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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, 1997 Commission File Number: 0-24866
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ISOLYSER COMPANY, INC.
(Exact Name of registrant as specified in its charter)
GEORGIA 58-1746149
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
650 ENGINEERING DRIVE
TECHNOLOGY PARK
NORCROSS, GEORGIA 30092
(Address of principal executive offices) (Zip Code)
(770) 582-6363
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 26, 1997, was approximately $93.7 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 24, 1998, there were outstanding 39,958,300 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
report on Form 10-K for the periods ended December 31, 1994, December 31, 1995,
and December 31, 1996, and current reports on Form 8-K dated May 31, 1995,
September 18, 1995, June 4, 1996, August 30, 1996 and December 19, 1996.
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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 1998
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
Isolyser Company, Inc. ("Isolyser" or the "Company") believes that it is the
first company to address the health care industry's fundamental needs of patient
care, safety, cost reduction and solid waste reduction by taking a life cycle
approach (from product development through disposal) to disposable products used
in the hospital. Isolyser develops, manufactures and markets proprietary and
other products for patient care, occupational safety and management of
potentially infectious and hazardous waste. The Company's 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. Moreover, 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. Isolyser's products are designed to provide
responsible solutions to regulatory requirements and initiatives and social
concerns. Through its products and services, the Company seeks to provide an
umbrella of protection from potentially infectious and hazardous waste for
patients, staff, the public and the environment. The Company also believes that
its products offer benefits to certain industries whose workers are in contact
with hazardous materials and where contaminated clothing, clean-up and barrier
materials must be incinerated at considerable expense
Trends in the Health Care Industry
The Company's products address a number of important trends in the health
care industry:
Facilitating Environmental Protection and Regulatory Compliance. The
disposal of large volumes of infectious and hazardous solid and liquid waste
generated by the health care and other industries has attracted increasing
public awareness and regulatory attention. The Environmental Protection Agency
("EPA") has issued regulations regarding incineration of potentially infectious
waste reportedly having the potential of closing many hospital incinerators, and
the Department of Transportation has issued regulations regarding the
transportation of potentially infectious waste. The American Hospital
Association has recommended that bio-hazardous waste be treated the same day it
is generated. Isolyser's products provide responsible compliance solutions to
compliance objectives. For example, OREX(R) Degradables(TM) reduce the volume of
solid waste placed into the environment (OREX Degradables), LTS(R) converts
liquid waste into solid polymers (LTS) and SMS(R) encapsulates and physically
disinfects sharps (SMS).
Meeting Health Care Cost Containment Initiatives. The health care industry
is under increasing pressure to reduce costs and improve efficiency. The Company
believes that its products and services facilitate cost-effective regulatory
compliance, reduce labor intensive disposal processes and provide a method to
reduce the cost of disposing of infectious and hazardous waste. As a result, a
greater portion of limited health care resources may be devoted directly to
patient care. The Company's procedure trays and equipment drapes facilitate cost
containment by reducing inventory volume and handling costs and by decreasing
operating room setup and clean up time, enabling hospitals to increase the
volume of procedures which may be performed.
Protecting Staff, Patients and the Public from Infection and Injury. The
health care industry has experienced a substantial increase in the transmission
of infectious diseases (such as HIV/AIDS and hepatitis) through cross-
infection. A 1990 conference sponsored by the Centers for Disease Control
reported that hospital-acquired
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bloodstream infections increased 133% from 1980 to 1989. Many hospitals have
established committees and created new professional positions to manage this
problem and monitor compliance with regulatory requirements. The Company
believes that its products directly and immediately reduce the risk of
cross-infection and promote compliance with professional, industry and
regulatory mandates by providing solutions for safe and effective handling of
potentially infectious and hazardous waste at the Point-of-Generation.
Business Strategy
The Company's goal is to become a leading developer of ecologically
beneficial degradable materials, products and services. The Company intends to
improve its operating results through the commercialization of OREX Degradables,
increased focus upon the Company's core businesses, planned dispositions of
underperforming assets and businesses, and continued new product development.
See "Risk Factors".
Commercializing OREX Degradables. The Company seeks to penetrate the market
for traditional disposable and reusable products by converting users of those
products to OREX Degradables, and has in the past sought to achieve that
objective with an initial primary focus on the health care industry. The Company
has sought to accomplish this goal by replacing conventional disposable and
reusable products used in procedure trays with OREX Degradables and selling OREX
Degradables on a stand-alone basis and in supplemental packs. During 1997, the
Company substantially reduced efforts to increase sales of OREX Degradables
while, among other things, preserving its existing base of hospitals purchasing
OREX Degradables and evaluating means to exploit the market position of OREX
Degradables within its various market potentials. The Company intends to
continue its investment in OREX Degradables by continuing to improve its line of
OREX products, identifying manufacturing and marketing opportunities which
achieve satisfactory profit margins on such products, and seeking to form and
continually support strategic alliances designed to advance the
commercialization of OREX Degradables. The Company continues to evaluate
manufacturing techniques to improve the quality of OREX products and reduce
manufacturing costs, while identifying and seeking access to more profitable
markets for its OREX products, both through strategic alliances and its
independent resources. There can be no assurance that OREX Degradables will
achieve or maintain substantial acceptance in their target markets. See "Risk
Factors -- Limited Operating History; Net Losses" and "-- Risks of New
Products".
Increased Focus on Core Businesses. The Company recently announced a revised
business structure which includes the creation within the Company of three
business units, namely (1) OREX Commercial Development, (2) Infection Control
and (3) Product Packaging (including procedure trays). In addition to creating a
business unit dedicated to OREX commercialization as described above, this
structure facilitates accountability and increases focus on achieving improved
operating results within each business unit.
Planned Dispositions. The Company recently announced its plan to sell its
207,000 square foot OREX Degradables materials manufacturing plant located in
Abbeville, South Carolina, its 128,000 square foot OREX Degradables non-woven
fabric plant located in Arden, North Carolina, its OREX fiber manufacturing
plant in Charlotte, North Carolina, and its subsidiary company, White Knight
Healthcare, Inc. ("White Knight"), which provides conversion manufacturing and
marketing of various non-woven disposable products and specialty apparel. There
can be no assurance that the Company will be able to successfully sell all or
any of the foregoing assets at satisfactory prices. If successful, the Company
believes these planned divestitures will provide funds to reduce debt, relieve
the Company of the burdens associated with such underperforming assets and
provide increased focus upon the remaining business units described above. See
"Risk Factors -- Risks of Planned Divestitures".
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 to seek regulatory
approval for use of its products where applicable. See "Risk Factors - Risks of
New Products" and "-- Regulatory Risks".
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Products and Markets
OREX Degradables
OREX Degradables are a line of products that provide protection to the
hospital staff, patient and environment while providing cost effective solutions
to the problems associated with solid waste reduction and disposal. OREX
Degradables are manufactured from a thermoplastic, hot water soluble polymer,
which can be configured into an array of products such as woven fabrics
(including operating room towels, absorbent gauze and laparotomy sponges),
non-woven fabrics (including gowns, surgical drapes, mop heads and surgical
headwear), films (including fluid collection bags, packaging materials and
equipment drapes), thermoformed and extruded items (including syringes, bowls,
instruments and tubing) as well as combinations of these configurations
(including diapers, underpads and laminates). 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 washing machine (the OREX Processor) after use for safe
disposal through the municipal sewer system. See "Risk Factors -- Limited
Operating History; Net Losses,"-- Risks of New Products", "-- Manufacturing and
Supply Risks" and "-- Regulatory Risks".
The Company believes that its OREX Degradables not only minimize the
quantity and cost of solid waste disposal, but also help to protect against the
transmission of infectious diseases such as HIV/AIDS and hepatitis by providing
disposal at the Point-of-Generation. Additionally, OREX Degradables facilitate
environmental protection by reducing the volume of potentially infectious and
hazardous waste that is either incinerated or transported to landfills. Finally,
the Company believes that OREX Degradables address regulatory compliance
initiatives such as the bloodborne pathogen rule promulgated under OSHA as well
as state initiatives to reduce the volume of solid waste. The Company has been
initially focused on delivering OREX Degradables to the health care industry.
While independent market research has estimated a substantial United States
market for non-woven disposable medical products, the Company currently believes
that OREX Degradables may be best suited for use within a subset of such
healthcare market at hospitals willing to purchase OREX Degradables at a price
which reflects the added benefits of degradable products such as facilitating
environmental protection, complying with regulations and saving on infectious
waste disposal costs. Management also believes that the technology used to
develop OREX Degradables has the potential for broad commercial applications
beyond the health care industry where protection from potentially infectious or
hazardous waste and reduction of solid waste is important, such as the nuclear
power industry. See "Risk Factors -- Risks of New Products".
OREX is manufactured from a variety of organic, degradable polymers that
have been modified to dissolve or degrade only in hot water. The basic compound
used to manufacture OREX Degradables woven and non-woven products is a polymer
known as polyvinyl alcohol ("PVA"), a safe material widely used in a variety of
consumer products such as eye drops, cosmetics and cold capsules. The Company
more recently has begun to develop the use of other polymers to test manufacture
OREX Degradables film and thermoformed and extruded products. Through a
manufacturing process developed by the Company, these polymers are modified so
they will dissolve or degrade only in hot water. See "Risk Factors --
Manufacturing and Supply Risks". 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 through the municipal sewer system
by dissolving or degrading them in hot water in an OREX Processor. An OREX
Processor is a standard commercial washing machine specially adapted primarily
by upgrading its water heater and removing the spin cycle. While a number of
suppliers exist for such washing machines, the Company has entered into
arrangements with three washing machine distributors for the supply of OREX
Processors at a retail cost of approximately $2,000 for a low capacity unit,
approximately $8,500 for a mid-capacity unit and approximately $20,000 for a
large capacity unit. 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. 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
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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. See "-- Government Regulation" and "Risk
Factors -- Regulatory Risks".
Tests conducted by Isolyser and independent third parties (such as testing
laboratories) indicate that OREX Degradables woven and non-woven fabric and film
can be produced to have the fluid resistance, moisture vapor transmission, flame
retardancy, impact protection and other characteristics of corresponding
conventional disposable and reusable products. To date, the Company has not
successfully completed certain non-woven fabric finishing applications to
lighter weight non-woven fabrics, necessitating the substitution of heavier
weight fabric for certain finished products. The Company has completed limited
field trials and has marketed OREX Degradables at a total of more than 250
hospitals. Prior OREX field trials, which consisted of monitored use of one or
more of a limited number of OREX Degradables woven and non-woven products, have
confirmed that such OREX Degradables products perform in a manner substantially
equivalent to similar disposable and reusable products. The Company's marketing
plan for OREX Degradables has been to provide increased focus on a limited
number of hospitals to seek to convert such hospitals from using traditional
disposable and reusable products to OREX Degradables products, first by
conducting product introductions through, for example, field trials and
thereafter by sales follow-through. These marketing efforts have been hindered
by delays in the Company's manufacturing schedule for expanding the OREX product
line and certain product performance issues. See "Risk Factors -- Manufacturing
and Supply Risks". Beginning at the end of 1995 and through 1996, the Company
engaged in a program of actively expanding its line of internally manufactured
OREX Degradables products in order to meet a customer's requirements to justify
conversion to degradable products, including the installation of an OREX
Processor. The Company now offers over 200 OREX catalog items (including both
sterile and non-sterile OREX products) which the Company believes address
substantially all non-woven products most often used by hospitals. Management of
the Company believes approximately 15 hospitals currently use OREX Degradables
for substantially all of their patient draping requirements. The Company has
followed a marketing strategy of making the OREX products available at prices
which do not take into account disposal cost savings provided by the Company's
products in order to seek to achieve market acceptance of OREX products. While
the Company's aggressive strategies to market OREX Degradables have resulted in
an expanded and improved line of OREX products and a core group of hospitals
which continue to purchase OREX Degradable products, the Company has not been
able to sell such products at acceptable profit margins. No assurance can be
given that hospitals will use OREX Degradables, that OREX Degradables will
achieve or maintain acceptance in its target markets or that the Company will be
successful in selling OREX Degradables at a price providing satisfactory margins
to the Company. See "Risk Factors -- Risks of New Products".
The Company has not been satisfied with its performance to date in
manufacturing and selling OREX Degradables. The Company began limited commercial
sales of limited quantities of OREX Degradables during the first nine months of
1995 following the Company's receipt of regulatory clearances and the delivery
of contract manufactured operating room towels, sponges and certain other
products in sufficient quantities to commence sales. Meaningful sales of OREX
Degradables, however, began to occur only in the fourth quarter of 1995, during
which approximately $514,000 of such products were sold. Beginning during the
first quarter of 1996, progress continued in introducing OREX Degradables
products to the health care market by including OREX Degradables in the
Company's procedure trays and packs. Through this distribution method, over 400
hospitals were purchasing OREX Degradables in variable volumes in 1996.
Throughout 1996, the Company worked toward improving the quality of its OREX
products while expanding the number of types of OREX products available for
regular supply. During 1996, the Company recorded $10.0 million of reserves for
OREX inventory which the Company believes is the proper amount to be recorded
due to improvements in manufacturing processes realized during the latter
portions of 1996 which rendered certain existing inventories second quality. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Risk Factors -- Risks of New Products". Total net sales of OREX
Degradables in 1996 approximated $7.1 million, primarily in health care markets.
Some of these sales included distributor stocking orders, and quarter to quarter
sales of OREX remained flat over 1996. Based in part on this flat growth rate,
the Company has not enjoyed sufficient demand for its OREX products to seek to
operate its OREX manufacturing plants at high efficiencies and thereby reduce
manufacturing costs. Such manufacturing inefficiencies, and related unabsorbed
manufacturing overhead, coupled with unit pricing for sales
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of OREX Degradables at an amount which does not take into account the disposal
cost savings provided by these products, has caused the Company to fail to
achieve profitable margins on the sales of OREX Degradables to date.
As a result of various factors, including greater profits to be achieved by
the Company's sale of its traditional rather than degradable products, the
Company reduced its marketing efforts for OREX Degradables in 1997. The
Company's sales of OREX Degradables in 1997 approximated $8.1 million, primarily
in health care markets. In 1997, the Company recorded a reserve of $13 million
for potentially excess OREX inventories, substantially reduced its production at
its Abbeville and Arden OREX materials manufacturing plants, and recorded an
impairment charge of $57.3 million against certain of its assets including its
Abbeville, Arden and Charlotte OREX materials manufacturing plants and its White
Knight subsidiary to reduce the carrying value of such assets to their estimated
fair value. Based upon a combination of factors, including determinations by the
Company that the carrying value of such assets are not justified by current OREX
sales volumes, the Company's belief that it could satisfy any future
requirements for manufacturing woven and non-woven OREX products from third
party contract manufacturers, and the Company's objective to reduce its debt,
the Company has made a decision to seek to sell its Abbeville, Arden and
Charlotte OREX materials plants and its White Knight subsidiary. There can be no
assurances that the Company will be able to successfully sell all or any of the
foregoing assets at satisfactory prices. If successful, the Company believes
these planned divestitures will provide funds to reduce debt, relieve the
Company of the burdens associated with these underperforming assets and provide
increased focus upon the remaining business units operated by the Company. See
"Risk Factors -- Risks of Planned Divestitures".
Infection Control Products
The Company recently formed a business unit called the Infection Control
Group which consists primarily of the equipment drape and fluid control products
manufactured by the Company's subsidiary, Microtek Medical, Inc.
("Microtek"), and the Company's safety products and services.
The Company acquired Microtek as of September 1, 1996. Through Microtek, the
Company manufactures and markets equipment drapes and fluid control products.
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.
Microtek designs, manufactures and markets two principal product lines for
use in niche markets of the health care 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. 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. Prior to July, 1995, Microtek was also engaged in the sale
of specialty otology products.
The Company acquired Microtek in a pooling of interests transaction as of
September 1, 1996, and the Company's financial statements have accordingly been
restated to include Microtek's financial statements. For 1995, 1996 and 1997,
sales of Microtek products accounted for approximately 28%, 24% and 27% of the
Company's total revenues, respectively. Included in such sales figures are $7.3
million, $7.9 million and $8.5 million of export sales by Microtek during 1995,
1996 and 1997, respectively.
The Company offers several other lines of safety products and services for
the management of potentially infectious and hazardous waste. These safety
products and services are described below.
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Liquid Treatment System (LTS) is a super-absorbent powder which converts
potentially infectious liquid waste into a solid waste suitable for landfill
disposal. Unlike conventional super-absorbents, LTS products are designed to
work across a wide pH range and electrolyte concentration, and absorb and
solidify without mechanical intervention such as stirring. 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. Product testing and laboratory analyses indicate that
LTS inactivates over 99% of tested microorganisms. LTS converts liquid waste
into a solid waste, thereby facilitating handling, transportation and disposal.
LTS can also be used to clean up spills of potentially infectious liquid waste.
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. The
Company has independent test results verifying product performance, has received
approvals from certain states to landfill LTS-treated waste and has a greater
number of sales representatives than its competitors. Based on the number of
suction canisters and other fluid collection devices sold in the United States,
the Company estimates that at least a $90.0 million market exists for LTS. LTS
may be sold in bulk or packaged separately with a canister or other fluid
collection device. 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 nearly eliminating the risk of accidental
punctures. According to product testing, this process inactivates over 99% of
tested microorganisms. The container of SMS treated sharps is suitable for
handling, transportation and disposal. The Company believes that SMS is the only
product on the market which operates as a physical disinfecting device for
sharps under applicable EPA requirements, rendering the contents safe for
landfill disposal. By comparison, competitive products perform only a collection
function with no disinfection or solid encapsulation capabilities, requiring
disposal at a higher cost.
Onsyte System is a mobile waste treatment unit that utilizes microwave
technology and steam to render infectious waste non-hazardous. The system then
shreds and grinds the material, making it non-recognizable and suitable for
disposal in landfills. In 1993, Isolyser began offering its Onsyte System to
hospitals and other waste generators as part of its umbrella approach to waste
management. In May 1995, the Company acquired SafeWaste Corporation
("SafeWaste") to provide, among other things, improved marketing and management
of the Company's mobile medical waste treatment services. SafeWaste, based in
Charlotte, North Carolina, operates the Company's three Onsyte Systems and a
mobile waste treatment unit through a joint venture with a customer of
SafeWaste.
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.
Product Packaging (Procedure Trays)
The Company recently formed a business unit called Product Packaging which
consists principally of its procedure tray products. Procedure trays are
sterilized packs which include all components (traditionally conventional
disposable or reusable medical products such as, for example, laparotomy
sponges, drapes and suction tubing) used in medical (primarily surgical)
procedures. Custom and standard procedure trays can be utilized in a wide range
of procedures, such as cardiovascular surgery and angiography, orthopedic
surgery, laparoscopic and endoscopic procedures and Caesarean-sections. Custom
trays are assembled according to the specific requirements of the hospital end
user. Isolyser entered the procedure tray market with the acquisition (the
"Atkins Acquisition") of Charles Atkins and Company, Ltd. ("Atkins") on February
28, 1993, and currently conducts its procedure tray business through its
subsidiary MedSurg Industries, Inc. ("MedSurg"), which it acquired (the "MedSurg
Acquisition") on December 31, 1993. For 1995, 1996 and 1997, sales of procedure
trays and related products accounted for approximately 46%, 34% and 37% of the
Company's total revenue, respectively. The Company made the Atkins and MedSurg
acquisitions because it believes there are synergies between OREX Degradables
and procedure trays, namely (i) the tray business serves as a distribution
channel for OREX Degradables and (ii) OREX Degradables differentiate the
Company's procedure trays from those of its competitors. Moreover, the Company's
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sales persons marketing procedure trays are uniquely situated to market OREX
Degradables because of their direct relationship with hospital operating room
personnel who are important to the decision-making process in purchasing OREX
Degradables and such sales persons' knowledge about regulatory and environmental
benefits and issues related to OREX Degradables.
White Knight
The Company acquired White Knight as of September 1, 1995. Through White
Knight, the Company manufactures and markets non-woven infection control
products and protective apparel for use primarily in the health care industry.
As an outgrowth of a business founded in the 1950s and evolved over a series of
mergers, acquisitions and restructurings, White Knight pioneered the disposable
medical products market in the early 1970s, and is today a manufacturer and
converter (in competition with other larger companies such as Allegiance
Corporation ("Allegiance")) of non-woven sterile and non-sterile products. White
Knight is a Pennsylvania corporation formed in 1991 to acquire substantially all
of the assets of the White Knight Health Care division of Work Wear Corporation,
Inc., which at the time was a debtor-in-possession under Chapter 11 of the
Bankruptcy Code of 1978, as amended.
White Knight's principal products and related markets can be categorized
into two overlapping groups. The first and largest, called the medical products
division, manufactures non-woven disposable surgical apparel, drapes and
accessory products (including drapes, gowns, shoe covers, masks and caps) for
use in hospitals and surgical centers. The second product group and related
market, called the specialty apparel division, manufactures disposable and
reusable apparel (such as coveralls, lab coats, frocks, hoods, foot coverings,
masks, caps and isolation gowns) which are in part an extension of White
Knight's medical products and which are marketed for use in clean room
environments, laboratories and other industrial applications (including clean
rooms for pharmaceutical, electronic and biotech industries as well as
automotive and paint industries).
Net sales of White Knight for the period from September 1, 1995 through
December 31, 1995, represented 18% of the Company's total revenue for the year
ended December 31, 1995. Net sales of White Knight in 1996 and 1997 represented
35% and 30%, respectively, of the Company's total revenue. Included in such
sales figures are $1.4 million, $4.5 million and $3.3 million of export sales by
White Knight during the last four months of 1995 and during 1996 and 1997,
respectively. Prior to the Company's acquisition of White Knight, the Company
made no material export sales.
Marketing and Distribution
Substantially all of the Company's sales in 1997 were made to the health
care market. Hospitals purchase most of their products from a few large
distributors, many of which provide inventory control services to their
customers. The Company believes that a key to penetrating the health care market
is a strong sales force capable of educating distributors and end users about
the unique characteristics of its products so that distributors will recommend
and end users will request the Company's products. Achieving market penetration
of the Company's products is subject to a number of risks. See "Risk Factors -
Risks of New Products".
As a part of a restructuring plan implemented during 1997, the Company
substantially reduced its sales force. As of December 31, 1997, the Company's
marketing and sales force consisted of 82 sales representatives, six field sales
managers, one home office sales manager, five marketing managers and 21 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 35% of the Company's total revenues during 1997. Of these
customers, only Owens & Minor, Inc. accounted for over 10% of the Company's
total sales during 1997. 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".
While the Company introduced OREX Degradables to the health care industry on
a limited basis in March, 1994, meaningful sales of OREX Degradables did not
commence until 1996. Over this time, the Company conducted field trials of
certain OREX Degradables products as a method to introduce this new technology
to the health care
526150.6
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marketplace. See "Products and Markets -- OREX Degradables". During 1996, the
Company continued to conduct such field trials while concurrently including
various OREX Degradables products, as they became available, in procedure trays
and by selling such products on a stand-alone basis and in supplemental packs.
As a result of various factors including unprofitable sales of OREX, the Company
substantially reduced its marketing efforts for its OREX products during 1997.
There can be no assurance that OREX Degradables will achieve or maintain
substantial acceptance in their target markets or that the Company will be
successful in selling OREX Degradables at a price providing satisfactory margins
to the Company. See "Risk Factors -- Risks of New Products" and "--
Manufacturing and Supply Risks".
The Company sells its procedure trays exclusively through independent
distributors with the marketing assistance of the Company's sales force. The
Company's other traditional medical products are sold through distributors and
custom procedure tray companies (including the Company's custom procedure tray
operations). 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.
Under an agreement entered into between White Knight and Sterile Concepts,
Sterile Concepts agreed to purchase a yearly minimum of $5.1 million of products
from White Knight until June 30, 1998. A portion of the purchase price payable
for these products by Sterile Concepts to White Knight is used to amortize
certain notes payable by White Knight to Sterile Concepts, thereby providing
certain trade discounts on product sales from White Knight to Sterile Concepts.
To the extent these notes are not entirely satisfied through these trade
discounts, the notes terminate at January 15, 2000 regardless of whether there
remains any unpaid principal or interest outstanding at that time. In July,
1996, Sterile Concepts was acquired by Maxxim Medical, Inc. ("Maxxim"), a
vertically integrated manufacturer and marketer of medical products competitive
with those of the Company. While Sterile Concepts had historically purchased
more than its minimum purchase obligation from White Knight, beginning in 1997,
Sterile Concepts failed to fulfill its purchase obligations under its underlying
agreement with White Knight. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The Company's total export sales during 1995, 1996 and 1997 were $8.7
million, $12.4 million and $11.8 million, respectively. Outside the United
States, the Company markets its products principally through a network of
approximately 80 different dealers and distributors. As of December 31, 1997,
the Company also had five 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.
As a part of its White Knight business, the Company markets various woven
and non-woven apparel (such as coveralls, lab coats, frocks, hoods, foot
coverings, masks, caps, isolation gowns, headrests and pillowcases) in
industrial markets such as clean room environments, laboratories, mass
transportation industries and automotive industries. The Company maintains a
sales force of five employees and a complementary set of independent sales
representatives dedicated to direct selling in this industry. The Company sells
its non-woven disposable industrial products primarily through large
distributors and sells the woven reusable industrial products primarily through
direct sales to service providers such as clean room launderers. Sales of OREX
Degradables within industrial markets has not to date been material to the
Company's results of operations. The Company has entered into a distribution
agreement with a large nuclear industry launderer for the supply of OREX
Degradables apparel and ancillary products such as OREX Degradables towels.
However, no sales have occurred to date under such distribution agreement as
processing evaluations continue to perfect means of removing hazardous and
radioactive contaminants from wastewater containing dissolved OREX Degradables
products. Preliminary product evaluations and testing in the nuclear market have
yielded positive results. Until these processing evaluations prove successful,
no assurances can be provided that OREX Degradables will achieve market
acceptance within the nuclear industry.
On March 1, 1992, Isolyser entered into a distribution agreement with
Allegiance, a leader in the sale of suction canisters and related apparatus.
Under this agreement, Allegiance had an exclusive right in the United States and
Canada to distribute LTS to the hospital and free standing surgery center market
and the nonexclusive right to sell and distribute LTS to the non-hospital health
care market. The agreement expires February 28, 1999 and is subject to renewal
for one-year terms thereafter unless otherwise terminated. Effective at the end
of 1994, Isolyser terminated Allegiance's exclusive LTS distribution rights in
accordance with the terms of the subject agreement
526150.6
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allowing for such termination if Allegiance did not achieve certain minimum
purchase requirements. During 1996, the Company began to distribute LTS through
other national distributors. Beginning in November, 1997, Allegiance
substantially reduced its purchases of LTS products. The Company believes that
such reduction of purchases may be temporary and that many of the Company's
customers using LTS maintain a preference for such product over competitors'
products. Such cessation of purchases may be related to recent regulatory
developments affecting LTS. See "-- Government Regulation", "Risk Factors --
Reliance Upon Distributors" and "-- Regulatory Risks".
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 to non-hospital markets. 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
OREX is manufactured from a variety of organic, degradable polymers that
have been modified to dissolve or degrade only in hot water. The basic compound
used to manufacture OREX Degradables woven and non-woven products is PVA, a safe
material widely used in a variety of consumer products such as eye drops,
cosmetics and cold capsules. The Company more recently has begun to develop the
use of other polymers to test manufacture OREX Degradables film and thermoformed
and extruded items. Through a manufacturing process developed by the Company,
the Company modifies these polymers so they will dissolve or degrade only in hot
water as a step in manufacturing OREX products. The modified polymers can then
be made into most woven and non-woven fabrics, film, packaging and thermoformed
and extruded products. 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 affected the Company's manufacturing costs for its OREX products. PVA
fiber is required to manufacture the Company's non-woven and woven OREX
Degradables, while PVA resin is the raw material required to manufacture OREX
Degradables utensils and film products and PVA fiber. 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. In January 1995,
the Company acquired a 128,000 square foot manufacturing facility located in
Arden, North Carolina which became operational later in 1995 as an OREX
Degradables non-woven fabric manufacturing plant. Effective June 1995, the
Company acquired a 207,000 square foot manufacturing facility located in
Abbeville, South Carolina which started operations as an OREX Degradables woven
manufacturing plant at the end of 1995. The Company has simultaneously sought to
both expand the catalog of OREX products manufactured by the Company and improve
the quality of such products. While the Company now believes it manufactures
substantially all non-woven products most often used by hospitals, the Company
has not been satisfied with the quality of certain of its OREX products. For
example, the Company to date has not successfully completed certain non-woven
fabric finishing applications to lighter weight non-woven fabrics, necessitating
the substitution of heavier weight fabric for certain finished products. See
"Risk Factors Manufacturing and Supply Risks".
The manufacturing capacity at the Company's OREX materials manufacturing
plants has significantly exceeded product demand, which has caused the Company
to incur overhead cost which have not been absorbed in the cost of product
sales. In 1997 the Company recorded a reserve of $13 million for potentially
excess OREX inventories, substantially reduced its manufacturing operations at
its Abbeville and Arden OREX materials manufacturing plants, and recorded
impairment charges of $57.3 million to certain of its assets, including its
Abbeville, Arden and Charlotte materials manufacturing plants, to reduce the
carrying value of such assets to their estimated fair value. The Company further
determined to seek to dispose such assets as OREX sales volumes did not justify
the continued carrying of such assets, the Company's belief that it could
satisfy any future requirements for manufacturing woven and non-woven products
from third party contract manufacturers, and the Company's objective to reduce
its debt. See "-- Business Strategy", "- Products and Markets", "Management's
Discussion and Analysis of Financial
526150.6
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Condition and Results of Operations", "Risk Factors -- Risks of Planned
Divestitures", "-- Risks of New Products" and "-- Manufacturing and Supply
Risks".
The Company uses various domestic and foreign independent manufacturers for
some OREX Degradables products for assembling, packaging, sterilizing and
shipping by the Company. The Company uses contractors in the People's Republic
of China to manufacture OREX Degradables sponge products. The Company has used
various independent parties (both domestically and internationally) to
manufacture various OREX Degradables thermoformed and extruded products 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 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 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 facility located in Norcross, Georgia is used for mixing
liquid and powdered chemicals, other light manufacturing and packaging. The
Company plans to relocate these operations to its facilities in Columbus,
Mississippi in 1998.
The Company currently purchases components for procedure trays from a large
number of independent vendors, and assembles custom and standard procedure trays
for use in a wide array of medical procedures, including orthopedic, ophthalmic,
cardiovascular, laparoscopic, obstetric-gynecologic and endoscopic procedures.
The Company's Virginia-based procedure tray manufacturing operation is separated
into four stages: (i) receiving and stocking components for procedure trays,
(ii) assembling trays from these components, (iii) sterilizing and quarantining
and (iv) shipping. Generally, custom trays can be shipped to customers within
approximately 60 days from the date an order is placed.
The Company conducts its non-woven conversion manufacturing operations in
three locations: (i) a 50,000 square foot owned facility in Childersburg,
Alabama, which manufactures medical products and specialty apparel products
including medical and specialty face masks; (ii) a 100,000 square foot facility
under a long-term lease in Douglas, Arizona which manufactures medical products
and specialty apparel; and (iii) an 87,000 square foot owned facility in Agua
Prieta, Mexico located adjacent to the Douglas facility to provide labor
intensive post-cutting applications. During 1997, the Company ceased operations
at its leased facility located in Acuna, Mexico (together with the related
leased Del Rio, Texas facility) which the Company consolidated with its Agua
Prieta plant. The Company also owns a 60,000 square foot facility in Runnemede,
New Jersey which previously manufactured products for the semi-autonomous
Struble & Moffitt division of White Knight which was terminated in 1997 through
consolidations and divestitures of certain small, independent product lines.
Through White Knight, the Company also maintains contracted manufacturing
operations in Texas and the People's Republic of China. Raw materials for White
Knight products are purchased from numerous vendors. White Knight's
relationships with vendors are good, although White Knight maintains no
long-term supply contracts with vendors. Certain medical and specialty apparel
products are impacted by user preference in fabric choice, such as spunlace
non-woven fabric marketed by DuPont under the Sontara trade name and wet-laid
non-woven fabric marketed by Dexter under the Dexter trade name. White Knight,
along with other larger competitors, has access to a full complement of fabric
selections from vendors of choice, although not in all cases with the same
pricing discounts available to larger purchasers.
Order Backlog
At December 31, 1997, the Company's order backlog totaled approximately $5.8
million compared to approximately $9.6 million (in each case net of any
cancellations) at December 31, 1996. All backlog orders at December 31, 1997 are
expected to be filled prior to year end 1998.
526150.6
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Technology and Intellectual Property
The Company seeks to protect its technology by, among other means, obtaining
patents and filing patent applications for technology or 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 two patents issued by the U.S.
Patent and Trademark Office, and re-allowed by such office in 1996, concerning
methods of disposing of OREX Degradables garments, fabrics, and packaging
materials. The Company also holds a patent issued in 1992 for a method of
disposing utensils such as procedure trays, laboratory ware, and patient care
items, and another patent issued in 1993 for a composite fabric consisting of
the materials from which OREX Degradables are made and the method of disposing
such fabric. In addition, the Company holds two patents issued in 1995 and 1998
for OREX Degradables mop heads, and recently received two patents covering (i)
articles of film, fabric, or fiber composed of OREX Degradables which are
configured into drapes, towels, covers, over wraps, gowns, head covers, face
masks, shoe covers, CSR wraps, sponges, dressings, tapes, under pads, diapers,
wash cloths, sheets, pillow coverings and napkins, and (ii) methods of disposing
of towels, sponges, and gauze produced from OREX Degradables. The Company also
recently received a patent covering methods of making OREX Degradables molded
parts (such as utensils and packaging) and film (such as gowns, drapes, head and
shoe covers, face masks, CSR wrap, under pads and diapers). 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 surgical drape composite article, (ii) a new class of OREX
biodegradable polymers, (iii) methods of disposing garments, linens, drapes,
towels and other articles of OREX Degradables, (iv) methods for enhancing the
absorbency and hand feel of OREX Degradables fabrics, (v) a method of disposing
a mop head comprised of OREX Degradables, (vi) a method of absorbing oil with
OREX Degradables fabric, and (vii) methods of producing OREX Degradables drapes,
towels, covers, over wraps, gowns, head covers, face masks, shoe covers, CSR
wraps, sponges, dressings, tapes, under pads, diapers, wash clothes, sheets,
pillow coverings, and napkins. The Company has not succeeded to date to achieve
allowability of application (iii) and an appeal has been filed before the U.S.
Patent and Trademark Office Board of Patent Appeals and Interferences. The
Company is not aware of any facts at this time that would indicate that patents
sought by these applications will not be issued. The Company's U.S. patents
expire between 2001 and 2016. 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".
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 to 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. To date, such license has not
been material to the Company's operations.
The Company has registered as trademarks with the U.S. Patent and Trademark
Office "Isolyser," "LTS," "SMS" and "OREX". Trademark registrations for "OREX"
and "LTS" have also been granted in the United Kingdom, and a trademark
registration for "OREX" has been granted in Canada. White Knight currently
maintains registrations with the U.S. Patent and Trademark Offices for the
trademarks "White Knight" and "Precept". 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 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, OREX Degradables compete with traditional
526150.6
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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 -- Risks of New
Products" and "-- Competition".
The market for procedure tray products is highly competitive. Based on
publicly available information, the Company believes that the procedure tray
market is dominated by three companies, who combined have more than 85% of the
United States market thus far converted to using procedure trays.
The market for the Company's traditional medical and specialty apparel
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, drapes,
gowns and procedure trays), OREX Degradables line of products and SMS products
are regulated by the FDA under medical device and drug provisions of the Federal
Food, Drug and Cosmetic Act (the "FDCA"). FDA regulations classify medical
devices into one 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) orders which the Company believes satisfy
FDA pre-market notification requirements. The FDA has issued to the Company
510(k) orders 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) orders will be
required for such products. There can be no assurances as to when, or if, other
such 510(k) orders necessary for the Company to market products developed by it
in the future will be issued by the FDA. The pharmaceutical products marketed by
the Company as components of certain procedure trays are subject to labeling,
current good manufacturing practices and other general requirements for drugs
under the FDCA, but because these products are produced by other entities, the
Company does not have any independent responsibility for any premarket approvals
required for these drug products. The FDA inspects medical device manufacturers
and distributors, and has broad authority to
526150.6
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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 possesses similar broad inspection and
enforcement authority over pharmaceutical products.
The FDA also requires health care companies to satisfy current good
manufacturing practices and record-keeping requirements. 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 are seeking to require that products being
sold within their jurisdictions obtain a CE mark. The failure of a product to
hold such mark does not necessarily prevent the sale of such products within the
European Union until June 14, 1998, by which time products being sold in the
European Union are required to hold such mark as a condition to such sales. Some
of the Company's safety products are being sold under such mark in the European
Union, and various others of the Company's products are currently being sold in
countries within the European Union without such mark based upon other
regulatory authorizations. One of the conditions to obtaining CE mark status
involves the qualification of the Company's manufacturing plants under certain
certification processes. Most of the Company's manufacturing plants have
obtained such certifications, although the Company's Herndon, Virginia and
Jacksonville, Florida plants have not yet received such certifications. The
Company plans to seek such certifications for these remaining plants. The
Company's Herndon facility does not do significant business in the European
Union. The Company's Jacksonville facility is a shipping point for distribution
of various of the Company's products to locations including those in the
European Union, and is scheduled for a certification inspection in early June,
1998. While the Company believes that its operations at these facilities are in
compliance with requirements to obtain certification and otherwise satisfy
requirements for CE mark status, no assurances are provided that such
certifications will be obtained, that such certifications will not be delayed 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 that it chemically kills microorganisms must be registered
with the EPA. Any product that makes a claim that it kills microorganisms via a
physical or mechanical means is considered a physical "device" under FIFRA, and
does not require EPA registration. 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
labelling or marketing that LTS treats or disinfects medical waste or kills
microorganisms. The EPA has recently 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 in 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 believes that it will obtain registration under FIFRA
of such new version of LTS; however, 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
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
526150.6
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actions or pending regulatory reviews will not continue to have an adverse
effect upon the sales of the Company's liquid absorbent products. 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 will not interfere with the proper
functioning of sewage treatment plants.
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, 1997, the Company employed approximately 2,100 full-time
employees and approximately 15 people as independent contractor sales
representatives. Of these employees, 100 were employed in marketing, sales and
customer support, 1,782 in manufacturing, 16 in research and development, and
150 in administrative positions. The Company believes its relationship with its
employees is good. Approximately 5 and 36 of White Knight's employees located at
the Struble & Moffitt plant and Douglas plant, respectively, were members of and
represented by the United Food and Commercial Workers Union, AFL-CIO. In
addition, approximately 301 of White Knight's employees located at White
Knight's Agua Prieta, Mexico plant are represented by a Mexican labor union.
Insurance
Isolyser maintains commercial general liability protection insurance which
provides coverage with respect to product liability claims of up to $12 million
per occurrence with a $13 million aggregate limit. 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. Although the
Company has never been named as a defendant in a product liability lawsuit,
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.
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
Limited Operating History; Net Losses. Isolyser was incorporated in 1987 and
commenced operations in 1988. Its principal products have been available in the
marketplace for a limited period of time. The Company began to commercially
introduce OREX Degradables in 1995 and total net sales of OREX Degradables in
1997 approximated $8.1 million but did not provide any gross profits. The
Company believes that the absence of gross profits on sales
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of OREX Degradables to date is due to a combination of factors including the
cost of manufacturing OREX Degradables products coupled with pricing of OREX
Degradables products at an amount which does not take into account disposal cost
savings provided by such products. The Company has been unable to either reduce
its cost of manufacturing or increase its sales prices for its OREX products,
and its sales of OREX remained flat in 1997 compared with 1996. For the year
ended December 31, 1997 the Company incurred actual net losses of approximately
$93.9 million, including $75 million of impairment charges, inventory charges
and reserves and other charges which were in part related to its OREX products.
No assurances can be given that the Company will operate profitably in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Risks of New Products. The Company's future performance will depend to a
substantial degree upon market acceptance of and the Company's ability to
successfully and profitably manufacture, market, deliver and expand its OREX
Degradables line of products. The Company's total sales of OREX Degradables to
date has not been a significant component of the Company's total sales of all of
its products, while the Company's expenses (which in significant part reflect
the Company's investment in the potential for increased sales of OREX
Degradables products) associated with these products have adversely affected
operating results. See "-- Limited Operating History; Net Losses".
The extent and rate at which market acceptance and penetration of the
Company's existing and future products are achieved is a function of many
variables including, but not limited to, product availability, product
selection, price, product performance and reliability, effectiveness of
marketing and sales efforts and ability to meet delivery schedules, as well as
general economic conditions affecting purchasing patterns. Long-term supply
contracts entered into by large hospital chains and smaller collective buying
groups may prohibit the Company from successfully marketing OREX Degradables to
such customers. The leading manufacturers of traditional disposable medical
products are large companies with significantly greater resources than those of
the Company. Those competitors have in many instances followed strategies of
aggressively marketing products competitive with OREX Degradables to buying
groups resulting in pricing pressures for such products. In addition, pressures
to reduce disposal costs of infectious waste have not materialized to the degree
originally anticipated. These factors and other factors have adversely affected
the Company's ability to adjust its price for 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. As the
Company currently has commercially available only a limited number of OREX
Degradables products and therefore cannot currently replace all traditional
disposable medical products with OREX Degradables products, potential customers
for the Company's products may not yet justify large-scale conversion to OREX
Degradables products. From time to time as the Company has introduced new OREX
Degradables products, the Company has encountered concerns with certain product
performance characteristics of those products. For example, the Company has not
been satisfied with the absorbency of its OREX Degradable towels and certain
aesthetic and user oriented product performance characteristics of the film
component of its OREX Degradables reinforced gowns. During 1997, the Company
substantially reduced its marketing efforts related to its OREX Degradables
products, substantially reduced its manufacturing of such products and recorded
significant nonrecurring charges related to its OREX business. The Company has
further determined to seek to dispose of its Abbeville and Arden OREX materials
manufacturing plants and its White Knight subsidiary. See "Business -- Business
Strategy" and "-- Products and Markets".
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 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".
Risks of Planned Divestitures. The Company has recently announced its plans
to seek to dispose of its Abbeville, Arden and Charlotte OREX materials
manufacturing plants and its White Knight subsidiary. The Company does not have
any firm offers to buy such assets, and the Company may not be successful in
selling such assets or be able to sell such assets at an acceptable price. If
the Company sells any such assets at an amount which
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is less than the amounts at which such assets are currently recorded on the
Company's financial statements, the Company would be required to record
additional charges to such financial statements, adversely affecting its
operating results. If the Company were unable to sell such assets, the Company
may be required to seek to dispose of other assets in order to improve its
liquidity. See "-- Liquidity Risks". The sale of such assets would eliminate the
ability of the Company to continue to internally manufacture OREX Degradables
woven and non-woven products at quantities adequate for commercial sales. See
"-- Manufacturing and Supply Risks".
Manufacturing and Supply Risks. Due to low sales rates for the Company's
OREX Degradables products, the Company's manufacturing capacities at its Arden
non-woven, Abbeville woven and Charlotte materials manufacturing plants have
significantly exceeded the Company's requirements for such products. The Company
operated its Arden and Abbeville plants during 1997 at very low manufacturing
volumes. Due to the foregoing and other factors, the Company recorded in 1997
significant impairment charges to its Abbeville, Arden and Charlotte
manufacturing plants and its White Knight subsidiary and recorded significant
reserves for potentially excess OREX inventories. These charges materially
adversely affected the Company's operating results for 1997. There can be no
assurance that the Company will be able to increase the demand for its OREX
Degradables or otherwise resolve the foregoing concerns and risks related to its
excess manufacturing capacity for its woven and non-woven OREX Degradables
products, or that the Company will not be required to record significant charges
or reserves in the future. While the Company has acquired the ability to
internally manufacture OREX Degradables non-woven and woven products, numerous
factors have caused the Company to seek to dispose of its assets providing such
internal manufacturing capabilities. See "Business -- Products and Markets". If
the Company does dispose of such assets, the Company will become dependent upon
independent manufacturers to satisfy its requirements for production of such
products once the Company exhausts its current inventory carrying levels in such
products. The Company uses and continues to remain substantially dependent upon
various domestic and foreign independent manufacturers for manufacturing and
conversion of other of its OREX Degradables products, including its OREX
Degradables film products and sponges. The Company has not commenced
manufacturing for commercial sale any OREX Degradables thermoformed and extruded
products, and commercially offers only a limited number of OREX Degradables film
products.
The Company has recently begun to develop the use of new polymers to test
manufacture OREX Degradables film and thermoformed and extruded products. While
the Company is undertaking evaluation of OREX Degradables manufactured from
these new polymers, 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 will all applicable regulatory
requirements.
The Company's products must be manufactured in compliance with FDA and other
regulatory requirements while maintaining product quality at acceptable
manufacturing costs. The Company has limited experience in manufacturing its
non-woven and woven OREX products, and no experience in internally manufacturing
its other OREX products, in the quantities required for profitable operations.
Prior to the Company's commencement of such manufacturing operations, no one had
manufactured OREX Degradables. There can be no assurance that manufacturing or
quality control problems will not arise at manufacturing plants used to supply
the Company's product, that the Company will be able to manufacture products of
an acceptable quality at commercially acceptable costs or that the Company will
be able to maintain the necessary licenses from governmental authorities to
continue to manufacture its OREX Degradables products.
The Company has experienced delays in manufacturing OREX Degradables
non-woven products at its Arden non-woven manufacturing plant. 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 may have resulted in the loss of certain potential hospital
customers. While management believes that it has identified and is addressing
the causes for such delays and while the Company continually seeks to improve
its products, there can be no assurance that future delays or quality concerns
will not occur. The Company anticipates that its non-woven fabric manufacturing
costs and other investments in OREX sales volume growth will continue to
adversely impact operating results pending a combination of achieving
significant increases in sales volume of its OREX Degradables products,
improving manufacturing efficiencies and adjusting product unit prices for such
products to take into account disposal cost savings on such products. See
"Business -- Manufacturing and Supplies".
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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. During 1996, the Company established a reserve of
approximately $10.0 million for potentially obsolete OREX inventories. 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 Company currently obtains most of the raw materials for OREX
Degradables, primarily polyvinyl alcohol ("PVA") fiber, from suppliers in the
People's Republic of China. The Company does not have any long-term supply
contracts or other formal contractual arrangements with any of its raw materials
suppliers or contract manufacturers. While raw materials and contract
manufacturing for OREX Degradables are also currently available from other
domestic and foreign independent manufacturers, there can be no assurance that
the Company will continue to be able to obtain raw materials and contract
manufacturing for its products on a commercially reasonable basis, if at all.
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 margins (the "Anti-dumping Margins") of 19% (for PVA imported
from Taiwan), 77% (for PVA imported from Japan), and 116% (for PVA imported from
producers in the People's Republic of China other than Sichuan Vinylon Works
which has been excluded from the case) of the raw material cost upon importing
such raw materials. The anti-dumping order explicitly excludes PVA fiber. PVA
resin, which is subject to the order, is a raw material required to manufacture
OREX Degradables film, extruded and thermoformed OREX Degradables and PVA fiber,
and PVA fiber, which is not subject to the order, is the raw material required
to manufacture OREX Degradables woven and non-woven products. To date, the anti-
dumping order has not had a direct material effect on the Company as the Company
has not to date used substantial quantities of PVA resin. Such anti-dumping
order may have resulted in increases to the Company's costs for raw materials
over that which might otherwise have prevailed. The price of raw materials used
by the Company in manufacturing its OREX Degradables products has been a
significant component to the Company's total manufacturing costs for these
products. Prevailing prices for such raw materials have adversely affected the
Company's ability to achieve profitable gross margins on the Company's sale of
OREX Degradables products. The Company does not currently anticipate any
difficultly in satisfying its requirements for PVA resin as such raw material is
available from a number of suppliers.
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. Finally, production in
the People's Republic of China and elsewhere outside the United States exposes
the Company to risks of currency fluctuations, political instability and other
risks inherent in manufacturing in foreign countries. Certain textiles and
similar products or materials (including certain OREX Degradables woven
products) imported from the People's Republic of China to the United States are
subject to import quotas which restrict the 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. See "Business --
Manufacturing and Supplies".
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
526150.6
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pursuant to the applications described above 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 rights is 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. The health care 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. 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 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, Owens &
Minor accounted for 10% or more of the Company's total sales during 1997.
Sterile Concepts has historically been a significant customer of White Knight,
based in part on a supply agreement between White Knight and Sterile Concepts
which requires that Sterile Concepts purchase a minimum of $5.1 million of
product from White Knight annually until June 30, 1998. In mid-1996, Sterile
Concepts was acquired by Maxxim, the latter of which is a competitor of White
Knight. While Sterile Concepts remains obligated to satisfy its minimum purchase
requirement under its supply agreement with White Knight until such agreement
expires in 1998, there can be no assurances that Sterile Concepts will in fact
satisfy such obligation. During 1997, Sterile Concepts failed to fulfill its
purchase obligations under such agreement. Recent regulatory developments
regarding the Company's LTS products described under "Business -- Government
Regulation" may have caused Allegiance to substantially reduce its
526150.6
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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 under FIFRA. Until
1996, Allegiance was the sole distributor for the Company's LTS products and
remains the most significant distributor of such products. Cessation of such
purchases by Allegiance has had a material adverse effect upon the Company's
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations". 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.
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 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 Company currently holds 510(k) orders issued by
the FDA which the Company believes satisfy FDA required clearances for marketing
of the Company's existing products. The FDA has issued to the Company 510(k)
orders 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) orders will be required for
such products. There can be no assurance as to when, or if, other such 510(k)
orders necessary for the Company to market products developed by it in the
future will be issued by the FDA. The FDA also requires health care companies to
satisfy current good manufacturing practice and record-keeping requirements.
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.
Recent developments regarding the Company's LTS products have had and may
continue to have a material adverse effect upon the Company's operating results.
In November, 1997, the State of California revoked its approval for the landfill
of LTS-treated waste within such state. Other states are in the process of
reviewing previously issued approvals to landfill LTS-treated wastes within such
states. The EPA has recently announced its position 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
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. While the Company is in the process of seeking
expedited registration of a new version of LTS under FIFRA, and is seeking to
comply with federal and local regulations concerning LTS, such developments have
adversely affected the Company's sales of LTS. 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. 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 will not interfere with the proper
functioning of sewage treatment plants thereby adversely affecting the
526150.6
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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.
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. In addition, the Company is subject to a
variety of occupational safety and health laws and regulations, including the
Occupational Safety and Health Act of 1973 ("OSHA"). While the Company believes
that its facilities are substantially in compliance with these requirements, a
determination that the Company is not in compliance with the ADA, OSHA or
related laws and regulations could result in the imposition of fines or other
penalties or, with respect to the ADA, an award of damages to private litigants.
See "Business -- Government Regulation".
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.
Health Care Reform. The federal government and the public have recently
focused considerable attention on reforming the health care system in the United
States. The current administration has pledged to bring about a reform of the
nation's health care system and, in September 1993, the President outlined the
administration's plan for health care reform. Included in the proposal were
calls to control or reduce public and private spending on health care, to reform
the payment methodology for health care goods and services by both the public
(Medicare and Medicaid) and private sectors, which may include overall
limitations on federal spending for health care benefits, and to provide
universal access to health care. A number of other health care proposals have
been advanced by members of both Houses of Congress. The Company cannot predict
the health care 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.
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 $13.0 million
in aggregate 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. The loss of the services of any one or more of
these individuals could have a material adverse effect upon the Company. Certain
of these individuals are not parties to employment agreements with the Company.
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") 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
526150.6
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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.
Liquidity Risks. While the Company believes that, based on its current
business plan, the Company's cash equivalents, existing credit facilities and
funds budgeted to be generated from operations in the future will be adequate to
meet its liquidity and capital requirements through 1998, currently unforeseen
future developments and possible increased working capital requirements may
require that the Company seek to obtain additional debt financing or issue
common stock. The Company's cash equivalents decreased from a $20.9 million at
December 31, 1996 to $9.3 million at December 31, 1997. In addition, the Company
had outstanding at December 31, 1997 approximately $36.7 million under its long
term credit facility with the Chase Manhattan Bank. In the past, the Company has
violated certain covenants of such credit facility, all of which covenant
violations have been waived. Recently, the Company negotiated certain
modifications of such covenants in a manner which the Company believes it will
satisfy in the future. No assurances can be provided that other violations of
such credit facility will not occur in the future or that, if such violations
occur, those violations will be waived. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
ITEM 2. PROPERTIES
The Company maintains its principal place of business in a 25,000 square
foot office building located in a light industrial park in Norcross, Georgia
which it acquired in 1996. The Company also leases from a local economic
development authority a 13,300 square foot administrative building located in
Columbus, Mississippi.
The Company maintains approximately 31,600 square feet of office,
manufacturing, production, research and development and warehouse space located
in Norcross, Georgia under a lease which expires December 31, 1998. The
Company's custom procedure tray business is located in Herndon, Virginia, a
suburb of Washington, D.C., where it occupies approximately 69,100 square feet
of space for office and production facilities, pursuant to a lease agreement
which expires December 31, 2003. The Company also leases approximately 60,000
square feet of space for its sterilization facilities and warehouse space
pursuant to a lease agreement which expires January 31, 2004, subject to a
renewal option through January 31, 2009. Effective January 5, 1995, the Company
acquired a 108,000 square-foot manufacturing facility located in Arden, North
Carolina which manufactures OREX Degradables non-woven fabric. The Company has
since added approximately 20,000 square feet of warehouse space to its Arden
facility. Effective June 1995, the Company acquired a 207,000 square foot
manufacturing facility located in Abbeville, South Carolina which began to
manufacture OREX Degradables towels at the end of 1995. The Company recently
announced plans to seek to sell its Arden and Abbeville manufacturing
facilities. See "Business -- Business Strategy".
The Company occupies an approximately 10,000 square foot building on a short
term basis in Charlotte, North Carolina where the Company operates its prototype
fiber manufacturing operations. The Company plans to vacate such facility during
1998, and currently plans to sell the equipment located at this facility.
The Company operates three existing non-woven conversion manufacturing
facilities, two of which are owned. The owned facilities include (i) a 50,000
square foot facility in Childersburg, Alabama which manufactures medical
products and specialty apparel products including medical and specialty face
masks, and (ii) an 87,000 square foot facility in Agua Prieta, Mexico located
adjacent to the Company's Douglas, Arizona plant which provides labor intensive
post-cutting manufacturing applications. The Company's Douglas, Arizona plant
manufactures medical products and specialty apparel in a 100,000 square foot
facility held under a lease expiring August 31, 2034. During 1997, the Company
relocated its Acuna, Mexico and Del Rio, Texas manufacturing operations to
achieve operating cost savings, and combined such operations with its existing
operations in Agua Prieta, Mexico and Douglas, Arizona.
The Company conducts its equipment drape and fluid control manufacturing
business from three locations. The Company owns two manufacturing buildings
totaling approximately 80,000 square feet located in Columbus, Mississippi. The
Company leases three manufacturing facilities totaling 62,000 square feet
located in the Dominican
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Republic. During 1996, the Company also entered into a lease of a 32,000 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 a facility in Jacksonville, Florida that comprises
approximately 45,000 square feet of warehouse and distribution space. The
Company uses this facility for distribution of finished products and
distribution of materials to the Company's Dominican Republic facility and light
manufacturing under a lease expiring April 1, 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. A subsidiary of the
Company leases a facility located in Charlotte, North Carolina containing
approximately 4,500 square feet of office and 5,500 square feet of warehouse
space under a lease expiring March 11, 1999.
The Company also owns a 60,000 square foot facility in Runnemede, New
Jersey, which no longer conducts any manufacturing operations. Formerly, this
facility was used to manufacture certain products incidental to the Company's
White Knight operations. The Company terminated such operations during 1997.
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, 1997.
526150.6
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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,
1996.
Common Stock
Quarter Ended High Low
1996
First Quarter............................ $18.25 $11.50
Second Quarter........................... $21.00 $10.50
Third Quarter............................ $12.88 $ 7.75
Fourth Quarter........................... $ 9.50 $ 6.13
1997
First Quarter............................ $ 8.37 $ 4.75
Second Quarter........................... $ 5.87 $ 2.68
Third Quarter ........................... $ 5.25 $ 2.68
Fourth Quarter .......................... $ 4.00 $ 1.90
On March 26, 1998, the closing sales price for the common stock as reported
by The Nasdaq Stock Market was $2.75 per share.
As of March 18, 1998, the Company had approximately 25,000 shareholders,
including approximately 1,323 shareholders of record and 23,677 persons or
entities holding the Company's common stock in nominee name.
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 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, 1997. 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, 1993 does not give effect to the December 31, 1993 MedSurg
Acquisition and includes only partial operating results of Atkins because the
Atkins Acquisition occurred on February 28, 1993. 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.
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
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historical financial data for each of the five years in the period ended
December 31, 1997 has been derived from the Company's audited consolidated
financial statements.
Year Ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Net sales............................... $38,769 $73,382 $104,874 $164,906 $159,940
Cost of goods sold...................... 20,837 49,928 74,953 128,598 142,093
-------------- ------------ ------------ ------------ -----------
Gross Profit............................ 17,932 23,454 29,921 36,308 17,846
Selling, general and administrative..... 13,285 21,496 27,737 41,381 43,422
Research and development................ 920 1,246 1,127 2,173 2,601
Amortization of intangibles............. 1,358 1,505 2,411 4,290 3,847
Impairment loss ........................ 0 0 0 0 57,310
Restructuring charge.................... 0 140 0 4,410 0
Costs associated with merger............ 0 0 0 3,372 0
-------------- ------------ ------------ ------------ -----------
Total operating expenses................... 15,563 24,587 31,275 55,626 107,180
-------------- ------------ ------------ ------------ -----------
Income (loss) from operations.............. 2,369 (933) (1,354) (19,318) (89,334)
Net other income .......................... 473 49 1,790 (1,316) (3,415)
-------------- ------------ ------------ ------------ -----------
Income (loss) before tax, extraordinary item and
cumulative effect of change in accounting
principle............................... 2,842 (884) 436 (20,634) (92,749)
Income tax provision (benefit)............. 1,199 455 980 (639) 354
-------------- ------------ ------------ ------------ -----------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle............................... 1,643 (1,339) (544) (19,995) (93,103)
Extraordinary item ........................ 24 0 0 457(2) 0
Cumulative effect of change in accounting
principle............................... 0 57(1) 0 0 (800)(3)
-------------- ------------ ------------ ------------ -----------
Net income (loss)....................... 1,667 (1,282) (544) (20,452) (93,903)
============== ============ ============ ============ ===========
Periodic accretion of redeemable preferred stock
to redemption value........................ 0 0 0 0 0
-------------- ------------ ------------ ------------ -----------
Net income (loss) applicable to common
stock .................................... 1,667 (1,282) (544) (20,452) (93,903)
============== ============ ============ ============ ===========
Income (loss) per common and common equivalent share - Basic and Diluted Income
(loss) before extraordinary item and
cumulative effect of change in accounting
principle............................ 0.07 (0.05) (0.02) (0.52) (2.37)
Extraordinary item...................... 0.00 0.00 0.00 (0.01) -
Cumulative effect of change in accounting
principle............................ 0.00 0.00 0.00 0.00 (0.02)
-------------- ------------ ------------ ------------ -----------
Net income (loss).................... 0.07 (0.05) (0.02) (0.53) (2.39)
============== ============ ============ ============ ===========
Weighted average number of common and
common equivalent shares outstanding.... 24,400 27,080 33,704 38,763 39,273
============== ============ ============ ============ ===========
526150.6
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- - ---------------
(1) The change in accounting principle reflects the adoption on January 1, 1994
of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities.
(2) Gives effect to the loss from refinancing of Isolyser's and Microtek's
credit facilities, net of tax benefits of $332,000.
(3) The change in accounting principle reflects the adoption of Emerging Issues
Task Force ("EITF") No. 97-13, "Accounting for Costs Incurred in Connection with
a Consulting Contract or an Internal Process that Combines Processing
Reengineering and Information Technology Transformation."
Year Ended December 31,
1993 1994 1995 1996 1997(1)
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working Capital.............................. $ 35,366 $ 88,527 $ 101,022 $ 91,962 $ 72,408
Intangible assets, net....................... 19,364 17,994 60,004 57,331 30,803
Total assets................................. 74,995 132,973 253,261 250,935 144,334
Long-term debt............................... 4,436 6,779 26,413 47,029 37,546
Redeemable common stock...................... 26,150 1,717 0 0 0
Total shareholders' equity................... $ 30,398 $ 110,662 $ 195,298 $ 178,804 $ 86,117
(1) Pursuant to SFAS No. 121 the Company classified $35.8 million of net assets
related to its OREX manufacturing facilities and White Knight subsidiary as held
for sale, and included such amount 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 Atkins Acquisition and the MedSurg
Acquisition and began to sell standard and custom procedure trays. Because these
acquisitions have been accounted for using the purchase method, the Company's
1993 operating results include the operations of Atkins from February 28, 1993,
but do not include any of the operating results of MedSurg which was acquired on
December 31, 1993.
On July 1, 1995, the Company 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
acquisition of 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.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales for 1997 were $159.9 million compared to $164.9 million for 1996, a
decline of 3.0%. The 1997 decline in sales of $5.0 million reflects a 6.1%
increase in sales of custom procedure trays and related products primarily as a
result of increased market penetration. However, sales of such products were
adversely affected during the fourth quarter of 1997 as a result of decreased
production during the Company's implementation of and
526150.6
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conversion to an upgraded manufacturing system which was completed over the
course of such quarter. Net sales of Microtek products increased 5.5% over
comparable 1996 sales, primarily as a result of the Venodyne acquisition
completed in April 1996. These increases in sales were offset by a 16.8% decline
in net sales of White Knight products and a 5.8% decline in net sales of safety
products during 1997 as compared with 1996.
The decline in sales of White Knight products was primarily due to a
competitor's purchase of a significant customer and the Company's decision to
de-emphasize marketing of White Knight products in favor of higher margin
products sold by its other subsidiaries. Sterile Concepts, a significant
customer of White Knight, was acquired by Maxxim, which is a product competitor
of the Company, in 1996. While Sterile Concepts remains contractually obligated
to purchase a yearly minimum of $5.1 million of products until June 30, 1998,
the Company expects that Sterile Concepts will no longer purchase White Knight
products. The Company is negotiating with Maxxim for a new supply agreement for
the sale of other products of the Company in settlement of the outstanding
obligations of Sterile Concepts to White Knight. No assurances can be provided
that the Company will be able to complete any such settlement negotiations. The
Company recently announced plans to sell its White Knight subsidiary which, if
consummated, would significantly reduce the Company's net sales. See "Business
- - -- Business Strategy" and "Risk Factors -- Risks of Planned Divestitures".
Sales of the Company's safety products have been materially adversely
affected by the substantial reduction in purchases of LTS products by
Allegiance, the primary distributor of such products, and recent adverse
regulatory developments. See "Business -- Marketing and Distribution" and "--
Government Regulation". While the Company plans to introduce a new LTS product
to preserve its market share created by LTS, the Company's ability to do so is
subject to obtaining federal registration of such product. The Company expects
that its operating results will continue to be adversely affected by reduced
sales of LTS, and no assurances can be provided that the Company will be able to
maintain its market share on such products by the registration and introduction
of a new LTS product. See "Risk Factors -- Reliance on Distributors" and "--
Regulatory Risks".
Included in the foregoing sales figures are $8.1 million in sales of OREX
Degradables during 1997. Sales of OREX Degradables during 1997 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 and evaluating means to exploit the market
position of OREX Degradables within its various market potentials. 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 of products at acceptable profit
margins. During 1997, the Company substantially revised its strategy to
commercialize its OREX products. See "Business -- Business Strategy" and "--
Products and Markets". There can be no assurances that OREX Degradables will
achieve or maintain substantial acceptance in their target markets. See "Risk
Factors -- Limited and Operating History; Net Losses" and "-- Risks of New
Products".
Gross profit in 1997 was $17.8 million or 11.1% of net sales compared to
$36.3 million or 22.0% of net sales in 1996. Included in cost of goods sold
during 1997 and 1996 were charges of $13 million and $10 million, respectively,
for OREX inventory reserves. OREX inventory reserves recorded in 1997 were
recognized due to excess quantities of OREX finished goods and raw materials on
hand. In addition to OREX reserves taken during 1997, the Company recorded other
inventory reserves and miscellaneous writeoffs which together totaled $1.7
million. OREX inventory reserves recorded in 1996 were recognized due to
improvements in manufacturing processes realized during the latter portions of
1996 rendering various existing inventories obsolete or second quality. After
adjusting gross profits by eliminating these charges, gross profits for 1997 and
1996 would have been 20.4% and 28.1% of sales, respectively. Also negatively
impacting gross profit during 1997 was unabsorbed overhead included in cost of
goods sold by reason of underutilization of manufacturing capacity at the
Company's Arden and Abbeville manufacturing plants. During the latter portions
of 1996, the Company reduced production at its Abbeville plant to more closely
align production with product demand. In the first quarter of 1997, the Company
further reduced production at both its Abbeville and Arden plants as a result of
excess inventory on hand. As a result, production at both facilities was minimal
during 1997. The Company recorded impairment charges in 1997 with respect to its
Arden and Abbeville plants to reduce the carrying value of such plants to their
estimated fair value, and plans to sell such plants in 1998. See "Business --
Business Strategy" and "Risk Factors -- Risks
526150.6
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of Planned Divestitures". Gross margin was also negatively impacted by both
underutilization of White Knight facilities as a result of decreased sales, and
underutilization of capacity created during 1996 with Microtek's addition of
manufacturing and distribution facilities in Jacksonville, Florida and Empalme,
Mexico.
Selling, general and administrative expenses were $43.4 million or 27.1% of
net sales in 1997 as compared to $41.4 million or 25.1% of net sales in 1996.
This increase was primarily attributed 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. Other factors affecting this change in expenses
included expenses for software and hardware installations, severance expenses
related to reductions in the sales and marketing personnel, expenses related to
the wind-down of the Company's Runnemede, New Jersey plant and operating costs
associated with the Company's administrative offices, offset by decreased
salaries and benefits associated with reducing the Company's sales and marketing
personnel.
Research and development expenses were $2.6 million or 1.6% of net sales in
1997 as compared to $2.2 million or 1.3% of net sales in 1996. This increase
represents expenses incurred to further develop and improve the quality of OREX
products.
Amortization of intangibles was $3.8 million or 2.4% of net sales in 1997 as
compared to $4.3 million or 2.6% of net sales in 1996. The decrease is
attributed to the 1996 impairment write-off of $2.6 million of SafeWaste
intangible assets as part of the Company's restructuring.
The Company recorded impairment charges totalling $57.3 million during 1997
with no comparable charges in 1996. The charges were primarily a result of
impairment to the Company's OREX material manufacturing plants and White Knight
subsidiary for the excess carrying value of such assets over their fair value.
See "Business --Business Strategy" and "-- Products and Markets". As a result of
the impairment charges taken and reclassification of such assets to net assets
held for sale, depreciation and amortization expenses are expected to be reduced
by approximately $5.4 million in 1998.
Restructuring charges of $4.4 million in 1996 related to decisions made by
the Company during 1996 to divest certain non-core businesses and consolidate
certain operations. During 1996, the Company also incurred transactional costs
associated with the Microtek acquisition of $3.4 million. There were no
comparable charges during 1997.
The resulting loss from operations was $89.3 million in 1997 as compared to
$19.3 million in 1996. After adjusting the 1997 operating loss to exclude $13
million of charges related to inventory reserves and $57.3 million related to
impairment charges, the operating loss would have been $19 million. After
adjusting the 1996 operating loss to exclude $19.1 million of charges for
inventory reserves, restructuring and the Microtek transaction expenses, the
operating loss would have been approximately $200,000.
Interest expense net of interest income was $3.4 million in 1997 as compared
to $1.3 million in 1996. The increase is primarily due to interest on debt
incurred in connection with inventory purchases and equipment acquisitions made
in 1996. The Company is endeavoring to reduce its debt and interest expense
through its plan to sell certain of its assets. No assurances can be provided
that the Company will successfully sell any of its assets. See "Business --
Business Strategy" and "Risk Factors -- Risks of Planned Divestitures".
Losses from joint venture was $44,000 and $34,000 in 1997 and 1996,
respectively.
Provisions for income taxes reflect an expense of $354,000 in 1997 compared
to a tax benefit of $639,000 in 1996. The effective tax rate in 1997 and 1996
differs from the statutory rate due primarily to valuation allowances recorded
against the Company's deferred income tax assets and the amortization and write
down of a portion of goodwill which is not deductible for tax purposes.
526150.6
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The Company recorded a cumulative effect of change in accounting principle of
$800,000 in 1997 with no comparable charges during 1996. 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 Company recorded an extraordinary item related to refinancing of the
Company's credit facilities of $457,000, net of a tax benefit of $332,000, in
1996 with no comparable charges in 1997.
The resulting net loss was $93.9 million in 1997 as compared to a net loss of
$20.5 million in 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales for 1996 were $164.9 million compared to $104.9 million for 1995,
an increase of 57%. The 1996 increase of $60.0 million reflects primarily a 220%
increase in net sales by White Knight as compared to comparable sales by the
Company in 1995 as a result of the September 1, 1995 White Knight acquisition, a
33.4% increase in net sales of Microtek primarily as a result of the Medi-Plast,
Xomed and Venodyne acquisitions, and a 15% increase in net sales of procedure
trays and related products primarily as a result of increased market
penetration. Sales of safety products and services increased 31% in 1996 as
compared to 1995. This increase reflects primarily increased sales of LTS during
1996 resulting from opening sales of LTS to more than one national distributor
and increased revenues from the Company's Onsyte System during 1996 resulting
from an acquisition transaction consummated during 1995.
Sales by White Knight decreased during the latter half of 1996, which the
Company primarily attributes to the acquisition in July, 1996 of Sterile
Concepts, a significant customer of White Knight, by Maxxim, which is a product
competitor of the Company. While Sterile Concepts remains contractually
obligated to purchase a yearly minimum of $5.1 million of products until June
30, 1998, such acquisition is expected to continue to adversely affect the
Company's sales in 1997 and future periods. Sales by Microtek during the fourth
quarter were adversely affected by a decision made during the fourth quarter to
immediately change the method of selling Microtek products by switching to
direct sales through the Company's sales force and immediately cease sales
through independent representatives as part of a strategy to seek to promote
long term sales growth.
Included in the foregoing sales figures are $7.1 million in sales of OREX
Degradables during 1996. Quarter to quarter sales of OREX Degradables during
1996 were flat, which management of the Company believes is attributable to
having only a small group of hospitals converted to using degradable versus
traditional products during 1996. Management believes that the rate of growth in
OREX sales has been adversely affected by delays in bringing new OREX catalog
items to market in quantities sufficient for commercial supply and product
performance or quality concerns for certain of the Company's OREX Degradables
products. While management believes that the Company's group of OREX products
currently includes substantially all non-woven products most often used in the
operating room, the Company does not yet manufacture for commercial sale OREX
Degradables film or thermoformed and extruded products such as bowls, basins and
utensils. Sales of OREX Degradables during 1996 did not contribute any gross
profits to the Company's operating results. Management believes that the Company
will continue to fail to receive profitable margins on sales of OREX Degradables
pending a combination of selling OREX Degradables in greater volumes, the
operation of the Company's OREX manufacturing plant at higher efficiencies and
increasing the unit price for OREX Degradables to an amount which takes into
account the disposal cost savings provided by such products. 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 of products at acceptable profit margins. The
Company's ability to achieve such objectives is subject to a number of risks
described under "Business -- Risk Factors".
Gross profit in 1996 was $36.3 million or 22% of net sales compared to $29.9
million or 28.5% of net sales in 1995. Included in costs of goods sold during
1996 was $10.0 million in reserves for OREX inventory with no comparable charges
recorded in 1995. These reserves were recognized due to improvements in
manufacturing processes realized during the latter portions from 1996 rendering
various existing inventories obsolete or second quality. After adjusting gross
profits by eliminating these charges, gross profit for 1996 would have been 28%.
526150.6
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Also negatively impacting gross profit during 1996 was unabsorbed overhead
included in cost of goods sold by reason of underutilization of manufacturing
capacity at the Company's Arden and Abbeville manufacturing plants. During the
latter portions of 1996, the Company reduced production at its Abbeville plant
to more closely align production with product demand. Pending increased
utilization of the Company's existing manufacturing capacity at its Arden and
Abbeville manufacturing plants and adjusting pricing of OREX Degradables to take
into account disposal cost savings over traditional products, the overhead of
the Company incurred through its Arden and Abbeville plants will continue to
negatively impact profit margins. The Company's ability to achieve such
objectives is subject to a number of risks described under "Business -- Risk
Factors" including without limitation "-- Risks of New Products" and "--
Manufacturing and Supply Risks".
Selling, general and administrative expenses were $41.4 million or 25.1% of
net sales in 1996 as compared to $27.7 million or 26.5% of net sales in 1995.
This increase was primarily due to increased commissions on increased sales,
increased travel, promotional and administrative expenses related to the White
Knight acquisition.
Research and development expenses were $2.2 million or 1.3% of net sales in
1996 as compared to $1.1 million or 1.1% of net sales in 1995. This increase
reflects expenses incurred during 1996 associated with the Company's
developmental PVA fiber plant.
Amortization of intangibles was $4.3 million or 2.6% of net sales in 1996 as
compared to $2.4 million or 2.3% of net sales in 1995. This increase was
primarily due to the White Knight and other acquisitions.
Restructuring charges were $4.4 million in 1996 with no comparable charges in
1995. This charge was a result of decisions made by the Company during 1996 to
divest certain non-core businesses and consolidate certain operations. During
1996, the Company also incurred transactional costs associated with the Microtek
acquisition of $3.4 million with no comparable charges during 1995.
The resulting loss from operations was $19.3 million in 1996 as compared to
$1.4 million in 1995. After adjusting the operating loss to exclude $19.1
million of charges for inventory reserves, restructuring and the Microtek
transaction expenses, the operating loss would have been approximately $200,000
for 1996.
Interest expense net of interest income was $1.3 million in 1996 as compared
to interest income net of interest expense of $1.8 million in 1995. The increase
in interest expense was primarily due to interest on debt incurred in connection
with the Microtek acquisition and inventory purchases and to decreased interest
income reflecting a reduction in short term investments during 1996 and a lower
interest rate on those investments.
Losses from joint venture was $34,000 and $44,000 in 1996 and 1995,
respectively.
Provisions for income taxes reflect a benefit for 1996 of $640,000 compared
to a tax expense of $980,000 in 1995. The effective tax rate in 1996 differs
from the statutory rate due primarily to the amortization of a portion of
goodwill which is not deductible for tax purposes, non-deductible Microtek
acquisition costs and certain reserves for inventory considered temporary
differences for tax purposes.
The Company recorded a $457,000 extraordinary loss from the refinancing of
Isolyser's and Microtek's credit facilities, net of a $332,000 tax benefit.
The resulting net loss was $20.5 million in 1996 as compared to a net loss of
$544,000 in 1995.
Liquidity and Capital Resources
As of December 31, 1997, the Company's cash and cash equivalents totalled
$9.3 million compared to $20.9 million at December 31, 1996.
During 1997, the Company utilized cash and proceeds from working capital
management to finance the purchase of property and equipment, reduce outstanding
balances under its credit facility and make scheduled debt repayments related to
previous acquisitions of businesses, equipment and capital leases. For 1997, net
cash provided by
526150.6
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operating activities was approximately $1.1 million; net cash used in investing
activities was approximately $3.8 million; and net cash used in financing
activities was approximately $8.8 million. The $1.1 million provision of cash
from operating activities in 1997 results principally from a $4.3 million
decrease in gross inventory, a $4.4 million decrease in gross accounts
receivable and a $2.2 million increase in accounts payable offset by losses
experienced during the year. During 1997 accounts receivable declined from
approximately $27.7 million to $22.8 million, inventory (including prepaid
inventory) declined from approximately $63.8 million to $45.2 million reflecting
the impact of the Company's adoption of synchronous manufacturing methodology,
and accounts payable increased from approximately $10.2 million to $12.3
million. These changes are prior to reclasses associated with net assets held
for sale. Cash used in investing activities during these periods include
primarily funds used to improve the Company's internal manufacturing software.
During 1997, cash expenditures for property and equipment and deposits on
machinery and equipment were $4.0 million, down from $19.1 million in 1996. To
the extent that the Company may, in the future, incur commitments for material
capital expenditures not currently envisioned, the Company anticipates that such
capital expenditures may require additional debt financing or issuances of
common stock to the extent not funded from available cash. Cash used in
financing activities of $8.8 million compares to cash proceeds provided by
financing activities of $24.7 million during 1996. During 1997, the Company
utilized approximately $10.3 million to reduce revolver, term and bank overdraft
debt.
During 1997, the Company began a review of its OREX manufacturing and
marketing programs. As this review progressed, the Company reduced output at its
OREX manufacturing facilities in order to reduce finished goods inventory and
more closely align production with demand. During 1997, the Company recorded a
reserve of $13 million for potentially excess OREX inventories. Because of
manufacturing inefficiencies, and related unabsorbed manufacturing overhead,
coupled with unit pricing for sales of OREX Degradables at an amount which does
not take into account the disposal cost savings provided by these products, the
Company failed to achieve profitable margins on the sales of OREX Degradables.
Based upon a combination of factors, including determinations by the Company
that the carrying value of its OREX manufacturing facilities are not justified
by current OREX sales volumes, the Company's belief that it could satisfy any
future requirements for manufacturing woven and non-woven OREX products from
third party contract manufacturers, and the Company's objective to reduce its
debt and make available funds to further develop the OREX technology, the
Company has decided to sell its OREX manufacturing facilities as well as its
White Knight subsidiary. There can be no assurances that the Company will be
able to successfully sell all or any of the foregoing assets at satisfactory
prices. If successful, the Company believes these planned divestitures will
provide funds to reduce debt, relieve the Company of burdens associated with
these underperforming assets, provide focus upon the remaining business units
operated by the Company and provide funds for the further development of OREX
technology. Net assets held for sale totaling $35.8 million at December 31, 1997
have been classified as current assets as a result of the Company's expectation
that these net assets will be sold during 1998. See "Risk Factors -- Risks of
Planned Divestitures".
In connection with the Microtek acquisition, the Company replaced its
existing $24.5 million Isolyser credit agreement and $17 million Microtek credit
agreement with a $55 million credit agreement (as amended to date, the "Credit
Agreement") between the Company and The Chase Manhattan Bank (the "Bank"), as
agent, consisting of a $40 million revolving credit facility maturing on August
31, 1999 and a $15 million term loan facility maturing on August 31, 2001. In
connection with this replacement, the Company recorded an extraordinary loss of
$457,000, net of a tax benefit of $332,000, relating to the extinguishment of
the former credit agreements. Borrowing availability under the revolving credit
facility is based on the lesser of (i) a percentage of eligible accounts
receivable and inventory or (ii) $40 million, less any outstanding letters of
credit issued under the Credit Agreement. Current additional borrowing
availability under the revolving facility at December 31, 1997 was $6.1 million
and at March 18, 1998 was $3.9 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 (8.13% at December 31, 1997). Outstanding borrowing under the revolving
credit facility was $24.3 million at December 31, 1997 and was $27.8 million at
March 18, 1998. Commencing on December 31, 1996, the term loan facility is
repayable in quarterly principal payments of $500,000 through September 1998 and
$1.0 million through June 2001, with any remaining indebtedness due on August
31, 2001. The term loan bears interest, at the Company's option, at either a
floating rate approximating the Bank's prime rate plus an interest margin or
LIBOR plus an interest margin (8.63% at December 31, 1997). Outstanding
borrowings under the term loan facility were $12.4 million at December 31, 1997.
The Credit Agreement provides for the issuance of up to $3 million in letters of
credit. Outstanding letters of credit at December 31, 1997 were $50,000. The
Credit Agreement provides for
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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. The Company is also subject to prepayment penalties through the third
year of the Credit Agreement equal to 1% of the amount of the aggregate
commitment terminated or reduced. 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 its
Norcross, Georgia administrative offices. The Credit Agreement contains certain
restrictive covenants, including the maintenance of certain financial ratios and
net income, and limitations on acquisitions, dispositions, capital expenditures
and additional indebtedness. The Company also is not permitted to pay any
dividends. During 1997, the Company reduced its working capital requirements. If
such requirements increase in the future, the Company 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.
At December 31, 1997, the Company was not in compliance with the net income
and net worth covenants. These existing covenant violations were waived by the
Bank effective March 20, 1998. In connection with the waiver of these covenant
violations, the Bank and the Company amended the Credit Agreement to revise
certain covenants including certain of the financial ratios and the net worth
and capital expenditure covenants, deleted the net income covenant, added an
earnings before interest, taxes, depreciation and amortization ("EBITDA")
covenant and revised the interest margins and term loan quarterly payments to
$750,000 at September 30, 1998, and $1.0 million thereafter. While the Company
does not currently anticipate that it will violate the covenants of the Credit
Agreement in the future, no assurances can be provided that these or other
violations of the Credit Agreement will not occur in the future or that, if such
violations occur, that the Bank will not elect to pursue its remedies under the
Credit Agreement.
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 1998. As described above,
however, currently unforeseen future developments and increased working capital
requirements may require additional debt financing or issuances of common stock
in 1998 and subsequent years. See "Risk Factors -- Liquidity Risks".
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, 1997. Export sales by the Company
during 1997 were $11.8 million. Currency translations on export sales could be
adversely affected in the future by the relationship of the U.S. Dollar with
foreign currencies.
Newly Issued Accounting Standards. In June 1997, the Financial Accounting
Standards Board issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 130
establishes standards for the reporting and displaying of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 131 establishes standards for the way
that public business enterprises report select information about operating
segments in reports issued to shareholders. The Company will adopt SFAS 130 and
SFAS 131 in 1999. Management does not expect these new pronouncements to
significantly impact the presentation of the Company's consolidated financial
statements.
Year 2000 Issue
Many companies are affected by the year 2000 issue, which could cause
equipment reliant upon computer applications to fail or create erroneous results
due to the failure of computer programs to correctly identify the year 2000
after December 31, 1999.
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During 1996, as part of a program to install improved information systems on
a Company-wide basis, the Company initiated a conversion from existing
management information software to programs that are year 2000 compliant. In the
fourth quarter of 1997, the Company's MedSurg operations completed its
conversion to a year 2000 compliant system. The Company's Microtek operations
are scheduled to complete such conversion in June, 1998, and the Company's
corporate operations are scheduled to complete such conversion by December,
1998. Costs incurred to date for such conversions approximate $5.8 million of
which $1.8 million have been expensed with $4.0 million representing capital
expenditures. The Company estimates that costs remaining to be incurred before
scheduled completion of such conversion will be approximately $1.5 million, of
which $100,000 million are expected to be expensed and $1.4 million are expected
to be capitalized. Other than such costs, the Company does not believe its
efforts to become year 2000 compliant will have a material adverse impact upon
the Company. Estimated costs to be incurred and the schedule to become year 2000
compliant are subject to uncertainties and risks (including, for example,
encountering unanticipated delays or impediments to conversion and disruptions
of ordinary business operations), and the failure of the Company to complete
such conversion within budget and on schedule could adversely affect the
Company.
The Company is not currently aware of any of its customers, product users,
suppliers or other vendors which are non-compliant with year 2000 in a manner
which would have an adverse effect upon the Company or its operations. The
Company continues to evaluate the potential impact upon the Company of
noncompliance with year 2000 issues by third parties with which the Company
deals.
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, debt covenant compliance, 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 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, risks
of planned divestitures, 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.
Not applicable.
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.
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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
Terence N. Furness President and Chief Executive Officer
Travis W. Honeycutt Executive Vice President, Secretary and Director
Dan R. Lee Executive Vice President, Assistant Secretary and
Director
Migirdic Nalbantyan Executive Vice President
Lester J. Berry Executive Vice President
Peter A. Schmitt Vice President of Finance, Treasurer, Chief
Financial Officer and Assistant Secretary
Richard Setian Vice President of Sales and Marketing
Michael Mabry Vice President and General Manager
David Velmosky Vice President of Human Resources
Theodore M. DuBose, IV Vice President of Industrial Sales
Rosdon Hendrix Director
Kenneth F. Davis Director
Olivia F. Kirtley Director
Gene R. McGrevin (age 55) was elected Chairman of the Board of Directors and
acting President of the Company in April 1997 concurrently with the retirement
and resignation of Robert L. Taylor from such positions. Mr. McGrevin also
serves as chairman and chief executive officer 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 Health Care Products Group of Kimberly-Clark
Corporation, founder and President of a consulting firm specializing in the
health care industry and an executive officer of VHA Enterprises, Inc.
Terence N. Furness (age 50) was elected President and Chief Executive Officer
of the Company effective January 1, 1998. Mr. Furness has 22 years experience in
the medical device industry. Prior to accepting this position with Isolyser, Mr.
Furness served as President of Zimmer, Inc., a wholly owned subsidiary of
Bristol-Myers Squibb, from 1995 to 1997, and as Senior Vice President Strategic
Planning of Bristol - Myers Squibb for a portion of 1997. From 1990 to 1995, Mr.
Furness served as President of the Medical Products Group of Smith & Nephew,
PLC,
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an international healthcare and consumer products firm. He holds a Bachelor of
Science in Physics from the University of North Carolina at Chapel Hill and a
Master in Business Administration from Harvard Graduate School of Business.
Travis W. Honeycutt (age 55) has been Executive Vice President, Secretary and
a Director of the Company since its inception in 1987. Prior to founding the
Company with Mr. Taylor, Mr. Honeycutt had over 20 years of experience in new
product development for the industrial and health care markets.
Dan R. Lee (age 50) 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.
Migirdic Nalbantyan (age 55) was elected as an Executive Vice President of
the Company effective February 1, 1998, and is currently in charge of the
Company's OREX Commercial Development business unit. 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 manufacturer 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.
Peter A. Schmitt (age 38) was elected Vice President of Finance, Chief
Financial Officer, Treasurer and Assistant Secretary of the Company effective in
May, 1997. Prior to accepting such position, Mr. Schmitt served for two years as
the chief financial officer and general manager of the Company's custom
procedure tray business. From 1993 to 1995 Mr. Schmitt was controller of Digene,
Inc., a biotechnology company. From 1991 to 1993, Mr. Schmitt was part of a
management turnaround team for a private printing company and between 1985 and
1990 Mr. Schmitt was employed by Touche Ross & Company and Coopers & Lybrand as
a senior auditor and audit supervisor, respectively.
Lester J. Berry (age 64) became an executive officer of the Company following
the conclusion of the acquisition of Microtek. Prior to that time, Mr. Berry had
served as a director and officer of Microtek since 1994. From 1987 through 1993,
Mr. Berry served in various capacities at 3M Corporation, including service as a
National Sales and Marketing Manager, Medical Specialties, and as the National
Sales Manager, Health Care Specialties.
Richard Setian (age 38) was elected Vice President of Marketing in May, 1996,
after working with the Company's marketing department since his association with
the Company in April, 1995. Between December, 1992 and March, 1995, Mr. Setian
served as Executive Vice President of Maxxim in its Boundary division. Prior to
his joining Maxxim, Mr. Setian held various sales and marketing positions with
Kendall Healthcare Products.
Michael Mabry (age 35) was elected Vice President of Operations of the
Company effective in May, 1997, and now serves as Vice President and General
Manager for the Company. 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.
David W. Velmosky (age 48) was appointed Vice President of Human Resources of
the Company effective in May, 1997. Prior to accepting such position, Mr.
Velmosky served in a non-executive capacity as Vice President of Human Resources
of the Company since his joining the Company in July, 1996. Mr. Velmosky was
formerly employed as Vice President of Human Resources for Atlantis Plastics,
Inc. from 1994 to 1996. Between 1992 and 1994, Mr. Velmosky was in the human
resources department of Pittsburg Plate and Glass. In addition to a bachelors
degree in industrial psychology, Mr. Velmosky holds numerous advanced
certifications in employment law, ERISA benefits and compensation practices.
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Theodore M. DuBose, IV (age 52) was elected Vice President of Industrial
Sales for the Company effective in May, 1997. Prior to accepting such position,
Mr. DuBose served in various non-executive capacities on behalf of the Company
including manager of Industrial Sales and President of SafeWaste Corporation,
since the date of his joining the Company as result of the Company's acquisition
of SafeWaste Corporation in May, 1995. Mr. DuBose founded the predecessor of
SafeWaste in 1992. Prior to SafeWaste, Mr. DuBose served in various executive
capacities with both entrepreneurial and large construction industry companies.
Rosdon Hendrix (age 58) 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 47) 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.
Olivia F. Kirtley, (age 47) was elected a Director of the Company in April,
1997. Ms. Kirtley is the Chief Financial Officer of Vermont American Corporation
of Louisville, Kentucky, the world's largest manufacturer and marketer of power
tool accessories. Prior to joining Vermont American Corporation in 1979, Ms.
Kirtley was Senior Tax Manager with Ernst & Young.
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.
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
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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 1997, 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. Schmitt filed a
Form 4 late, Mr. DuBose amended a timely filed Form 3 to correct a typographical
error and Jamal Silim (a former director) filed a Form 5 late reporting an
exempt option grant.
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ITEM 11.EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid by the
Company (or Microtek for services rendered during the years ended December 31,
1996 and 1995), to the two individuals serving as the Company's chief executive
officer during portions of 1997, and each of the four most highly compensated
executive officers of the Company other than such chief executive officers who
were serving as executive officers at December 31, 1997 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Other Annual Awards All Other
Name and Principal Position Year Salary Bonus Compensation Options (#) Compensation
- - --------------------------- --- ------ ----- ------------ ------------- ------------
Gene R. McGrevin ................. 1997 $67,874 - - 150,000 -
Chairman, Former President
Robert L. Taylor,................. 1997 $150,000 - - - $2,998(1)
Former Chairman, President and 1996 $150,000 - - 40,000 $2,453(1)
Chief Executive Officer 1995 $150,000 - - - $2,570(1)
Travis W. Honeycutt............... 1997 $150,000 - - - $3,235(2)
Executive Vice President 1996 $150,000 - - 40,000 $3,235(2)
1995 $150,000 - - - $3,235(2)
Dan R. Lee ...................... 1997 $150,000 - - 100,000 $4,978(4)
Executive Vice President (3) 1996 $150,000 $100,000 - 50,000 $4,417(4)
1995 $150,000 $100,000 - 41,250 $5,093(4)
Lester J. Berry................... 1997 $150,000 - - - $9,302(5)
Vice President (3) 1996 $150,000 $100,000 - - $7,539(5)
1995 $150,000 $ 74,000 - 16,500 $6,427(5)
Peter A. Schmitt.................. 1997 $137,000 $ 25,587 - - $9,114(6)
- - -----------
(1) This amount represents the Company's payment ($2,125) for $500,000 of term
life insurance and contributions to a 401(k) plan ($873, $328 and $445 in 1997,
1996 and 1995 respectively).
(2) This amount represents the Company's payment on Mr. Honeycutt's behalf, for
$500,000 term life insurance policies.
(3) Compensation earned prior to 1997 by Messrs. Lee and Berry stated in the
table is based upon compensation plans of Microtek as these individuals were
executive officers of Microtek prior to the Microtek acquisition effected
September 1, 1996.
(4) This amount represents payment ($2,036 per year) for $250,000 term life
insurance and contributions for a 401(k) plan for the balance of the amount
stated.
(5) This amount represents the Company's payment ($5,158 per year) for $250,000
term life insurance and contributions for a 401(k) plan for the balance of the
amount stated.
(6) This amount represents relocation expenses ($6,969) and contributions to a
401(k) plan for the balance ($2,145) of the amount stated.
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Employment Arrangements
The Company is a party to employment agreements with all of its Named
Executive Officers, except Travis W. Honeycutt. In connection with Mr.
McGrevin's acceptance of his position as Chairman of the Board of Directors and
acting President of the Company, the Company and Mr. McGrevin entered into an
employment agreement pursuant to which Mr. McGrevin agreed to serve in such
capacities until December 31, 1997, or such later date as the Company and Mr.
McGrevin might mutually agree. Such agreement, which expired effective December
31, 1997, provided for a fixed salary, allowed Mr. McGrevin to participate in
Company sponsored employee benefit plans and set forth Mr. McGrevin's agreement
to certain restrictive covenants relating to the protection of confidential
information. The agreement was terminable by the Company at any time with or
without cause and without any obligation in respect of severance.
Subsequent to Mr. Taylor's retirement as Chairman, Chief Executive Officer
and President of the Company, the Company and Mr. Taylor concluded the terms of
an employment agreement pursuant to which the Company retained the continuing
services of Mr. Taylor as a non-executive employee through August 30, 1999 and
obtained Mr. Taylor's agreement to certain restrictive covenants including
covenants relating to the protection of confidential information and restricting
Mr. Taylor's ability to compete against the Company. In consideration of the
foregoing, the Company agreed to continue Mr. Taylor's salary ($150,000 per
year) and certain Company-funded health and life insurance benefits through the
term of such employment agreement.
In the fourth quarter of 1997, the Company and Dan R. Lee concluded an
employment agreement providing that 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 is a party to an employment agreement with Microtek expiring on
January 3, 1999. Such employment agreement specifies a minimum salary and
benefits 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.
Effective March 12, 1998, Mr. Schmitt entered into an employment agreement
with the Company expiring on March 12, 2001. Such employment agreement specifies
a minimum salary and benefits payable to him during the term of the employment
agreement. 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 or
the employee with or without cause. In the event of termination of the agreement
by the Company without cause, or by the employee for good reason (as defined),
the employee would be entitled to specified severance of between six months and
one year of salary. In the event of any termination of Mr. Schmitt's employment
occurring within six months after a change of 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 in amount equal
to 2.99 times Mr. Schmitt'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.
Employee Benefit Plans
Stock Option Plan. In April 1992, the Board of Directors and shareholders of
the Company adopted a Stock Option Plan (the "Plan"). The Plan currently
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
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events). Options may be granted under the Plan to employees, officers or
directors of, and consultants and advisors to, the Company who, in 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 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 Plan. The purposes of the 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 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
Plan.
As of March 24, 1998, options to purchase 4,308,829 shares of common stock
were outstanding under the Plan.
Employee Stock Purchase Plan. In February 1995 the Board approved and in
April 1995 the Company's shareholders ratified, the adoption of the Company's
Employee Stock Purchase Plan for employees of the Company and its subsidiaries
(the "Stock Purchase Plan"). The Stock Purchase Plan was established pursuant to
the provisions of Section 423 of the Code. The purpose of the Stock Purchase
Plan is 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 Stock Purchase Plan payroll deductions are used to purchase the
Company's common stock.
An aggregate of 300,000 shares of common stock of the Company have been
reserved for issuance under the Stock Purchase Plan, and an aggregate of 113,090
shares of common stock have been purchased and issued under the Stock Purchase
Plan. All employees (including officers of the Company) who have been
continuously employed for three months or more by the Company or its designated
subsidiaries (during which such employee's hours of employment were 1,000 or
more) as of the commencement of any offering period under the Stock Purchase
Plan are eligible to participate in the Stock Purchase Plan. An employee
electing to participate in the Stock Purchase Plan must authorize a whole
percentage (not less than 1% nor more than 10%) of the employee's compensation
to be deducted by the Company from the employee's pay during each pay period.
The price for common stock which is purchased under the Stock Purchase Plan is
equal to 85% of the fair market value of the common stock on either the first
business day or last business day of the applicable offering period, whichever
is lower.
A participant may voluntarily withdraw from the Stock Purchase Plan at any
time by giving at least 30 days notice to the Company prior to the end of the
offering period and will receive on withdrawal the cash balance, without
interest, then held in the participant's account. Upon termination of employment
for any reason, including resignation, discharge, disability or retirement, or
upon the death of a participant, the balance of the participant's
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account, without interest, will be paid to the participant or his or her
designated beneficiary. However, in the event of the participant's death, the
participant's beneficiary may elect to exercise the participant's option to
purchase such number of full shares which such participant's accumulated payroll
deductions will purchase at the applicable purchase price.
Stock Options
The Company granted options to its Named Executive Officers in 1997 as set
forth in the following table. The Company has no stock appreciation rights
("SARs") outstanding.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
-------------------------------------------------------------
Percent of
Number of Total
Securities Options/SARs Exercise Potential Realizable Value at
Underlying Granted to or Base Assumed Annual rates of Stock
Options/SARs Employees in Price Price Appreciation for Option
Name Granted (#) Fiscal Year ($/Sh) Expiration Term(1)
Date ----------------------------------
5% ($) 10% ($)
--------------- ---------------- ------------ ------------- ----------------- ----------------
Gene R. McGrevin 150,000 23% $ 4.75 04/04/02 $ 196,850(1) $ 435,000(1)
Dan R. Lee 100,000 16% $ 4.75 04/04/02 $ 131,234(1) $ 290,000(1)
(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 1997
and of unexercised options held by the Company's Named Executive Officers at
December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of
Securities Value of Unexercised
Underlying in-the-Money
Unexercised Options/SARs at
Options/SARs at FY-End ($)
FY-End (#) Exercisable/
Shares Acquired Value Exercisable/ Unexercisable
Name On Exercise (#) Realized ($) Unexercisable
- - ---- --------------- ------------ -------------
Gene R. McGrevin ................ -0- -0- 150,000/0 0/0(1)
Robert L. Taylor ................ -0- -0- 13,333/26,667 0/0(2)
Travis W. Honeycutt ............. -0- -0- 13,333/26,667 0/0(2)
Dan R. Lee ...................... -0- -0- 309,211/133,334 389,507/0(3)
Peter A. Schmitt ................ -0- -0- 35,000/40,000 0/0(4)
- - -----------
(1) The indicated value is based on an exercise price of $4.75 per share
and value per share at December 31, 1997 of $2.38.
(2) The indicated value is based on an exercise price of $14.45 per share
and value per share at December 31, 1997 of $2.38.
(3) The indicated value is based on exercise prices of $0.83 per share on
251,295 shares, $3.49 per share on 41,250 shares and $7.125 per share
on 16,666 shares for exercisable options and $7.125 per share on
33,334 shares and $4.75 per share on 100,000 shares for unexercisable
options, and a value per share on December 31, 1997 of $2.38.
(4) The indicated value is based upon an exercise price of $7.125 per share
and value per share at December 31, 1997 of $2.38.
Director Compensation
Nonemployee directors of the Company who are not affiliated with greater than
five percent shareholders of the Company ("Nonemployee Directors") are
compensated $1,000 and $250 for each meeting of the Board of Directors and
Committee of the Board of Directors, respectively, requiring travel for
attendance and are reimbursed upon request for the reasonable expenses incurred
in attending Board of Directors or committee meetings. In addition, the
Company's 1995 Nonemployee Director Stock Option Plan (the "Director Option
Plan") provides for automatic grants to each Nonemployee Director of
nonqualified stock options covering 2,000 shares of common stock at an exercise
price equal to the fair market value of the Company's common
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stock on the date of grant. The date of grant under the Director Option Plan for
each Nonemployee Director then serving as such is at each of the following
times: (1) on the effective date of adoption of the Director Option Plan, (2) on
the election of a Nonemployee Director to the Board of Directors (except at an
annual meeting of shareholders) and (3) following each annual meeting of
shareholders occurring subsequent to the first anniversary of the effective date
of the Director Option Plan and the date of any option granted to such
Nonemployee Director under the Director Option Plan. Options granted under the
Director Option Plan may be exercised only by the optionee beginning six months
after the date of grant until the earliest of five years after the date of
grant, 30 days after ceasing to be a director of the Company (other than due to
death or disability) and one year after death or disability.
During 1996, the Board of Directors, with each Nonemployee Director
abstaining, adopted a policy to increase the equity interest of its Nonemployee
Directors in the Company by awarding to each such director a stock option for
25,000 shares of Company common stock provided such director had attended at
least 75% of the sum of all meetings of the Board of Directors and any
committees on which that director served during the first year following his or
her election to the Board. Accordingly, each then incumbent Nonemployee Director
was awarded at the end of 1996 a non-qualified stock option under the Company's
Stock Option Plan covering 25,000 shares of the Company's common stock at an
exercise price of $8.00 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.
During 1997 in connection with the formation by the Board of Directors of its
Executive Committee to assist in the transition of certain duties and the search
for a permanent replacement chief executive of the Company, both arising as a
result of the retirement of the former President and Chief Executive Officer of
the Company, the Board of Directors awarded each of Mr. Hendrix and Dr. Davis,
the two Nonemployee Directors on such Executive Committee, a non-qualified stock
option under the Company's Stock Option Plan covering 25,000 shares of the
Company's common stock at an exercise price of $5.25 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 24, 1998, 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, and (iii) all directors and executive officers as a group:
Common Percentage of
Shares Beneficially Stock Beneficially
Name of Beneficial Owner Owned Owned
------------------- -----
Robert L. Taylor (1) ........................... 2,789,750 7.0%
Travis W. Honeycutt (2)......................... 2,900,388 7.3%
Gene R. McGrevin (3) ........................... 170,000 *
Dan R. Lee (4).................................. 352,610 *
Lester J. Berry (5)............................. 92,974 *
Rosdon Hendrix (6).............................. 102,000 *
Kenneth Davis (7)............................... 89,243 *
Olivia F. Kirtley (8) .......................... 108,600 *
Terence N. Furness (9) ......................... 50,000 *
Peter A. Schmitt (10) ......................... 36,500 *
All directors and executive officers as a
group (14) persons) (11) 4,075,752 10.0%
- - -----------
*Represents less than 1% of the common stock
(1) As reported by Mr. Taylor in a Statement on Schedule 13G filed with the
Securities and Exchange Commission. Includes 2,600 shares of common
stock over which Mr. Taylor acts as custodian under the Georgia
Transfers to Minors Act, and options to acquire 26,666 shares
exercisable within 60 days.
(2) Includes options to acquire 26,666 shares exercisable within 60 days.
(3) Includes options to acquire 150,000 shares exercisable within 60 days.
(4) Includes options to acquire 342,545 shares exercisable within 60 days.
(5) Includes options to acquire 82,500 shares exercisable within 60 days.
(6) Includes options to acquire 56,000 shares exercisable within 60 days.
(7) Includes options to acquire 54,000 shares exercisable within 60 days.
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(8) Includes 74,500 shares of common stock not owned directly by Ms.
Kirtley but in which beneficial ownership may be attributed to Ms.
Kirtley, and options to acquire 2,000 shares exercisable within 60
days.
(9) Includes options to acquire 50,000 shares exercisable within 60 days.
(10) Includes options to require 35,000 shares exercisable within 60 days.
(11) Includes options to acquire 969,377 shares exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
P.E.T.Net Pharmaceutical Services, LLC ("PETNet"), a limited liability
company which develops and operates facilities to distribute pharmaceuticals to
provide diagnostic services through an advanced technology known as positron
imaging, leases approximately 3,500 square feet of space included within the
Company's administrative headquarters located in Norcross, Georgia. Mr.
McGrevin, the Chairman of the Company, serves as the Chairman and Chief
Executive Officer of PETNet and is a substantial investor in PETNet. The lease
between the Company and PETNet provides for a rental rate of $15.00 per square
foot per year ($52,500 per year) which includes certain basic services such as
utilities and maintenance within such rental rate. The lease expires June 30,
2000, but may be terminated earlier at the discretion of either party upon six
months notice. Prior to entering into such lease, representatives of the Company
evaluated rental rates for comparable office space in order to advise the
Company's Board of Directors relative to the fairness of the transaction. With
Mr. McGrevin abstaining, the Board of Directors approved and authorized the
lease transaction.
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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 included on pages F-1
through F-__ 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, 1997 and 1996
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 Consolidated
Statements of Changes in Shareholders' Equity for
the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 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 Articles of Merger of MedSurg Industries, Inc. and MedSurg Acquisition
Corp. dated December 31, 1993 (incorporated by reference to Exhibit
2.1 filed with the Company's Registration Statement on Form S-1, File
No. 33-83474)
2.2 Plan and Agreement of Merger dated December 31, 1993 of MedSurg
Industries, Inc. and MedSurg Acquisition Corp. (incorporated by
reference to Exhibit 2.2 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
2.3 Certificate of Merger and Name Change of MedSurg Industries, Inc. and
MedSurg Acquisition Corp. dated January 7, 1994 (incorporated by
reference to Exhibit 2.3 filed with the Company's Registration
Statement on Form S-1, File No. 33-84374)
2.4 Articles of Merger of Creative Research and Manufacturing, Inc. and
Creative Acquisition Corp. dated December 31, 1993 (incorporated by
reference to Exhibit 2.4 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
2.5 Plan and Agreement of Merger dated December 31, 1993 of Creative
Research and Manufacturing, Inc. and Creative Acquisition Corp.
(incorporated by reference to Exhibit 2.5 filed with the Company's
Registration Statement on Form S-1, File No. 33-83474)
2.6 Certificate of Merger and Name Change of Creative Research and
Manufacturing, Inc. and Creative Acquisition Corp. dated January 7,
1994 (incorporated by reference to Exhibit 2.6 filed with the
Company's Registration Statement on Form S-1, File No. 33-83474)
Agreement and Plan of Merger dated as of July 28, 1995 among the
2.7 Company, White Knight Acquisition Corp. and White Knight Healthcare,
Inc. (incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed October 3, 1995)
2.8 Agreement and Plan of Merger dated as of May 1, 1995 among the
Company, Isolyser/SafeWaste Acquisition Corp. and SafeWaste
Corporation (incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on June 15, 1995)
2.9 Articles of Merger dated May 31, 1995 of SafeWaste Corporation With
and Into Isolyser/SafeWaste Acquisition Corp. (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form 8-K
filed on June 15, 1995)
2.10 Certificate of Merger dated May 31, 1995 of Isolyser/SafeWaste
Acquisition Corp. and SafeWaste Corporation (incorporated by reference
to Exhibit 2.3 to the Company's Current Report on Form 8-K filed on
June 15, 1995)
2.11 Articles of Merger of White Knight Healthcare, Inc., and White Knight
Acquisition Corp., dated September 18, 1995 (incorporated by reference
to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on
October 3, 1995)
2.12 Certificate of Merger of White Knight Healthcare, Inc., and White
Knight Acquisition Corp., dated September 18, 1995 (incorporated by
reference to Exhibit 2.3 to the Company's Current Report on Form 8-K
filed October 3, 1995)
2.13 Stock Purchase Agreement dated December 31, 1993 between the Company,
MedSurg Acquisition Corp., Creative Acquisition Corp., MedSurg
Industries, Inc., Creative Research and Manufacturing, Inc. and
MedInvest Enterprises, Inc. (incorporated by reference to Exhibit 2.7
to the Company's Registration Statement on Form S-1, File No.
33-83474)
2.14 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).
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 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).
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).
10.10 Lease Agreement, dated July 29, 1993, between Richard E. Curtis,
Trustee and MedSurg Industries, Inc. (incorporated by reference to
Exhibit 10.25 filed with the Company's Registration Statement on Form
S-1, File No. 33-83474)
10.11 First Lease Amendment, dated February 28, 1994, between Richard E.
Curtis, Trustee and MedSurg Industries, Inc. (incorporated by
reference to Exhibit 10.26 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
10.12 Lease 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)
10.13 Lease, dated September 28, 1984, between M.S.I. Limited Partnership
and MedSurg Industries, Inc. (incorporated by reference to Exhibit
10.28 filed with the Company's Registration Statement on Form S-1,
File No. 33-83474)
10.14 Amendment No. 1 to Lease, dated October 10, 1984, between M.S.I.
Limited Partnership and MedSurg Industries, Inc. (incorporated by
reference to Exhibit 10.29 filed with the Company's Registration
Statement on Form S- 1, File No. 33-83474)
10.15 Agreement and Second Amendment to Lease, dated December 31, 1993,
between M.S.I. Limited Partnership and MedSurg Industries, Inc.
(incorporated by reference to Exhibit 10.30 filed with the Company's
Registration Statement on Form S-1, File No. 33-83474)
10.16 Third Amendment to Lease, dated September 9, 1994, between M.S.I.
Limited Partnership nd Medsurg Industries, Inc. (incorporated by
reference to Exhibit 10.31 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
10.17 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)
10.18 Amended 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).
10.19 Lease 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)
10.20 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)
10.21 Agreement and Lease dated October 1, 1992 between Industrial
Development Authority of the City of Douglas, Arizona and White Knight
Healthcare, Inc. (incorporated by reference to Exhibit 10.41 filed
with the Company's Registration Statement on Form S-1 File No.
33-97086)
10.22 Product Purchase and Supply Agreement dated February 8, 1993 between
White Knight Healthcare, Inc. and Sterile Concepts, Inc. (incorporated
by reference to Exhibit 10.42 filed with the Company's Registration
Statement on Form S- 1 File No. 33-97086)
10.23 Non-Negotiable Promissory Note in the original principal amount of
$2,304,000.00 dated February 8, 1993 between White Knight Healthcare,
Inc. and Sterile Concepts, Inc. (incorporated by reference to Exhibit
10.43 filed with the Company's Registration Statement on Form S-1 File
No. 33-97086)
10.24 Non-Negotiable Promissory Note in the original principal amount of
$1,278,500.00 dated February 8, 1993 between White Knight Healthcare,
Inc. and Sterile Concepts, Inc. (incorporated by reference to Exhibit
10.44 filed with the Company's Registration Statement on Form S-1 File
No. 33-97086)
10.25 Form of Non-Negotiable Promissory Note in the original Principal
amount of $750,000 dated September 15, 1995 between the Company and
Ali R. Momtaz (incorporated by reference to Exhibit 10.46 filed with
the Company's Registration Statement on Form S-1 File No. 33-97086)
10.26 Distribution and Marketing Agreement dated September 15, 1995 between
the Company and Sterile Concepts, Inc. (incorporated by reference to
Exhibit 10.48 filed with the Company's Registration Statement on Form
S-1 File No. 33-97086)
10.27 Agreement, dated March 18, 1995 between White Knight Hospital
Disposables and United Food and Commercial Workers Local 99R
(incorporated by reference to Exhibit 10.50 filed with the Company's
Registration Statement on Form S-1 File No. 33-97086)
10.28 Labor Contract, dated July 22, 1994, between Union of Industrial,
Related and Similar Workers of the Municipality of Agua Prieta,
Sonora, C.R.O.M. and Industrias Apson, S.A. de C.V. (incorporated by
reference to Exhibit 10.51 filed with the Company's Registration
Statement on Form S- 1 File No. 33-97086)
10.29 Lease, dated October 1, 1995, between SafeWaste Corporation and
Highwoods/Forsyth Limited Partnership (incorporated by reference to
Exhibit 10.56 filed with the Company's Registration Statement on Form
S-1 File No. 33-97086)
10.30 1995 Employee Stock Purchase Plan, as amended by First Amendment dated
July 1, 1995 (incorporated by reference to Exhibit 10.57 filed with
the Company's Registration Statement on Form S-1 File No. 33-97086)
10.31 Second Amendment to 1995 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.58 to the Company vs. Annual Report on Form
10-K for the period ended December 31, 1995)
10.32 Third Amendment to 1995 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K
for the period ending December 31, 1996).
10.33 Asset Exchange Agreement dated July, 1995 between Microtek and Xomed,
Inc. (incorporated by reference to Exhibit 10.9 to Microtek's Annual
Report on Form 10-K for the period ended November 30, 1995).
10.34 Asset Purchase Agreement dated November 30, 1995 among Microtek,
Medi-Plast International, Inc. and certain affiliates of Medi-Plast
International, Inc. (incorporated by reference to Microtek's Current
Report on Form 8-K dated December 8, 1995).
10.35 Asset Purchase Agreement dated April 27, 1996 between Microtek and
Advanced Instruments, Inc. (incorporated by reference to Exhibit 2.1
to Microtek's Current Report on Form 8-K dated May 15, 1996).
10.36 Employment Agreement dated as of April 11, 1997 between Isolyser
Company, Inc. and Gene R. McGrevin.
10.37 Employment Agreement effective as of April 1, 1997, between Isolyser
Company, Inc. and Dan R. Lee.
10.38 Employment Agreement dated as of May 1, 1997 between Isolyser Company,
Inc. and Robert L. Taylor.
10.39 Employment Agreement effective as of March 1, 1998, between Isolyser
Company, Inc. and Peter Schmitt.
11.1 Statement re: computation of per share earnings
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1
to the Company's Annual Report on Form 10-K for the period ending
December 31, 1996)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP 27.1 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K/A, filed October 14, 1997, regarding Other Events.
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)
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. 1995 Employee Stock Purchase Plan, as amended by First Amendment dated July
1, 1995 (incorporated by reference to Exhibit 10.57 filed with the
Company's Registration Statement on Form S-1 File No. 33-97086)
13. Second Amendment to 1995 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.58 to the Company vs. Annual Report on Form 10-K
for the period ended December 31, 1995)
526150.6
-47-
14. Third Amendment to 1995 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K for
the period ending December 31, 1996).
15. Employment Agreement dated as of April 11, 1997 between Isolyser Company,
Inc. and Gene R. McGrevin.
16. Employment Agreement effective as of April 1, 1997, between Isolyser
Company, Inc. and Dan R. Lee.
17. Employment Agreement dated as of May 1, 1997 between Isolyser Company, Inc.
and Robert L. Taylor.
18. Employment Agreement effective as of March 12, 1998, between Isolyser
Company, Inc. and Peter Schmitt.
526150.6
-48-
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 __, 1998.
ISOLYSER COMPANY, INC.
By:__________________________________________
Terence N. Furness, 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 __, 1998.
SIGNATURE TITLE
- - --------- -----
President and Chief Executive Officer
Terence N. Furness (principal executive officer)
Executive Vice President,
Travis W. Honeycutt Secretary and Director
Executive Vice President and Director
Dan R. Lee
Vice President, Chief Financial Officer and
Peter A. Schmitt Treasurer (principal financial and accounting
officer)
Chairman of the Board of Directors
Gene R. McGrevin
Director
Rosdon Hendrix
Director
Kenneth F. Davis
Director
Olivia F. Kirtley
526150.6
INDEPENDENT AUDITORS' REPORT
Board of Directors of Isolyser Company, Inc.:
We have audited the consolidated balance sheets of Isolyser Company, Inc. and
subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December, 31, 1997. 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. The consolidated financial statements
give retroactive effect to the merger of the Company and Microtek Medical, Inc.
("Microtek") which has been accounted for as a pooling of interests as described
in Note 2 to the consolidated financial statements. We did not audit the
statements of operations, changes in shareholders' equity, and cash flows of
Microtek for the year ended November 30, 1995 which statements reflect total
revenues of $30,058,999 for the year ended November 30, 1995. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Microtek for 1995, is
based solely on the report of such other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 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 11 to the consolidated financial statements, the Company
changed its method of accounting for business process reengineering costs.
Atlanta, Georgia
February 27, 1998
(March 20, 1998 as to the 7th paragraph of Note 5) Deloitte & Touche LLP
533791.wp61
F-1
ASSETS 1997 1996 LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
CURRENT ASSETS EQUITY CURRENT LIABILITIES
Cash and cash equivalents $ 9,298,800 $ 20,925,485 Accounts payable $10,108,429 $ 10,197,641
Accounts receivable, net of allowance 13,909,271 27,691,301 Bank overdraft 3,229,216
for doubtful accounts of $1,643,951 Accrued compensation 2,519,672 3,521,704
and $1,702,069, respectively Other accrued liabilities 3,124,204 3,237,546
Inventories, net 32,067,351 62,823,765 Current portion of long-term 4,609,493 4,496,623
deb ----------- -----------
Prepaid inventories 932,784
Net assets held for sale 35,750,491 20,361,798 24,682,730
Prepaid expenses and other assets 1,744,733 2,629,005
----------- -----------
LONG-TERM DEBT 37,545,894 47,028,592
Total current assets 92,770,646 115,002,340
DEFERRED RENT 309,372 419,741
PROPERTY AND EQUIPMENT
Land 964,390 2,842,390 COMMITMENTS AND CONTINGENCIES (Note 8)
Building and leasehold improvements 9,491,053 24,541,979
Equipment 19,696,911 52,915,897 SHAREHOLDERS' EQUITY:
Furniture and fixtures 6,252,651 4,821,744 Participating preferred stock, no par,
Construction-in-progress 1,217,335 1,967,451 500,000 shares authorized, none issued
----------- -----------
37,622,340 87,089,461 Common stock, $.001 par; 100,000,000
Less accumulated depreciation 17,630,265 13,143,721 shares authorized; 39,554,411 and
----------- ----------- 38,352,649 shares issued, respectively 39,554 39,342
Property and equipment, net 19,992,075 73,945,740
Additional paid-in capital 203,601,184 203,345,978
DEPOSITS ON MACHINERY AND EQUIPMENT 1,398 2,063,573
NET ASSETS HELD FOR SALE 1,642,082 Accumulated deficit (115,743,281)(21,839,927)
Unearned shares restricted to
INTANGIBLE ASSETS: employee stock ownership plan (300,000) (360,000)
Goodwill 34,581,870 56,634,863 Cumulative translation adjustment (103,526) 14,723
----------- ----------
Customer lists 1,285,898 5,559,410 87,493,931 181,200,116
Patent and license agreements 2,272,610 2,526,063 Treasury shares, at cost
Noncompete agreements 485,000 485,000 (310,232 and 319,544 shares, (1,377,364)(2,396,580)
respectively) ----------- -----------
Other 427,165 717,886
----------- -----------
39,052,543 65,923,222 Total shareholders' equity 86,116,567 178,803,536
Less accumulated amortization 8,249,130 8,591,899
----------- -----------
Intangible assets, net 30,803,413 57,331,323
INVESTMENT IN JOINT VENTURE 110,463 154,463
OTHER ASSETS - Net 655,636 795,078
----------- -----------
$144,333,631 $250,934,599 $ 144,333,631 $ 250,934,599
=========== =========== =============== =============
See notes to consolidated financial statements.
533791.wp61
F-2
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
NET SALES $159,939,799 $ 164,906,050 $104,874,417
COST OF GOODS SOLD 142,093,456 128,597,814 74,953,378
----------- ----------- ------------
Gross profit 17,846,343 36,308,236 29,921,039
OPERATING EXPENSES:
Selling and marketing expenses 26,504,953 27,479,033 18,234,438
General and administrative expenses 16,916,898 13,902,758 9,503,179
Amortization of intangibles 3,847,223 4,289,850 2,411,090
Research and development 2,600,824 2,172,910 1,126,873
Impairment loss 57,310,274
Restructuring charge 4,410,536
Costs associated with merger 3,371,546
Total operating expenses 107,180,172 55,626,633 31,275,580
LOSS FROM OPERATIONS (89,333,829) (19,318,397) (1,354,541)
INTEREST INCOME 555,306 1,708,766 3,212,838
INTEREST EXPENSE (3,926,500) (2,990,147) (1,378,621)
LOSS FROM JOINT VENTURE (44,000) (34,246) (43,810)
-------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION
(BENEFIT), EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (92,749,023) (20,634,024) (435,866)
INCOME TAX PROVISION (BENEFIT) 354,331 (639,120) 979,615
LOSS BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (93,103,354) (19,9994,904) (543,749)
EXTRAORDINARY ITEM - Loss from refinancing
of credit facilities, net of tax
benefit of $332,041 (457,465)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of tax of $0 (800,000)
NET LOSS $(93,903,354) $(20,452,369) $ (543,749)
LOSS PER COMMON SHARE - Basic and Diluted:
Loss before extraordinary item and cumulative
effect of change in accounting principle $ (2.37) $ (0.52) $ (0.02)
Extraordinary item (0.01)
Cumulative effect of change in accounting principle (0.02) - -
NET LOSS $ (2.39) $ (0.53) $ (0.02)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING -
Basic and Diluted 39,272,691 38,762,750 33,704,310
=========== =========== ============
See notes to consolidated financial statements
533791.wp61
F-3
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNREALIZED
ADDITIONAL LOSS ON
COMMON STOCK ISSUED PAID-IN ACCUMULATED TRANSLATION SHORT-TERM ESOP TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT INVESTMENTS SHARES SHARES EQUITY
BALANCE - December 31, 1994 31,900,566 $31,901 $111,989,107 $(870,529) $ (8,585) $ _ $(480,000) $ 110,661,894
Issuance of common stock to
acquire businesses 528,292 528 8,925,458 8,925,986
Issuance of common stock at
$14.50 per share for cash in
conjunction with the Company's
secondary public offering (net
transaction costs of$5,288,360) 5,492,970 5,493 74,354,213 74,359,706
Reclassification of redeemable
common shares tocommon shares 495,930 496 3,718,979 3,719,475
Exercise of stock options and
warrants 318,348 318 1,224,595 1,224,913
Purchase and retirement of common
stock (383,457) (383) (1,281,476) (1,281,859)
Release of 16,500 shares reserved
for ESOP 11,125 60,000 71,125
Tax benefits related to
stock options 665,971 665,971
Currency translation loss (33,759) (33,759)
Purchase of 329,502 treasury
shares (2,471,265) (2,471,265)
Net loss (543,749) (543,749)
--------- ------ ---------- ---------- ------- ------- --------- -------- ----------
BALANCE - December 31, 1995 38,352,649 38,353 199,607,972 (1,414,278) (42,344) - (420,000)(2,471,265) 195,298,438
Microtek net income for
December, 1995 26,720 26,720
Exercise of stock options and
warrants 989,183 989 3,118,021 3,119,010
Issuance of 9,985 shares
of common stock from
treasury pursuant to ESPP 43,860 74,685 118,545
Vesting of performance stock
options 500,000 500,000
Release of 16,500 shares
reserved from ESOP 76,125 (60,000) 136,125
Currency translation gain 57,067 57,067
Net loss (20,452,369) (20,452,369)
--------- ------ ------------ ----------- ------ ------- --------- ---------- ---------
BALANCE - December 31, 1996 39,341,832 39,342 203,345,978 (21,839,927) 14,723 - (360,000) (2,396,580) 178,803,536
Exercise of stock options and
warrants 205,139 205 750,270 750,475
Issuance of 51,482 shares of
common stock from treasury
pursuant to ESPP (79,797) 386,115 306,318
Issuance of 107,484 shares
of common stock from
treasury pursuant to
401(k) plan (417,182) 806,131 388,949
Release of 16,500 shares
reserved for ESOP (21,328) 60,000 38,672
Exchange of 6,000
common shares 7,440 7 23,243 (23,250) -
Release of 7,681 White Knight
escrow shares (149,780) (149,780)
Currency translation loss (118,249) (118,249)
Net loss - - - (93,903,354) - - - - 93,903,354)
BALANCE - December 31, 1997 $ 39,554,411 $39,554 $203,601,184 $(115,743,281) $(103,526) $ - $(300,000)$(1,377,364)$86,116,567
============ ====== ============ ============= ========= ========= ======== ========== ==========
533791.wp61
F-4
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
OPERATING ACTIVITIES:
Net loss $ (93,903,354) $ (20,452,369)$ (543,749)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Microtek net income for December 1995 26,720
Depreciation 7,524,004 6,552,416 2,552,817
Amortization 3,847,223 4,289,850 2,336,383
Provision for doubtful accounts 375,442 145,092 82,832
Provision for obsolete and slow moving inventory 14,694,250 9,479,426 372,611
Tax benefits relating to stock options 665,971
Loss on disposal of property and equipment 138,403 207,252 25,646
Impairment loss 57,310,274 2,169,934
Loss from joint venture 44,000 34,426 44,236
Compensation expense related to ESOP 38,672 136,125 71,125
Compensation expense related to vesting of variable options 500,000
Changes in assets and liabilities, net of effects from purchased
businesses:
Accounts receivable 4,408,808 (4,128,080) (296,003)
Inventories 4,314,164 (25,708,431) (16,995,068)
Prepaid inventories (404,438) 245,116 (819,476)
Prepaid expenses and other assets 698,272 (1,305,973) (447,744)
Deferred income taxes (1,357,482) (794,346)
Other assets (259,459) (185,977) (1,425,325)
Accounts payable 2,157,788 (5,531,890) 8,244,677
Accrued compensation 278,315 (434,562) (48,457)
Other liabilities (388,098) (3,528) (96,387)
Other accrued liabilities 177,913 1,597,373 (366,141)
Net cash provided by (used in) operating activities 1,052,180 (33,724,562) (7,436,398)
----------------- ------------- ------------
INVESTING ACTIVITIES:
Purchase of and deposits for property and equipment (4,013,545) (19,081,793) (46,494,427)
Purchase of businesses, net of cash acquired (5,873,503) (33,455,465)
Proceeds from the sale of property and equipment 262,500 125,703
Proceeds from disposition of joint venture 298,248
Net cash used in investing activities (3,751,045 (24,955,296) (79,525,941)
----------------- ------------- ------------
FINANCING ACTIVITIES:
Borrowings under line of credit agreements 53,068,155 74,943,720 18,527,411
Repayments under line of credit agreements (57,240,650) (52,264,517) (33,388,630)
Increase (decrease) in bank overdraft (2,721,485) 1,429,174 728,837
Proceeds from notes payable 1,338,022 13,844,872 18,177,688
Repayment of notes payable (4,699,355) (16,461,380) (6,075,497)
Proceeds from issuance of common stock 79,648,066
Direct costs related to issuance of common stock (6,288,360)
Purchase of treasury stock (3,753,124)
Issuance of treasury stock 695,267 118,545
Proceeds from exercise of stock options and warrants 750,475 3,119,010 1,224,913
Net cash provided by (used in) financing activities (8,809,571) 24,729,424 69,801,304
================= ============= ============
(CONTINUED)
533791.wp61
F-5
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ (118,249) $ 57,067 $ (33,759)
----------------- ------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (11,626,685) (33,893,367) 17,194,794)
CASH AND CASH EQUIVALENTS:
Beginning year 20,925,485 54,818,852 72,013,646
End of year $ 9,298,800 $ 20,925,485$ 54,818,852
================= ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of interest capitalized) $ 3,772,635 $ 2,797,865$ 1,350,731
================= ============ ===========
Income taxes $ 217,952 $ 1,922,656$ 1,302,386
================= ============ ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Liabilities assumed in conjunction with the purchase of businesses $ 30,214,399
===========
Equipment acquired through capital leases $ 243,327 $ 1,008,503
================= ============
See Notes to Consolidated Financial Statements
(Concluded)
533791.wp61
F-6
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
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. 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's future performance will depend to a substantial degree upon
its ability to successfully market its patented OREX Degradables (TM)
products ("OREX") in commercial quantities. The Company's sales of OREX
products were $8,138,500 for the year ended December 31, 1997 and
$7,079,000 for the year ended December 31, 1996.
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. 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 except for the inventories held by the Company's subsidiary,
White Knight Healthcare, Inc. ("White Knight"). White Knight uses the
last-in first-out ("LIFO") inventory valuation method. 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.
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. During 1996 and
1995, the Company capitalized as part of property and equipment $220,000
and $920,000 of interest, respectively.
Intangible Assets - Intangible assets consist primarily of goodwill,
customer lists, and noncompete agreements. Goodwill represents the excess
of the cost of acquired businesses
533791.wp61
F-7
over the fair value of net identifiable assets acquired and is amortized
using the straight-line method over 10 to 40 years. Customer lists and
noncompete agreements are amortized using the straight-line method over 4
to 15 years.
Joint Venture - Investment in the joint venture is accounted for using the
equity method of accounting. The joint venture investment represents a 50%
ownership interest in a mobile waste treatment operation.
Research and Development Costs - Research and development costs 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 and Mexican subsidiaries are translated into U.S. dollars at
current exchange rates, and revenues and expenses are translated at average
exchange rates. As the Mexican subsidiaries' operations are an extension of
the Company's operations, the U.S. dollar is considered to be the
functional currency and any exchange gains or losses are included in net
income. The effect of foreign currency transactions was not material to the
Company's results of operations for the years ended December 31, 1997,
1996, and 1995.
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 an asset may not be recoverable. 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).
Earning Per Share - Earnings per share is calculated in accordance SFAS
128, "Earnings Per Share," which was adopted in 1997 and calls for the
restatement of all periods presented on a comparative basis. This Statement
simplifies the standards for computing earnings per share ("EPS")
previously found in Accounting Principles Board Opinion ("APB") 15,
"Earnings Per Share," by replacing the presentation of primary EPS with
basic EPS. It also requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed similarly to fully
diluted EPS under APB 15. For 1997, 1996, and 1995, there were no
533791.wp61
F-8
significant differences in weighted average shares outstanding for the
basic and diluted EPS computations.
Newly Issued Accounting Standards - In June 1997, the Financial Accounting
Standards Board issued SFAS 130, "Reporting Comprehensive Income" and SFAS
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS 130 establishes standards for the reporting and displaying of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. SFAS 131
establishes standards for the way that the public business enterprises
report select information about operating segments in interim financial
reports issued to shareholders. The Company will adopt SFAS 130 and SFAS
131 in 1999. Management does not expect these new pronouncements to
significantly impact the presentation of the Company's consolidated
financial statements.
Reclassifications - Certain reclassifications have been made in the 1995
and 1996 financial statements to conform to the 1997 classifications.
2. ACQUISITIONS
On August 30, 1996, the Company merged with Microtek Medical, Inc.
("Microtek"), a manufacturer and marketer of a broad range of medical and
surgical supplies, and, in connection therewith, issued 7,722,965 shares of
common stock for all of Microtek's outstanding common stock. Costs related
to the merger of $3,372,000 were charged to expense primarily in the third
quarter of fiscal 1996. The merger was accounted for as a pooling of
interests and, accordingly, the Company's financial statements have been
restated to include the results of Microtek for all periods presented. In
conjunction with the merger, certain stock options issued to officers of
Microtek became fully vested, and, accordingly, $500,000 of compensation
expense related to this vesting was recognized as additional paid-in
capital. Combined and separate results of the Company and Microtek for the
periods prior to the merger are as follows:
ISOLYSER MICROTEK ELIMINATIONS COMBINED
Nine months ended September 30, 1996
Net sales $ 93,886 $ 30,516 $ (804) $ 123,598
Extraordinary item (292) (283) (575)
Net Income (loss) (6,406) 2 (6,404)
Year ended December 31, 1995
(Microtek as of November 30, 1995)
Net sales 75,414 30,059 (599) 104,874
Net income (loss) (2,851) 2,307 (544)
Note: All eliminations are related to intercompany sales and purchases.
533791.wp61
F-9
In connection with the merger, Microtek changed its fiscal year-end from
November 30 to December 31, which conforms to Isolyser's fiscal year-end.
Microtek's separate results for fiscal 1996 have been restated to a
December 31 year-end. Microtek's separate results of operations for the
month of December 1995, therefore, are not reflected in the consolidated
statement of operations. The following is a condensed statement of income
for Microtek for the month of December 1995 (in thousands):
Net sales $ 2,701
Cost of good sold 1,423
-----------
Gross profit 1,278
Operating expenses 939
-----------
Income from operations 339
Interest income 105
-----------
Income before income tax provision 234
Income tax provision 207
-----------
Net income $ 27
===========
The consolidated financial statements for all periods prior to 1996 have
not been restated for the change in fiscal years. They include the
Company's result of operations on a December 31 fiscal year basis, and
Microtek's on a November 30 fiscal year basis.
On April 28, 1996, the Company acquired substantially all of the assets of
Venodyne, a manufacturer and marketer of medical products, for $4,000,000
in cash financed by Microtek's credit facility, a $1,750,000 note payable
(Note 5), and additional consideration not to exceed $1,000,000, based on
sales of certain of Venodyne's products, through April 1999. Through
December 31, 1997, $487,000 in additional consideration has been paid.
Goodwill arising from this acquisition is being amortized using the
straight-line method over 25 years.
On May 31, 1995, the Company acquired SafeWaste Corporation ("SafeWaste"),
a mobile waste management company, for $3,105,000, consisting of $1,179,000
in cash and 169,318 shares of common stock valued at $1,926,000. Goodwill
arising from this acquisition was being amortized using the straight-line
method over ten years. In December 1996, the carrying value of goodwill was
written off in conjunction with a restructuring (Note 3).
On June 27, 1995, the Company acquired the infection control drape line of
Xomed, Inc. ("Xomed"), in exchange for the assets of the Company's otology
product line, $1,316,000 in cash financed by Microtek's credit facility and
$1,314,000 in notes payable (Note 5). Goodwill arising from the acquisition
is being amortized using the straight-line method over 25 years.
Effective September 1, 1995, the Company acquired White Knight, a
manufacturer, packager, and distributor of medical supplies for
$30,888,000, including $1,388,000 in expenses, consisting of $23,889,000 in
cash and 359,000 shares of common stock valued at $6,994,000. In
conjunction with the purchase, the Company allocated $4,124,000 to a
customer list and $22,355,000 to goodwill, which was being amortized using
the straight-line method over 7 and 20 years, respectively. In December
1997, the carrying value of the customer list and goodwill was written off
due to impairment (Note 3).
On November 30, 1995, the Company acquired substantially all of the assets
and assumed certain liabilities of Medi-Plast International, Inc.,
("Mediplast"), a manufacturer and marketer of
533791.wp61
F-10
medical supplies for $11,119,000 consisting of $7,519,000 in cash financed
by the Company's credit facility and a $3,600,000 note payable (Note 5).
Goodwill arising from the acquisition is being amortized using the
straight-line method over 25 years.
These acquisitions have been accounted for using the purchase method of
accounting. The consolidated statements of operations include the
operations of the businesses since their respective acquisition dates.
The following unaudited pro forma information for 1996 and 1995 gives
effect to these acquisitions as if they had occurred on January 1, 1995:
1996 1995
Net sales $ 166,492,000 $147,783,000
Net loss (20,697,000) (1,071,000)
Net loss per share - Basic and Diluted (0.53) (0.03)
The pro forma consolidated information is not necessarily indicative of the
results that would have been reported had such acquisitions occurred on
such dates, nor is it indicative of the Company's future operations.
3. IMPAIRMENT AND RESTRUCTURING
IMPAIRMENT
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:
Write-down of property and equipment $ 34,516,000
Write-down of intangible assets 22,794,000
-----------------
$ 57,310,000
=================
533791.wp61
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On February 25, 1998, the Company approved a plan to dispose of its Orex
manufacturing facilities and White Knight subsidiary. Accordingly, the net
assets of these entities of $35,750,000 at December 31, 1997, are
classified as held for sale in the accompanying consolidated balance
sheet, and are comprised of the following:
Assets:
Accounts receivable $ 8,848,000
Inventory (LIFO basis) 11,748,000
Prepaid inventory (LIFO basis) 1,337,000
Prepaid expenses and other assets 186,000
Property and equipment, net 19,980,000
Other assets 286,000
------------
Total assets 42,385,000
Liabilities:
Accounts payable 2,247,000
Bank overdraft 508,000
Accrued compensation 766,000
Accrued expenses 1,278,000
Long-term debt 1,836,000
------------
Total liabilities 6,635,000
------------
$ 35,750,000
============
Net assets held for sale
The Company anticipates disposing of these entities in 1998.
The following represents the results of operations (including impairment
charges) of the above noted entities for the year ended December 31, 1997:
Net sales $ 49,931,000
Net loss (86,357,000)
Net loss per share - Basic and Diluted (2.20)
RESTRUCTURING
During 1996, the Company approved a plan to consolidate and or dispose of
its noncore businesses and to consolidate certain of its administrative
functions and services (the "Restructuring"). As part of the Restructuring,
the Company recorded the following charges:
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F-12
Write-down of intangible assets $ 2,623,000
Employee severance 1,113,000
Other 675,000
-------------
$ 4,411,000
=============
In conjunction with the Restructuring, the Company recorded an impairment
loss of $2,623,000 relating to valuation adjustments on certain intangible
assets of the Company's noncore businesses to be sold. As a result of the
restructuring, certain long-lived assets, primarily equipment, with a
carrying value of $1,642,000 at December 31, 1996 were classified as held
for sale. During the fourth quarter of 1997, the Company determined that
this equipment would be held for use and accordingly, reclassified this
equipment into Property and Equipment in the accompanying consolidated
balance sheet.
4. INVENTORIES
Inventories are summarized by major classification at December 31, 1997 and
1996 as follows:
1997 1996
Raw materials $ 24,121,000 $ 20,936,000
Work-in-process 4,456,000 23,267,000
Finished goods 25,901,000 29,346,000
------------------ -------------------
54,478,000 73,549,000
Less reserves for:
Slow moving and obsolete inventory 22,411,000 10,041,000
LIFO inventory 684,000
------------------ -------------------
$ 32,067,000 $ 62,824,000
================== ===================
At December 31, 1996, LIFO inventories approximated $28,324,000. At
December 31, 1997, the Company's LIFO inventory is included as a component
of net assets held for sale.
At December 31, 1997, the net OREX inventory is approximately $7,500,000.
5. LONG-TERM DEBT
In conjunction with the August 30, 1996 Microtek merger, the Company
replaced its existing $24,500,000 Isolyser credit agreement and $17,000,000
Microtek credit agreement with a $55,000,000 credit agreement as amended
through August 12, 1997 between the Company and a Bank, consisting of a
$40,000,000 revolving credit facility through August 31, 1999 and a
$15,000,000 term loan facility (the "Credit Agreement"). In conjunction
with this replacement, the Company recorded an extraordinary loss of
$457,000 in 1996, net of a tax benefit of $332,000 relating to the
extinguishment of the former credit agreements.
Borrowings under the revolving credit facility are based on the lesser of a
percentage of eligible accounts receivable and inventory or $40,000,000
less any outstanding letters of credit issued under the Credit Agreement.
Current additional borrowing availability under the facility at December
31, 1997 was $6,095,000. Revolving credit borrowings bear interest, at the
533791.wp61
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Company's option, at either the Alternate Base Rate, plus an Interest
Margin as defined ("Interest Margin") or LIBOR plus an Interest Margin
(8.13% at December 31, 1997). Outstanding borrowings under the revolving
credit facility were $24,274,000 and $28,447,000 at December 31, 1997 and
1996, respectively.
Commencing on December 31, 1996, the term loan facility is repayable in
quarterly principal payments of $500,000 through September 1998 and
$750,000 through June 2001, with any remaining indebtedness due on August
31, 2001. The term loans bear interest, at the Company's option, at either
the Alternate Base Rate plus an Interest Margin or LIBOR plus an Interest
Margin (8.63% at December 31, 1997). Outstanding borrowings under the term
loan facility were $12,388,000 and $14,500,000 at December 31, 1997 and
1996, respectively.
The Credit Agreement provides for the issuance of up to $3,000,000 in
letters of credit. Outstanding letters of credit at December 31, 1997 were
$50,000.
The Credit Agreement 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% per annum. The Company is also
subject to prepayment penalties through the third year of the Credit
Agreement equal to 1% of the amount of the aggregate commitment terminated
or reduced, as defined.
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. The Credit
Agreement contains certain restrictive covenants, including the maintenance
of certain financial ratios, net income, net worth, and limitations on
acquisitions, dispositions, capital expenditures, and additional
indebtedness. The Company also is not permitted to pay any dividends.
At December 31, 1997, the Company was not in compliance with the net income
and net worth covenants. These existing covenant violations were waived by
the Bank on March 20, 1998. In connection with the waiver of these covenant
violations, the Bank and the Company amended the Credit Agreement to revise
certain covenants including certain of the financial ratios and the net
worth and capital expenditure covenants, delete the net income covenant,
add an earnings before interest, taxes, depreciation and amortization
("EBITDA") covenant, and revise the Interest Margins and term loan
quarterly payments to $750,000 at September 30, 1998 and $1 million
thereafter.
As a result of the Microtek merger, the Company is also obligated under
certain other long-term notes payable, relating primarily to Microtek
acquisitions, which aggregated $4,051,000 and $5,238,000 at December 31,
1997 and 1996, respectively. These obligations bear interest at rates
ranging from 6.09% to 9.5% and mature through November 2000. Two of the
acquisition notes payable aggregating $3,490,000 and $4,638,000 at December
31, 1997 and 1996, respectively, are subordinated to the Credit Agreement.
As a result of the White Knight acquisition, the Company is also obligated
under certain other long-term notes payable and capital leases which
aggregated approximately $1,836,000 and $1,906,000 at December 31, 1997 and
1996, respectively. These obligations bear interest at rates ranging from
6.1% to 11.6% and mature through August 2003, and are included as a
component of net assets held for sale at December 31, 1997.
The Company has a $250,000 overdraft protection credit facility with
another bank which was
533791.wp61
F-14
unused at December 31, 1997.
During 1997 and 1996, the Company acquired certain equipment under capital
leases aggregating $243,000 and $822,000 at December 31, 1997 and 1996,
respectively.
At December 31, 1997, aggregate maturities of long-term debt, including
$1,836,000 included as a component of net assets held for sale and amounts
due under capital leases, are summarized below:
1998 $ 4,609,000
1999 29,452,000
2000 6,683,000
2001 1,697,000
2002 51,000
Thereafter 1,499,000
---------------------
$ 43,991,000
=====================
The carrying value of long-term debt at December 31, 1997 approximates fair
value based on interest rates that are believed to be available to the
Company for debt with similar provisions provided for in the existing debt
agreements.
6. LEASES
The Company leases office, manufacturing, and warehouse space, and
equipment under operating lease agreements expiring through 2004. Rent
expense was $2,595,000, $2,549,000, and $1,728,000 in 1997, 1996, and
1995, respectively. At December 31, 1997, minimum future rental payments
under these leases are as follows:
1998 $ 1,901,000
1999 1,771,000
2000 1,710,000
2001 2,366,000
2002 1,445,000
Thereafter 1,916,000
---------------------
$ 11,109,000
=====================
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 (benefit) is summarized as follows:
533791.wp61
F-15
1997 1996 1995
Current:
Federal $ 349,000 $ 852,000
State $ 80,001 67,000 140,000
Foreign 274,330 179,000 380,000
-------------- ----------------- -----------------
354,331 595,000 1,372,000
Deferred:
Federal (1,039,000) (1,483,000)
State (195,000) (68,000)
----------------- -----------------
(1,234,000) (1,551,000)
Tax expense resulting
from allocating
employee stock
option tax benefits
to additional paid-in
capital 666,000
Tax expense resulting from
allocating certain tax
benefits to reduce
goodwill, including
$252,000 of previously
unrecognized tax
benefits as
December 31, 1994 493,000
-------------- ----------------- -----------------
354,331 (639,000) 980,000
Income tax benefit related
to extraordinary item (332,000)
-------------- ----------------- -----------------
Total income tax
provision (benefit) $ 354,331 $ (971,000) $ 980,000
============== ================= =================
During 1995, the Company recognized $666,000 in income tax benefits
associated with the exercise of employee stock options. Of the benefit
recognized in 1995, $125,000 related to compensation expense deductions
generated during 1994. These income tax benefits were recorded in the
accompanying consolidated financial statements as additional paid-in
capital.
The income tax provision (benefit) allocated to continuing operations using
the federal statutory tax rate differs from the actual income tax provision
(benefit) as follows:
DECEMBER 31,
1997 1996 1995
------------------------------------------------------------------------------------
Federal statutory rate $ (31,806,692) (34) % $ (7,016,000) (34) % $ 148,000 34 %
State income taxes 86,000 20 %
Items not deductible for tax
purposes, primarily goodwill
and merger costs 8,595,300 9 % 2,881,000 14 % 504,000 116 %
Tax benefit allocated to
reduce goodwill % 242,000 56 %
Other, net (11,853) % 124,000 1 % % %
Valuation allowance 23,577,576 25 % 3,372,000 16 %
---------------- ----- --------------------- ----------- -----
$ 354,331 - % $ (639,000) (3) % $ 980,000 226 %
================ ===== ===================== =========== =====
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.
533791.wp61
F-16
The following items comprise the Company's deferred taxes at December 31,
1997 and 1996:
1997 1996
Deferred income tax assets (liabilities):
Allowance for doubtful accounts $ 346,000 $ 585,000
Inventory 10,367,000 4,727,000
Accrued expenses 1,210,000 480,000
Valuation allowance (11,923,000) (5,792,000)
------------ -----------
Net deferred income taxes - current - -
Operating loss carryforward 15,506,000 3,143,000
Capital loss carryforward 230,000 230,000
Intangible assets 1,284,000 (1,000,000)
Property and equipment 3,931,000 (2,554,000)
Credit carryforward 152,000 157,000
Accrued expenses 2,893,000
Other 122,000 24,000
Valuation allowance (24,118,000)
--------------- ----------
Net deferred income taxes - noncurrent - -
--------------- ----------
Net deferred income taxes $ - $ -
=============== ==========
Gross deferred income tax assets and liabilities equaled $36,041,000 and
$0, respectively, at December 31, 1997 and $9,346,000 and $3,554,000,
respectively, at December 31, 1996.
During 1995, the Company reduced the valuation allowance with respect to
deferred tax assets by $96,000 to $548,000. During 1996, the Company
increased the valuation allowance with respect to deferred tax assets by
$5,244,000 to $5,792,000. During 1997, the Company increased their
valuation allowance by $30,249,000 to $36,041,000.
At December 31, 1997, the Company has net operating loss carryforwards of
$45,605,000 which expire at various dates through 2012. The loss includes
$4,289,000 for compensation cost deductions associated with the exercise of
employee stock options. The tax benefit relating to these deductions will,
when realized, be recorded as additional paid-in capital.
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.
The Company's SafeWaste subsidiary is a co-guarantor for a $303,000 capital
lease obligation of Safewaste's joint venture, Safe Horizon.
9. REDEEMABLE COMMON STOCK
In connection with the December 31, 1993 acquisition of MedSurg and
Creative Research, the Company issued 991,860 shares of common stock at
$7.50 per share to Medinvest. In
533791.wp61
F-17
accordance with the terms of the acquisition agreement, Medinvest had the
option to require the Company to repurchase up to 50% of the common shares,
495,930 shares, at $7.50 per share exercisable between January 2, 1995 and
March 31, 1995.
On January 24, 1995, the Company received notice from Medinvest of its
election to require the Company to repurchase 267,006 of the redeemable
common shares at $7.50 per share. The closing of this redemption took place
on February_24, 1995. On April 28, 1995, an additional 62,496 shares were
repurchased for $468,720, pursuant to a March_30, 1995 final redemption
election from Medinvest. The carrying value of the remaining 166,428
unredeemed shares was reclassified as a component of shareholders' equity.
10. SHAREHOLDERS' EQUITY
Preferred Stock - On April 24, 1994, the Company authorized, for future
issuance in one or more series or classes, 10,000,000 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.
Common Stock and Warrants- In November 1995, the Company completed a
secondary public offering of 5,492,970 shares of its $.001 par value common
stock at $14.50 per share for proceeds of $74,359,706, net of transaction
costs of $5,288,360. A portion of the proceeds of this offering was used to
repay all of Isolyser's revolving credit borrowings.
On August 31, 1995, the Company's Board of Directors approved a 2-for-1
stock split effected in the form of a 100% stock dividend to shareholders
of record on September 15, 1995. All share and per share data has been
adjusted to give retroactive effect to this stock split.
In connection with the sale of 1,255,600 shares of common stock at $3 per
share in 1991, the Company issued currently exercisable warrants to
purchase, in whole or in part, 83,708 of its common shares at $3 per share,
subject to adjustment to prevent dilution. In September 1995, warrants to
purchase 41,854 shares of common stock were exercised. On March_7, 1996,
the remaining warrants were exercised.
Stock Options - On April 28, 1992, the Company adopted the Stock Option
Plan (the "Plan") which, as amended, authorizes the issuance of up to
4,800,000 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 Plan Committee may grant alternate rights in tandem with an
option, but the grantee must exercise either the right or the option.
Options and/or rights under the 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 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 Plan
Committee. Through December 31, 1997, no alternate rights had been issued.
The Company has also granted nonqualified stock options to certain
employees, nonemployees, consultants, and directors to purchase shares of
the Company's common stock outside of the Plan. Options granted expire in
various amounts through 2001.
533791.wp61
F-18
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, 1997, currently exercisable options for 8,000 shares were outstanding
under this plan.
A summary of option activity during the three years ended December 31, 1997
is as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
Outstanding - December 31, 1994
Granted 3,553,981 $ 4.59
Exercised 751,613 10.30
Canceled (233,663) 4.94
(38,932) 8.39
----------------
Outstanding - December 31, 1995
Granted 4,032,999 5.60
Exercised 1,875,016 7.95
Canceled (983,165) 3.19
(1,111,819) 11.50
----------------
Outstanding - December 31, 1996
Granted 3,813,031 5.65
Exercised 642,000 4.62
Canceled (213,705) 3.62
(347,022) 6.27
----------------
Outstanding - December 31, 1997 3,894,304 $ 5.54
================
During 1996, the Company repriced 904,000 options with a weighted average
exercise price of $15.32 to $7.125.
The following table summarizes information pertaining to options
outstanding and exercisable at December 31, 1997:
RANGE OF NUMBER WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE (YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
$.83 to $3.79 1,107,273 2.5 $ 2.39 1,107,273 $ 2.39
$4.00 to $4.60 144,000 9.4 4.00 14,000 4.04
$4.64 to $9.00 2,557,031 2.4 6.69 1,815,214 6.78
$13.13 to $18.00 86,000 3 14.37 32,666 14.24
Total 3,894,304 $ 5.54 2,969,153 $ 5.20
============ =========
At December 31, 1996 and 1995, exercisable options were 2,636,434 and
3,189,836, respectively, at weighted average exercise prices of $4.77 and
$4.11, respectively.
533791.wp61
F-19
The fair value of options granted in 1997, 1996 and 1995 were $2.44, $6.93
and $8.94, respectively, using the Black Sholes option pricing model with
the following assumptions:
1997 1996 1995
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 44.05% 53.90% 53.00%
Risk free interest rate 6.66% 6.03% 6.06%
Forfeiture rate 2.89% 3.00% 3.00%
Expected life, in years 6.09 4.05 3.25
In April 1995, the Company adopted an Employee Stock Purchase Plan
("ESPP") which authorizes the issuance of up to 300,000 shares of common
stock. Under the 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. At December 31, 1997 and 1996, 51,482
and 9,958 rights to purchase shares had been granted, respectively. Pro
forma compensation costs associated with the rights granted under the ESPP
is estimated based on fair market value.
The Company applies APB 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its stock-based compensation
plans. Effective January 1, 1996, the Company adopted 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 the
method of SFAS 123, the Company's pro forma net loss and basic and diluted
net loss per share for 1997, 1996, and 1995 would have been as follows (in
thousands, except per share amounts):
1997 1996 1995
Net loss $(94,796,000) $ 24,577,000) $(5,335,000)
============= ============ ===========
Net loss per share -
Basic and Diluted $ (2.41) $ (0.63) $ (0.16)
============= ============= ===========
At December 31, 1997 and 1996, shares available for future grants are
857,000 and 354,000 under the Company option plans and ESPP.
Employee Stock Ownership Plan - Effective December 1, 1992, Microtek
adopted an Employee Stock Ownership Plan ("ESOP") to which the Company has
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. 16,500
reserved shares have been released during each of 1997, 1996, and 1995,
resulting in compensation expense of $39,000, $136,000, and $71,000,
respectively. At December 31, 1997, 82,500 common shares with a market
value of $247,500 remain
533791.wp61
F-20
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 may not be 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 1997, 1996, and 1995.
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
presently 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 offer 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, except in an offer approved by the
Company under the shareholder rights plan, then each right not owned by
the acquiror 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 acquiror obtains 15%
ownership, if the Company is involved in certain mergers, business
combinations, or asset sales, each right not owned by the acquiror 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.
533791.wp61
F-21
11. 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
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. No restatement of prior
year financial statements is required, and the effect of this change on
the current year and prior year quarters is not material.
12. SIGNIFICANT CUSTOMERS AND CERTAIN CONCENTRATIONS
For the year ended December 31, 1997, approximately 20% of the Company's
sales were to one customer. Accounts receivable from this customer were
$2,349,000 at December 31, 1997. For the year ended December 31, 1996, 17%
of the Company's sales were to one customer. Accounts receivable from this
customer were $2,688,000 at December 31, 1996. During the year ended
December 31, 1995, 21% and 11% of the Company's sales were to two
customers. Accounts receivable from these customers at December 31, 1995
were $2,450,000 and $2,411,000.
Included in the Company's consolidated balance sheet at December 31, 1997
are the net assets of the Company's manufacturing facilities located in
the United Kingdom, Mexico, and the Dominican Republic, which total
$2,961,000.
At December 31, 1997, approximately 16.7% of the Company's labor force is
covered under three collective bargaining agreements, none of which expire
within one year.
13. 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. Vesting in the
Company's matching contributions is based on years of continuous service.
The Company contributed $510,447, $140,391, and $102,203 to the plan
during 1997, 1996, and 1995, respectively.
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14. UNAUDITED QUARTERLY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER
------------------------------------------------
YEAR ENDED FIRST SECOND THIRD FOURTH
DECEMBER 31,
1997
Net Sales $40,003 $42,434 $ 41,877 $ 35,626
Gross profit 9,157 9,472 (4,615)1 3,832
Loss before cumulative
effect of change (3,910) (3,566) (17,177) (68,450)2
in accounting principle
Loss (3,910) (3,566) (17,177) (69,250)3
Loss per common share -
Basic & Diluted (0.10) (0.09) (0.44) (1.76)
1996
Net sales $40,145 $40,879 $ 41,956 $ 41,926
Gross profit 11,480 12,695 10,290 1,8434
Loss before
extraordinary item 437 269 (6,536) (14,165)5
Net income (loss) 437 269 (7,110)6 (14,048)
Earnings (loss per
common share -
Basic & Diluted 0.01 0.01 (0.18) (0.37)
1 Includes $13 million of excess and/or obsolete OREX inventory write downs.
2 Includes $57.3 million of impairment charges (Note 3).
3 Includes a cumulative charge of $800,000, net of tax of $0, relating to the
implementation of EITF 97-13 (Note 11).
4 Includes $10 million of excess and/or obsolete OREX inventory write downs.
5 Includes $4.4 million of restructuring charges (Note 3).
6 Includes an extraordinary loss of $458,000, net of a tax benefit of
$332,000, from the refinancing of the Company's credit facilities.
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION PERIOD EXPENSES (NOTE 1) (NOTE 2) END OF PERIOD
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful trade accounts
receivable $ 256,545 $ 82,832 $ 836,210 $ - $ 1,175,587
============= ============= ============ ============== =============
Reserve for obsolete and slow-moving
inventories $ 694,060 $ 372,611 $ - $ (454,074) $ 612,597
============= ============= ============ ============== =============
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful trade accounts
receivable $ 1,175,587 $ 145,092 $ 381,390 $ - $ 1,702,069
============= ============= ============ ============== =============
Reserve for obsolete and slow-moving
inventories $ 612,597 $ 9,479,426 $ - $ (51,180) $ 10,040,843
============= ============= ============ ============== =============
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful trade accounts
receivable $ 1,702,069 $ 375,442 $ - $ (227, 419) $ 1,850,092
============= ============= ============ ============== =============
Reserve for obsolete and slow-moving
inventories $ 10,040,843 $ 14,694,250 $ - $ (1,197,778) $ 23,537,315
============= ============= ============ ============== =============
Note 1: Represents allowance for doubtful accounts and reserves for
slow-moving and obsolete inventories of acquired businesses at
date of acquisition.
Note 2: "Deductions" represent amounts written off during the period less
recoveries of amounts previously written off.
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INDEPENDENT AUDITORS' CONSENT
Board of Directors and Shareholders
Isolyser Company, Inc.:
We consent to the incorporation by reference in Registration Statements Nos.
333-36049, 33-85668, 33-93524, 33-93526, 33-93528, and 333-11407 of Isolyser
Company, Inc. on Form S-8 of our report dated February 27, 1998 (March 20, 1998
as to the 7th paragraph of Note 5) appearing in this Annual Report on Form 10-K
of Isolyser Company, Inc. for the year ended December 31, 1997.
Atlanta, Georgia
March 31, 1998 Deloitte & Touche LLP
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