for
distribution of finished products, distribution of materials to the Company's
Dominican Republic facility and light manufacturing under a lease expiring April
30, 2003.
Through a subsidiary, the Company leases approximately 9,000 square feet of
space near Manchester, England, approximately 7,000 of which is used for
warehouse space and 2,000 of which is used for office space.
The Company believes that its present facilities are adequate for its
current requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation and legal
proceedings in the ordinary course of business. Such litigation and legal
proceedings have not resulted in any material losses to date, and the Company
does not believe that the outcome of any existing lawsuits will have a material
adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of the Company's
shareholders during the three months ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is traded and quoted on The Nasdaq Stock Market under the
symbol "OREX". The following table shows the quarterly range of high and low
sales prices of the common stock during the periods indicated since December 31,
1997.
Common Stock
Quarter Ended High Low
------------- ---- ---
1999
First Quarter $3.25 $1.06
Second Quarter $5.00 $2.28
Third Quarter $4.94 $3.13
Fourth Quarter $4.00 $2.31
1998
First Quarter $3.93 $2.31
Second Quarter $3.00 $2.03
Third Quarter $3.06 $1.12
Fourth Quarter $2.00 $1.03
On March 17, 2000, the closing sales price for the common stock as reported
by The Nasdaq Stock Market was $5.875 per share.
As of March 17, 2000, the Company had approximately 18,400 shareholders,
including approximately 1,400 shareholders of record and 17,000 persons or
entities holding the Company's common stock in nominee name.
20
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. Moreover, the Company's
credit facility prohibits the Company from declaring or paying cash dividends
without the prior written consent of its lenders. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources". Accordingly, the Company does not intend to pay cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary historical financial data for each
of the five years in the period ended December 31, 1999. As a result of the 1996
acquisition of Microtek, which was accounted for as a pooling of interests, the
Company's financial statements have been restated to include the results of
Microtek for all periods presented. The operations data for the year ended
December 31, 1995 includes only partial operating results of SafeWaste and White
Knight because these acquisitions occurred effective May 31, 1995 and September
1, 1995, respectively. On July 1, 1995, the Company acquired the infection
control drape line of Xomed in exchange for Microtek's otology product line and
the operations data for the year ended December 31, 1995 therefore includes only
partial operating results for such acquisition transaction. The operations data
for the year ended December 31, 1995 does not give effect to the November 30,
1995 acquisition of Medi-Plast International, Inc. ("Medi-Plast"), as such
acquisition was consummated at Microtek's fiscal year end on November 30, 1995.
In April, 1996, Microtek purchased the Venodyne division of Advanced
Instruments, Inc., and the Company's results of operations include the results
of Venodyne only from the April 27, 1996 acquisition date. Additionally, during
1999 the Company disposed of substantially all of the assets of its MedSurg
subsidiary and all of its capital stock in its White Knight subsidiary, and
during 1998 the Company disposed of its Arden and Charlotte, North Carolina and
Abbeville, South Carolina manufacturing facilities, its industrial and Struble &
Moffitt divisions of its White Knight subsidiary, and substantially all of the
net assets of its SafeWaste subsidiary. The summary historical financial data
should be read in conjunction with the historical consolidated financial
statements of the Company and the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data appearing elsewhere in this Form 10-K. The summary
historical financial data for each of the five years in the period ended
December 31, 1999 has been derived from the Company's audited consolidated
financial statements.
21
Year Ended December 31,
-----------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales .................................... $ 104,874 $ 164,906 $ 159,940 $ 147,643 $ 97,554
Licensing revenues ........................... -- -- -- -- 1,500
--------- --------- --------- --------- ---------
Total revenues ......................... 104,874 164,906 159,940 147,643 99,054
Cost of goods sold ........................... 74,953 128,598 142,094 109,936 61,970
--------- --------- --------- --------- ---------
Gross Profit ...................... 21 36,308 17,846 37,707 37,084
Operating expenses
Selling, general and administrative..... 27,737 41,381 43,422 40,182 26,596
Research and development ............... 1,127 2,173 2,601 3,906 3,724
Amortization of intangibles ............ 2,411 4,290 3,847 2,052 1,440
Impairment loss ..................... -- -- 57,310 7,445 769
Restructuring charge ................... -- 4,410 -- -- --
Costs associated with merger ........... -- 3,372 -- --
Gain on business disposition ........... -- -- -- -- (628)
-------- --------- --------- --------- ---------
Total operating expenses............ 31,275 55,626 107,180 53,585 31,901
--------- --------- --------- --------- ---------
Income (loss) from operations....... (1,354) (19,318) (89,334) (15,878) 5,183
Net other income (expense) ................... 1,790 (1,316) (3,415) (3,223) (1,195)
--------- --------- --------- --------- ---------
Income (loss) before tax, extraordinary
items and cumulative effect of change
in accounting principle ................... 436 (20,634) (92,749) (19,101) 3,988
Income tax provision (benefit) ............ 980 (639) 354 540 1,291
--------- ---------- --------- --------- ---------
Income (loss) before extraordinary items
and cumulative effect of change in ........ (544) (19,995) (93,103) (19,641) 2,697
accounting principle
Extraordinary items (1) ...................... -- 457 -- (1,404) --
Cumulative effect of change
in accounting principle (2) ............. -- -- 800 -- --
------- --------- --------- --------- ---------
Net income (loss) ......................... $ (544) $ (20,452) $ (93,903) $ (18,237) $ 2,697
========= ========= ========= ========= =========
Net income (loss) per common equivalent share -
Basic and Diluted
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle .......... $ (0.02) $ (0.52) $ (2.37) $ (0.49) $ 0.07
Extraordinary items ..................... -- (0.01) -- 0.03 --
Cumulative effect of change in
accounting principle .................... -- -- (0.02) -- --
--------- --------- ------------- ---------- ----------
Net income (loss) per common equivalent share. $ (0.02) $ (0.53) (2.39) $ (0.46) $ 0.07
========== ========== ============= ========== ==========
Weighted average number of common and
common equivalent shares outstanding - basic 33,704 38,763 39,273 39,655 40,318
Weighted average number of common and
common equivalent shares outstanding
- diluted .................................. 33,704 38,763 39,273 39,655 41,158
- -----------------
(1) Gives effect to the gain from the extinguishment of debt in 1998 and the
loss from refinancing of Isolyser's and Microtek's credit facilities, net
of tax benefits of $332 in 1996.
(2) Reflects the adoption of Emerging Issues Task Force ("EITF") Consensus No.
97-13, "Accounting for Costs in Connection with a Consulting Contract or an
Internal Process that Combines Processing Reeingineering and Information
Technology Costs Transformation."
22
Year Ended December 31,
------------------------------------------------------------------------------
1995 1996 1997 (1) 1998 (2) 1999
---- ---- -------- -------- ----
Balance Sheet Data:
(in thousands)
Working Capital .................. $ 101,022 $ 91,962 $ 72,408 $ 39,124 $ 45,550
Intangible assets, net ........... 60,004 57,331 30,803 29,128 23,071
Total assets ..................... 253,261 250,935 144,334 109,518 95,339
Long-term debt ................... 26,413 47,029 37,546 19,376 --
Total shareholders' equity ....... $ 195,298 $ 178,804 $ 86,117 $ 68,675 $ 74,722
(1) Pursuant to $ 35.8121million of netclassified assets related to its OREX
manufacturing facilities and White Knight subsidiary as held for sale, and
included such amount in current assets.
(2) Pursuant to SFAS No. 121 the Company classified $9.9 million of net assets
related to its White Knight subsidiary and its former headquarters building
as held for sale, and included such amounts in current assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
The Company was incorporated in 1987 and commenced operations in 1988 with
the introduction of its SMS products. In 1990, the Company introduced its LTS
products and thereafter introduced others of its safety products and services.
During 1993, the Company completed the acquisition of two procedure tray
businesses and began to sell standard and custom procedure trays.
On July 1, 1995, Microtek acquired the infection control drape line of
Xomed, in exchange for Microtek's otology product line, thereby providing
Microtek greater concentration on its core business. On September 1, 1995,
Isolyser acquired White Knight and began the conversion manufacturing of
non-woven fabric into finished goods such as drapes and gowns. On November 30,
1995, Microtek acquired Medi-Plast, a manufacturer of equipment drapes. Because
these acquisitions were accounted for using the purchase method, the Company's
operating results do not include the operating results of the acquired
operations for periods prior to these respective acquisition dates.
In April, 1996, Microtek purchased the Venodyne division of Advanced
Instruments, Inc., which manufactures and markets pneumatic pumps and disposable
compression sleeves for use in reducing deep vein thrombosis, and the Company's
results of operations include the results of Venodyne only from the April 27,
1996 acquisition date. Effective September 1, 1996, Isolyser completed its
merger with Microtek, which was accounted for as a pooling of interests.
Accordingly, the Company's financial statements have been restated for all
periods to combine the financial statements of each of Isolyser and Microtek.
In March 1998, the Company announced a plan to dispose of its OREX
manufacturing facilities and its White Knight subsidiary. In August 1998, the
Company disposed of its Arden and Charlotte, North Carolina OREX manufacturing
facilities, and substantially all of the net assets of the industrial division
of its White Knight subsidiary and its SafeWaste subsidiary. In 1998 the Company
disposed of the Struble & Moffitt division of its White Knight subsidiary. In
October 1998, the Company disposed of its Abbeville, South Carolina OREX
manufacturing facility. The Company maintains a 19.5% minority interest in the
company formed to own and operate the Abbeville and Arden facilities.
On March 31, 1999, the Company disposed of its former corporate
headquarters in Norcross, Georgia. Effective May 31, 1999, the Company disposed
of the stock of its White Knight subsidiary. On July 12, 1999, the Company sold
substantially all of the assets of MedSurg to Allegiance and granted to
Allegiance an exclusive worldwide license to the Company's proprietary
technologies to manufacture, use and sell products made from material which can
be dissolved and disposed of through sanitary sewer systems for healthcare
applications.
23
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net revenues for 1999 were $99.1 million compared to $147.6 million for
1998, a decline of 32.9%. Excluding sales of businesses sold during 1998 or
1999, net sales in 1999 increased 21.2% over net revenues in 1998. Sales of
Microtek products increased to $49.8 million during 1999 as compared to $42.1
million during 1998, an increase of 18.4%. This increase was primarily a result
of new business from a short-term manufacturing contract arrangement with
Allegiance. Sales of the Company's safety products were 4.3% lower in 1999 than
1998. This decrease was due to continuing reduction in purchases of safety
products by Allegiance during portions of 1998 and 1999.
Included in 1999 revenues are $1.5 million of licensing revenue associated
with the amortization of $10.5 million payment by Allegiance allocated to the
Company's Supply and License Agreement with Allegiance and $1.7 million in sales
of OREX Degradables during 1999. Sales of OREX Degradables in 1999 did not
contribute any gross profits to the Company's operating results. The Company
believes that Allegiance will commence the introduction of Enviroguard products
for which the Company supplies materials to Allegiance during the second quarter
of 2000, and that the product line will gradually roll out over the balance of
2000. Other than with respect to the license fee amortization, the Company does
not expect the volume of purchases through 2000 under the Company's agreement
with Allegiance to produce any gross profits. To the extent any indemnification
claims by Allegiance are satisfied by payments or applications of funds in
escrow, the license fee amortization will be reduced proportionately. The
Company's ability to successfully manufacture, supply and expand its OREX
Degradables line of products at acceptable profit margins remains subject to
risks. See "Risk Factors - History of Net Losses", "- Marketing Risks Affecting
OREX Products", "-Manufacturing and Supply Risks" and "-Claims Arising from
Divestitures".
Sales of the Company's safety products have been materially adversely
affected by the substantial reduction in purchases of LTS products by the
Allegiance division of Cardinal Healthcare, the largest distributor of such
products, and the previously reported adverse regulatory developments related to
the change in policy by the EPA requiring registration of the new LTS-Plus
product prior to its introduction into the market. This policy change by EPA
also forced the withdrawal of all landfill approvals for conventional LTS
products in mid-1998. LTS-Plus, the new generation treatment product, is fully
developed and tested and will be ready for market as soon as full regulatory
approval has been acquired by state regulatory agencies. Since this approval
process is different in every state, there is no set timetable for the
completion of the regulatory approval process. See "Risk Factors - Reliance Upon
Distributors" and "-Regulatory Risks".
Gross profit for 1999 was $37.1 million or 37.4% of net revenues compared
to $37.7 million or 25.5% of net revenues in 1998. In June, 1999 the Company
recorded an adjustment to cost of sales and inventory, providing for an increase
in the valuation of inventory and a corresponding reduction in cost of sales of
$1.6 million.
Selling, general and administrative expenses were $26.6 million or 26.9% of
net sales in 1999 as compared to $40.2 million or 27.2% of net sales in 1998.
This decrease in absolute dollar expenses is due to operations sold during the
year partially offset by a $1.5 million increase in these expenses incurred by
the Company's continuing operations.
Research and development expenses were $3.7 million or 3.8% of net sales in
1999 as compared to $3.9 million or 2.6% of net sales in 1998. The Company
initiated a re-engineering of the OREX Degradables products in 1998 which was
completed in late 1998. The completion of the re-engineering of OREX to produce
Enviroguard in 1998 and reduced costs associated with the development of a new
LTS product accounted for the decline in expenditures in 1999 compared to 1998.
Amortization of intangibles was $1.4 million or 1.5% of net sales in 1999.
This compares to $2.1 million or 1.4% of net sales in 1998. The decrease in 1999
is primarily due to operations sold during the year.
The Company recorded impairment and other charges during 1999 of $769,000
compared to $7.4 million of impairment charges in 1998. The 1999 impairment
charges were attributed to the disposition of the Company's interests in its
White Knight subsidiary of $1.6 million partially offset by a $821,000
adjustment of a previous impairment charge associated with the 1998 sale of its
24
White Knight industrial business. 1998 charges related to the disposition of the
Company's White Knight industrial business, and the excess carrying values of
the Company's White Knight subsidiary and the Company's former headquarters over
their respective fair values.
Income from operations in 1999 of $5.2 million compares with a loss from
operations in 1998 of $15.9, or a $21.1 million turnaround in operating results.
Interest expense, net of interest income, in 1999 was $1.2 million compared
to $3.2 million in 1998. The decline is primarily attributable to the
elimination of the Company's outstanding balance in its revolver and term loan
facility from proceeds of divestitures.
Provision for income taxes was $1.3 million for 1999 compared to $540,000
in 1998. The 1999 income tax provision is comprised primarily of state and
foreign income taxes.
The Company recorded a $1.4 million gain from the extinguishment of debt
during 1998 related to a purchase agreement with a former customer.
The resulting net income for 1999 was $2.7 million compared to a 1998 net
loss of $18.2 million.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales for 1998 were $147.6 million compared to $159.9 million for 1997,
a decline of 7.7%. The 1998 decline of $12.3 million reflects a 14.6% decrease
in White Knight Healthcare product net sales as compared to 1997, a 39.7%
decrease in White Knight Industrial product net sales as compared to 1997, a 10%
decline in net sales of safety products over comparable 1997 sales, a 1% decline
in Microtek net sales as compared to 1997 and a 0.5% increase in sales of
MedSurg products over comparable 1997 sales.
The decline in sales of White Knight products was primarily due to the
aforementioned sale of the industrial division of White Knight as well as the
Company's decision to de-emphasize marketing of White Knight products in favor
of higher margin products sold by its other subsidiaries.
In 1998, sales of the Company's safety products were materially adversely
affected by the substantial reduction in purchases of LTS products by
Allegiance, the primary distributor of such products, and previously reported
adverse regulatory developments related to a change in policy by the EPA
requiring registration of the LTS products and removal by the State of
California of a prior approval to landfill LTS-treated waste in California. The
Company developed plans to introduce a new LTS product to preserve its market
share created by LTS, however, the Company's ability to do so is subject to
obtaining federal registration of such product. The Company has filed for
federal registration of its new product but no assurances can be provided that
the Company will be able to obtain such registration or maintain its market
share on such products by the introduction of a new LTS product. During the
third and fourth quarter of 1998, Allegiance substantially increased their
purchases of LTS products. See "Risk Factors - Reliance Upon Distributors" and "
- - Regulatory Risks".
Sales by MedSurg were adversely affected by reductions of inventory
carrying levels by MedSurg's distributors, competition by other procedure tray
companies, and group purchasing organizations adversely affecting new business
efforts of MedSurg.
Included in the foregoing sales figures are $4.7 million in sales of OREX
Degradables during 1998. Sales of OREX Degradables in 1998 did not contribute
any gross profits to the Company's operating results. During 1997, the Company
substantially reduced its selling and marketing efforts to increase sales of
OREX Degradables and instead focused on preserving its existing base of
hospitals purchasing OREX Degradables while evaluating alternative manufacturing
processes that would meet end user quality requirements while contributing gross
margin to the Company's operations. During 1998, the Company substantially
revised its strategy to commercialize its OREX products. As a result of these
efforts, the Company introduced new degradable products, Enviroguard, to the
healthcare industry using a hydroentanglement manufacturing process to produce a
spunlaced fabric. The Company to date has not achieved any gross profits on its
sale of OREX Degradables. The Company's future performance will depend to a
substantial degree upon market acceptance of and the Company's ability to
successfully manufacture, market, deliver and expand its OREX Degradables line
25
of products at acceptable profit margins. There can be no assurances that OREX
Degradables will achieve or maintain substantial acceptance in their target
markets. See "Risk Factors - Net Losses" and "- Marketing Risks Affecting OREX
Products".
Gross profit for 1998 was $37.7 million or 25.5% of net sales compared to
$17.8 million or 11.2% of net sales in 1997. Included in cost of goods sold in
1998 were $900,000 in write-offs related to the sale of the Company's White
Knight industrial business. Included in cost of goods sold in 1997 were charges
of $13.0 million for OREX inventory reserves. OREX inventory reserves recorded
during 1997 were recognized due to excess quantities of OREX finished goods and
raw materials on hand. In addition to OREX reserves taken in 1997, the Company
recorded other inventory reserves and miscellaneous write-offs, which together
totaled $1.7 million. After adjusting gross profits by eliminating these
charges, gross margin for 1998 and 1997 would have been 26.1% and 20.4% of net
sales, respectively. The improvement in gross margin is primarily due to the
decision to sell the Company's Arden and Abbeville manufacturing facilities.
During the latter portion of 1996 and early 1997, the Company significantly
reduced production at both facilities, negatively impacting gross margin through
the underutilization of its manufacturing capacity. In 1998, the Company decided
to sell these assets, classifying the fair value of the assets as held for sale.
As such, the Company benefited by not depreciating these assets. In August and
October, 1998, the Company sold the Arden and Abbeville facilities,
respectively, thereby eliminating any remaining cash losses incurred by these
facilities. Gross margin was also positively impacted by movement of products
manufactured at Microtek's Columbus, Mississippi facility to its facility in the
Dominican Republic. Offsetting these improvements was further underutilization
of White Knight facilities as a result of decreased sales.
Selling, general and administrative expenses were $40.2 million or 27.2% of
net sales in 1998 as compared to $43.4 million or 27.1% of net sales in 1997.
Included in selling, general and administrative expenses in 1998 were $400,000
of business process reengineering activities and a $300,000 write-down of
accounts receivable associated with the sale of the Company's White Knight
industrial business. The improvement in selling, general and administrative
expenses was primarily due to lower sales and implementation of a previously
announced plan to reduce sales and marketing personnel.
Research and development expenses were $3.9 million or 2.6% of net sales in
1998 as compared to $2.6 million or 1.6% of net sales in 1997. This increase
represents expenses incurred to further develop and improve the quality of OREX
products and costs associated with planning the registration of the Company's
new LTS product.
Amortization of intangibles was $2.1 million or 1.4% of net sales in 1998
as compared to $3.8 million or 2.4% of net sales in 1997. The decrease is
attributed to the 1997 goodwill impairment write-offs at the Company's White
Knight subsidiary.
The Company recorded impairment charges totaling $7.4 million during 1998
as compared to $57.3 million during 1997. The 1998 charges were related to the
disposition of the Company's White Knight industrial business, and the excess
carrying value of the Company's White Knight subsidiary and the Company's former
headquarters in Norcross, Georgia over their fair values. 1997 charges relate to
impairment of the Company's OREX material manufacturing plants and White Knight
subsidiary for the excess carrying value of such assets over their fair value.
The resulting loss from operations was $15.9 million in 1998 compared to
$89.3 million in 1997. After adjusting the 1998 operating loss to exclude the
$7.4 million of impairment charges and $1.9 million in other writeoffs and
expenses, the operating loss would have been $6.6 million. After adjusting the
1997 operating loss to exclude $13.0 million of charges related to inventory and
$57.3 million related to impairment charges, the operating loss would have been
$19.0 million.
Interest expense net of interest income was $3.2 million in 1998 as
compared to $3.4 million in 1997. The decrease is due to the paydown of the
revolver and term facility with proceeds from the aforementioned sale of assets
which occurred in the second half of 1998. Offsetting this decline were higher
interest rates.
Income from joint venture was $11,000 in 1998 as compared to a loss of
$44,000 in 1997. In conjunction with the August 1998 sale of its SafeWaste
subsidiary, the Company sold its interest in the joint venture.
Provision for income taxes reflect an expense of $540,000 and $354,000 in
1998 and 1997, respectively. The effective tax rates in 1998 and 1997 differs
from the statutory rate due primarily to valuation allowances recorded against
26
the Company's deferred income tax assets and in 1997 due to the amortization and
write-down of a portion of goodwill which is not deductible for tax purposes.
The Company recorded a $1.4 million gain from the extinguishment of debt
during 1998 related to a purchase agreement with a former customer.
The Company recorded a cumulative net effect of a change in accounting
principle of $800,000 in 1997 with no comparable charges during 1998. This
charge related to the adoption of a new accounting principle in the fourth
quarter of 1997 which requires that the cost of business process reengineering
activities that are part of a project to acquire, develop or implement internal
use software, whether done internally or by third parties, be expensed as
incurred. Previously, the Company capitalized these costs as system development
costs.
The resulting net loss was $18.2 million in 1998 as compared to a net loss
of $93.9 million in 1997.
Liquidity and Capital Resources
- -------------------------------
As of December 31, 1999, the Company's cash and cash equivalents totaled
$17.0 million compared to $7.3 million at December 31, 1998.
At December 31, 1999, the Company held a $3.1 million escrow receivable,
which was subsequently increased to $4.3 million through the deposit of proceeds
payable to the Company upon the expiration of a short term contract
manufacturing relationship with Allegiance. These funds are held in escrow as a
non-exclusive source for payment of claims based upon a breach of covenants by
the Company in connection with the sale of its procedure tray business to
Allegiance. The Company and Allegiance are in discussion relative to certain
indemnification claims made by Allegiance which resulted in the increase in the
amount deposited in such escrow account. The financial impact, if any, of the
claims made by Allegiance is not known at this time. See "Risk Factors - Claims
Arising from Divestitures".
During 1999, the Company utilized cash and proceeds from the disposition of
assets to finance the purchase of property and equipment, reduce outstanding
balances under its credit agreement and make scheduled debt repayments related
to previous acquisitions of businesses, equipment and capital leases while
funding working capital requirements. For 1999, net cash used in operating
activities was approximately $1.4 million; net cash provided by investing
activities was approximately $34.3 million; and net cash used in financing
activities was approximately $23.3 million. The $1.4 million of cash used in
operating activities in 1999 results principally from the increases in accounts
receivable, Enviroguard inventories and prepaid expenses. These increases were
partially offset by operating earnings. During 1999, cash generated from
investing activities included $35.6 million in funds generated from disposition
of the Company's White Knight and MedSurg businesses and the former headquarters
building. Offsetting these proceeds was approximately $1.3 million in capital
expenditures in 1999 as compared to $3.3 million in 1998. These expenditures
were primarily associated with investments to improve the Company's internal
management information systems. Cash used in financing activities was
approximately $23.3 million in 1999 as compared to $13.1 million in 1998. During
1999, the Company repaid all of its outstanding term and revolver debt.
The Company maintains a $15.0 million credit agreement (as amended to date,
the "Credit Agreement") with The Chase Manhattan Bank (the "Bank"), consisting
of a revolving credit facility maturing on June 30, 2000. Borrowing availability
under the revolving credit facility is based on the lesser of (i) a percentage
of eligible accounts receivable and inventory or (ii) $15.0 million, less any
outstanding letters of credit issued under the Credit Agreement. Current
borrowing availability under the revolving facility at December 31, 1999 was
$12.8 million. Revolving credit borrowings bear interest, at the Company's
option, at either a floating rate approximating the Bank's prime rate plus an
interest margin, as defined, or LIBOR plus an interest margin (6.6% at December
31, 1999). There were no outstanding borrowing under the revolving credit
facility at December 31, 1999. The Credit Agreement provides for the issuance of
up to $1.0 million in letters of credit. Outstanding letters of credit at
December 31, 1999 were $50,000. The Credit Agreement provides for a fee of 0.25%
per annum on the unused commitment, an annual collateral monitoring fee of
$50,000, and an outstanding letter of credit fee of up to 2% per annum.
Borrowings under the Credit Agreement are collateralized by the Company's
accounts receivable, inventory, equipment, Isolyser's stock of its subsidiaries
and certain of the Company's plants and offices. The Credit Agreement contains
certain restrictive covenants, including the maintenance of certain financial
ratios and earnings, and limitations on acquisitions, dispositions, capital
expenditures and additional indebtedness. The Company also is not permitted to
pay any dividends. During 1999, the Company reduced its working capital
requirements. If such requirements increase in the future, the Company
27
anticipates seeking an increase to its revolving line of credit to the extent
such requirements are not otherwise satisfied out of available cash flow or
borrowings under the Company's existing line of credit. There can be no
assurances that such an increase to the Company's revolving credit facility will
be available to the Company.
Based on its current business plan, the Company currently expects that cash
equivalents and short term investments on hand, the Company's existing credit
facility and funds budgeted to be generated from operations will be adequate to
meet its liquidity and capital requirements through 2000. However, currently
unforeseen future developments and increased working capital requirements may
require additional debt financing or issuances of common stock in 2000 and
subsequent years.
Inflation and Foreign Currency Translation. Inflation has not had a
material effect on the Company's operations. If inflation increases, the Company
will attempt to increase its prices to offset its increased expenses. No
assurance can be given, however, that the Company will be able to adequately
increase its prices in response to inflation.
The assets and liabilities of the Company's Mexican and United Kingdom
subsidiaries are translated into U.S. dollars at current exchange rates and
revenues and expenses are translated at average exchange rates. The effect of
foreign currency transactions was not material to the Company's results of
operations for the year ended December 31, 1999. Export sales by the Company
during 1999 were $7.0 million. Currency translations on export sales could be
adversely affected in the future by the relationship of the U.S. Dollar with
foreign currencies. In the future, the Company may import significant amounts of
products from foreign manufacturers, exposing the Company to risks on
fluctuations in currency exchange rates.
Newly Issued Accounting Standards. In June 1998, the Financial Accounting
Standards Board issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133, effective for the Company on January 1, 2001,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. The
Company is currently evaluating the impact that this standard will have on its
results of operations and financial position upon adoption.
Year 2000 Issue
- ---------------
The Company has not encountered any material adverse consequences
associated with the year 2000 issue and is not aware of any facts or
circumstances suggesting that it will encounter any material adverse effects
from the year 2000 issue. The Company incurred a total of approximately $8.0
million as a part of a program to install information systems Company wide, of
which $2.5 million has been expensed and $5.5 million represents capital
expenditures. Uncertainties nevertheless remain as a result of the year 2000
issue, either as a result of the Company's information technology systems or the
Company's relationship with its customers, product users, suppliers or other
vendors who are not compliant with year 2000. This may result in a system
failure which could have the effect of a temporary inability to receive
supplies, ship products or operate accounting and other internal systems.
The statements made under this caption are Year 2000 Readiness Disclosure
under the Year 2000 Information and Readiness Disclosure Act.
Forward Looking Statements
- --------------------------
Statements made in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Annual Report on Form
10-K that state the Company's or management's intentions, hopes, beliefs,
expectations or predictions of the future are forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements include, without limitation, statements regarding the
Company's planned product introductions and registrations, capital expenditure
requirements, cash and working capital requirements, the Company's expectations
regarding the adequacy of current financing arrangements, product demand and
market growth, the year 2000 issue, and other statements regarding future plans
and strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. It should be noted that the Company's
actual results could differ materially from those contained in such forward
looking statements mentioned above due to adverse changes in any number of
factors that affect the Company's business including, without limitation, risks
28
associated with investing in and the marketing of the Company's OREX Degradables
products, manufacturing and supply risks, risks concerning the protection of the
Company's technologies, risks of technological obsolescence, reliance upon
distributors, regulatory risks, product liability and other risks described in
this Annual Report on Form 10-K. See "Business - Risk Factors".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operating results and cash flows are subject to fluctuations
from changes in interest rates and foreign currency exchange rates. The
Company's cash and cash equivalents are short-term, highly liquid investments
with original maturities of three months or less consisting entirely of U.S.
Government securities or government backed securities. These investments are
classified in accordance with SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities," as available for sale securities and are stated at
cost which approximates market. As a result of the short-term nature of the
Company's cash and cash equivalents, a change of market interest rates does not
impact the Company's operating results or cash flow.
The assets and liabilities of the Company's United Kingdom subsidiary are
translated into U.S. dollars at current exchange rates and revenues and expenses
are translated at average exchange rates. The effect of foreign currency
translations was not material to the Company's results of operations for the
year ended December 31, 1999. Currency translations on export sales or import
purchases could be adversely effected in the future by the relationship of the
U.S. dollar with foreign currencies.
The Company's greatest sensitivity with respect to market risk is to
changes in the general level of U.S. interest rate and its effect upon the
Company's interest expense. At December 31, 1999, the Company had no long-term
or short-term debt that bears interest at floating rates. However, should the
Company incur borrowing under its credit agreement, such borrowings would bear
interest at variable rates. Because these rates are variable, an increase in
interest rates would result in additional interest expense and a reduction in
interest rate would result in reduced interest expense.
The Company does not use any derivative instruments to hedge its interest
rate expense. The Company does not use derivative instruments for trading
purposes and the use of such instruments would be subject to strict approvals by
the Company's senior officers. Therefore, the Company's exposure related to such
derivative instruments is not expected to be material to the Company's financial
position, results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data are listed
under Item 14(a) and filed as part of this report on the pages indicated.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
29
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
- --------------------------------
The current directors and executive officers of the Company are as
follows:
Name Position
---- --------
Gene R. McGrevin Chairman of the Board of Directors
Migirdic Nalbantyan President and Chief Executive Officer,
Director
Dan R. Lee Executive Vice President, Assistant
Secretary and Director
Michael Mabry Executive Vice President and Secretary
James C. Rushing, III Executive Vice President, Chief
Financial Officer and Assistant Secretary
Travis W. Honeycutt Director
Rosdon Hendrix Director
Kenneth F. Davis Director
John E. McKinley Director
Ronald L. Smorada Director
Gene R. McGrevin (age 57) was elected Chairman of the Board of Directors
and acting President of the Company in April 1997, and currently serves as
Chairman of Isolyser. Mr. McGrevin also serves as chairman of P.E.T.Net
Pharmaceutical Services, LLC, a manufacturer and distributor of
radiopharmaceuticals. Mr. McGrevin previously served as Vice Chairman and Chief
Executive Officer of Syncor International Corp., a public company in the nuclear
medicine industry, with which Mr. McGrevin was associated since 1989. Prior to
managing Syncor, Mr. McGrevin served in executive positions with various
healthcare businesses including President of the Healthcare Products Group of
Kimberly-Clark Corporation, founder and President of a consulting firm
specializing in the healthcare industry and an executive officer of VHA
Enterprises, Inc.
Migirdic Nalbantyan (age 57) was elected a Director of the Company in
September 1998, and President and Chief Executive Officer of the Company
effective October 1, 1998. Previously, Mr. Nalbantyan served as an Executive
Vice President of the Company from February 1, 1998. Prior to accepting such
position, Mr. Nalbantyan served in various executive positions, including
president, of BBA Nonwovens, a division of BBA Group PLC and now one of the
worlds largest manufacturers of nonwoven products, from 1986 to 1997. From 1968
to 1986 he held various manufacturing, process and product development,
marketing and business planning positions at DuPont's Textile Fibers operations.
Dan R. Lee (age 52) became an executive officer of the Company following
the conclusion of the acquisition of Microtek, and became a director of the
Company in December, 1996. Mr. Lee currently serves as the Executive Vice
President in charge of the Company's Infection Control Group. Prior to accepting
such positions with the Company, Mr. Lee had served as the Vice President and
Chief Operating and Financial Officer of Microtek since 1987. Previous to that
time, he was engaged in the public accounting practice, including more than five
years with KPMG Peat Marwick.
30
Michael Mabry (age 37) was elected Executive Vice President in October 1998
after serving as Vice President of Operations of the Company since May, 1997.
Prior to accepting such position, Mr. Mabry served in various positions with the
Company (including Chief Information Officer) since his joining the Company in
September, 1995. From 1984 to 1995, Mr. Mabry was employed by DeRoyal Industries
where his career advanced from software engineer to vice president of
information systems and operations.
James C. "Jim" Rushing III (age 56) was elected Executive Vice President
and Chief Financial Officer in December 1999 after serving in the executive
position of Vice President - Finance since March 1999. Prior to joining Isolyser
in December 1998, Mr. Rushing served in various financial positions including
Chief Financial Officer of New Life Corporation of America, a national charity
serving the financial and estate planning needs of high net worth investors
through 5,000 financial advisors throughout the U.S., from 1997 to 1998, and as
Vice President - Finance, BBA Nonwovens, a division of BBA Group PLC, which is
one of the worlds largest manufacturers of nonwoven products, from 1995 to 1997.
As owner of a management consulting firm, Mr. Rushing provided various chief
financial officer and director services to various firms in the Mid-South from
1980 to 1995. Mr. Rushing was employed by Northern Telecom, Inc. (NORTEL), at
its U.S. Headquarters as Director of Accounting and Financial Analysis from 1978
to 1980.
Travis W. Honeycutt (age 57) has been Executive Vice President, Secretary
and a Director of the Company since its inception in 1987 and until his
retirement as an employee in 1999. Prior to his co-founding the Company in 1987,
Mr. Honeycutt had over 20 years of experience in new product development for the
industrial and healthcare markets. Mr. Honeycutt remains a Director of Isolyser.
Rosdon Hendrix (age 60) was elected a Director of the Company in December
1994. Until he retired in June 1992, Mr. Hendrix served for approximately 30
years in various financial positions for General Motors Corporation, including
serving as Resident Comptroller from 1975 until his retirement. Since June 1992,
Mr. Hendrix has engaged in efficiency consulting studies with various
governmental authorities and businesses in Georgia.
Kenneth F. Davis (age 49) was elected a Director of the Company in January
1996. Dr. Davis has been a practicing surgeon on the staff of the Harbin Clinic
and Redmond Regional Medical Center, Rome, Georgia since 1986. In addition, Dr.
Davis serves on the Board of AmSouth Bank of Georgia, a publicly owned bank, as
well as various other companies, including a privately held hospital consulting
firm.
John E. McKinley (age 56) was elected a Director of the Company in May
1998. Between 1991 and 1996, Mr. McKinley was the principle operating officer of
BankSouth Corporation, Atlanta, Georgia, where he was a Board member and
Chairman of the Credit Policy Committee. Mr. McKinley also headed the Management
Committee of Bank South, which included direct responsibility for credit policy,
business banking and mortgage banking. From 1969 to 1991, Mr. McKinley worked
with Citizens and Southern National Bank and C&S/Sovran where he was the chief
credit officer of C&S Georgia Corporation and a senior vice president.
Additionally, Mr. McKinley has taught in numerous banking schools and has
authored or co-authored numerous books and articles on banking. Since 1996, Mr.
McKinley has been engaged in private consulting services. Mr. McKinley also
serves as a director of Inficorp Holdings, Inc.
Ronald L. Smorada (age 53) was elected a Director of the Company in May
1999. During the past five years, Dr. Smorada has been an active participant in
the nonwovens industry holding senior management positions at Reemay, Fiberweb
and BBA US Holdings, the latter being the parent of the former two, with
nonwoven sales in excess of $800 million. Dr. Smorada worked in the development,
acquisition and integration of new and existing businesses, both domestic and
international. A major focus for him has been the application and conversion of
science and technical concepts into meaningful businesses. Former affiliates of
the Company have purchased significant quantities of nonwovens from Fiberweb.
The Company's Articles of Incorporation adopt the provisions of the Georgia
Business Corporation Code (the "Corporation Code") providing that no member of
the Company's Board of Directors shall be personally liable to the Company or
its shareholders for monetary damages for any breach of his duty of care or any
other duty he may have as a director, except liability for any appropriation, in
violation of the director's duties, of any business opportunity of the Company,
for any acts or omissions that involve intentional misconduct or a knowing
violation of law, for liability under the Corporation Code for unlawful
distributions to shareholders, and for any transaction from which the director
receives an improper personal benefit.
31
The Company's Bylaws provide that each officer and director shall be
indemnified for all losses and expenses (including attorneys' fees and costs of
investigation) arising from any action or other legal proceeding, whether civil,
criminal, administrative or investigative, including any action by and in the
right of the Company, because he is or was a director, officer, employee or
agent of the Company or, at the Company's request, of any other organization. In
the case of action by or in the right of the Company, such indemnification is
subject to the same exceptions, described in the preceding paragraph, that apply
to the limitation of a director's monetary liability to the Company. The Bylaws
also provide for the advancement of expenses with respect to any such action,
subject to the officer's or director's written affirmation of his good faith
belief that he has met the applicable standard of conduct, and the officer's or
director's written agreement to repay any advances if it is determined that he
is not entitled to be indemnified. The Bylaws permit the Company to enter into
agreements providing to each officer or director indemnification rights
substantially similar to those set forth in the Bylaws, and such agreements have
been entered into between the Company and each of the members of its Board of
Directors and certain of its executive officers. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by provisions in the Articles of Incorporation and Bylaws, it provides
greater assurances to officers and directors that indemnification will be
available, because, as a contract, it cannot be modified unilaterally in the
future by the Board of Directors or by the shareholders to eliminate the rights
it provides.
Section 16(a) Beneficial Ownership Reporting Compliance.
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 and the
rules issued thereunder, Isolyser's executive officers and directors and any
persons holding more than ten percent of the Company's common stock are required
to file with the Securities and Exchange Commission and The Nasdaq Stock Market
reports of their initial ownership of the Company's common stock and any changes
in ownership of such common stock. Specific due dates have been established and
the Company is required to disclose in its Annual Report on Form 10-K and Proxy
Statement any failure to file such reports by these dates. Copies of such
reports are required to be furnished to Isolyser. Based solely on its review of
the copies of such reports furnished to Isolyser, or written representations
that no reports were required, Isolyser believes that, during 1999, all of its
executive officers (including the Named Executive Officers), directors and
persons owning more than 10% of its common stock complied with the Section 16(a)
requirements, except Mr. Honeycutt filed one Form 4 late to report sales of his
direct shares owned.
32
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid by
the Company to the Company's chief executive officer, and each of the four most
highly compensated executive officers of the Company during 1999 other than such
chief executive officer (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
--------------------------
Long-Term
Other Compensation
Annual Awards All Other
Name and Principal Position Year Salary Bonus Comp. Options(#) Compensation
- --------------------------- ---- ------ ----- ----- ---------- ------------
Migirdic Nalbantyan
President and Chief Executive . 1999 $181,154 $185,400 -- 250,000 $130,899(1)
Officer ....................... 1998 $127,112(2) -- -- 400,000 $ 2,077(3)
Peter Schmitt ................. 1999 $153,365 $125,400 -- 205,265 $ 5,983(4)
Former Executive Vice President 1998 $136,058 -- -- 150,000 $ 3,863(5)
and Chief Financial Officer ... 1997 $122,187 $ 18,000 -- -- $ 9,458(6)
Michael Mabry ................. 1999 $152,885 $130,800 -- 150,000 $ 5,968(7)
Executive Vice President and .. 1998 $130,981 -- -- 150,000 $ 4,495(8)
Secretary ..................... 1997 $ 97,566 $ 30,000 -- 50,000 $ 4,350(9)
1999 $162,000 $127,044 -- 35,081 $ 7,319(10)
Dan R. Lee .................... 1998 $150,000 -- -- 122,368 $ 5,133(11)
Executive Vice President ...... 1997 $150,000 -- -- 100,000 $ 4,978(11)
1999 $150,000 $ 59,950 -- -- $ 11,585(12)
Lester J. Berry ............... 1998 $150,000 -- -- 20,000 $ 9,658(13)
Former Vice President ......... 1997 $150,000 -- -- -- $ 9,302(13)
(1) This amount represents $124,337 in reimbursements paid for relocation of
residence, $6,208 in contribution to a 401(k) plan and $354 for $50,000 of
term life insurance.
(2) This amount represents compensation paid from February 1, 1998, the date
Mr. Nalbantyan became an employee of the Company.
(3) This amount represents contributions to a 401(k) plan.
(4) This amount represents $5,923 in contributions to a 401(k) plan and $60 for
a $50,000 term life insurance policy.
(5) This represents $3,842 in contributions to a 401(k) plan and $21 for a
$50,000 term life insurance policy.
(6) This represents $6,968 in reimbursed expenses for relocation of residence
and $2,490 in contribution to a 401(k) plan.
(7) This amount represents $5,908 in contribution to a 401(k) plan and $60 for
a $50,000 term life insurance policy.
(8) This amount represents $4,429 in contributions to a 401(k) plan and $66 for
a $50,000 term life insurance policy.
(9) This amount represents $4,284 in contribution to a 401(k) plan and $66 for
a $50,000 term life insurance policy.
(10) This amount represents $5,070 in contributions to a 401(k) plan, $2,036 for
$250,000 term life insurance policy and $213 for $50,000 term life
insurance policy.
(11) This amount represents payment ($2,036 per year) for a $250,000 term life
insurance policy and contributions for a 401(k) plan for the balance of the
amount stated.
33
(12) This amount represents $5,909 for $250,000 term life insurance policy,
$5,625 contribution to a 401(k) plan and $51 for $50,000 term life
insurance policy.
(13) This amount represents the Company's payment ($5,158 per year) for $250,000
term life insurance and contributions to a 401(k) plan for the balance of
the amount stated.
Employment Arrangements
- -----------------------
Messrs. Nalbantyan and Mabry are each parties to a three year employment
agreement with the Company. The term of Mr. Nalbantyan's employment agreement
commenced February 1, 1998 and the term of Mr. Mabry's employment agreement
commenced March 31, 1998. Such employment agreements specify a minimum salary
and benefits payable during the term of the employment agreement, and contains
certain restrictive covenants including covenants relating to the protection of
confidential information and restricting competition against the Company. The
agreement is terminable by the Company or the employee with or without cause. In
the event of a termination of the agreement by the Company without cause, or by
the employee for good reason (as defined), the employee would generally be
entitled to one year of salary as severance. In the event of any termination of
the employee's employment occurring within six months after a change in control
(as defined) of the Company, other than a termination of employment as a result
of death, disability or for cause, then the Company is obligated to pay a
severance amount equal to 2.99 times the employee's annual base salary as then
in effect plus certain other amounts primarily involving continuation of health
insurance for up to one year following the date of such termination of
employment. In the event any such payments would be subject to the excise tax
imposed under the Internal Revenue Code, then such amount would be reduced to
the extent necessary so that no payment shall be subject to such excise tax
unless any such reduction would net the employee a lesser amount on an after tax
basis.
Mr. Schmitt retired from the Company effective February 1, 2000. In
connection with such planned retirement, the Company and Mr. Schmitt entered
into a severance agreement on December 1, 1999, in which, among other things,
Mr. Schmitt ratified and confirmed the protective covenants contained in his
employment agreement including covenants relating to the protection of
confidential information and restricting competition against the Company. In
addition, the Company agreed to a lump sum severance payment of $162,500 at the
time of retirement, continued health insurance benefits for up to one year
following the date of retirement and the vesting of Mr. Schmitt's stock options
at the date of retirement with up to two years following such retirement to
exercise such stock options.
The Company and Dan R. Lee are parties to an employment agreement under
which Mr. Lee agrees to continue to serve as an employee of the Company through
March 31, 2000, and specifies a certain minimum salary and benefits. The
agreement also includes certain restrictive covenants including covenants
relating to the protection of confidential information and restricting
competition against the Company. The agreement is terminable by the Company with
or without cause. In the event of any termination of Mr. Lee's employment by the
Company without cause, the Company remains obligated to pay the base salary
provided in the agreement through March 31, 2000.
Mr. Berry retired from the Company on December 31, 1999, and is a party to
an employment agreement with Microtek which expired on December 31, 1999. Such
employment agreement specifies a minimum salary and benefit payable to him
during the term of the employment agreement and, in consideration therefore,
contains certain provisions restricting his ability to compete against the
Company after termination of the agreement or to use or disclose confidential
information. In connection with the Microtek acquisition, Mr. Berry agreed to
delete certain compensatory provisions of such agreement otherwise arising in
the event of certain events constituting a change of control. Mr. Berry has
agreed to continue to assist the Company in a non-executive capacity following
his retirement at the end of 1999.
Employee Benefit Plans
- ----------------------
1992 Stock Option Plan. In April 1992, the Board of Directors and
shareholders of the Company adopted a Stock Option Plan (the "1992 Stock Option
Plan"). The 1992 Stock Option Plan provides for the issuance of options to
purchase up to 4,800,000 shares of common stock (subject to appropriate
adjustments in the event of stock splits, stock dividends and similar dilutive
events). Options may be granted under the 1992 Stock Option Plan to employees,
officers or directors of, and consultants and advisors to, the Company who, in
34
the opinion of the Compensation Committee, are in a position to contribute
materially to the Company's continued growth and development and to its
long-term financial success. The 1992 Stock Option Plan is administered by a
committee appointed by the Board of Directors. The Compensation Committee has
been designated by the Board of Directors as the committee to administer the
1992 Stock Option Plan. The purposes of the 1992 Stock Option Plan are to ensure
the retention of existing executive personnel, key employees and consultants of
the Company, to attract and retain new executive personnel, key employees and
consultants and to provide additional incentives by permitting such individuals
to participate in the ownership of the Company.
Options granted to employees may either be incentive stock options (as
defined in the Internal Revenue Code (the "Code")) or nonqualified stock
options. The exercise price of the options shall be determined by the Board of
Directors or the committee at the time of grant, provided that the exercise
price may not be less than the fair market value of the Company's common stock
on the date of grant as determined in accordance with the limitations set forth
in the Code. The terms of each option and the period over which it vests are
determined by the committee, although no option may be exercised more than ten
years after the date of grant and all options become exercisable upon certain
events defined to constitute a change of control. To the extent that the
aggregate fair market value, as of the date of grant, of shares with respect to
which incentive stock options become exercisable for the first time by an
optionee during the calendar year exceeds $100,000, the portion of such option
which is in excess of the $100,000 limitation will be treated as a nonqualified
stock option. In addition, if an optionee owns more than 10% of the total voting
power of all classes of the Company's stock at the time the individual is
granted an incentive stock option, the purchase price per share cannot be less
than 110% of the fair market value on the date of grant and the term of the
incentive stock option cannot exceed five years from the date of grant. Upon the
exercise of an option, payment may be made by cash, check or, if provided in the
option agreement, by delivery of shares of the Company's common stock having a
fair market value equal to the exercise price of the options, or any other means
that the Board or the committee determines. Options are non-transferable during
the life of the option holder. The 1992 Stock Option Plan also permits the grant
of alternate rights defined as the right to receive an amount of cash or shares
of common stock having an aggregate fair market value equal to the appreciation
in the fair market value of a stated number of shares of common stock from the
grant date to the date of exercise. No alternate rights have been granted under
the 1992 Stock Option Plan.
As of March 17, 2000, options to purchase 2,726,744 shares of common stock
were outstanding under the 1992 Stock Option Plan and approximately 263,673
shares of common stock were available for future awards under that Plan.
1999 Stock Option Plan. In March 1999 the Board approved and in May 1999
the Company's shareholders ratified, the adoption of the Company's 1999
Long-Term Incentive Plan (the "1999 Stock Option Plan"). The 1999 Stock Option
Plan currently provides for the issuance of options and other stock awards to
acquire shares of common stock up to a maximum of 1,200,000 shares (subject to
appropriate adjustment in the event of stock splits, stock dividends and other
similar dilutive events). Options and other stock awards may be granted under
the 1999 Stock Option Plan to employees of the Company and certain subsidiaries
and affiliated businesses, and to directors, consultants and other persons
providing key services to the Company.
The Compensation Committee of the Board of Directors will determine the
terms and conditions of options granted under the 1999 Stock Option Plan,
including the exercise price, which generally may not be less than the fair
market value of the Company's common stock on the date of grant. Awards under
the 1999 Stock Option Plan may be settled through cash payments, the delivery of
shares of common stock, or a combination thereof as the Committee shall
determine. Stock options awarded under the 1999 Stock Option Plan which are
intended to be incentive stock options are subject to the same restrictions
described above with respect to the 1992 Stock Option Plan.
The 1999 Stock Option Plan may be terminated or amended by the Board of
Directors at any time, except that the following actions may not be taken
without shareholder approval: (a) increasing the number of shares that may be
issued under the 1999 Stock Option Plan (except for certain adjustments provided
for under the 1999 Stock Option Plan), or (b) amending the 1999 Stock Option
Plan provisions regarding the limitations on the exercise price. In the event of
a change of control (as defined generally to include the acquisition by an
individual, entity or group of more than 15% of the outstanding common stock of
the Company, a merger or consolidation of the Company or a sale by the Company
of all or substantially all of the Company's assets), any award granted under
35
the 1999 Stock Option Plan shall become exercisable except to the extent (a) the
award otherwise provides or (b) the exerciseability of such award will result in
an "excess parachute payment" within the meaning of the Code. The 1999 Stock
Option Plan is unlimited in duration and, in the event of 1999 Stock Option Plan
termination, shall remain in effect as long as any awards under it are
outstanding, except no incentive stock options may be granted under the 1999
Stock Option Plan on a date that is more than ten years from the date the 1999
Stock Option Plan is approved by shareholders. Each option expires on the date
established by the Compensation Committee at the time of the grant, except the
expiration cannot be later than the earliest of ten years from the date on which
the option was granted, if the participant's date of termination occurs for
reasons other than retirement or early retirement, the one year anniversary of
such date of termination, or if the participant's date of termination occurs by
reason of retirement or early retirement, the three year anniversary of such
date of termination.
As of March 17, 2000, options to purchase 329,000 shares of common stock
were outstanding under the 1999 Stock Option Plan and approximately 871,000
shares of common stock were available for future awards under the 1999 Stock
Option Plan.
Employee Stock Purchase Plan. In March 1999 the Board approved and in May
1999 the Company's shareholders ratified, the adoption of the Company's Employee
Stock Purchase Plan for employees of the Company and its subsidiaries (the "1999
Stock Purchase Plan"). The 1999 Stock Purchase Plan was established pursuant to
the provisions of Section 423 of the Code to provide a method whereby all
eligible employees of the Company may acquire a proprietary interest in the
Company through the purchase of common stock. Under the 1999 Stock Purchase Plan
payroll deductions are used to purchase the Company's common stock. An aggregate
of 700,000 shares of common stock of the Company were reserved for issuance
under the 1999 Stock Purchase Plan.
Stock Options
- -------------
The Company granted options to its Named Executive Officers in 1999 as set
forth in the following table. The Company has no stock appreciation rights
("SARs") outstanding.
36
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable Value at
_______________________________________________________ Assumed Annual Rates of Stock
Percent of Price Appreciation for Option
Number of Total Term(1)
Securities Options/SARs Exercise Expiration __________________________
Name Underlying Granted to or Base Date 5%($) 10%($)
---- ---------- ---------- ------- ---- ----- ------
Migirdic Nalbantyan 250,000 16.3% 2.125 2/25/09 $334,100 $840,676
Peter Schmitt 205,265 13.4% 2.125 2/25/09 $274,316 $695,172
Michael Mabry 150,000 19.8% 2.125 2/25/09 $200,460 $508,005
Dan R. Lee 35,081 2.3% 2.125 2/25/09 $46,882 $118,809
Lester J. Berry - - 2.125 2/25/09 - -
------------------
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall market conditions.
The following table sets forth the value of options exercised during 1999
and of unexercised options held by the Company's Named Executive Officers at
December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise (#) Realized ($) Unexercisable Unexercisable
---- --------------- ------------ ------------- -------------
Migirdic Nalbantyan - - $100,000(1) $510,938(1)
Peter Schmitt - - $82,158(2) $171,137(2)
Mike Mabry - - $24,389(3) $199,730(3)
Dan R. Lee - - $537,457(4) $29,600(4)
Lester J. Berry - - $3,939(5) -
-------------------------
(1) The indicated value is based on exercise prices ranging from $1.25 to
$2.6875 per share on 100,000 of exercisable options and exercise prices
ranging from $1.25 to $2.6875 at 550,000 unexercisable options, and a value
per share on December 31, 1999 of $2.96875.
37
(2) The indicated value is based on exercise prices ranging from $1.25 to
$3.375 on 118,816 exercisable options and exercise prices ranging from
$1.25 to $2.2813 on 181,184 unexercisable options, and a value per share of
$2.96875 at December 31, 1999.
(3) The indicated value is based on exercise prices ranging from $1.25 to
$3.375 on 77,425 exercisable options and exercise prices ranging from $1.25
to $3.375 on 222,575 unexercisable options, and a value per share at
December 31, 1999 of $2.96875.
(4) The indicated value is based on exercise prices ranging from $.83 to $3.49
on 386,409 exercisable options and exercise prices ranging from $2.125 to
$3.375 on 63,591 unexercisable options, and a price per share at December
31, 1999 of $2.96875.
(5) The indicated value is based on exercise prices ranging from $2.73 to
$3.375 on 87,500 exercisable options and an exercise price of $3.375 on
15,000 unexercisable options, and a price per share at December 31, 1999 of
$2.96875.
Director Compensation
- ---------------------
In 1998, the Company revised its system for compensating nonemployee
directors of the Company who are not affiliated with greater than 5%
shareholders of the Company ("Nonemployee Directors").
The Chairman receives a retainer of $48,000 per year, payable at the rate
of $4,000 per month. Such retainer became effective April 1, 1998, until which
time the Chairman continued to be compensated at the rate of $90,000 per year,
which was the salary rate approved for the Chairman in connection with his
agreement to accept the offices of acting president and chairman of the Company
in 1997. The other Nonemployee Directors of the Company receive a retainer of
$10,000 per year payable in a lump sum following each annual meeting of
shareholders. No meeting fees are payable to the Nonemployee Directors.
Nonemployee Directors are reimbursed upon request for reasonable expenses
incurred in attending Board of Director or committee meetings.
At each regular annual meeting of shareholders, the Company grants to each
Nonemployee Director a non-qualified stock option covering 5,000 shares of
common stock (except that such stock option covers 25,000 shares of common stock
for Nonemployee Directors upon their initial election as a director of the
Company) at an exercise price equal to the fair market value of the Company's
common stock on such date of grant. These option grants may be exercised only by
the optionee beginning six months after the date of the grant until the earliest
of five years after the date of grant, thirty days after ceasing to be a
director of the Company (other than due to death or disability), and one year
after death or disability.
In addition, the Board of Directors, with each Nonemployee Director
abstaining, awarded to each Nonemployee Director a non-qualified stock option
under the Company's 1999 Stock Option Plan covering 10,000 shares of the
Company's common stock at an exercise price of $3.375 per share (being the fair
market value of the Company's common stock on the grant date), and being
exercisable immediately upon the date of grant until the earliest of five years
after the grant date or one year after ceasing to be a director of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 17, 2000, certain information
regarding the beneficial ownership of common stock by (i) each person known by
the Company to be the beneficial owner of more than five percent of the
outstanding shares of common stock, (ii) each director and Named Executive
Officer identified under "Executive Compensation" above, and (iii) all directors
and executive officers as a group:
38
Percentage of
Common Stock
Shares Beneficially Beneficially
Name of Beneficial Owner Owned Owned
- ------------------------ ----- -----
Travis W. Honeycutt (1) 2,373,722 5.7%
Gene R. McGrevin (2) 285,000 *
Migirdic Nalbantyan (3) 223,500 *
Dan R. Lee (4) 330,244 *
Rosdon Hendrix (5) 126,000 *
Kenneth Davis (6) 139,243 *
John E. McKinley (7) 160,000 *
Peter Schmitt (8) 159,000 *
Ronald L. Smorada (9) 35,000 *
Mike Mabry (10) 100,027 *
Lester J. Berry (11) 112,974 *
Dimensional Fund Advisors, Inc. (12) 2,612,370 6.3%
All directors and executive officers
as a group (12 persons)(13) 4,052,210 9.8%
- ------------------
* Represents less than 1% of the common stock
(1) Includes options to acquire 40,000 shares exercisable within 60 days.
(2) Includes options to acquire 245,000 shares exercisable within 60 days.
(3) Includes options to acquire 212,500 shares exercisable within 60 days and
1,000 shares owned by a family member.
(4) Includes options to acquire 320,179 shares exercisable within 60 days.
(5) Includes options to acquire 96,000 shares exercisable within 60 days.
(6) Includes options to acquire 94,000 shares exercisable within 60 days.
(7) Includes options to acquire 40,000 shares exercisable within 60 days.
(8) Includes options to acquire 157,500 shares exercisable within 60 days.
(9) Includes options to acquire 35,000 shares exercisable within 60 days.
(10) Includes options to acquire 99,703 shares exercisable within 60 days.
(11) Includes options to acquire 60,000 shares exercisable within 60 days.
(12) As reported by Dimensional Fund Advisors, Inc. in a Statement on Form 13G
filed with the Securities and Exchange Commission. Dimensional Fund
Advisors, Inc. address is 1299 Ocean Avenue, 11th Floor, Santa Monica,
California 90401.
(13) Includes options to acquire 1,407,382 shares exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) - Financial Statements and Schedules
The following financial statements and schedules are filed as part of this
annual report.
Consolidated Financial Statements and Independent Auditors' Report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations and
Comprehensive Income (Loss) for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997
Notes to the Consolidated Financial Statements
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Other schedules are omitted because they are not applicable, not required
or because required information is included in the consolidated financial
statements or notes thereto.
(3)(a) Exhibits
2.1 Agreement and Plan of Merger dated March 15, 1996 among the Company,
Microtek Medical, Inc. and MMI Merger Corp. (incorporated by reference
to the Joint Proxy Statement/Prospectus included in the Company's
Registration Statement on Form S-4, File No. 333-7977).
2.2 Asset Purchase Agreement dated August 11, 1998, between White Knight
Healthcare, Inc. and Thantex Holdings, Inc. (incorporated by reference
to Exhibit 2.1 filed with the Company's Current Report on Form 8-K
dated August 11, 1998).
2.3 Asset Purchase Agreement dated August 11, 1998, between SafeWaste
Corporation and SafeWaste, Inc. (incorporated by reference to Exhibit
2.2 filed with the Company's Current Report on Form 8-K dated August
11, 1998).
2.4 Arden Plant Agreement dated August 11, 1998, between Isolyser Company,
Inc., Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.3
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
2.5 Barmag Agreement dated August 11, 1998, between Isolyser Company, Inc.
and Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.4
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
2.6 PVA Agreement dated August 11, 1998, between Isolyser Company, Inc.
and Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.5
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
2.7 Abbeville Plant Agreement dated August 11, 1998, between Isolyser
Company, Inc., Thantex Specialties, Inc. and Thantex Holdings, Inc.
(incorporated by reference to Exhibit 2.6 filed with the Company's
Current Report on Form 8-K dated August 11, 1998).
2.8 Stock Purchase Agreement dated June 10, 1999, between Premier Products
LLC and Isolyser Company, Inc. (incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K filed July 13, 1999).
2.9 Asset Purchase Agreement dated as of May 25, 1999, among Allegiance
Healthcare Corporation ("Allegiance"), Isolyser and MedSurg
(incorporated by reference to Exhibit 2.1 in the Company's Current
Report on Form 8-K filed July 27, 1999).
40
2.10 First Amendment to Asset Purchase Agreement dated as of July 12, 1999,
among Allegiance, Isolyser and MedSurg (incorporated by reference to
Exhibit 2.2 in the Company's Current Report on Form 8-K filed July 27,
1999).
2.11 Supply and License Agreement dated as of July 12, 1999,between
Isolyser and Allegiance (incorporated by reference to Exhibit 2.3 in
the Company's Current Report on Form 8-K filed July 27, 1999).
2.12 Escrow Agreement dated as of July 12, 1999, among Allegiance, First
National Bank of Chicago and Isolyser (incorporated by reference to
Exhibit 2.5 in the Company's Current Report on Form 8-K filed July 27,
1999).
3.1 Articles of Incorporation of Isolyser Company, Inc. (incorporated by
reference to Exhibit 3.1 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474).
3.2 Articles of Amendment to Articles of Incorporation of Isolyser
Company, Inc. (incorporated by reference to Exhibit 3.2 filed with the
Company's Annual Report on Form 10-K for the period ending December
31, 1996)
3.3 Amended and Restated Bylaws of Isolyser Company, inc. (incorporated by
reference to Exhibit 3.2 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
3.4 First Amendment to Amended and Restated Bylaws of Isolyser Company,
Inc. (incorporated by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K filed July 29, 1996).
3.5 Second Amendment of Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K
filed December 20, 1996).
4.1 Specimen Certificate of Common Stock (incorporated by reference to
Exhibit 4.1 filed with the Company's Registration Statement on Form
S-1, File No. 33-83474).
4.2 Shareholder Protection Rights Agreement dated as of December 20, 1996
between Isolyser Company, Inc. and SunTrust Bank (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
filed on December 20, 1996).
4.3 First Amendment to Shareholder Protection Rights Agreement dated as of
October 14, 1997 between Isolyser Company, Inc. and SunTrust Bank
(incorporated by reference to Exhibit 4.2 filed with the Company's
Current Report on Form 8-K/A filed on October 14, 1997)
10.1 Stock Option Plan and First Amendment to Stock Option Plan
(incorporated by reference to Exhibit 4.1 filed with the Company's
Registration Statement on Form S-8, File No. 33-85668)
10.2 Second Amendment to Stock Option Plan (incorporated by reference to
Exhibit 4.1 filed with the Company's Registration Statement on Form
S-8, File No. 33-85668)
10.3 Form of Third Amendment to Stock Option Plan (incorporated by
reference to Exhibit 10.37 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1994)
10.4 Form of Fourth Amendment to the Stock Option Plan (incorporated by
reference to Exhibit 10.59 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1995).
10.5 Form of Fifth Amendment to Stock Option Plan (incorporated by
reference to Exhibit 10.5 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1996).
10.6 Form of Incentive Stock Option Agreement pursuant to Stock Option Plan
(incorporated by reference to Exhibit 4.2 filed with the Company's
Registration Statement on Form S-8, File No. 33-85668)
10.7 Form of Non-Qualified Stock Option Agreement pursuant to Stock Option
Plan (incorporated by reference to Exhibit 4.3, filed with the
Company's Registration Statement on Form S-8, File No. 33-85668)
10.8 Form of Option for employees of the Company outside of Stock Option
Plan (incorporated by reference to Exhibit 10.6 filed with the
Company's Registration Statement on Form S-1, File No. 33-83474)
10.9 Employment Agreement of Lester J. Berry (incorporated by reference to
Exhibit 10.9 filed with the Company's Annual Report on Form 10-K for
the period ended December 31, 1996).
10.10Lease Agreement, dated October 21, 1991, between Weeks Master
Partnership, L.P. and the Company (incorporated by reference to
Exhibit 10.27 filed with the Company's Registration Statement on Form
S-1, File No. 33-83474)
10.11Form of Indemnity Agreement entered into between the Company and
certain of its officers and directors (incorporated by reference to
Exhibit 10.45 filed with the Company's Registration Statement on Form
S-1, File No. 33-83474)
10.12Amended and Restated Credit Agreement dated as of August 30, 1996,
among the Company, MedSurg, Microtek, White Knight, the Guarantors
named therein, the Lenders named therein and The Chase Manhattan Bank
(incorporated by referenced to Exhibit 10.1 of the Company's Current
Report on Form 8-K filed on September 13, 1996).
41
10.13Lease Agreement, dated November 18, 1994, between Weeks Realty, L.P.
and the Company (incorporated by reference to Exhibit 10.38 filed with
the Company's Annual Report on Form 10-K for the period ended December
31, 1994)
10.141995 Nonemployee Director Stock Option Plan (incorporated by
reference to Exhibit 10.39 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1994)
10.15Employment Agreement effective as of April 1, 1997, between Isolyser
Company, Inc. and Dan R. Lee (incorporated by reference to Exhibit
10.37 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
10.16Employment Agreement effective as of March 1, 1998, between Isolyser
Company, Inc. and Peter Schmitt (incorporated by reference to Exhibit
10.39 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
10.17Employment Agreement dated as of February 1, 1998, between the
Company and Migirdic Nalbantyan (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998).
10.18Severance Memorandum of Understanding dated August 5, 1998 between
the Company and Steve Plante (incorporated by reference to Exhibit
10.49 to the Company's Annual Report on From 10-K for the period ended
December 31, 1998).
10.19Employment Agreement dated May 27, 1998, between the Company and
Lester J. Berry as amended by letter agreement dated December 16, 1998
(incorporated by reference to Exhibit 10.50 to the Company's Annual
Report on Form 10-K for the period ending December 31, 1998).
10.20Agreement dated August 25, 1999, between the Company and Travis W.
Honeycutt (incorporated by reference to Exhibit 10.1 in the Company's
Quarterly Report on Form 10-Q filed November 15, 1999).
10.21* Severance Agreement dated as of December 1, 1999, between the
Company and Peter Schmitt.
10.221999 Long-Term Incentive Plan (incorporated by reference to Exhibit A
to the Company's Schedule 14A filed on April 19, 1999).
21.1* Subsidiaries of the Company
23.1* Consent of Deloitte & Touche LLP
27.1* Financial Data Schedule
-------------------------------------
* Filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ending December 31, 1999.
3(b) Executive Compensation Plans and Arrangements.
1. Stock Option Plan and First Amendment to Stock Option Plan
(incorporated by reference to Exhibit 4.1 filed with the Company's
Registration Statement on Form S-8, File No. 33-85668)
2. Second Amendment to Stock Option Plan (incorporated by reference to
Exhibit 4.1 filed with the Company's Registration Statement on Form
S-8, File No. 33-85668)
3. Form of Third Amendment to Stock Option Plan (incorporated by
reference to Exhibit 10.37 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1994)
4. Form of Fourth Amendments to the Stock Option Plan (incorporated by
reference to Exhibit 10.59 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1995).
5. Form of Fifth Amendment to Stock Option Plan (incorporated by
reference to Exhibit 10.5 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1996).
6. Form of Incentive Stock Option Agreement pursuant to Stock Option Plan
(incorporated by reference to Exhibit 4.2 filed with the Company's
Registration Statement on Form S-8, File No. 33-85668)
7. Form of Non-Qualified Stock Option Agreement pursuant to Stock Option
Plan (incorporated by reference to Exhibit 4.3, filed with the
Company's Registration Statement on Form S-8, File No. 33-85668)
42
8. Form of Option for employees of the Company outside of Stock Option
Plan (incorporated by reference to Exhibit 10.6 filed with the
Company's Registration Statement on Form S-1, File No. 33-83474)
9. Employment Agreement of Lester J. Berry (incorporated by reference to
Exhibit 10.9 filed with the Company's Annual Report on Form 10-K for
the period ended December 31, 1996).
10. Form of Indemnity Agreement entered into between the Company and
certain of its officers and directors (incorporated by reference to
Exhibit 10.45 filed with the Company's Registration Statement on Form
S-1, File No. 33-83474)
11. 1995 Nonemployee Director Stock Option Plan (incorporated by reference
to Exhibit 10.39 filed with the Company's Annual Report on Form 10-K
for the period ended December 31, 1994)
12. Employment Agreement effective as of April 1, 1997, between Isolyser
Company, Inc. and Dan R. Lee (incorporated by reference to Exhibit
10.37 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
13. Employment Agreement effective as of March 12, 1998, between Isolyser
Company, Inc. and Peter Schmitt(incorporated by reference to Exhibit
10.39 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
14. Employment Agreement dated as of February 1, 1998, between the Company
and Migirdic Nalbantyan (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
15. Severance Memorandum of Understanding dated August 5, 1998 between the
Company and Steve Plante (incorporated by reference to Exhibit 10.49
to the Company's annual Report on Form 10-K for the period ended
December 31, 1998).
16. Employment Agreement dated May 27, 1998, between the Company and
Lester J. Berry as amended by letter agreement dated December 16, 1998
(incorporated by reference to Exhibit 10.50 to the Company's Annual
Report on Form 10-K for the period ending December 31, 1998).
17. Agreement dated August 25, 1999, between the Company and Travis W.
Honeycutt (incorporated by reference to Exhibit 10.1 in the Company's
Quarterly Report on Form 10-Q filed November 15, 1999).
18. Severance Agreement dated as of December 1, 1999, between the Company
and Peter Schmitt.
19. 1999 Long-Term Incentive Plan (incorporated by reference to Exhibit A
to the Company's Schedule 14A filed on April 19, 1999).
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 30, 2000.
ISOLYSER COMPANY, INC.
By: s/ Migirdic Nalbantyan
------------------------------------
Migirdic Nalbantyan, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities indicated on March 30, 2000.
SIGNATURE TITLE
- --------- -----
s/ Migirdic Nalbantyan President, Chief Executive Officer and Director
Migirdic Nalbantyan (principal executive officer)
s/ Dan R. Lee Executive Vice President and Director
Dan R. Lee
s/ James C. Rushing, III Executive Vice President, Chief Financial
James C. Rushing, III Officer and Treasurer (principal financial and
accounting officer)
s/ Gene R. McGrevin Chairman of the Board of Directors
Gene R. McGrevin
s/ Travis W. Honeycutt Director
Travis W. Honeycutt
s/ Rosdon Hendrix Director
Rosdon Hendrix
s/ Kenneth F. Davis Director
Kenneth F. Davis
s/ John E. McKinley Director
John E. McKinley
s/ Ronald L. Smorada Director
Ronald L. Smorada
INDEPENDENT AUDITORS' REPORT
Board of Directors of Isolyser Company, Inc.:
Norcross, GA
We have audited the accompanying consolidated balance sheets of Isolyser
Company, Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of operations and comprehensive income
(loss), changes in shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the index at Item 14. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles. Also, in our opinion such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 12 to the consolidated financial statements, the Company
changed its method of accounting for business process reengineering costs.
Atlanta, Georgia Deloitte & Touche LLP
February 25, 2000
1
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS In thousands
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $17,006 $7,325
Accounts receivable, net of allowance for
doubtful
accounts of $829 and $1,039, respectively 13,773 18,118
Disposition escrow account 3,130 -
Inventory, net 24,036 23,647
Prepaid inventories - 337
Net assets held for sale - 9,873
Prepaid expenses and other assets 1,298 1,076
------------- -------------
Total current assets 59,243 60,376
PROPERTY AND EQUIPMENT:
Land 245 244
Building and leasehold improvements 4,387 9,455
Equipment 9,320 14,941
Furniture and fixtures 3,550 2,710
Other 4,081 3,722
------------- -------------
21,583 31,072
Less accumulated depreciation 12,990 15,511
------------- -------------
Property and equipment, net 8,593 15,561
INTANGIBLE ASSETS:
Goodwill 26,691 34,893
Customer lists 786 1,286
Patent and license agreements 3,072 2,464
Noncompete agreements - 385
Other 55 362
------------- -------------
30,604 39,390
Less accumulated amortization 7,533 10,262
------------- -------------
Intangible assets, net 23,071 29,128
INVESTMENT IN THANTEX 3,605 3,605
OTHER ASSETS, net 827 848
------------- -------------
TOTAL ASSETS $95,339 $109,518
============= =============
See notes to consolidated financial statements.
2
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS In thousands, except share data
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
CURRENT LIABILITIES:
Accounts payable $4,905 $6,247
Accrued compensation 1,803 2,221
Other accrued liabilities 850 3,389
Current portion of deferred licensing revenue 3,000 -
Current portion of long-term debt 2,615 9,395
Current portion of product financing agreement 520 -
------------- -------------
Total current liabilities 13,693 21,252
LONG-TERM LIABILITIES:
Deferred licensing revenue 6,000 -
Long-term debt - 19,376
Deferred rent - 215
Long-term portion of product financing
agreement 924 -
------------- -------------
Total long-term liabilities 6,924 19,591
SHAREHOLDERS' EQUITY:
Participating preferred stock, no par, 500,000
shares authorized, none issued - -
Common stock, $.001 par; 100,000,000
shares authorized; 40,730,060 and 39,803,774
shares issued, respectively 41 40
Additional paid-in capital 206,600 203,364
Accumulated deficit (131,283) (133,980)
Unearned shares restricted to employee stock
ownership plan (180) (240)
Cumulative translation adjustment (22) (75)
------------- -------------
75,156 69,109
Treasury shares, at cost (46,999 shares) (434) (434)
------------- -------------
Total shareholders' equity 74,722 68,675
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $95,339 $109,518
============= =============
See notes to consolidated financial statements.
3
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
In thousands, except per share data
1999 1998 1997
-------------- --------------- ---------------
NET SALES $ 97,554 $ 147,643 $ 159,940
LICENSING REVENUES 1,500 - -
-------------- --------------- ---------------
Total revenues 99,054 147,643 159,940
COST OF GOODS SOLD 61,970 109,936 142,094
-------------- --------------- ---------------
Gross profit 37,084 37,707 17,846
OPERATING EXPENSES:
Selling, general and administration 26,596 40,182 43,422
Amortization of intangibles 1,440 2,052 3,847
Research and development 3,724 3,906 2,601
Impairment loss 769 7,445 57,310
Gain on business disposition (628) - -
-------------- --------------- ---------------
Total operating expenses 31,901 53,585 107,180
-------------- --------------- ---------------
INCOME (LOSS) FROM OPERATIONS 5,183 (15,878) (89,334)
INTEREST INCOME 450 273 555
INTEREST EXPENSE (1,645) (3,507) (3,926)
INCOME (LOSS) FROM JOINT VENTURE - 11 (44)
-------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3,988 (19,101) (92,749)
INCOME TAX PROVISION 1,291 540 354
-------------- --------------- ---------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,697 (19,641) (93,103)
EXTRAORDINARY ITEM - Gain from extinguishment of debt, net of tax of $0 - 1,404 -
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of tax of $0 - - (800)
-------------- --------------- ---------------
NET INCOME (LOSS) $ 2,697 $ (18,237) $ (93,903)
-------------- --------------- ---------------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation gain (loss) 53 29 (119)
-------------- --------------- ---------------
COMPREHENSIVE INCOME (LOSS) $ 2,750 $ (18,208) $ (94,022)
============== =============== ===============
NET INCOME (LOSS) PER COMMON SHARE - Basic and Diluted:
Income (loss) before extraordinary item and cumulative effect of change
in accounting principle $ 0.07 $ (0.49) $ (2.37)
Extraordinary item - 0.03 -
Cumulative effect of change in accounting principle - - (0.02)
-------------- --------------- ---------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.07 $ (0.46) $ (2.39)
============== =============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - Basic 40,318 39,655 39,273
============== =============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - Diluted 41,158 39,655 39,273
============== =============== ===============
See notes to consolidated financial statements.
4
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
In thousands
Common Stock Issued Additional
------------------- Paid-in Accumulated Translation ESOP Treasury Shareholders'
Shares Amount Capital Deficit Adjustment Shares Shares Equity
------ ---------- ---------- ----------- ----------- -------- -------- -------------
BALANCE - December 31, 1996 39,342 $ 39 $ 203,346 $ (21,840) $ 15 $ (360) $(2,396) $ 178,804
Exercise of stock options and warrants 205 750 750
Issuance of 51 shares of common stock from
treasury pursuant to ESPP (80) 386 306
Issuance of 107 shares of common stock from
treasury pursuant to 401 (k) plan (417) 806 389
Release of 17 shares reserved for ESOP (21) 60 39
Exchange of 6 common shares 7 23 (23) -
Release of 8 White Knight escrow shares (150) (150)
Currency translation loss (119) (119)
Net loss (93,903) (93,903)
------ ---------- ---------- ----------- ----------- -------- -------- -------------
BALANCE - December 31, 1997 39,554 39 203,601 (115,743) (104) (300) (1,377) 86,116
Issuance of 128 shares of common stock from
treasury pursuant to ESPP (706) 961 255
Issuance of 249 shares of common stock from
treasury pursuant to 401 (k) plan 250 1 511 512
Release of 17 shares reserved for ESOP (42) 60 18
Release of 1 White Knight escrow share (18) (18)
Currency translation gain 29 29
Net loss (18,237) (18,237)
------ ---------- ---------- ----------- ----------- -------- -------- -------------
BALANCE - December 31, 1998 39,804 40 203,364 (133,980) (75) (240) (434) 68,675
Issuance of 110 shares of common stock
pursuant to ESPP 110 117 117
Issuance of 251 shares of common stock
pursuant to 401 (k) plan 251 582 582
Release of 17 shares reserved for ESOP (11) 60 49
Stock option compensation expense 568 568
Tax benefits related to stock options 217 217
Exercise of stock options and warrants 565 1 1,763 1,764
Currency translation gain 53 53
Net income 2,697 2,697
------ ---------- ---------- ----------- ----------- -------- -------- -------------
BALANCE - December 31, 1999 40,730 $ 41 $ 206,600 $ (131,283) $ (22) $ (180) $ (434) $ 74,722
====== ========== ========== =========== =========== ======== ======== =============
See notes to consolidated financial statements.
5
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
In thousands 1999 1998 1997
--------------- -------------- ---------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,697 (18,237) (93,903)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 2,604 3,727 7,524
Amortization of intangibles 1,277 2,052 3,847
Licensing revenue (1,500) - -
Provision for doubtful accounts 143 291 376
Provision for obsolete and slow moving inventory (1,394) 43 14,694
Loss on disposal of property and equipment - - 138
Impairment loss 769 7,445 57,310
Gain on business disposition (628) - -
(Gain) loss from joint venture - (11) 44
Extraordinary gain from extinguishment of debt - (1,404) -
Compensation expense related to ESOP 49 17 39
Stock option compensation expense 568 - -
Tax benefits related to stock options 217 - -
Changes in assets and liabilities, net of effects
from disposed businesses:
Accounts receivable (1,916) (3,521) 4,409
Inventories (1,077) 7,575 4,314
Prepaid inventories (68) 104 (404)
Prepaid expenses (1,812) 778 698
Other assets (15) (372) (260)
Accrued income taxes 87 - -
Accounts payable 1,474 (4,805) (564)
Accrued compensation 109 (269) 278
Other liabilities (48) (156) (388)
Other accrued liabilities (2,916) 772 178
--------------- -------------- ---------------
Net used in operating (1,380) (5,971) (1,670)
--------------- -------------- ---------------
INVESTING ACTIVITIES:
Purchase of and deposits for property and equipment (1,306) (3,299) (4,014)
Disposition proceeds 35,600 20,416 263
--------------- -------------- ---------------
Net cash provided by (used in) investing 34,294 17,117 (3,751)
--------------- -------------- ---------------
FINANCING ACTIVITIES:
Borrowings under line of credit agreements 35,967 56,629 53,068
Repayments under line of credit agreements (59,086) (57,802) (57,241)
Proceeds from notes payable - 110 1,338
Repayment of notes payable (2,630) (12,852) (4,699)
Proceeds from issuance of common stock 699 511 -
Issuance of treasury stock - 255 695
Proceeds from exercise of stock options 1,764 - 751
--------------- -------------- ---------------
Net cash used in financing activities (23,286) (13,149) (6,088)
--------------- -------------- ---------------
(Continued)
6
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 53 29 (118)
--------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 9,681 (1,974) (11,627)
CASH AND CASH EQUIVALENTS:
Beginning of year 7,325 9,299 20,926
--------------- -------------- ---------------
End of year $ 17,006 $ 7,325 $ 9,299
=============== ============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest
$ 1,345 $ 3,437 $ 3,773
=============== ============== ===============
Income taxes $ 928 $ 344 $ 218
=============== ============== ===============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Stock received in exchange for assets disposed
(Note 2) $ - $ 3,605 $ 243
=============== ============== ===============
Equipment acquired through capital leases
$ - $ 277 $ 243
=============== ============== ===============
Disposition escrow account (Note 2)
$ 3,130 $ - $ -
=============== ============== ===============
See notes to consolidated financial statements.
7
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
________________________________________________________________________________
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Isolyser Company, Inc. and subsidiaries (the "Company") develop,
manufacture, and market proprietary and other products and services for
patient care, occupational safety and management of potentially infectious
and hazardous waste primarily for the domestic health care market, which
represents one business segment. The Company's products provide an umbrella
of protection from potentially infectious and hazardous waste for patients,
staff, the public and the environment by facilitating the safe and
cost-effective disposal of such waste at the Point-of-Generation(TM). The
Company markets its products to hospitals and other end users through
distributors and directly through its own sales force. The Company
anticipates selling its products, primarily OREX(R) and Enviroguard
Degradables ("OREX" and "Enviroguard"), to industries other than
healthcare, but the Company currently has no operations or presence in
those industries.
The Company's future performance will depend to a substantial degree upon
its ability to successfully market OREX and Enviroguard in commercial
quantities. The Company introduced its Enviroguard products during 1999.
Sales of OREX and Enviroguard products were $1.7 million for the year ended
December 31, 1999. Sales of OREX products were $4.7 million and $8.1
million for the years ended December 31, 1998 and 1997, respectively.
Consolidation Policy - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition - Revenues from the sale of the Company's products are
recognized at the time of shipment. At this point, persuasive evidence of a
sale arrangement exists, delivery has occurred, the Company's price to the
buyer is fixed and collectibility of the associated receivable is
reasonably assured. The Company generally only accepts product returns for
damaged products. Actual returns have not been significant.
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.
Inventories - Inventories are stated at the lower of cost or market. The
first-in first-out ("FIFO") valuation method is used to determine the cost
of inventories. Cost includes material, labor and manufacturing overhead
for manufactured and assembled goods and materials only for goods purchased
for resale. Inventories are stated net of an allowance for obsolete and
slow-moving inventory.
8
Property and Equipment - Property and equipment is stated at cost less
accumulated depreciation and is depreciated using the straight-line method
over the estimated useful lives of the related assets, generally three to
40 years.
Intangible Assets - Intangible assets consist primarily of goodwill,
customer lists and patent and license agreements and are amortized using
the straight-line method over the following estimated useful lives:
Intangible Asset Estimated Useful Life
---------------- ---------------------
Goodwill 10 to 40 years
Customer lists 15 years
Patent and license agreements 17 years
Portions of these intangibles were sold in conjunction with the 1999
dispositions (Note 2).
Investment in Joint Venture - The investment in the joint venture was
accounted for using the equity method of accounting. The joint venture
investment represented a 50.0% ownership interest in a mobile waste
treatment operation, which was sold in conjunction with the August 11, 1998
disposition of SafeWaste.
Investment in Thantex - The investment in Thantex represents a 19.5%
ownership interest in a company formed to own and operate the Arden and
Abbeville manufacturing facilities and is accounted for under the cost
method of accounting (Note 2).
Research and Development Costs - Research and development costs include
product research as well as various product and process development
activities and are charged to expense as incurred.
Cash and Cash Equivalents - Cash equivalents are short-term, highly liquid
investments with original maturities of three months or less consisting
entirely of U.S. government securities or government backed securities.
These investments are classified in accordance with Statement of Financial
Accounting Standards ("SFAS") 115, Accounting for Certain Investments in
Debt and Equity Securities as available for sale securities and are stated
at cost, which approximates market.
Income Taxes - Deferred tax assets and liabilities are determined based on
the difference between financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized (Note 7).
Foreign Currency Translation - The assets and liabilities of the Company's
United Kingdom subsidiary are translated into U.S. dollars at current
exchange rates, and revenues and expenses are translated at average
exchange rates. The effect of foreign currency transactions was not
material to the Company's results of operations for the years ended
December 31, 1999, 1998 and 1997.
Impairment of Long-Lived Assets -The Company reviews long-lived assets and
certain intangibles for impairment when events or changes in circumstances
indicate that the carrying amount of these assets may not be recoverable.
In addition, management periodically reviews the appropriateness of the
assets' amortization lives. Any impairment losses are reported in the
period in which the recognition criteria are first applied based on the
fair value of the asset. Assets held for disposal are carried at the lower
of carrying amount or fair value, less estimated cost to sell such assets.
The Company discontinues depreciating or amortizing assets held for sale
effective with the decision to sell the assets (Note 3).
9
Earnings Per Share - Earnings per share is calculated in accordance SFAS
128, Earnings Per Share, which requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures. Primary and diluted weighted-average share
differences result solely from dilutive common stock options.
Newly Issued Accounting Standards - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133, effective for the Company on
January 1, 2001, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and for
hedging activities. The Company is currently evaluating the impact that
this standard will have on its results of operations and financial position
upon adoption.
Reclassifications - Certain reclassifications have been made in the 1998
and 1997 financial statements to conform to the 1999 classifications.
2. DISPOSITIONS
On February 25, 1998, the Company approved a plan to dispose of its Arden
and Charlotte, North Carolina and Abbeville, South Carolina OREX
manufacturing facilities and its White Knight subsidiary and reflected the
net assets of these entities as held-for-sale at December 31, 1997.
On August 11, 1998, the Company disposed of its Arden and Charlotte, North
Carolina OREX manufacturing facilities, 4.5 million pounds of OREX
Inventory (Note 9), the industrial division of its White Knight subsidiary
and substantially all of the assets of its SafeWaste subsidiary (classified
as held for use at December 31, 1997) for cash proceeds of $13.5 million.
On October 14, 1998, the Company disposed of its Abbeville, South Carolina
OREX manufacturing facility for proceeds of $8.0 million, consisting of
$7.5 million in cash and a $500,000 8.0% note payable due October 14, 2003.
The net cash proceeds from these dispositions were used to repay amounts
borrowed under the Company's Credit Agreement (Note 5). In conjunction with
these dispositions, the Company also received a 19.5% ownership interest in
Thantex, the company formed to own and operate the Arden and Abbeville
facilities (Note 1).
On December 15, 1998, the Company disposed of the Struble and Moffit
division of its White Knight subsidiary for cash proceeds of $1.2 million.
On March 31, 1999, the Company disposed of its former corporate
headquarters in Norcross, Georgia, for cash proceeds of approximately $1.9
million, which were used to repay amounts borrowed under the Company's
Credit Agreement (Note 5). The Company reflected this asset as held for
sale at December 31, 1998.
Effective May 31, 1999, the Company disposed of the stock of its White
Knight subsidiary for cash proceeds of $8.2 million. These proceeds were
used to reduce outstanding borrowings under the Company's Credit Agreement
(Note 5).
On July 12, 1999, the Company disposed of substantially all of the assets
of its MedSurg subsidiary and entered into a license agreement with
Allegiance Healthcare Corporation ("Allegiance") (Note 10), for net
proceeds of $28.6 million, consisting of $25.5 million in cash and a $3.1
10
million escrow receivable (the "Disposition Escrow Account"). The escrow is
to be paid upon the satisfaction by the Company of certain covenants
included in the sale agreement. In conjunction with the sale, the Company
recorded a gain of $628,000. A portion of the proceeds was used to repay
the then remaining outstanding borrowings under the Company's Credit
Agreement (Note 5).
On February 16, 2000, Allegiance deposited an additional $1.2 million into
the Disposition Escrow Account related to costs the Company incurred in
2000 on Allegiance's behalf. (Note 8).
At December 31, 1999 and 1998, net assets held for sale are comprised of
the following:
(in thousands) 1999 1998
-------------- ---- ----
Assets:
Accounts Receivable - $ 3,589
Inventory (LIFO basis in 1998) $ 4,846 6,156
Prepaid inventory (LIFO basis in 1998) - 588
Prepaid expenses and other assets - 71
Property and equipment, net - 2,000
Other assets - 73
_________ __________
Total assets 4,846 12,477
Liabilities:
Accounts payable 3,211 1,441
Bank overdraft - 361
Accrued compensation - 261
Accrued expenses 1,635 525
Long-term debt - 16
_________ __________
Total liabilities $ 4,846 $ 2,604
--------- ---------
Net assets held for sale $ - $ 9,873
======== =========
On January 31, 2000 the Company transferred title of the remaining net
assets held-for-sale to Allegiance. The effect of not depreciating net
assets held for sale was $272,000, $3.1 million and $0 in 1999, 1998 and
1997, respectively.
The following represents the results of operations (including impairment
charges) of the entities that were disposed of for the years ended December
31, 1999 and 1998, respectively:
(in thousands, except per share data) 1999 1998
------------------------------------- ---- ----
Net sales $ 38,673 $ 97,821
Net loss (509) (18,553)
Net loss per share - Basic and Diluted (0.01) (0.47)
11
3. IMPAIRMENT LOSS
During the fourth quarter of 1997, the Company determined that its OREX
manufacturing facilities in Arden and Charlotte, North Carolina and
Abbeville, South Carolina and its White Knight subsidiary were impaired
based on analyses of undiscounted future operating cash flows from these
entities. As a result, the Company recorded the following impairment
charges to adjust the carrying values of such entities to their estimated
fair market values based on appraisals and/or analyses of discounted future
operating cash flows from these entities:
(in thousands)
--------------
Write-down of property and equipment $ 34,516
Write-down of intangible assets 22,794
------
$ 57,310
=========
In conjunction with the 1998 disposition of the Company's White Knight
Industrial and Struble and Moffit divisions (Note 2), the Company recorded
additional impairment and other charges totaling $7.0 million to adjust the
carrying values of the net assets to their fair market values based upon
actual consideration received. The following charges were recorded:
(in thousands)
--------------
Write-down of inventory (1) $ 900
Write-down of accounts receivable (2) 300
Write-down of property and equipment (3) 5,800
-----
$ 7,000
=========
(1) Included in cost of goods sold
(2) Included in selling, general and administrative expenses
(3) Included in impairment loss
In December, 1998, based upon revised estimated consideration to be
received from the disposition of the remainder of White Knight and the
Company's former corporate office, the Company recorded an additional
impairment loss of $1.6 million.
In conjunction with the May 31, 1999 disposition of White Knight (Note 2),
the Company recorded an additional impairment charge of $769,000 to adjust
the carrying values of the related net assets to their fair market values
based upon actual consideration received.
4. INVENTORIES
Inventories are summarized by major classification at December 31, 1999 and
1998 as follows:
(in thousands) 1999 1998
-------------- ---- ----
Raw materials $ 12,056 $ 12,527
Work-in-process 1,389 1,733
Finished goods 12,199 11,569
------ ------
25,644 25,829
Less reserves for:
Slow moving and obsolete inventory 1,608 2,182
----- -----
Inventory, net $ 24,036 $ 23,647
======== =========
12
At December 31, 1998, the Company's LIFO inventory is included as a
component of net assets held for sale.
At December 31, 1999 and 1998, net OREX inventory is approximately $7.2
million and $4.9 million, respectively.
5. LONG-TERM DEBT
The Credit Agreement
The Company is party to a credit agreement between the Company and a Bank
(the "Credit Agreement"). As amended through December 31, 1999, the Credit
Agreement provides for a $15.0 million revolving credit facility, which
matures on June 30, 2000. Borrowings under the facility are based on the
lesser of a percentage of eligible accounts receivable and inventory or
$15.0 million, less any outstanding letters of credit issued under the
Credit Agreement. Borrowing availability under the facility at December 31,
1999 was $12.8 million. Revolving credit borrowings bear interest, at the
Company's option, at either the Alternate Base Rate, plus an Interest
Margin, as defined, ("Interest Margin") or LIBOR plus an Interest Margin
(6.6% at December 31, 1999). Outstanding borrowings under the revolving
credit facility were $0 and $23.1 million at December 31, 1999 and 1998,
respectively.
The Credit Agreement contains certain restrictive covenants, including the
maintenance of certain financial ratios, earnings before interest, taxes,
depreciation and amortization ("EBITDA") and net worth, and places
limitations on acquisitions, dispositions, capital expenditures and
additional indebtedness. In addition, the Company is not permitted to pay
any dividends. At December 31, 1999, the Company was in compliance with
these covenants.
The Credit Agreement provides for the issuance of up to $1.0 million in
letters of credit. Outstanding letters of credit at December 31, 1999 were
$50,000. The Credit Agreement also provides for a fee of .25% per annum on
the unused commitment, an annual collateral monitoring fee of $50,000 and
an outstanding letter of credit fee of up to 2.0% per annum. Borrowings
under the Credit Agreement are collateralized by the Company's accounts
receivable, inventory, property and equipment and general intangibles, as
defined, and are guaranteed by the Company.
Other Long-Term Debt
The Company is obligated under certain long-term notes payable, relating
primarily to acquisitions by Microtek, which aggregated $2.6 million and
$3.1 million at December 31, 1999 and 1998, respectively. These obligations
bear interest at rates ranging from 6.1% to 9.5% and mature through
November 2000. Two of the acquisition notes payable aggregating $2.4
million and $2.8 million at December 31, 1999 and 1998, respectively, are
subordinated to the Credit Agreement.
The carrying value of long-term debt at December 31, 1999 and 1998
approximates fair value based on interest rates that are believed to be
available to the Company for debt with similar prepayment provisions
provided for in the existing debt agreements.
In 1998 the Company recorded an extraordinary gain for $1.4 million,
relating to the extinguishment of a $1.3 million 7.0% note payable to a
former customer of the White Knight subsidiary. The note was to be settled
by trade discounts to be received on purchases of White Knight products
13
through January, 2000. During 1996, this customer was acquired by a
competitor and subsequently discontinued its purchases of White Knight
products.
6. LEASES
The Company leases office, manufacturing and warehouse space and equipment
under operating lease agreements expiring through 2007. Rent expense was
$2.1 million, $2.8 million and $2.6 million in 1999, 1998 and 1997,
respectively. At December 31, 1999, minimum future rental payments under
these leases are as follows:
(in thousands)
--------------
2000 $ 1,075
2001 739
2002 608
2003 373
2004 213
Thereafter 480
---
Total minimum payments $ 3,488
========
The Company may, at its option, extend certain of its office, manufacturing
and warehouse space lease terms through various dates.
7. INCOME TAXES
The income tax provision is summarized as follows:
(in thousands) 1999 1998 1997
-------------- ---- ---- ----
Current:
Federal $ 466
State 454 $ 80
Foreign 154 $ 540 274
--------- -------- --------
1,074 540 354
Deferred:
Federal - - -
State - - -
--------- -------- --------
Tax expense resulting from
allocating employee stock
option tax benefits to
additional paid-in-capital 217 - -
--------- -------- --------
Total income tax provision $ 1,291 $ 540 $ 354
========= ======== ========
During 1999, the Company recognized $217,000 in income tax benefits
associated with the exercise of employee stock options. The benefits
recognized related to compensation expense deductions generated during
1996. These income tax benefits were recorded in the accompanying
consolidated financial statements as additional paid-in capital.
The income tax provision allocated to continuing operations using the
federal statutory tax rate differs from the actual income tax provision as
follows:
14
(in thousands) December 31
______________ _________________________________________________________________
1999 1998 1997
_________________________________________________________________
Federal statutory rate $ 1,356 34% $ (6,494) (34%) $ (31,535) (34)%
State taxes, net of
federal benefit 300 8 - - - -
Items not deductible
for tax purposes 3,045 76 1,323 7 1,652 2
Other, net (124) (3) 159 1 (12) -
Valuation allowance (3,286) (83) 5,552 29 $ 30,249 32
----- -- ----- -- ------------ --
Total $ 1,291 32% $ 540 3% $ 354 -%
========== == =========== ==== ============ ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Deferred income taxes as of December 31, 1999 and 1998 are as follows:
December 31,
-------------
(in thousands) 1999 1998
-------------- ---- ----
Deferred income tax assets (liabilities):
Allowance for doubtful accounts $ 185 $ 348
Inventory 3,610 8,311
Accrued expenses 321 1,311
Valuation allowance (4,116) (9,970)
============ ============
Net deferred income taxes - current - -
Operating loss carryforward 26,318 33,057
Capital loss carryforward 5,147 -
Intangible assets (560) 10
Property and equipment (502) (1,686)
Tax credit carryforward 384 242
Deferred license revenue 3,416 -
Valuation allowance (34,303) (31,623)
============ ============
Net deferred income taxes - noncurrent - -
============ ============
Net deferred income taxes $ - $ -
============ ============
Gross deferred income tax assets and liabilities equaled $39.4 million and
$1.1 million, respectively, at December 31, 1999 and $43.3 million and $1.7
million, respectively, at December 31, 1998.
During 1997, the Company increased its valuation allowance by $30.2 million
to $36.0 million. During 1998, the Company increased its valuation
allowance by $5.6 million to $41.6 million. During 1999, the Company
decreased its valuation allowance by $3.3 million to $38.3 million.
At December 31, 1998, the Company had net federal and state operating loss
carryforwards of $83.8 million and $76.0 million, respectively. In
conjunction with the May 1999 White Knight disposition (Note 2), net
federal and state operating loss carryforwards of $9.7 million and $5.7
million were transferred to the purchaser. During 1999, net federal and
state operating loss carryforwards of $7.1 million and $11.6 million,
respectively, were utilized to reduce taxable income. Of these loss
15
carryforwards utilized, $1.1 million related to compensation expense
associated with the exercise of employee stock options in 1996. The income
tax benefit associated with this $1.1 million was recorded in the
accompanying consolidated financial statements as additional paid-in
capital. At December 31, 1999, the Company has net federal and state
operating loss carryforwards of $67.0 million and $58.6 million,
respectively, of which $3.2 million relates to compensation expense
associated with the exercise of employee stock options. These loss
carryforwards expire at various dates through 2019.
At December 31, 1999, the Company has tax credit carryforwards of $384,000
of which $242,000 expires in 2003.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in routine litigation and proceedings in the
ordinary course of business. Management believes that pending litigation
matters will not have a material adverse effect on the Company's financial
position or results of operations.
In connection with the sales of several of its former businesses over the
last two years, the Company has entered into various agreements with
purchasers to indemnify the purchasers against certain matters, including
without limitation undisclosed liabilities and breaches of representations
and warranties by Isolyser. The Company is not aware of any claims for
indemnification in connection with these transactions, except that
Allegiance, in conjunction with the sale of MedSurg, has made certain
claims relative to product returns of excess inventories, failure to
disclose certain lost customer accounts and failure to complete certain
manufacturing assembly services under a temporary manufacturing contract
(Note 2). Under the terms of the contract with Allegiance, and in addition
to the Company's general indemnification obligations to Allegiance, the
Company deposited $3.1 million in the Disposition Escrow Account at the
July 12, 1999 closing and an additional $1.2 million on February 16, 2000,
to secure the Company's potential indemnification obligations. The Company
has denied that it has any liability to Allegiance for these claims and
remains in discussions with Allegiance to reach a satisfactory resolution.
Both parties are in the process of resolving these matters expeditiously.
Resolution of these claims by a payment from the Company or from the
Disposition Escrow Account will be recorded as an adjustment to deferred
licensing revenues related to the Allegiance license agreement described in
Note 10.
9. PRODUCT FINANCING AGREEMENT
In conjunction with the August 11, 1998 disposition of the Arden
manufacturing facility (Note 2), the Company entered into a product
financing arrangement with Thantex whereby the Company agreed to repurchase
2.6 million pounds of OREX fiber originally sold to Thantex for $0.45 per
pound, either as fiber or converted product for $0.80 per pound ratably
over a four year period. Accordingly, the Company continues to record this
inventory at historical carrying value and has recorded a liability for the
repurchase price to Thantex in the accompanying financial statements. The
difference between the repurchase price and the sale price represents
deferred interest expense which is being recognized on a straight line
basis over a four year period.
10. LICENSE AGREEMENT
In conjunction with the July 12, 1999 disposition of MedSurg (Note 2), the
Company entered into a 42 month agreement which provides Allegiance with
the exclusive right to market the Company's Enviroguard products in the
global healthcare market. The payment of $10.5 million allocated to the
agreement is being recognized as license revenue on a straight-line basis
over the life of the agreement. In addition to the license fee, Allegiance
agreed to purchase a minimum amount of fabric over the life of the
agreement for a pre-determined price. As part of the agreement, Allegiance
and the Company agreed to develop a new generation of processing systems
which will compliment the Enviroguard fabric life cycle cost performance.
16
The processing systems will be produced and supported by the Company and
Allegiance and Allegiance will pay the Company a royalty if the products
are disposed of via a publicly owned water treatment facility.
11. SHAREHOLDERS' EQUITY
Preferred Stock - On April 24, 1994, the Company authorized, for future
issuance in one or more series or classes, 10.0 million shares of no par
value preferred stock. On December 19, 1996, the Company allocated 500,000
of the authorized shares to a series of stock designated as Participating
Preferred Stock.
Stock Options - On April 28, 1992, the Company adopted a Stock Option Plan
(the "1992 Plan") which, as amended, authorizes the issuance of up to 4.8
million shares of common stock to certain employees, consultants and
directors of the Company under incentive and/or nonqualified options and/or
alternate rights. An alternate right is defined as the right to receive an
amount of cash or shares of stock having an aggregate market value equal to
the appreciation in the market value of a stated number of shares of the
Company's common stock from the alternate right grant date to the exercise
date. The 1992 Plan Committee may grant alternate rights in tandem with an
option, but the grantee may only exercise either the right or the option.
Options and/or rights under the 1992 Plan may be granted through April 27,
2002 at prices not less than 100% of the market value at the date of grant.
Options and/or rights become exercisable based upon a vesting schedule
determined by the 1992 Plan Committee and become fully exercisable upon a
change in control, as defined. Options expire not more than ten years from
the date of grant and alternate rights expire at the discretion of the 1992
Plan Committee. Through December 31, 1999, no alternate rights had been
issued.
The Company has also granted nonqualified stock options to certain
employees, non-employees, consultants and directors to purchase shares of
the Company's common stock outside of the 1992 Plan. Options granted expire
in various amounts through 2001.
In April 1995, the Company adopted a Director Stock Option Plan, which
authorizes the issuance of up to 30,000 shares of common stock. At December
31, 1999, currently exercisable options for 18,000 shares were outstanding
under this plan.
In March 1999, the Company adopted the 1999 Stock Option Plan (the "1999
Plan"), which was approved by the shareholders on May 27, 1999. The 1999
Plan authorizes the issuance of up to 1.2 million shares of common stock to
certain employees, consultants and directors of the Company under incentive
and/or nonqualified options, stock appreciation rights ("SARs") and other
stock awards (collectively, "Stock Awards"). Stock Awards under the 1999
Plan may be granted at prices not less than 100% of the market value at the
date of grant. Options and/or SARs become exercisable based upon a vesting
schedule determined by the 1999 Plan Committee and become fully exercisable
upon a change in control, as defined. Options expire not more than ten
years from the date of grant and SARs and other stock awards expire at the
discretion of the 1999 Plan Committee. The 1999 Plan is unlimited in
duration. As of December 31, 1999, there were 329,000 options outstanding
under the 1999 Plan.
A summary of option activity during the three years ended December 31, 1999
is as follows:
17
Weighted Average
Shares Exercise Price
------ --------------
Outstanding - December 31, 1996 3,813,031 $ 5.65
Granted 642,000 4.62
Exercised (213,705) 3.62
Canceled (346,022) 6.27
--------
Outstanding - December 31, 1997 3,895,304 5.54
Granted 2,826,417 2.51
Canceled (2,841,554) 5.81
----------
Outstanding - December 31, 1998 3,880,167 3.13
Granted 1,115,346 2.51
Exercised (555,250) 3.17
Canceled (648,919) 4.28
--------
Outstanding - December 31, 1999 3,791,344 $ 2.76
=========
On February 25, 1998, the Company permitted option holders to exchange all
of their stock options having an exercise price at or above $3.49 for a
lesser number of replacement stock options at a new exercise price equal to
the then current fair market value of a share common stock. The exchange
program was made available to all then current employees except one
executive officer. As a result 1,379,732 options at a weighted-average
exercise price of $7.12 were exchanged for 1,034,662 options with a
weighted-average exercise price of $3.37.
In connection with the MedSurg disposition (Note 2), the Company, on
various dates during 1999, canceled options for 8,106 common shares and
granted new options for 9,811 common shares at market value. The FASB
anticipates issuing an Interpretation of Accounting Principles Board
("APB") No. 25, Accounting for Stock Options Issued to Employees, in early
2000. Upon adoption of this Interpretation the Company will be required to
prospectively account for these 9,811 options and any other options
repriced after December 15, 1998, using variable plan accounting.
Additionally, the Company accelerated the vesting and extended the
expiration dates of options for 663,697 common shares and, accordingly,
recorded $568,000 in compensation expense in the accompanying consolidated
financial statements. Of these options, 300,000, with $215,000 in related
compensation expense, were owned by the Company's former Chief Financial
Officer.
The following table summarizes information pertaining to options
outstanding and exercisable at December 31, 1999:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
--------------- ----------- ------------ ----- ----------- -----
$ 0.83 - $ 1.10 394,423 1.2 $ 0.85 370,423 $ 0.84
$ 1.25 - $ 1.50 466,080 6.7 1.28 143,313 1.27
$ 2.12 - $ 2.73 1,317,331 6.5 2.26 300,250 2.37
$ 2.81 - $ 4.13 1,281,510 4.5 3.33 743,960 3.38
$ 4.75 - $ 8.13 288,000 2.0 5.72 288,000 5.72
$13.13 - $14.45 44,000 1.0 14.35 44,000 14.35
------ --- ----- ------ -----
3,791,344 4.9 $ 2.76 1,889,946 $ 3.17
========= === ====== ========= ======
18
At December 31, 1999, 1998 and 1997, exercisable options were 1,889,946,
2,481,950 and 2,969,153 respectively, at weighted average exercise prices
of $3.17, $3.46 and $5.20, respectively.
The weighted average fair value of options granted in 1999, 1998 and 1997
was $1.35, $1.48 and $2.44, respectively, using the Black Scholes option
pricing model with the following assumptions:
1999 1998 1997
---- ---- ----
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 40.3% 47.6% 44.1%
Risk free interest rate 5.4% 5.3% 6.7%
Forfeiture rate 3.8% 15.7% 2.9%
Expected life, in years 7.2 7.1 6.1
Employee Stock Purchase Plan - In April 1995, the Company adopted an
Employee Stock Purchase Plan (the "1995 ESPP") which authorized the
issuance of up to 300,000 shares of common stock. Under the 1995 ESPP,
employees could contribute up to 10% of their compensation toward the
purchase of common stock at each year-end. The employee purchase price was
derived from a formula based on fair market value of the Company's common
stock. In January 1999, after all 300,000 common shares were issued, the
1995 ESPP was terminated.
In March 1999, the Company adopted a new Employee Stock Purchase Plan (the
"1999 ESPP") which authorizes the issuance of up to 700,000 shares of
common stock. Under the 1999 ESPP, eligible employees may contribute up to
10% of their compensation toward the purchase of common stock at each
year-end. The employee purchase price is derived from a formula based on
fair market value of the Company's common stock. During 1999 the Company
granted rights to purchase 34,220 shares, which were issued in January
2000. Pro forma compensation cost associated with the rights granted under
the 1999 ESPP is estimated based on fair market value.
The Company applies APB 25, and related interpretations in accounting for
its stock-based compensation plans. The Company also applies the
disclosure-only provisions of SFAS 123, Accounting for Stock-Based
Compensation. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates consistent with SFAS 123, the Company's pro forma net income (loss)
and basic and diluted net income (loss) per share for 1999, 1998 and 1997
would have been as follows:
(in thousands, except per share data) 1999 1998 1997
------------------------------------- ---- ---- ----
Net income (loss) $ 1,808 $ (20,548) $ (94,796)
========== ============ ============
Net income (loss) per share Basic and
Diluted $ 0.04 $ (0.51) $ (2.41)
========== ============ ============
At December 31, 1999 and 1998, shares available for future grants are
1,846,000 and 829,000 under the Company option plans and the 1995 and 1999
ESPP.
Employee Stock Ownership Plan - Effective December 1, 1992, Microtek
adopted an Employee Stock Ownership Plan ("ESOP") to which the Company has
19
the option to contribute cash or shares of the Company's common stock.
During 1993, the Company contributed 16,500 common shares to the ESOP. On
November 29, 1993, the Company reserved an additional 148,500 common shares
at $3.64 per share for issuance to the ESOP. As consideration for the
148,500 reserved shares, the ESOP issued a $540,000 purchase loan (the
"ESOP Loan") to the Company, payable in equal annual installments of
$79,000, including interest at 6% commencing November 29, 1994. During each
of 1999, 1998 and 1997, 16,500 reserved shares have been released,
resulting in compensation expense of $49,000, $28,000 and $39,000,
respectively. At December 31, 1999, 49,500 common shares with a market
value of $295,000 remain unearned under the ESOP.
The Company's contributions to the ESOP each plan year will be determined
by the Board of Directors, provided that for any year in which the ESOP
Loan remains outstanding the contributions by the Company are not less than
the amount needed to provide the ESOP with sufficient cash to pay
installments under the ESOP Loan. The Company contributed $79,392 to the
ESOP during each of 1999, 1998 and 1997.
The unearned shares reserved for issuance under the ESOP are accounted for
as a reduction of shareholders' equity. The ESOP Loan is not recorded in
the accompanying financial statements.
Shareholder Rights Plan - On December 19, 1996, the Company adopted a
shareholder rights plan under which one common stock purchase right is
attached to and trades with each outstanding share of the Company's common
stock. The rights become exercisable and transferable, apart from the
common stock, ten days after a person or group, without the Company's
consent, acquires beneficial ownership of, or the right to obtain
beneficial ownership of, 15% or more of the Company's common stock or
announces or commences a tender or exchange offer that could result in 15%
ownership. Once exercisable, each right entitles the holder to purchase one
one-hundredth of a share of Participating Preferred Stock at a price of
$60.00 per one one-hundredth of a Preferred Share, subject to adjustment to
prevent dilution. The rights have no voting power and, until exercised, no
dilutive effect on net income per common share. The rights expire on
December 31, 2006, and are redeemable at the discretion of the Board of
Directors at $.001 per right.
If a person acquires 15% ownership, other than via an offer approved by the
Company under the shareholder rights plan, then each right not owned by the
acquirer or related parties will entitle its holder to purchase, at the
right's exercise price, common stock or common stock equivalents having a
market value immediately prior to the triggering of the right of twice that
exercise price. In addition, after an acquirer obtains 15% ownership, if
the Company is involved in certain mergers, business combinations, or asset
sales, each right not owned by the acquirer or related persons will entitle
its holder to purchase, at the right's exercise price, shares of common
stock of the other party to the transaction having a market value
immediately prior to the triggering of the right of twice that exercise
price.
In September 1997, the Company amended its shareholder rights plan to
include a provision whereby it may not be amended and rights may not be
redeemed by the Board of Directors for a period of one year or longer. The
provision only limits the power of a new Board in those situations where a
proxy solicitation is used to evade protections afforded by the shareholder
rights plan. A replacement Board retains the ability to review and act upon
competing acquisition proposals.
12. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In November 1997, the Emerging Issues Task Force ("EITF") issued EITF
97-13, Accounting for Costs Incurred in Connection with a Consulting
20
Contract or an Internal Process that Combines Process Reengineering and
Information Technology Transformation, which requires that the cost of
business process reengineering activities that are part of a project to
acquire, develop or implement internal use software, whether done
internally or by third parties, be expensed as incurred. Previously, the
Company capitalized these costs as system development costs.
The change, effective in the fourth quarter of 1997, resulted in a
cumulative charge of $800,000, net of tax of $0.
13. SIGNIFICANT CUSTOMERS AND CERTAIN CONCENTRATIONS
The Company generated 15%, 22% and 20% of its sales from a single customer
in 1999, 1998 and 1997, respectively. The related accounts receivable from
these customers were $2.1 million, $2.5 million and $2.4 million at
December 31, 1999, 1998 and 1997, respectively.
Included in the Company's consolidated balance sheet at December 31, 1999
are the net assets of the Company's manufacturing facilities located in the
United Kingdom, China, Mexico and the Dominican Republic, which total $8.2
million. Only the manufacturing facility in the United Kingdom sells
products to external customers. Sales from the United Kingdom were $4.4
million, $4.5 million and $4.5 million in 1999, 1998 and 1997,
respectively.
At December 31, 1999, none of the Company's labor force is covered under a
collective bargaining agreement.
14. RETIREMENT PLANS
The Company maintains a 401(k) retirement plan covering employees who meet
certain age and length of service requirements, as defined. The Company
matches a portion of employee contributions to the plans either in cash or
shares of the Company's common stock. Vesting in the Company's matching
contributions is based on years of continuous service. The Company
contributed stock with a fair value of $576,000, $501,000 and $510,000 to
the plan during 1999, 1998 and 1997, respectively.
15. SUBSEQUENT EVENT
On February 11, 2000 the Company paid $259,000 for approximately 13.0%
interest in Consolidated Ecoprogress Technology, Inc, a Canadian technology
marketing company trading on the Vancouver Securities Exchange.
Consolidated Ecoprogress offers the Company an entry into certain
technologies which compliment the Company's product offering and open the
opportunity to enter the consumer disposables market with unique product
positioning.
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16. UNAUDITED QUARTERLY FINANCIAL INFORMATION
(in thousands, except per share data)
Year Ended Quarter
December 31, First Second Third Fourth
------------ ----- ------ ----- ------
1999
----
Net sales $34,769 $32,251 $17,053 $14,981
Gross profit 10,970 12,827 7,340 5,947
Net income (loss) (367) 984 1,310(1) 770
Income (loss) per common share -
Basic and Diluted (0.01) 0.02 0.03 0.02
1998
----
Net sales $41,230 $38,874 $36,112 $31,427
Gross profit 10,642 8,742(2) 9,973 8,350
Loss before extraordinary item (1,287) (9,260)(3) (2,056) (7,038)(4)
Net loss (1,287) (9,260) (2,056) (5,634)(5)
Loss per common share -
Basic & Diluted (0.03) (0.23) (0.05) (0.15)
(1) Includes $769,000 of impairment charges (Note 3)
(2) Includes $900,000 of inventory write-downs.
(3) Includes $6.5 million of impairment and other charges (Note 3).
(4) Includes $2.1 million of impairment charges (Note 3).
(5) Includes an extraordinary gain of $1.4 million net of tax benefit of
$0, relating to the extinguishment of debt (Note 5).
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
________________________________________________________________________________
Balance of
Beginning Charged to Balance of
Description of Period Expense Deductions(1) End of Period
----------- --------- ------- ------------- -------------
Year ended December 31,1997:
Allowance for doubtful trade accounts
receivable $ 1,702 $ 375 $ (433) $ 1,644
========== ======== ========= ==========
Reserve for obsolete and slow-moving
inventories $ 10,041 $ 14,694 $ (2,324) $ 22,411
========== ======== ========= ==========
Year ended December 31, 1998:
Allowance for doubtful trade accounts
receivable $ 1,644 $ 291 $ (896) $ 1,039
========== ======== ========= ==========
Reserve for obsolete and slow-moving
inventories $ 22,411 $ 43 $ (20,272)(2) $ 2,182
========== ======== ========= ==========
Year ended December 31, 1999:
Allowance for doubtful trade accounts
receivable $ 1,039 $ 249 $ (459) $ 829
========== ======== ========= ==========
Reserve for obsolete and slow-moving
inventories $ 2,182 $ 134 $ (708) $ 1,608
========== ======== ========= ==========
(1) "Deductions" represent amounts written off during the period less
recoveries of amounts previously written off.
(2) Represents inventory written off.
23