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815973v6
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, 1998
Commission File Number: 0-24866
ISOLYSER COMPANY, INC.
(Exact Name of registrant as specified in its charter)
GEORGIA 58-1746149
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4320 INTERNATIONAL BOULEVARD
NORCROSS, GEORGIA 30093
(Address of principal executive offices) (Zip Code)
(770) 806-9898
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. [X]
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 25, 1999, was approximately $67.9 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 25, 1999, there were outstanding 40,077,412 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,
December 31, 1996, and December 31, 1997, quarterly report on Form 10-Q for the
period ended March 31, 1998, and current reports on Form 8-K dated May 31, 1995,
September 18, 1995, June 4, 1996, August 30, 1996, December 19, 1996, and August
11, 1998.
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 1999
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.
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. Since 1997, the
Company has substantially reduced efforts to increase sales of OREX Degradables
while, among other things, seeking to preserve 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 seeking 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. In 1998 the Company implemented a
revised business structure which includes the creation within the Company of
three business units, namely (1) OREX commercial development under a division
called OREX Technologies International, (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.
Completed and Planned Dispositions. During 1998, the Company completed
several previously announced planned divestitures to provide funds to reduce
debt, relieve the Company of the burdens associated with underperforming assets
and providing increased focus upon the Company's remaining business units
described above. Over the course of 1998, the Company concluded the sale of
various assets including its Arden and Charlotte, North Carolina and Abbeville,
South Carolina materials manufacturing plants, assets associated with the
Company's SafeWaste Corporation ("SafeWaste") subsidiary, and the industrial and
Struble & Moffitt divisions of its White Knight Healthcare, Inc. ("White
Knight") subsidiary. The Company has contracted to sell its administrative
office building located in Norcross, Georgia, after consolidating such
administrative requirements with its research and development facilities located
nearby. The Company may in the future pursue other divestiture transactions if
the Company believes that such transactions will promote the Company's
objectives to reduce debt, relieve the Company of burdens associated with
underperforming assets and increase the Company's ability to improve the
operating results of its remaining business units. 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".
Products and Markets
OREX Degradables
OREX Degradables are a line of products that provide protection to
people and the environment while providing cost effective solutions to the
problems associated with solid waste reduction and disposal. OREX Degradables
are manufactured from 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 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 health care 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 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 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".
The Company has not been satisfied with its performance to date in
manufacturing and selling OREX Degradables. In particular, the Company has
failed to achieve profitable margins on sales of OREX degradable products to
date. Accordingly, the Company has engaged in a program to improve its operating
results by reducing its marketing efforts directed towards the sale of OREX
Degradables, divesting itself of underperforming assets, reducing the amount of
its debt, and forming a business unit called OREX Technologies International
("OTI") to provide increased focus on OREX commercial development. See "Risk
Factors - Limited Operating History; Net Losses", "- Risks of New Products" and
"-Manufacturing and Supply Risks".
The Company, through OTI, has developed a spunlaced OREX Degradables
fabric which is neither chemically nor thermally bonded and therefore remains
softer, more flexible and cooler than previously available OREX products. The
Company plans to introduce this product line under the brand Enviroguard(TM) on
a staged basis beginning during the second quarter of 1999. OTI continues to
work to develop and validate other applications for the OREX technology. See
"Risk Factors - Risks of New Products".
Infection Control Products
In 1998 the Company 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.
The Company acquired Microtek in a pooling of interests transaction as
of September 1, 1996, and the Company's financial statements prior to the
acquisition date have accordingly been restated to include Microtrek's financial
statements. 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.
For 1996, 1997 and 1998, sales of Microtek products accounted for
approximately 24%, 27% and 33% of the Company's total revenues, respectively.
Included in such sales figures are $7.9 million, $8.5 million and $8.6 million
of export sales by Microtek during 1996, 1997 and 1998, respectively.
The Company offers several other lines of safety products for the
management of potentially infectious and hazardous waste. The leading safety
products are described below.
Liquid Treatment System (LTS) is a super-absorbent powder which
converts potentially infectious liquid waste into a solid waste suitable for
landfill disposal, subject to applicable regulatory requirements. LTS is
typically added to a suction canister or other fluid collection device in which
blood or other body and irrigation fluids are collected during surgery or in
wound drainage after surgery. LTS converts liquid waste into a solid waste,
thereby facilitating handling, transportation and disposal. Regardless of
whether LTS is disposed of in landfills or through incineration or other special
process, LTS provides advantageous occupational safety benefits by
Point-of-Generation treatment of potentially infectious liquid waste. See "-
Government Regulation".
Sharps Management System (SMS) is designed to encapsulate and
physically disinfect contaminated sharps (such as needles, syringes, scalpels,
etc.) at the Point-of-Generation. The product consists of a puncture- and
spill-resistant plastic container partially filled with a bathing solution for
encapsulation. When full, a small amount of catalyst powder is added. The
catalyst creates a chemical reaction which heats the container and solidifies
the contents, thus encapsulating the sharps and reducing the risk of accidental
punctures. The container of SMS treated sharps is suitable for handling,
transportation and disposal.
During 1998 the Company sold its mobile waste treatment business
operated by SafeWaste, a wholly owned subsidiary of the Company.
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)
In 1998 the Company 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 Caesarian-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 1996, 1997 and 1998, sales of procedure
trays and related products accounted for approximately 34%, 37% and 40% 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
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.
During portions of 1998 White Knight's principal products and related
markets could be categorized into two overlapping groups. The first and largest,
called the medical products division, is still operated by White Knight and
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). A portion of this latter product group (not including White
Knight's Precept(R) brand) was sold in 1998. The Company has announced plans to
sell its remaining businesses operated through its White Knight subsidiary. See
"Risk Factors - Risks of Planned Divestitures."
Net sales of White Knight in 1996, 1997 and 1998 represented 35%, 30%
and 25%, respectively, of the Company's total revenue. Included in such sales
figures are $4.5 million, $3.3 million and $2.5 million of export sales by White
Knight during 1996, 1997 and 1998, respectively.
Marketing and Distribution
Substantially all of the Company's sales in 1998 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 and 1998, the
Company substantially reduced its sales force. As of December 31, 1998, the
Company's marketing and sales force consisted of 20 sales representatives, 50
field sales managers, nine home office sales manager, nine marketing managers
and 31 persons in customer support. The sales force has been divided into two
groups which operate independently, one working for the Company's Infection
Control Group and the other working for the Company's Product Packaging
Division. The Company is dependent upon a few large distributors for the
distribution of its products. The Company's top three customers accounted for
approximately 33% of the Company's total revenues during 1998. Of these
customers, only Owens & Minor, Inc. accounted for over 10% of the Company's
total sales during 1998. 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 marketplace. 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. The Company
currently plans to introduce on a staged basis a new line of OREX products,
under the Enviroguard brand, beginning in the second quarter of 1999. See
"Products and Markets - OREX Degradables". 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 paid 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 1996, 1997 and 1998 were $12.4
million, $11.8 million and $11.1 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, 1998,
the Company also had two sales representatives operating in international
markets, and maintains an office and warehouse distribution center near
Manchester, England and an office for one of its sales representatives and
support personnel in Luxembourg, Europe.
During a portion of 1998, as a part of its White Knight business, the
Company marketed 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 sold this business in August, 1998.
On March 1, 1992, Isolyser entered into a distribution agreement with
Allegiance, a leader in the sale of suction canisters and related apparatus. The
agreement expires February 28, 2000 and is subject to renewal for one-year terms
thereafter unless otherwise terminated. 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. 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. 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. The Company
acquired OREX Degradables material manufacturing plants as a part of this
expansion strategy. The manufacturing capacity at the Company's OREX materials
manufacturing plants significantly exceeded product demand, which caused the
Company to incur overhead costs which were not absorbed in the cost of product
sales. The Company sold these manufacturing facilities in 1998 to a corporation
in which the Company retained a 19.5% continuing ownership interest. Over the
past year, the Company has also begun sourcing OREX fabric using hydroentangled
manufacturing processes to manufacture a spunlaced fabric which is neither
chemically nor thermally bonded. Through these manufacturing efforts, both
domestic and abroad, the Company seeks to reduce the cost of producing OREX
drapes and gowns while simultaneously improving the quality of these products.
See "Risk Factors - Manufacturing and Supply Risks".
In 1998, in connection with the sale by the Company of its OREX
materials manufacturing plants which were used by the Company to convert PVA
fiber into OREX nonwoven roll goods and towels, the Company sold 4.5 million
pounds of excess PVA fiber at a price of $.45 per pound under an agreement
pursuant to which the Company agreed to repurchase 2.6 million pounds of such
fiber (either as fiber or converted goods) over a four year period at a cost of
$.80 per pound of fiber. During 1998, the Company paid $223,000 for such fiber.
See "Risk Factors - 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 and spunlaced OREX
Degradables fabric. 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 has not yet
successfully reduced the cost of manufacturing OREX thermoformed and extruded
products and OREX film products to a sufficient degree to offer such products
commercially. See "Risk Factors - Manufacturing and Supply Risks".
The Company manufactures its equipment drapes and fluid control
products at its facilities in Columbus, Mississippi, the Dominican Republic and
Empalme, Mexico. The Company utilizes a facility in Jacksonville, Florida as a
distribution point for receipt and shipment of product and for light
manufacturing.
The Company currently relies upon independent manufacturers for the
purchase of materials and components for most of its safety products. The
Company uses, and expects to continue to use, vendors of stock items to the
extent possible to control direct material costs for its safety products. The
Company's safety products production facilities located in Norcross, Georgia and
Columbus, Mississippi are used for mixing liquid and powdered chemicals, other
light manufacturing and packaging. The packaging portion of these operations was
relocated to 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 two locations: (i) a 90,000 square foot facility under a long-term lease in
Douglas, Arizona which manufactures medical products and specialty apparel; and
(ii) a 90,000 square foot owned facility in Agua Prieta, Mexico located adjacent
to the Douglas facility to provide labor intensive post-cutting applications. In
1998, as a part of the Company's sale of the industrial division of White
Knight, the Company sold a 50,000 square foot facility located in Childersburg,
Alabama, which manufactured medical and specialty apparel products, including
face masks. As a part of such sale, White Knight agreed to purchase a certain
minimum amount of face mask products manufactured at the Childersburg facility
until August 2002. Also during 1998, the Company sold a 60,000 square foot
facility in Runnemede, New Jersey which previously manufactured products for the
semi-autonomous Struble & Moffitt division of White Knight. The operations of
this division were 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.
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, 1998, the Company's order backlog totaled approximately
$2.0 million compared to approximately $5.9 million (in each case net of any
cancellations) at December 31, 1997. All backlog orders at December 31, 1998 are
expected to be filled prior to year end 1999.
Technology and Intellectual Property
The Company seeks to protect its technology by, among other means,
obtaining patents and filing patent applications for technology and products
that it considers important to its business. The Company also relies upon trade
secrets, technical know-how and innovation and market penetration to develop and
maintain its competitive position.
The Company holds several patents issued by the U.S. Patent and
Trademark Office concerning methods of disposing of OREX Degradables, including:
(1) US Patent 5,207,837, which was issued in 1993 and successfully reexamined by
the U.S. Patent Office in 1996, which covers a method of disposing OREX
Degradables that are configured into a drape, towel, cover, overwrap, gown, head
cover, face mask, shoe covering, sponge, dressing, tape, underpad, diaper, wash
cloth, sheet, pillow cover, or napkin; (2) US Patent 5,181,967, which was issued
in 1993, and which covers a method of disposing particular OREX Degradables
utensils such as procedure trays, laboratory ware, and patient care items; and
(3) US Patent 5,181,966, which was issued in 1993 and successfully reexamined in
1996, and which covers a method of disposing OREX Degradables configured into
packaging materials.
Isolyser also has several patents which cover particular OREX
Degradable products, including (1)US Patent 5,650,219, which was issued in 1995
and covers a method of disposing particular OREX Degradables configured into
garments, linens, drapes, and towels; (2) US Patent 5,620,786, which was issued
in 1997 and covers particular OREX Degradables that are configured into towels,
sponges, or gauze; (3) US Patent 5,268,222, which was issued in 1993 and covers
a composite fabric made with an OREX Degradable; (4) US Patent 5,885,907, which
was issued on March 23, 1999, and covers particular OREX Degradables configured
into a towel, sponge, or gauze; and (5) US Patents 5,470,653 and 5,707,731,
issued in 1995 and 1998, and which cover mop heads made from OREX Degradables.
Isolyser also has patents that cover methods of producing OREX
Degradables, including: (1) US Patent 5,871,679, issued February 16, 1999, and
which covers methods for producing OREX Degradables that are configured into
thermoplastic films and fabrics; and (2) US Patent 5,661,217, issued in 1997,
which covers a method of forming molded packaging and utensils from OREX
Degradables, and methods of forming OREX Degradables films into a packaging,
drape, cover, overwrap, gown, head cover, face mask, shoe cover, CSR wrap, tape,
underpad or diaper.
The Company also has several issued patents related to its SMS and LTS
technologies.
The Company currently has several applications pending before the U.S.
Patent and Trademark Office which relate to OREX Degradables. Specifically,
those applications concern (i) a new class of OREX biodegradable polymers, (ii)
methods for enhancing the absorbency and hand feel of OREX Degradables fabrics,
(iii) finishing formulations for OREX Degradables, (iv) a pipeliner manufactured
with OREX Degradables, (v) medical containers made from OREX Degradables, and
(vi) a method of absorbing oil with OREX Degradables fabric. The Company is not
aware of any facts at this time that would indicate that patents sought by these
applications will not be issued; however, no assurances can be provided that
patents will issue from these applications. See "Risk Factors Protection of
Technologies."
The Company's U.S. patents expire between 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 in the Company's surgical and
equipment drapes manufactured with film and nonexclusive rights to such
additives in non-woven drape products, subject to the payment of royalties and
certain other terms and conditions specified in the license agreement. 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," "OREX", "LTS" and "SMS". In addition, the Company
is applying to register the trademark "Enviroguard" in the U.S. Patent and
Trademark Office. Trademark registrations for "Isolyser", "OREX" and "LTS" have
also been granted in various foreign countries. 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 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) clearances which the Company
believes satisfy FDA pre-market notification requirements. The FDA has issued to
the Company 510(k) clearances on OREX Degradables products for surgical sponges,
operating room towels, drapes, gowns, surgeon's caps, surgeon's vests, shoe
covers and medical bedding. The Company is currently developing, evaluating and
testing certain OREX Degradables film and thermoformed or extruded OREX products
manufactured from non-PVA polymers, and it is possible that new 510(k)
clearances will be required for such products. There can be no assurances as to
when, or if, other such 510(k) clearances necessary for the Company to market
products developed by it in the future will be issued by the FDA. The
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 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 record-keeping
requirements and the quality system regulation (QSR) which require that
manufacturers have a quality system for the design and production of medical
devices intended for commercial distribution in the United States. Failure to
comply with applicable regulatory requirements, which may be ambiguous or
unclear, can result in fines, civil and criminal penalties, stop sale orders,
loss or denial of approvals and recalls or seizures of products.
Countries in the European Union require that products being sold within
their jurisdictions obtain a CE mark. The Company has CE mark approval to sell
of its safety products in Europe. One of the conditions to obtaining CE mark
status involves the qualification of the Company's manufacturing plants under
certain certification processes. All of the Company's manufacturing plants have
obtained such certifications. To maintain CE mark approval, the Company has to
satisfy continuing obligations including annual inspections by European notified
bodies as well as satisfy record keeping and other quality assurance
requirements. The notified bodies have the authority to stop the Company's use
of the CE mark if the Company fails to meet these standards. While the Company
believes that its operations at these facilities are in compliance with
requirements to maintain CE mark status, no assurances are provided that such
certifications will be maintained or that other foreign regulatory requirements
will not adversely affect the Company's marketing efforts in foreign
jurisdictions.
Under the Federal Insecticide, Fungicide, and Rodenticide Act
("FIFRA"), any product which claims to kill microorganisms through chemical
action must be registered with the EPA. Any product that makes a claim that it
kills microorganisms exclusively via a physical or mechanical means is regulated
as a physical "device" under FIFRA. Pesticide devices do not require EPA
registration, but are subject to some requirements, including labeling and
record keeping. FIFRA affects primarily the Company's LTS and SMS products. The
Company believes its SMS product qualifies as a physical disinfecting device
under FIFRA, which permits the Company to advertise that such product physically
disinfects microorganisms without EPA registration. LTS is not registered with
the EPA. The Company has marketed LTS in a manner in which the Company believed
complied with FIFRA by not making claims in product labeling or marketing that
LTS treats or disinfects medical waste or kills microorganisms. In 1998 the EPA
announced its position that FIFRA requires that products, such as LTS, which
hold state approvals related to anti-microbial efficacy, such as state approval
for landfill of LTS-treated waste, impliedly make claims about killing
microorganisms which necessitate registration under FIFRA. The Company continues
to sell its LTS products without FIFRA registration, and has met with the EPA
concerning its continuing sale of LTS products and methods to obtain expedited
registration of a new version of LTS under FIFRA. The Company has altered its
marketing of LTS to comply with EPA's new guidance. The Company 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 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 Degradables 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, 1998, the Company employed approximately 1,655
full-time employees and approximately 15 people as independent contractor sales
representatives. Of these employees, 92 were employed in marketing, sales and
customer support, 1,400 in manufacturing, 17 in research and development, and
133 in administrative positions. The Company believes its relationship with its
employees is good. Approximately 13 of White Knight's employees located at the
Douglas plant were members of and represented by the United Food and Commercial
Workers Union, AFL-CIO. In addition, approximately 257 of White Knight's
employees located at White Knight's Agua Prieta, Mexico plant are represented by
a Mexican labor union.
Insurance
The Company maintains commercial general liability protection insurance
which provides coverage with respect to product liability claims of up to $12
million per occurrence with a $12 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. 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 1998 approximated $4.7 million but did not provide any gross
profits. Sales of OREX Degradables in 1998 were substantially less than
comparable sales in 1997. The Company has not aggressively marketed such
products because the sale of such products has not been profitable. The Company
believes that the absence of gross profits on sales of OREX Degradables to date
is due to a combination of factors including but not limited to 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 sought to reduce its cost of
manufacturing its OREX products before developing a new marketing strategy for
such products. For the year ended December 31, 1998 the Company incurred actual
net losses of approximately $18.2 million, including $9.4 million of impairment
and other charges. 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 reflects
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 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. Unsatisfactory performance
to date of OREX products in the market place could adversely affect the
Company's introduction of new OREX products. Since 1997, the Company has
substantially reduced its marketing efforts related to its OREX Degradables
products, substantially reduced its manufacturing of such products, recorded
significant nonrecurring charges related to its OREX business, and sold various
of its facilities formerly used by the Company to internally manufacture OREX
Degradables products. 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", and "Risk Factors -
Manufacturing and Supply Risks".
Risks of Planned Divestitures. The Company has announced its plans to
seek to dispose of its remaining businesses operated through its White Knight
subsidiary. While the Company has engaged in negotiations to complete such
divestiture, the Company does not have under contract any such divestiture.
Meanwhile, White Knight has been operating at a loss. The Company may not be
successful in selling such business or may not be able to sell such business at
an acceptable price. If the Company either elects not to or is unable to sell
such business, the Company will need to develop and implement a new operating
plan to improve the operating results of such business. Such new operating plan
could require the Company to incur charges to its financial statements to
restructure its operations, adversely affecting operating results. Also, the
Company may be required or may elect to seek to dispose of other assets to
improve its liquidity and its operating results. If the Company disposes of
assets at an amount less than the amount 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 sells its remaining White Knight business, the
Company will forego its ability to internally convert OREX Degradables nonwoven
products into finished goods for commercial sale, requiring that the Company
locate alternative conversion manufacturing services. If the Company disposes of
other assets, the Company may be required to outsource services previously
provided within the Company. See "- Manufacturing and Supply Risks" and "-
Liquidity Risks".
Manufacturing and Supply Risks. Due to low sales rates for the
Company's OREX Degradables products, the Company's manufacturing capacities
available for the production of OREX goods have significantly exceeded the
Company's requirements for such products. While the Company has disposed of many
of its former assets having such excess capacity, the Company's White Knight
subsidiary continues to have excess capacity which adversely affects the
Company's operating results. See "- Risks of Planned Divestitures". The Company
has entered into contracts requiring that it purchase certain minimum quantities
of PVA fiber raw material which the Company uses for the manufacture of OREX
fabrics. In addition, the Company has entered into a contract for the
manufacture of OREX fabrics. See "Business - Manufacturing and Supplies". The
inability of the Company to increase the sales rates of the Company's OREX
Degradables products, including its planned Enviroguard product line, could
adversely affect the ability of the Company to satisfy its obligations under
these contracts, thereby adversely affecting the Company's operating results.
The Company's divestiture of certain of its assets which formerly
provided internal manufacturing capabilities for the production of OREX goods
has increased the Company's dependence upon independent manufacturers to satisfy
its requirements for the production of OREX products. The Company's existing
inventories of OREX non-woven roll goods and finished products and OREX towels
mitigate immediate risks associated with dependence upon such third party
suppliers. The Company has also sought to reduce such risks by maintaining a
minority ownership position in the company which operates the manufacturing
facilities previously owned by the Company for the production of OREX non-woven
roll goods and OREX towels. The Company has entered into a contract with the
owner of such manufacturing facilities for the continuing supply of OREX
non-woven roll goods, but has not yet concluded a contract for the continuing
supply of OREX towels. The Company's new Enviroguard product line for spunlaced
OREX fabrics is dependent upon supply sources based in China. The Company has
negotiated a short-term contract for the continued supply of such spunlaced
fabrics with one supplier located in China. Production in 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 material (including certain
OREX Degradables woven products) imported from China to the United States are
subject to import quotas which restrict total volume of such items available for
import by the Company, creating risks of limited availability and increased
costs for certain OREX Degradables woven products. See "Business - Manufacturing
and Supplies."
The Company's cost to manufacture OREX Degradable products to date have
not been acceptable. See "Risk Factors - Limited Operating History; Net Losses".
There can be no assurances that the Company will be able to reduce its cost to
manufacture such product. To date, the Company has been unable to manufacture
OREX Degradables film and thermoformed and extruded products at an acceptable
cost. The Company has recently begun to develop the use of new polymers to test
manufacture OREX Degradables film and thermoformed and extruded products. While
the Company has undertaken an evaluation of these new products, no assurances
can be provided that the Company will be successful in manufacturing on a
commercial basis OREX Degradables products from these polymers or that such
products will comply with applicable regulatory requirements.
The Company's products must be manufactured in compliance with FDA and
other regulatory requirements while maintaining product quality at an acceptable
manufacturing cost. 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 products, 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 from time to time experienced delays in manufacturing
certain OREX Degradables products. The Company has also from time to time
encountered dissatisfaction with certain quality or performance characteristics
of its products. These delays and quality or performance issues 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 or that past
customer relations on these products will not adversely affect future customer
relations and operating results.
The Company is continually in the process of making improvements to its
technologies and systems for manufacturing its OREX Degradables products, while
simultaneously marketing and supplying various of these products. From time to
time, the Company has invested in inventory of certain OREX Degradables products
which subsequently have been rendered obsolete by improvements in manufacturing
technologies and systems. There can be no assurances that possible future
improvements in manufacturing processes or products will not render other
inventories of product obsolete, thereby adversely affecting the Company's
financial statements.
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 was 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.
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
difficulty 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.
Protection of Technologies. The Company's success will depend in part
on its ability to protect its technologies. The Company relies on a combination
of trade secret law, proprietary know-how, non-disclosure and other contractual
provisions and patents to protect its technologies. Failure to adequately
protect its patents and other proprietary technologies, including particularly
the Company's intellectual property concerning its OREX Degradables, could have
a material adverse effect on the Company and its operations. The Company holds
various issued patents and has various patent applications pending relative to
its OREX Degradables products.
See "Business - Technology and Intellectual Property".
Although management believes that the Company's patents and patent
applications provide or will provide adequate protection, there can be no
assurance that any of the Company's patents will prove to be valid and
enforceable, that any patent will provide adequate protection for the
technology, process or product it is intended to cover or that any patents will
be issued as a result of pending or future applications. Failure to obtain the
patents pursuant to the 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 right 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 Company believes that these trends
have also adversely affected the Company's procedure tray business by, among
other things, reducing the amount of the Company's procedure tray sales thereby
adversely affecting operating results. 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 more than 10% of the Company's total sales during 1998.
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 required 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 remained obligated to satisfy its minimum
purchase requirement under its supply agreement with White Knight until such
agreement expired in 1998, 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 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. Reduction 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 of the
Company's products is lengthy, expensive and uncertain, and regulatory
authorities may delay or prevent product introductions or require additional
tests prior to introduction. The Company currently holds 510(k) clearances
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) clearances on OREX Degradables products for surgical sponges, operating
room towels, drapes, gowns, surgeon's caps, surgeon's vests, shoe covers and
medical bedding. The Company is currently developing, evaluating and testing
certain OREX Degradables film and thermoformed or extruded OREX products
manufactured from non-PVA polymers, and it is possible that new 510(k)
clearances will be required for such products. There can be no assurance as to
when, or if, other such 510(k) clearances necessary for the Company to market
products developed by it in the future will be issued by the FDA. The FDA also
requires health care companies to satisfy the quality system regulation. Failure
to comply with applicable regulatory requirements, which may be ambiguous or
unclear, can result in fines, civil and criminal penalties, stop sale orders,
loss or denial of approvals and recalls or seizures of products. There can be no
assurance that changes in existing regulations or the adoption of new
regulations will not occur, which could prevent the Company from obtaining
approval for (or delay the approval of) various products or could affect market
demand for the Company's products.
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
direct landfill disposal (without sterilization) of LTS-treated waste within
such state. In February 1998 EPA announced a new policy that FIFRA requires that
products, such as LTS, which hold state approvals related to anti-microbial
efficacy, such as state approvals for landfill of LTS-treated waste, impliedly
make claims about killing microorganisms which would require that LTS be
registered under FIFRA. LTS has not been registered under FIFRA and, based in
part on meetings by the Company with the EPA, the Company continues to sell LTS
without such registration. The Company now is marketing LTS without relying upon
any state approvals for direct landfill disposal. The Company also is in the
process of seeking expedited registration of a new version of LTS under FIFRA.
However, 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 products will not interfere with the
proper functioning of sewage treatment plants thereby adversely affecting the
Company's ability to successfully commercialize such newly developing OREX
Degradables technology. There can be no assurance that disposal of OREX
Degradables in areas where these approvals have not been granted will not result
in fines, penalties or other sanctions against product users or adversely affect
market demand for the Company's products.
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 $12.0
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.
Anti-Takeover Provisions. On December 19, 1996, the Company's Board of
Directors adopted a Shareholder Protection Rights Agreement (the "Rights
Agreement"). Under the Rights Agreement, a dividend of one right ("Right") to
purchase a fraction of a share of a newly created class of preferred stock was
declared for each share of common stock outstanding at the close of business on
December 31, 1996. The Rights, which expire on December 31, 2006, may be
exercised only if certain conditions are met, such as the acquisition (or the
announcement of a tender offer the consummation of which would result in the
acquisition) of beneficial ownership of 15 percent or more of the common stock
("15% Acquisition") of the Company by a person or affiliated group. The Rights,
if exercised, would cause substantial dilution to a person or group of persons
that attempts to acquire the Company without the prior approval of the Board of
Directors. The Board of Directors may cause the Company to redeem the Rights for
nominal consideration, subject to certain exceptions. The Rights Agreement may
discourage or make more difficult any attempt by a person or group of persons to
obtain control of the Company.
Liquidity Risks. While the Company believes that, based on its current
business plan, the Company's cash equivalents, existing credit facilities,
proceeds from divestitures and funds budgeted to be generated from operations in
the future will be adequate to meet its liquidity and capital requirements
through 1999, 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 $9.3 million at December 31, 1997 to $7.3 million at December 31,
1998. In addition, the Company had outstanding at December 31, 1998
approximately $23.1 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 approximately 32,000 square feet of office,
manufacturing, production, research and development and warehouse space located
in Norcross, Georgia under a lease which expires December 30, 2000. The Company
consolidated its administrative offices to this Norcross facility during 1998,
and is in the process of selling its former administrative offices. The Company
also leases from a local economic development authority a 13,300 square foot
administrative building located in Columbus, Mississippi under a lease which
expires December 31, 2007.
The Company'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.
The Company operates two existing non-woven conversion manufacturing
facilities through its White Knight subsidiary. The Company owns a 90,000 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 90,000 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 100,000 square feet located in Columbus,
Mississippi. The Company leases three manufacturing facilities totaling 66,000
square feet located in the Dominican 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.
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, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is traded and quoted on The Nasdaq Stock Market under
the symbol "OREX". The following table shows the quarterly range of high and low
sales prices of the common stock during the periods indicated since December 31,
1997.
Common Stock
Quarter Ended High Low
- ------------- -----------------
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
---------------------
1998
First Quarter $ 3.93 $ 2.31
-------------------------
Second Quarter $ 3.00 $ 2.03
-----------------------
Third Quarter $ 3.06 $ 1.12
------------------------
Fourth Quarter $ 2.00 $ 1.03
-----------------------
On March 25, 1999, the closing sales price for the common stock as reported
by The Nasdaq Stock Market was $2.0938 per share.
As of March 25, 1999, the Company had approximately 20,300 shareholders,
including approximately 1,300 shareholders of record and 19,000 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 of its lenders. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources". Accordingly, the Company does not intend to pay cash
dividends in the foreseeable future.
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth summary historical financial data for each
of the five years in the period ended December 31, 1998. As a result of the 1996
acquisition of Microtek, which was accounted for as a pooling of interests, the
Company's financial statements have been restated to include the results of
Microtek for all periods presented. The operations data for the year ended
December 31, 1995 includes only partial operating results of SafeWaste and White
Knight because these acquisitions occurred effective May 31, 1995 and September
1, 1995, respectively. On July 1, 1995, the Company acquired the infection
control drape line of Xomed in exchange for Microtek's otology product line and
the operations data for the year ended December 31, 1995 therefore includes only
partial operating results for such acquisition transaction. The operations data
for the year ended December 31, 1995 does not give effect to the November 30,
1995 acquisition of Medi-Plast International, Inc. ("Medi-Plast"), as such
acquisition was consummated at Microtek's fiscal year end on November 30, 1995.
In April, 1996, Microtek purchased the Venodyne division of Advanced
Instruments, Inc., and the Company's results of operations include the results
of Venodyne only from the April 27, 1996 acquisition date. Additionally, during
1998 the Company disposed of its Arden and Charlotte, North Carolina and
Abbeville, South Carolina manufacturing facilities, its industrial and Struble &
Moffitt divisions of its White Knight subsidiary, and substantially all of its
net assets of its SafeWaste subsidiary. The summary historical financial data
should be read in conjunction with the historical consolidated financial
statements of the Company and the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data appearing elsewhere in this Form 10-K. The summary
historical financial data for each of the five years in the period ended
December 31, 1998 has been derived from the Company's audited consolidated
financial statements.
Year Ended December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Net sales..................... $ 73,382 $ 104,874 $ 164,906 $ 159,940 $ 147,643
Cost of goods sold............ 49,928 74,953 128,598 142,093 109,936
----------- ----------- ---------- ---------- ---------
Gross Profit ....................... 23,454 29,921 36,308 17,846 37,707
Selling, general and 21,496 27,737 41,381 43,422 40,506
administrative ..............
Research and development .... 1,246 1,127 2,173 2,601 3,582
Amortization of intangibles . 1,505 2,411 4,290 3,847 2,052
Impairment loss ............ 0 0 0 57,310 7,445
Restructuring charge ........ 140 0 4,410 0 -
Costs associated with merger.. 0 0 3,372 0 -
----------- ----------- ---------- ---------- ---------
Total operating expenses ......... 24,587 31,275 55,626 107,180 53,585
----------- ----------- ---------- ---------- ---------
Loss from operations .............. (933) (1,354) (19,318) (89,334) (15,878)
----------- ----------- ---------- ---------- ---------
Net other income (expense) ....... 49 1,790 (1,316) (3,415) (3,222)
Income (loss) before tax, extraordinary
items and cumulative effect of change
in accounting principle ....... (884) 436 (20,634) (92,749) (19,100)
Income tax provision (benefit) ... 455 980 (639) 354 541
----------- ----------- ---------- ---------- ---------
Loss before extraordinary items and
cumulative effect of change in
accounting principle............. (1,339) (544) (19,995) (93,103) (19,641)
Extraordinary items ................ 0 0 457(2) 0
Cumulative effect of change 57(1) 0
in accounting principle........ 0 (800)(3) 1,404(2)
----------- ----------- ---------- ---------- ---------
Net loss......................... $ (1,282) $ (544) $ (20,452) $ (93,903) $ (18,237)
=========== ========== =========== ========= ===========
Loss per common and common equivalent share
-Basic and Diluted
Loss before extraordinary item and
cumulative effect of change in
accounting principle ... $ (0.05) $ (0.02) $ (0.52) $ (2.37) $ (0.49)
Extraordinary items ......... 0.00 0.00 (0.01) - 0.03
Cumulative effect of change in
accounting principle ........ 0.00 0.00 0.00 (0.02)
----------- ----------- ---------- ---------- ---------
Net loss ..................... $ (0.05) $ (0.02) $ (0.53) $ (2.39) $ (0.46)
=========== =========== ========== ========== =========
Weighted average number of common and
common equivalent shares outstanding 27,080 33,704 38,763 39,273 39,655
- -----------------
(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 gain from the extinguishment of debt in 1998 and the
loss from refinancing of Isolyser's and Microtek's credit facilities, net of tax
benefits of $332,000 in 1996
(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."
December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working Capital....................... $ 88,527 $ 101,022 $ 91,962 $ 72,408 $ 39,124
Intangible assets, net................. 17,994 60,004 57,331 30,803 29,128
Total assets............................. 132,973 253,261 250,935 144,334 109,518
Long-term debt......................... 6,779 26,413 47,029 37,546 18,366
Redeemable common stock.......... 1,717 0 0 0 0
Total shareholders' equity............ $ 110,662 $ 195,298 $ 178,804 $ 86,117 $ 68,676
(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, Microtek acquired the infection control drape line of
Xomed, in exchange for Microtek's otology product line, thereby providing
Microtek greater concentration on its core business. On September 1, 1995,
Isolyser acquired White Knight and began the conversion manufacturing of
non-woven fabric into finished goods such as drapes and gowns. On November 30,
1995, Microtek acquired Medi-Plast, a manufacturer of equipment drapes. Because
these acquisitions were accounted for using the purchase method, the Company's
operating results do not include the operating results of the acquired
operations for periods prior to these respective acquisition dates.
In April, 1996, Microtek purchased the Venodyne division of Advanced
Instruments, Inc., which manufactures and markets pneumatic pumps and disposable
compression sleeves for use in reducing deep vein thrombosis, and the Company's
results of operations include the results of Venodyne only from the April 27,
1996 acquisition date. Effective September 1, 1996, Isolyser completed its
merger with Microtek, which was accounted for as a pooling of interests.
Accordingly, the Company's financial statements have been restated for all
periods to combine the financial statements of each of Isolyser and Microtek.
In March 1998, the Company announced a plan to dispose of its OREX
manufacturing facilities and its White Knight subsidiary. In August 1998, the
Company disposed of its Arden and Charlotte, North Carolina OREX manufacturing
facilities, and substantially all of the net assets of the industrial division
of its White Knight subsidiary and its SafeWaste subsidiary. In 1998 the Company
disposed of the Struble & Moffitt division of its White Knight subsidiary. In
October 1998, the Company disposed of its Abbeville, South Carolina OREX
manufacturing facility. The Company maintains a 19.5% minority interest in the
company formed to own and operate the Abbeville and Arden facilities.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales for 1998 were $147.6 million compared to $159.9 million for
1997, a decline of 7.7%. The 1998 decline of $12.3 million reflects a 14.6%
decrease in White Knight Healthcare product net sales as compared to 1997, a
39.7% decrease in White Knight Industrial product net sales as compared to 1997,
a 10% decline in net sales of safety products over comparable 1997 sales, a 1%
decline in Microtek net sales as compared to 1997 and a 0.5% increase in sales
of MedSurg products over comparable 1997 sales.
The decline in sales of White Knight products was primarily due to the
aforementioned sale of the industrial division of White Knight as well as the
Company's decision to de-emphasize marketing of White Knight products in favor
of higher margin products sold by its other subsidiaries. The Company has
announced plans to sell White Knight which, if consummated, would significantly
reduce the Company's net sales. See "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 previously reported
adverse regulatory developments related to a change in policy by the EPA
requiring registration of the LTS products and removal by the State of
California of a prior approval to landfill LTS-treated waste in California. The
Company has developed and plans to introduce a new LTS product to preserve its
market share created by LTS, however, the Company's ability to do so is subject
to obtaining federal registration of such product. The Company has filed for
federal registration of its new product but no assurances can be provided that
the Company will be able to obtain such registration or maintain its market
share on such products by the introduction of a new LTS product. During the
third and fourth quarter of 1998, Allegiance substantially increased their
purchases of LTS products. See "Risk Factors - Reliance Upon Distributors" and -
Regulatory Risks".
Sales by MedSurg were adversely affected by reductions of inventory
carrying levels by MedSurg's distributors, competition by other procedure tray
companies, and group purchasing organizations adversely affecting new business
efforts of MedSurg.
Included in the foregoing sales figures are $4.7 million in sales of
OREX Degradables during 1998. Sales of OREX Degradables in 1998 did not
contribute any gross profits to the Company's operating results. During 1997,
the Company substantially reduced its selling and marketing efforts to increase
sales of OREX Degradables and instead focused on preserving its existing base of
hospitals purchasing OREX Degradables while evaluating alternative manufacturing
processes that would meet end user quality requirements while contributing gross
margin to the Company's operations. During 1998, the Company substantially
revised its strategy to commercialize its OREX products. As a result of these
efforts, the Company plans to introduce new degradable products to the
healthcare industry using a hydroentanglement manufacturing process to produce a
spunlaced fabric. The Company to date has not achieved any gross profits on its
sale of OREX Degradables. The Company's future performance will depend to a
substantial degree upon market acceptance of and the Company's ability to
successfully manufacture, market, deliver and expand its OREX Degradables line
of products at acceptable profit margins. There can be no assurances that OREX
Degradables will achieve or maintain substantial acceptance in their target
markets. See "Risk Factors - Limited Operating History; Net Losses" and - Risks
of New Products".
Gross profit for 1998 was $37.7 million or 25.5% of net sales compared
to $17.8 million or 11.1% of net sales in 1997. Included in cost of goods sold
in 1998 were $900,000 in write-offs related to the sale of the Company's White
Knight industrial business. Included in cost of goods sold in 1997 were charges
of $13 million for OREX inventory reserves. OREX inventory reserves recorded
during 1997 were recognized due to excess quantities of OREX finished goods and
raw materials on hand. In addition to OREX reserves taken in 1997, the Company
recorded other inventory reserves and miscellaneous write-offs, which together
totaled $1.7 million. After adjusting gross profits by eliminating these
charges, gross margin for 1998 and 1997 would have been 26.1% and 20.4% of net
sales, respectively. The improvement in gross margin is primarily due to the
decision to sell the Company's Arden and Abbeville manufacturing facilities.
During the latter portion of 1996 and early 1997, the Company significantly
reduced production at both facilities, negatively impacting gross margin through
the underutilization of its manufacturing capacity. In 1998, the Company decided
to sell these assets, classifying the fair value of the assets as held for sale.
As such, the Company benefited by not depreciating these assets. In August and
October, 1998, the Company sold the Arden and Abbeville facilities,
respectively, thereby eliminating any remaining cash losses incurred by these
facilities. Gross margin was also positively impacted by movement of products
manufactured at Microtek's Columbus, Mississippi facility to its facility in the
Dominican Republic. Offsetting these improvements was further underutilization
of White Knight facilities as a result of decreased sales.
Selling, general and administrative expenses were $40.5 million or
27.4% of net sales in 1998 as compared to $43.4 million or 27.1% of net sales in
1997. Included in selling, general and administrative expenses in 1998 were
$400,000 of business process reengineering activities and a $300,000 write-down
of accounts receivable associated with the sale of the Company's White Knight
industrial business. Included in selling, general and administrative expenses in
1997 was a $1,000,000 charge related to the adoption of a new accounting
principle relating to business process reengineering activities. Previously, the
Company capitalized these costs as system development costs. After adjusting
selling, general and administrative expenses by eliminating these charges,
selling, general and administrative expenses for 1998 and 1997 would have been
$39.8 million and $42.4 million, respectively. The improvement in selling,
general and administrative expenses was primarily due to lower sales and
implementation of a previously announced plan to reduce sales and marketing
personnel.
Research and development expenses were $3.6 million or 2.4% of net
sales in 1998 as compared to $2.6 million or 1.6% of net sales in 1997. This
increase represents expenses incurred to further develop and improve the quality
of OREX products and costs associated with planning the registration of the
Company's new LTS product.
Amortization of intangibles was $2.1 million or 1.4% of net sales in
1998 as compared to $3.8 million or 2.4% of net sales in 1997. The decrease is
attributed to the 1997 goodwill impairment write-offs at the Company's White
Knight subsidiary.
The Company recorded impairment charges totaling $7.4 million during
1998 as compared to $57.3 million during 1997. The 1998 charges were related to
the disposition of the Company's White Knight industrial business, and the
excess carrying value of the Company's White Knight subsidiary and the Company's
former headquarters in Norcross, Georgia over their fair values. 1997 charges
relate to impairment of the Company's OREX material manufacturing plants and
White Knight subsidiary for the excess carrying value of such assets over their
fair value.
The resulting loss from operations was $15.9 million in 1998 compared
to $89.3 million in 1997. After adjusting the 1998 operating loss to exclude the
$7.4 million of impairment charges and $1.9 million in other writeoffs and
expenses, the operating loss would have been $6.6 million. After adjusting the
1997 operating loss to exclude $13 million of charges related to inventory and
$57.3 million related to impairment charges, the operating loss would have been
$19 million.
Interest expense net of interest income was $3.2 million in 1998 as
compared to $3.4 million in 1997. The decrease is due to the paydown of the
revolver and term facility with proceeds from the aforementioned sale of assets
which occurred in the second half of 1998. Offsetting this decline were higher
interest rates.
Income from joint venture was $11,000 in 1998 as compared to a loss of
$44,000 in 1997. In conjunction with the August 1998 sale of its SoftWaste
subsidiary, the Company sold its interest in the joint venture.
Provision for income taxes reflect an expense of $540,000 and $354,000
in 1998 and 1997, respectively. The effective tax rates in 1998 and 1997 differs
from the statutory rate due primarily to valuation allowances recorded against
the Company's deferred income tax assets and in 1997 due to the amortization and
write-down of a portion of goodwill which is not deductible for tax purposes.
The Company recorded a $1.4 million gain from the extinguishment of
debt during 1998 related to a purchase agreement with a former customer.
The Company recorded a cumulative net effect of a change in accounting
principle of $800,000 in 1997 with no comparable charges during 1998. This
charge related to the adoption of a new accounting principle in the fourth
quarter of 1997 which requires that the cost of business process reengineering
activities that are part of a project to acquire, develop or implement internal
use software, whether done internally or by third parties, be expensed as
incurred. Previously, the Company capitalized these costs as system development
costs.
The resulting net loss was $18.2 million in 1998 as compared to a net
loss of $93.9 million in 1997.
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 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.
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. 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 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. In 1998, the Company sold such plants. See "Business -
Business Strategy" and "Risk Factors - Risks 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 totaling $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.
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.
Liquidity and Capital Resources
As of December 31, 1998, the Company's cash and cash equivalents
totaled $7.3 million compared to $9.3 million at December 31, 1997.
During 1998, the Company utilized cash and proceeds from the
disposition of assets to finance the purchase of property and equipment, reduce
outstanding balances under its credit agreement and make scheduled debt
repayments related to previous acquisitions of businesses, equipment and capital
leases while funding working capital requirements. For 1998, net cash used in
operating activities was approximately $5.8 million; net cash provided by
investing activities was approximately $17.1 million; and net cash used in
financing activities was approximately $13.3 million. The $5.8 million use of
cash from operating activities in 1998 results principally from a $7.6 million
decrease in gross inventory, offset against a $3.5 million increase in gross
accounts receivable, a $4.7 million decrease in accounts payable and losses
experienced during the year. During 1998, cash generated from investing
activities included $20.4 million in funds generated from disposition of the
Company's Abbeville, South Carolina and Arden and Charlotte, North Carolina OREX
manufacturing facilities, its SafeWaste business, and the Struble & Moffitt and
industrial divisions of its White Knight subsidiary. Offsetting these proceeds
was approximately $3.3 million in capital expenditures in 1998 as compared to
$4.0 million in 1997. These expenditures were primarily associated with
investments to improve the Company's internal management information systems.
Cash used in financing activities was approximately $13.3 million in 1998 as
compared to $8.8 million in 1997. During 1998, the Company utilized
approximately $14.0 million to reduce term, revolver and bank overdraft debt.
During 1998, the Company began the implementation of a strategic plan
to dispose of certain under performing assets, subsidiaries and businesses. As a
result, the Company disposed of its OREX manufacturing facilities as well as its
SafeWaste subsidiary and White Knight industrial business. These divestitures
have provided funds to reduce debt, relieve the Company of burdens associated
with poorly performing assets, provided focus upon the remaining business units
operated by the Company and provided funds for the future development of the
OREX technology. Net assets held for sale totaling $9.9 million at December 31,
1998 have been classified as current assets as a result of the Company's
expectation that these net assets will be sold during 1999. These net assets
held for sale consist of the Company's White Knight Healthcare subsidiary and
the Company's former headquarters located in Norcross, Georgia.
The Company maintains a $28 million credit agreement (as amended to
date, the "Credit Agreement") with The Chase Manhattan Bank (the "Bank"), as
agent, consisting of a revolving credit facility maturing on June 30, 2000.
Borrowing availability under the revolving credit facility is based on the
lesser of (i) a percentage of eligible accounts receivable and inventory or (ii)
$28 million, less any outstanding letters of credit issued under the Credit
Agreement. Current additional borrowing availability under the revolving
facility at December 31, 1998 was $2.3 million and at March 18, 1999 was $1.3
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 (9.0% at December 31,
1998). Outstanding borrowing under the revolving credit facility was $23.1
million at December 31, 1998 and was $24.4 million at March 18, 1999. At
December 31, 1997, as part of the Credit Agreement, the Company had a $15
million term loan facility. Utilizing proceeds from the disposition of assets,
the term loan was paid in full during 1998. Upon full payment, the term loan
commitment from the Bank was cancelled. The Credit Agreement provides for the
issuance of up to $3 million in letters of credit. Outstanding letters of credit
at December 31, 1998 were $97,000. The Credit Agreement provides for a fee of
0.25% per annum on the unused commitment, an annual collateral monitoring fee of
$50,000, and an outstanding letter of credit fee of up to 2% per annum. The
Credit Agreement is also subject to prepayment penalties through August 1999
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 earnings, and limitations on
acquisitions, dispositions, capital expenditures and additional indebtedness.
Certain of such covenants require that the Company reduce before September 30,
1999 its outstanding borrowings under its funded debt by about $10 million from
its funded debt existing at December 31, 1998. The Company also is not permitted
to pay any dividends. During 1998, 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, 1998, the Company was not in compliance with the EBITDA
and net worth covenants of the Credit Agreement. These existing covenant
violations were waived by the Bank effective March 22, 1999. In connection with
the waiver of these covenant violations, the Bank and the Company amended the
Credit Agreement to extend the maturity date of the facility to June 30, 2000,
reduce the facility to $28 million from $30 million, and revised certain
covenants including certain of the financial ratios, and EBITDA, net worth and
capital expenditure covenants. 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 and proceeds
from the sale of assets will be adequate to meet its liquidity and capital
requirements through 1999. However, currently unforeseen future developments and
increased working capital requirements may require additional debt financing or
issuances of common stock in 1999 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, 1998. Export sales by the Company
during 1998 were $11.1 million. Currency translations on export sales could be
adversely affected in the future by the relationship of the U.S. Dollar with
foreign currencies. In the future, the Company may import significant amounts of
products from foreign manufacturers, exposing the Company to risks on
fluctuations in currency exchange rates.
Newly Issued Accounting Standards. In June 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 companies report select information about operating segments in
reports issued to shareholders. The Company adopted SFAS 130 and SFAS 131 in
1998. Adoption of these new pronouncements had no effect on the Company's
consolidated operations or financial position. In June 1998, the Financial
Accounting Standards Board issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company is currently evaluating the
impact that this standard will have on its results of operations and financial
position upon adoption.
Year 2000 Issue
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.
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 substantially all of its conversion to a year 2000 compliant system,
with certain minor upgrades to be completed in third quarter, 1999. The
Company's Microtek operations substantially completed such conversion in 1998.
The Company's corporate operations are scheduled to complete such conversion by
June, 1999. If the Company does not sell its remaining White Knight business,
the Company has scheduled to complete such conversion for the White Knight
business during second quarter, 1999. Costs incurred to date for such
conversions approximate $7.9 million of which $2.5 million have been expensed
with $5.3 million representing capital expenditures. The Company estimates that
costs remaining to be incurred before scheduled completion of such conversion
will be approximately $735,000, all of which are expected to be capitalized. The
Company has begun, but not completed, a program to evaluate year 2000 compliance
of non-information technology assets. The Company has determined that its
critical manufacturing equipment is year 2000 compliant. Estimated costs to be
incurred and the schedule to become year 2000 compliant are subject to
uncertainties and risks (including, for example, failure to timely identify and
correct non-compliant systems, 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;
however, the Company has not completed its inquiries to third parties concerning
their compliance with the year 2000 issue. 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. The Company's customers are
primarily healthcare institutions or vendors to such institutions.
The Company has not adopted a specific contingency plan to address year
2000 non-compliance issues. The Company's experience in installing replacement
information systems has caused the Company to become familiar with the
consequences of reliance on such technology and short term solutions for
temporary interruptions to such systems. If the Company experiences critical
interruptions to its information systems or technologies, the Company will be
required to engage additional clerical services and would expect to incur
additional distribution expenses which could have a material adverse effect on
the Company's operating results.
The statements made under this caption are Year 2000 Readiness Disclosure
under the Year 2000 Information and Readiness Disclosure Act.
Forward Looking Statements
Statements made in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Annual
Report on Form 10-K that state the Company's or management's intentions, hopes,
beliefs, expectations or predictions of the future are forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward looking statements include, without limitation, statements
regarding the Company's planned product introductions and registrations, capital
expenditure requirements, cash and working capital requirements, the Company's
expectations regarding the adequacy of current financing arrangements, product
demand and market growth, 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
The Company's operating results and cash flows are subject to
fluctuations from changes in interest rates and foreign currency exchange rates.
The Company's cash and cash equivalents are short-term, highly liquid
investments with original maturities of three months or less consisting entirely
of U.S. Government securities or government backed securities. These investments
are classified in accordance with SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities," as available for sale securities and are stated
at cost which approximates market. As a result of the short-term nature of the
Company's cash and cash equivalents, a change of market interest rates does not
impact the Company's operating results or cash flow.
The assets and liabilities of the Company's 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 translations was not material to the Company's results of
operations for the year ended December 31, 1998. Currency translations on export
sales or import purchases could be adversely effected in the future by the
relationship of the U.S. dollar with foreign currencies.
At December 31, 1998, $23.1 million of the Company's long-term debt
bears interest at floating rates. Because these interest rates are variable, an
increase in interest rates would result in additional interest expense and a
reduction in interest rates would result in reduced interest expense, each of
which would have a corresponding impact on the Company's earnings and cash flow.
The remaining $3.5 million of the Company's long-term debt bears interest at
fixed rates ranging from 6.09% to 9.5%. A change in market interest rates is not
expected to be material to these fixed rate obligations.
The Company does not use any derivative instruments to hedge its
interest rate expense. The Company does not use derivative instruments for
trading purposes and the use of such instruments would be subject to strict
approvals by the Company's senior officers. Therefore, the Company's exposure
related to such derivative instruments is not expected to be material to the
Company's financial position, results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data are listed
under Item 14(a) and filed as part of this report on the pages indicated.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The current directors and executive officers of the Company are as
follows:
Name Position
---- ---------
Gene R. McGrevin Chairman of the Board of Directors
Migirdic Nalbantyan President and Chief Executive Officer, Director
Travis W. Honeycutt Executive Vice President, Secretary and Director
Dan R. Lee Executive Vice President, Assistant Secretar
and Director
Lester J. Berry Executive Vice President
Peter A. Schmitt Executive Vice President of Finance and
Administration, Treasurer, Chief
Financial Officer and Assistant Secretary
Michael Mabry Executive Vice President
David W. Velmosky Vice President of Administration/Strategic Alliances
Steve Plante Vice President
James C. Rushing, III Vice President - Finance
Rosdon Hendrix Director
Kenneth F. Davis Director
John E. McKinley Director
Terence N. Furness Director
Gene R. McGrevin (age 56) was elected Chairman of the Board of
Directors and acting President of the Company in April 1997, and currently
serves as Chairman of Isolyser. Mr. McGrevin also serves as chairman 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.
Migirdic Nalbantyan (age 56) was elected a Director of the Company in
September 1998, and President and Chief Executive Officer of the Company
effective October 1, 1998. Previously, Mr. Nalbantyan served as an Executive
Vice President of the Company from February 1, 1998. Prior to accepting such
position, Mr. Nalbantyan served in various executive positions, including
president, of BBA Nonwovens, a division of BBA Group PLC and now one of the
worlds largest manufacturers of nonwoven products, from 1986 to 1997. From 1968
to 1986 he held various manufacturing, process and product development,
marketing and business planning positions at DuPont's Textile Fibers operations.
Travis W. Honeycutt (age 56) has been Executive Vice President,
Secretary and a Director of the Company since its inception in 1987. Prior to
his co-founding the Company in 1987, Mr. Honeycutt had over 20 years of
experience in new product development for the industrial and health care
markets.
Dan R. Lee (age 51) 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.
Peter A. Schmitt (age 39) was elected Executive Vice President of
Finance and Administration, Chief Financial Officer, Treasurer and Assistant
Secretary in October 1998 after serving in similar positions since 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 65) 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 General Manager of Vision Care, National Sales and
Marketing Manager, Medical Specialties, and as the National Sales Manager,
Health Care Specialties and Surgical Products.
Michael Mabry (age 36) was elected Executive Vice President in October
1998 after serving as Vice President of Operations of the Company since May,
1997. Prior to accepting such position, Mr. Mabry served in various positions
with the Company (including Chief Information Officer) since his joining the
Company in September, 1995. From 1984 to 1995, Mr. Mabry was employed by DeRoyal
Industries where his career advanced from software engineer to vice president of
information systems and operations.
David W. Velmosky (age 49) was elected Vice President of
Administration/Strategic Alliances in October 1998 after serving as Vice
President of Human Resources of the Company effective since 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 and a masters degree
in industrial relations, Mr. Velmosky holds numerous advanced certifications in
employment law, ERISA benefits and compensation practices and is a certified
Senior Human Resources Professional.
Steve Plante (age 48) was elected Vice President of the Company in
October 1998 after serving as General Manager of MedSurg beginning earlier in
1998 and as Vice President of Operations of MedSurg since 1996. Mr. Plante
joined MedSurg in 1979, serving as plant manager.
James C. "Jim" Rushing III (age 55) was elected to the executive
position of Vice President Finance effective March 1999. Prior to accepting this
appointment, Mr. Rushing served in various financial positions including Chief
Financial Officer of New Life Corporation of America, a national charity serving
the financial and estate planning needs of high net worth investors through
5,000 financial advisors throughout the U.S., from 1997 to 1998, and as Vice
President - Finance, BBA Nonwovens, a division of BBA Group PLC, which is one of
the worlds largest manufacturers of nonwoven products, from 1995 to 1997. As
owner of a management consulting firm, Mr. Rushing provided various chief
financial officer and director services to various firms in the Mid-South from
1980 to 1995. Mr. Rushing was employed by Northern Telecom, Inc. (NORTEL), at
its U.S. Headquarters as Director of Accounting and Financial Analysis from 1978
to 1980.
Rosdon Hendrix (age 59) 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 48) was elected a Director of the Company in
January 1996. Dr. Davis has been a practicing surgeon on the staff of the Harbin
Clinic and Redmond Regional Medical Center, Rome, Georgia since 1986. In
addition, Dr. Davis serves on the Board of AmSouth Bank of Georgia, a publicly
owned bank, as well as various other companies, including a privately held
hospital consulting firm.
John E. McKinley (age 55) was elected a Director of the Company in May
1998. Between 1991 and 1996, Mr. McKinley was the principle operating officer of
BankSouth Corporation, Atlanta, Georgia, where he was a Board member and
Chairman of the Credit Policy Committee. Mr. McKinley also headed the Management
Committee of Bank South, which included direct responsibility for credit policy,
business banking and mortgage banking. From 1969 to 1991, Mr. McKinley worked
with Citizens and Southern National Bank and C&S/Sovran where he was the chief
credit officer of C&S Georgia Corporation and a senior vice president.
Additionally, Mr. McKinley has taught in numerous banking schools and has
authored or co-authored numerous books and articles on banking. Since 1996, Mr.
McKinley has been engaged in private consulting services.
Mr. McKinley also serves as a director of Inficorp Holdings, Inc.
Terence N. Furness (age 50) was elected President and Chief Executive
Officer of the Company effective January 1, 1998, and resigned such positions on
October 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, 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.
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 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 1998, 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. Nalbantyan filed a Form 4 late to report an exempt
share purchase by a family member and Mr. McGrevin filed an amended Form 5 to
correct a clerical error.
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 1998, 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, 1998
(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
Migirdic Nalbantyan 1998 $127,112(1) - - 400,000 $2,077(2)
President and Chief Executive
Officer
Terence N. Furness 1998 $240,000 $62,500 - 600,000(3) $4,750(4)
Former President and Chief
Executive Officer
Travis W. Honeycutt 1998 $150,000 - - - $3,235(5)
Executive Vice President 1997 $150,000 - - - $3,235(5)
1996 $150,000 - - 40,000 $3,235(5)
Dan R. Lee 1998 $150,000 - - 122,368 $5,133(7)
Executive Vice President (6) 1997 $150,000 - - 100,000 $4,978(7)
1996 $150,000 $100,000 - 50,000 $4,417(7)
Lester J. Berry 1998 $150,000 - - 20,000 $9,658(8)
Vice President (6) 1997 $150,000 - - - $9,302(8)
1996 $150,000 $100,000 - 16,500 $7,539(8)
Steve Plante 1998 $157,930 - - 72,999 $3,841(9)
Vice President
- -----------
(1) This amount represents compensation paid from February 1, 1998, the date Mr.
Nalbantyan became an employee of the Company.
(2) This amount represents contributions to a 401(k) plan.
(3) Mr. Furness' options, while awarded in 1998, have since expired.
(4) This amount represents contributions to a 401(k) plan.
(5) This amount represents the Company's payment on Mr. Honeycutt's behalf, for
$500,000 term life insurance policies.
(6) 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.
(7) 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.
(8) 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.
(9) This amount represents contributions to a 401(k) plan.
Employment Arrangements
The Company is a party to employment agreements with all of its
currently employed Named Executive Officers, except Travis W. Honeycutt and
Steve Plante.
Mr. Furness was hired as the Company's President and Chief Executive
Officer effective January 1, 1998, and resigned such position effective October
1, 1998. In connection with such resignation, the Company entered into a
severance agreement with Mr. Furness pursuant to which the Company agreed to
severance payments aggregating $300,000 payable over one year and agreed to
continue Company provided medical and dental coverage for one year, and Mr.
Furness agreed to certain covenants relating to the protection of confidential
information and restricting his ability to compete against the Company.
Effective February 1, 1998, in connection with the Company's hiring of
Mr. Nalbantyan as an Executive Vice President of the Company in charge of the
Company's OREX commercial development business unit, Mr. Nalbantyan entered into
a three year employment agreement with the Company. Such employment agreement
specifies a minimum salary and benefits payable to him during the term of the
employment agreement, and contains certain restrictive covenants including
covenants relating to the protection of confidential information and restricting
competition against the Company. The agreement is terminable by the Company or
the employee with or without cause. In the event of a termination of the
agreement by the Company without cause, or by the employee for good reason (as
defined), the employee would be entitled to one year of salary as severance. In
the event of any termination of Mr. Nalbantyan's employment occurring within six
months after a change in control (as defined) of the Company, other than a
termination of employment as a result of death, disability or for cause, then
the Company is obligated to pay a severance amount equal to 2.99 times Mr.
Nalbantyan'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.
The Company and Dan R. Lee are parties to an employment agreement under
which Mr. Lee agrees to continue to serve as an employee of the Company through
March 31, 2000, and specifies a certain minimum salary and benefits. The
agreement also includes certain restrictive covenants including covenants
relating to the protection of confidential information and restricting
competition against the Company. The agreement is terminable by the Company with
or without cause. In the event of any termination of Mr. Lee's employment by the
Company without cause, the Company remains obligated to pay the base salary
provided in the agreement through March 31, 2000.
Mr. Berry is a party to an employment agreement with Microtek expiring
on December 31, 1999. Such employment agreement specifies a minimum salary and
benefit payable to him during the term of the employment agreement and, in
consideration therefore, contains certain provisions restricting his ability to
compete against the Company after termination of the agreement or to use or
disclose confidential information. In connection with the Microtek acquisition,
Mr. Berry agreed to delete certain compensatory provisions of such agreement
otherwise arising in the event of certain events constituting a change of
control. Mr. Berry has agreed to continue to assist the Company in a
non-executive capacity following his scheduled retirement at the end of 1999.
Mr. Plante and the Company are parties to a severance agreement
pursuant to which the Company has agreed to pay Mr. Plante severance in the
amount equal to one year's salary in the event the employment of Mr. Plante is
terminated by the Company without cause including a termination of employment
resulting from a change of control.
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 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 11, 1999, options to purchase 4,078,543 shares of common
stock were outstanding under the Plan and approximately 145,200 shares of common
stock were available for future awards 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 "1995 Stock Purchase Plan"). The 1995 Stock Purchase Plan was established
pursuant to the provisions of Section 423 of the Code to provide a method
whereby all eligible employees of the Company may acquire a proprietary interest
in the Company through the purchase of common stock. Under the 1995 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 were
reserved for issuance under the 1995 Stock Purchase Plan, all of which have been
purchased and issued under the 1995 Stock Purchase Plan. On March 25, 1999, the
Board of Directors of the Company approved, adopted and recommended to the
shareholders the 1999 Stock Purchase Plan containing terms substantially similar
to the terms of the 1995 Stock Purchase Plan.
Stock Options
The Company granted options to its Named Executive Officers in 1998 as
set forth in the following table. The Company has no stock appreciation rights
("SARs") outstanding.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
----------------------------------------------------------
Name Number of Percent of Exercise Expiration Potential Realizable Value at
---- Securities Total or Base Date Assumed Annual rates of Stock
Underlying Options/SARs Price Price Appreciation for Option
Options/SARs Granted to ($/Sh) Term(1)
Granted (#) Employees in
Fiscal Year
--------------------------------
5% ($) 10% ($)
------------- -------------- ----------- ------------ --------------- ---------------
Migirdic Nalbantyan 200,000 7% $ 2.6875 02/01/08 $ 338,031(1) $ 856,637(1)
200,000 7% $ 1.25 10/02/08 $ 157,224(1) $ 398,436(2)
Terence N. Furness 42,666 2% $ 2.34375 12/31/98 $ 0(2) $ 0(2)
557,334 20% $ 2.00 12/31/98 $ 0(2) $ 0(2)
Dan R. Lee 36,842 1% $ 3.375 11/01/01 $ 34,353(1) $ 75,912(1)
85,526 3% $ 3.375 04/04/02 $ 79,749(1) $ 176,224(1)
Lester J. Berry 20,000 * $ 3.375 02/25/08 $ 42,450(1) $ 107,578(1)
Steve Plante 7,368 * $ 3.375 10/20/99 $ 15,639(1) $ 39,632(1)
2,211 * $ 3.375 10/03/00 $ 2,062(1) $ 4,556(1)
1,105 * $ 3.375 10/03/00 $ 1,030(1) $ 2,277(1)
7,368 * $ 3.375 11/01/01 $ 6,870(1) $ 15,182(1)
21,750 * $ 3.375 01/01/99 $ 20,281(1) $ 44,815(1)
33,197 1% $ 1.25 10/01/08 $ 26,097(1) $ 66,134(1)
------------------
*Less than one percent.
(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.
(2) While these options were granted in the last fiscal year, they also
expired in the last fiscal year.
The following table sets forth the value of options exercised during
1998 and of unexercised options held by the Company's Named Executive
Officers at December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise (#) Realized ($) Unexercisable Unexercisable
---- --------------- ------------ ------------- -------------
Migirdic Nalbantyan -0- -0- 0/400,000 0/0 (1)
Travis W. Honeycutt -0- -0- 40,000/0 0/0 (2)
Dan R. Lee -0- -0- 345,617/69,302 57,798/0 (3)
Lester J. Berry -0- -0- 102,500/0 0/0 (4)
Steve Plante -0- -0- 37,346/47,654 0/0 (5)
-----------
(1) The indicated value is based on an exercise prices of $2.6875 per share on
200,000 shares and $1.25 per share on 200,000 shares for unexercisable
options, and a value per share on December 31, 1998 of $1.06.
(2) The indicated value is based on an exercise price of $14.45 per share and
value per share at December 31, 1998 of $1.06.
(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, $3.375 per share on
53,072 shares for exercisable options and $3.375 on 69,302 shares for
unexercisable options, and a value per share on December 31, 1998 of $1.06.
(4) The indicated value is based on an exercise price of $3.19 per share on
66,000 shares, $2.73 per share on 16,500 shares for exercisable options and
$3.375 per share on 20,000 shares for unexercisable options and value per
share at December 31, 1998 of $1.06.
(5) The indicated value is based upon an exercise price of $3.375 per share on
37,346 shares for exercisable options and $3.375 per share on 14,457 shares
and $1.25 per share on 33,197 shares for unexercisable options, and a value
per share at December 31, 1998 of $1.06.
TEN YEAR OPTION/SAR REPRICINGS
In February 1998, the Company permitted option holders to exchange all
of their stock options having an exercise price at or above $3.49 for a lesser
number of replacement stock options at a new exercise price equal to the then
current fair market value of a share of Common Stock. (The exchange formula
provided for the reduction in the number of outstanding stock options by a
percentage equal to the product of fifty percent multiplied by the percentage
differential between the exercise price set forth in the stock option to be
cancelled in the exchange and the new exercise price.) The exchange program was
made available to all current employees in the Company except one executive
officer. The following table provides certain information regarding the exchange
for those executive officers of the Company who elected to participate in the
exchange, as well as certain information relative to a stock option repricing in
1996, for all current executive officers of the Company and executive officers
of the Company existing at the time of such repricing.
Ten-Year Option/SAR Repricings
Name and Title Date Securities Securities Market price Exercise New Length of
Underlying Underlying of stock at price at Exercise original
Number of Number of time of time of Price option term
options/ options/ repricing or repricing ($) remaining at
SARs SARs Rec'd amendment or date of
repriced or in Repricing ($) amendment repricing or
amended or amendment ($) amendment
(#) (#)
- -------------------------------------------------------------------------------------------------------------------
Dan R. Lee 02/25/98 50,000 36,842 3.375 7.125 3.375 3.7 years
Executive Vice
President
02/25/98 100,000 85,526 3.375 4.75 3.375 4.1 years
Peter A. Schmitt 02/25/98 30,000 22,105 3.375 7.125 3.375 2.5 years
Executive Vice
President
02/25/98 45,000 33,158 3.375 7.125 3.375 3.7 years
Michael Mabry 02/25/98 40,000 29,473 3.375 7.125 3.375 2.6 years
Executive Vice 02/25/98 50,000 42,763 3.375 4.75 3.375 4.1 years
President 11/01/96 40,000 40,000 7.125 18.00 7.125 4.0 years
David W. 02/25/98 20,000 14,737 3.375 7.125 3.375 3.7 years
Velmosky
Vice President
Steve Plante
Vice President 02/25/98 10,000 7,368 3.375 7.125 3.375 1.7 years
02/25/98 3,000 2,211 3.375 7.125 3.375 2.6 years
02/25/98 1,500 1,105 3.375 7.125 3.375 2.6 years
02/25/98 10,000 7,368 3.375 7.125 3.375 3.7 years
02/25/98 30,000 21,750 3.375 7.125 3.375 0.8 years
11/01/96 10,000 10,000 7.125 9.00 7.125 3 years
11/01/96 3,000 3,000 7.125 18.00 7.125 3.8 years
11/01/96 1,500 1,500 7.125 18.00 7.125 3.8 years
11/01/96 30,000 30,000 7.125 7.50 7.125 2.2 years
James S. Asip 11/01/96 25,000 25,000 7.125 13.13 7.125 4.2 years
Former Vice
President of
Sales
Richard Setian 11/01/96 54,000 54,000 7.125 9.00 7.125 3.5 years
Former Vice
President of
Marketing
Michael Sahady 11/01/96 40,000 40,000 7.125 14.45 7.125 4.2 years
Former Executive
Vice
President
Kenneth R. 12/18/96 25,000 25,000 7.125 13.13 7.125 4.1 years
Newsome 12/18/96 99,000 99,000 7.125 7.50 7.125 2.0 years
Former Vice
President of
Operations
Director Compensation
In 1998, the Company revised its system for compensating nonemployee
directors of the Company who are not affiliated with greater than 5%
shareholders of the Company ("Nonemployee Directors").
The Chairman receives a retainer of $48,000 per year, payable at the
rate of $4,000 per month. Such retainer became effective April 1, 1998, until
which time the Chairman continued to be compensated at the rate of $90,000 per
year, which was the salary rate approved for the Chairman in connection with his
agreement to accept the offices of acting president and chairman of the Company
in 1997. The other Nonemployee Directors of the Company receive a retainer of
$10,000 per year payable in a lump sum following each annual meeting of
shareholders. No meeting fees are payable to the Nonemployee Directors.
Nonemployee Directors are reimbursed upon request for reasonable expenses
incurred in attending Board of Director or committee meetings.
The Company's 1995 Nonemployee Director Stock Option Plan (the
"Director Option Plan") provides for automatic grants to Nonemployee Directors
of non-qualified stock options covering 2,000 shares of common stock at an
exercise price equal to the fair market value of the Company's common stock on
the date of grant. The date of grant under the Director Option Plan for each
Nonemployee Director then serving as such is (i) on the election of a
Nonemployee Director to the Board of Directors (except at an annual meeting of
shareholders) and (ii) following each annual meeting of shareholders occurring
subsequent to the first anniversary of the date of any options granted to such
Nonemployee Director under the preceding clause (i). Supplementing such grants
under the Director Option Plan, the Company grants to each Nonemployee Director
a non-qualified stock option covering 3,000 shares of common stock at an
exercise price equal to the fair market value of the Company's common stock on
such date of grant concurrently with the automatic grants under the Director
Option Plan as described above. These option grants may be exercised only by the
optionee beginning six months after the date of the grant until the earliest of
five years after the date of grant, thirty days after ceasing to be a director
of the Company (other than due to death or disability), and one year after death
or disability.
In addition, the Board of Directors, with each Nonemployee Director
(other than the Chairman) abstaining, awarded to each Nonemployee Director
(other than the Chairman) a non-qualified stock option under the Company's Stock
Option Plan covering 20,000 shares of the Company's common stock at an exercise
price of $2.28125 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. The Board of Directors, with the
Chairman abstaining, awarded the Chairman 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 $2.8125 per share (being the fair market value of such
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. Also in 1998, the Board of Directors,
with the Chairman abstaining, awarded the Chairman a non-qualified stock option
under the Company's stock option plan covering 50,000 shares of the Company's
common stock at an exercise price of $1.25 per share (being the fair market
value on the grant date), being exercisable one year after the grant date 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 25, 1999, certain information
regarding the beneficial ownership of common stock by (i) each person known by
the Company to be the beneficial owner of more than five percent of the
outstanding shares of common stock, (ii) each director and Named Executive
Officer identified under "Executive Compensation" above, and (iii) all directors
and executive officers as a group:
Percentage of Common
Stock Beneficially
Shares Beneficially Owned
Name of Beneficial Owner Owned
Robert L. Taylor (1) 2,012,600 5.0%
Travis W. Honeycutt (2) 2,563,722 6.4%
Gene R. McGrevin (3) 220,000 *
Migirdic Nalbantyan (4) 51,000 *
Dan R. Lee (5) 384,188 *
Rosdon Hendrix (6) 127,000 *
Kenneth Davis (7) 114,243 *
John E. McKinley (8) 145,000 *
Terence N. Furness 25,000 *
Steve Plante (9) 24,278 *
Lester J. Berry (10) 112,974 *
Dimensional Fund Advisors, Inc. (11) 2,582,850 6.4%
All directors and executive officers as a group (14) persons) 3,888,177 9.5%
(12)
- --------------
* 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 40,000 shares exercisable within 60
days.
(2) Includes options to acquire 40,000 shares exercisable within 60 days.
(3) Includes options to acquire 180,000 shares exercisable within 60 days.
(4) Includes options to acquire 50,000 shares exercisable within 60 days and
1,000 shares owned by a family member.
(5) Includes options to acquire 374,123 shares exercisable within 60 days.
(6) Includes options to acquire 81,000 shares exercisable within 60 days.
(7) Includes options to acquire 79,000 shares exercisable within 60 days.
(8) Includes options to acquire 25,000 shares exercisable within 60 days.
(9) Includes options to require 18,596 shares exercisable within 60 days.
(10) Includes options to acquire 102,500 shares exercisable within 60 days.
(11) As reported by Dimensional Fund Advisors, Inc. in a Statement on Form 13G
filed with the Securities and Exchange Commission. Dimensional Fund
Advisors, Inc. address is 1299 Ocean Avenue, 11th Floor, Santa Monica,
California 90401.
(12) Includes options to acquire 1,067,236 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,
leased approximately 3,500 square feet of space included within the Company's
administrative headquarters located in Norcross, Georgia during 1998. Mr.
McGrevin, the Chairman of the Company, serves as the Chairman 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 was terminated by mutual agreement at or about
February 1, 1999. 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) - Financial Statements and Schedules
The following financial statements and schedules are filed as part of this
annual report.
Consolidated Financial Statements and Independent Auditors' Report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31,
1998 and 1997
Consolidated Statements of Operations and Comprehensive Loss for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
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)
2.7 Agreement and Plan of Merger dated as of July 28, 1995 among the
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 Amendment to the Stock Option Plan (incorporated by
reference to Exhibit 10.59 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1995).
10.5 Form of Fifth Amendment to Stock Option Plan (incorporated by
reference to Exhibit 10.5 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1996).
10.6 Form of Incentive Stock Option Agreement pursuant to Stock Option Plan
(incorporated by reference to Exhibit 4.2 filed with the Company's
Registration Statement on Form S-8, File No. 33-85668)
10.7 Form of Non-Qualified Stock Option Agreement pursuant to Stock Option
Plan (incorporated by reference to Exhibit 4.3, filed with the
Company's Registration Statement on Form S-8, File No. 33-85668)
10.8 Form of Option for employees of the Company outside of Stock Option
Plan (incorporated by reference to Exhibit 10.6 filed with the
Company's Registration Statement on Form S-1, File No. 33-83474)
10.9 Employment Agreement of Lester J. Berry (incorporated by reference to
Exhibit 10.9 filed with the Company's Annual Report on Form 10-K for
the period ended December 31, 1996).
10.10 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 and 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 (incorporated by reference to
Exhibit 10.36 filed with the Company's Annual Report on Form 10-K for
the period ended December 31, 1997).
10.37 Employment Agreement effective as of April 1, 1997, between Isolyser
Company, Inc. and Dan R. Lee (incorporated by reference to Exhibit
10.37 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
10.38 Employment Agreement dated as of May 1, 1997 between Isolyser Company,
Inc. and Robert L. Taylor (incorporated by reference to Exhibit 10.38
filed with the Company's Annual Report on Form 10-K for the period
ended December 31, 1997).
10.39 Employment Agreement effective as of March 1, 1998, between Isolyser
Company, Inc. and Peter Schmitt (incorporated by reference to Exhibit
10.39 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
10.40 Asset Purchase Agreement dated August 11, 1998, between White Knight
Healthcare, Inc. and Thantex Holdings, Inc. (incorporated by reference
to Exhibit 2.1 filed with the Company's Current Report on Form 8-K
dated August 11, 1998).
10.41 Asset Purchase Agreement dated August 11, 1998, between SafeWaste
Corporation and SafeWaste, Inc. (incorporated by reference to Exhibit
2.2 filed with the Company's Current Report on Form 8-K dated August
11, 1998).
10.42 Arden Plant Agreement dated August 11, 1998, between Isolyser Company,
Inc., Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.3
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
10.43 Barmag Agreement dated August 11, 1998, between Isolyser Company, Inc.
and Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.4
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
10.44 PVA Agreement dated August 11, 1998, between Isolyser Company, Inc.
and Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.5
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
10.45 Abbeville Plant Agreement dated August 11, 1998, between Isolyser
Company, Inc., Thantex Specialties, Inc. and Thantex Holdings, Inc.
(incorporated by reference to Exhibit 2.6 filed with the Company's
Current Report on Form 8-K dated August 11, 1998).
10.46 Employment Agreement dated as of January 1, 1998, between the Company
and Terence N. Furness (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
10.47 Employment Agreement dated as of February 1, 1998, between the Company
and Migirdic Nalbantyan (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
10.48* Severance Agreement dated as of October 1, 1998, between the Company
and Terence N. Furness.
10.49* Severance Memorandum of Understanding dated August 5, 1998 between the
Company and Steve Plante.
10.50* Employment Agreement dated May 27, 1998, between the Company and
Lester J. Berry as amended by letter agreement dated December 16,
1998.
11.1* Statement re: computation of per share earnings
21.1* Subsidiaries of the Company
23.1* Consent of Deloitte & Touche LLP
27.1* Financial Data Schedule
- --------------------------------------
* Filed herewith.
(b) Reports on Form 8-K: Form 8-K/A, filed October 26, 1998.
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)
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 (incorporated by reference to
Exhibit 10.36 filed with the Company's Annual Report on Form 10-K for
the period ended December 31, 1997).
16. Employment Agreement effective as of April 1, 1997, between Isolyser
Company, Inc. and Dan R. Lee(incorporated by reference to Exhibit
10.37 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
17. Employment Agreement dated as of May 1, 1997 between Isolyser Company,
Inc. and Robert L. Taylor (incorporated by reference to Exhibit 10.38
filed with the Company's Annual Report on Form 10-K for the period
ended December 31, 1997).
18. Employment Agreement effective as of March 12, 1998, between Isolyser
Company, Inc. and Peter Schmitt(incorporated by reference to Exhibit
10.39 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
19. Employment Agreement dated as of January 1, 1998, between the Company
and Terence N. Furness (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
20. Employment Agreement dated as of February 1, 1998, between the Company
and Migirdic Nalbantyan (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
21. Severance Agreement dated as of October 1, 1998, between the Company
and Terence N. Furness.
22. Severance Memorandum of Understanding dated August 5, 1998 between the
Company and Steve Plante.
23. Employment Agreement dated May 27, 1998, between the Company and
Lester J. Berry as amended by letter agreement dated December 16,
1998.
815973v6
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 31, 1999.
ISOLYSER COMPANY, INC.
By: /s/ MIGIRDIC NALBANTYAN
-----------------------
Migirdic Nalbantyan, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities indicated on March 31, 1999.
SIGNATURE TITLE
/s/ MIGIRDIC NALBANTYAN President, Chief Executive Officer and Director
Migirdic Nalbantyan (principal executive officer)
/s/ TRAVIS W. HONEYCUTT Executive Vice President,
Travis W. Honeycutt Secretary and Director
/s/ DAN R. LEE Executive Vice President and Director
Dan R. Lee
/s/ PETER A. SCHMITT Executive Vice President, Chief Financial Officer
Peter A. Schmitt and Treasurer (principal financial and accounting
officer)
/s/ GENE R. MCGREVIN Chairman of the Board of Directors
Gene R. McGrevin
/s/ ROSDON HENDRIX Director
Rosdon Hendrix
/s/ KENNETH F. DAVIS Director
Kenneth F. Davis
/s/ JOHN E. MCKINLEY Director
John E. McKinley
/s/ TERENCE N. FURNESS Director
Terence N. Furness
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, 1998 and 1997, and the related
consolidated statements of operations and comprehensive loss, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and comprehensive
loss and its cash flows for each of the three years in the period ended December
31, 1998 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 Deloitte & Touche LLP
March 22, 1999
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
ASSETS 1998 1997 LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 7,324,976 $ 9,298,800 CURRENT LIABILITIES:
Accounts receivable, net of Accounts payable $ 6,246,514 $ 10,108,429
allowance for doubtful Accrued compensation 2,221,430 2,519,672
accounts of $1,038,563 and Other accrued liabilities 3,389,214 3,124,204
$1,643,951, respectively 18,117,970 13,909,271
Inventories, net 23,646,914 32,067,351 Current portion of long-term debt 9,394,767 4,609,493
----------- -------------
Prepaid inventories 337,306
Net assets held for sale 9,872,825 35,750,491 Total current liabilities 21,251,925 20,361,798
Prepaid expenses and other
assets 1,075,693 1,746,131
------------ ------------
Total current assets 60,375,684 92,772,044 LONG-TERM DEBT 18,365,557 37,545,894
PROPERTY AND EQUIPMENT: DEFERRED RENT 214,370 309,372
Land 244,390 964,390
Building and leasehold
improvements 9,455,246 11,757,796 COMMITMENTS AND CONTINGENCIES (Note 8)
Equipment 14,941,168 16,600,424
Furniture and fixtures 2,709,327 2,503,121 SHAREHOLDERS' EQUITY:
Construction-in-progress 3,722,019 1,217,335 Participating preferred stock, no
------------ ------------ par, 500,000 shares authorized,
31,072,150 33,043,066 none issued
Less accumulated depreciation 15,510,793 13,050,991 Common stock, $.001 par; 100,000,000
------------ ------------ shares authorized; 39,803,774 and
Property and equipment, net 15,561,357 19,992,075 39,554,411 shares issued, respectively 39,804 39,554
INTANGIBLE ASSETS: Additional paid-in capital 203,363,722 203,601,184
Accumulated deficit (133,979,888) (115,743,281)
Goodwill 34,893,115 34,581,870 Unearned shares restricted to
Customer lists 1,285,898 1,285,898 employee stock ownership plan (240,000) (300,000)
Patent and license agreements 2,463,781 2,444,070 Cumulative translation adjustment (74,617) (103,526)
Noncompete agreements 385,000 385,000 ------------- -------------
69,109,021 87,493,931
Other 362,101 355,705 Treasury shares, at cost
------------ ------------ (46,999 and 174,259 shares,
39,389,895 39,052,543 respectively) (433,890) (1,377,364)
------------- -------------
Less accumulated amortization 10,262,226 8,249,130
------------ ------------
Intangible assets, net 29,127,669 30,803,413 Total shareholders' equity 68,675,131 86,116,567
INVESTMENT IN JOINT VENTURE 110,463
INVESTMENT IN THANTEX 3,604,371
OTHER ASSETS - Net 848,442 655,636
------------ ------------ ------------ ------------
$109,517,523 $144,333,631 $109,517,523 $144,333,631
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
NET SALES $ 147,642,941 $ 159,939,799 $ 164,906,050
COST OF GOODS SOLD 109,935,577 142,093,456 128,597,814
-------------- -------------- --------------
Gross profit 37,707,364 17,846,343 36,308,236
OPERATING EXPENSES:
Selling general and administration 40,506,711 43,421,851 41,381,791
Amortization of intangibles 2,052,115 3,847,223 4,289,850
Research and development 3,581,608 2,600,824 2,172,910
Impairment loss 7,444,903 57,310,274
Restructuring charge 4,410,536
Costs associated with merger 3,371,546
-------------- -------------- --------------
Total operating expenses 53,585,337 107,180,172 55,626,633
-------------- -------------- --------------
LOSS FROM OPERATIONS (15,877,973) (89,333,829) (19,318,397)
INTEREST INCOME 273,521 555,306 1,708,766
INTEREST EXPENSE (3,507,088) (3,926,500) (2,990,147)
INCOME (LOSS) FROM JOINT VENTURE 11,160 (44,000) (34,246)
-------------- -------------- --------------
LOSS BEFORE INCOME TAX PROVISION (BENEFIT),
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (19,100,380) (92,749,023) (20,634,024)
INCOME TAX PROVISION (BENEFIT) 540,227 354,331 (639,120)
-------------- -------------- --------------
LOSS BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (19,640,607) (93,103,354) (19,994,904)
EXTRAORDINARY ITEMS - Gain from extinguishment
of debt, net of tax of $0 in 1998 and loss from
refinancing of credit facilities, net of tax
benefit of $332,041 in 1996 1,404,000 (457,465)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of tax of $0 (800,000)
-------------- -------------- --------------
NET LOSS (18,236,607) (93,903,354) (20,452,369)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss) 28,909 (118,249) 57,067
-------------- -------------- --------------
COMPREHENSIVE LOSS $ (18,207,698) $ (94,021,603) $ (20,395,302)
============== ============= =============
LOSS PER COMMON SHARE - Basic and diluted:
Loss before extraordinary items and cumulative
effect of change in accounting principle $ (0.49) $ (2.37) $ (0.52)
Extraordinary items 0.03 (0.01)
Cumulative effect of change in accounting
principle (0.02)
-------------- -------------- --------------
NET LOSS $ (0.46) $ (2.39) $ (0.53)
-------------- -------------- --------------
WEIGHTED-AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - Basic and Diluted 39,655,190 39,272,691 38,762,750
============== ============= =============
See notes to consolidated financial statements.
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ISSUED ADDITIONAL ACCUMULATED TRANSLATION ESOP TREASURY SHAREHOLDERS'
PAID-IN
-------------------
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT SHARES SHARES EQUITY
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
for 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 issued and
outstanding common shares
for 7,440 new 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
Issuance of 128,148 shares of
common stock from treasury
pursuant to ESPP (706,004) 960,790 254,786
Issuance of 249,363 shares of
common stock pursuant to
401(k) plan 249,363 250 511,079 511,329
Release of 16,500 shares
reserved for ESOP (42,537) 60,000 17,463
Release of 888 White Knight
escrow shares (17,316) (17,316)
Currency translation gain 28,909 28,909
Net loss (18,236,607)
---------- ------- ------------ ------------- --------- --------- ----------- ------------
BALANCE - December 31, 1998 39,803,774 $39,804 $203,363,722 $(133,979,888) $ (74,617) $(240,000) $ (433,890) $ 68,675,131
========== ======= ============ ============= ========= ========= =========== ============
See notes to consolidated financial statements.
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
OPERATING ACTIVITIES:
Net loss $(18,236,607) $(93,903,354) $(20,452,369)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Microtek net income for December 1995 26,720
Depreciation 3,726,744 7,524,005 6,552,416
Amortization 2,052,031 3,847,223 4,289,850
Provision for doubtful accounts 290,643 375,442 145,092
Provision for obsolete and slow moving inventory 43,216 14,694,250 9,479,426
Loss on disposal of property and equipment 138,403 207,252
Impairment loss 7,444,903 57,310,274 2,169,934
(Income) loss from joint venture (11,160) 44,000 34,426
Extraordinary gain from extinguishment of debt (1,404,000)
Compensation expense related to ESOP 17,462 38,672 136,125
Compensation expense related to vesting of variable options 500,000
Changes in assets and liabilities, net of effects from
purchased and disposed businesses:
Accounts receivable (3,520,532) 4,408,808 (4,128,080)
Inventories 7,574,637 4,314,164 (25,708,431)
Prepaid inventories 104,113 (404,438) 245,116
Prepaid expenses and other assets 778,432 698,272 (1,305,973)
Deferred income taxes (1,357,482)
Other assets (372,359) (259,459) (185,977)
Accounts payable (4,658,180) 2,157,788 (5,531,890)
Accrued compensation (269,247) 278,315 (434,562)
Other liabilities (155,564) (388,098) (3,528)
Other accrued liabilities 772,004 177,913 1,597,373
------------ ------------ ------------
Net cash (used in) provided by operating activities (5,823,464) 1,052,180 (33,724,562)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of and deposits for property and equipment (3,299,172) (4,013,545) (19,081,793)
Purchase of businesses, net of cash acquired (5,873,503)
Proceeds from the sale of assets held for sale 20,415,880 262,500
------------ ------------ ------------
Net cash provided by (used in) investing activities 17,116,708 (3,751,045) (24,955,296)
------------ ------------ ------------
FINANCING ACTIVITIES:
Borrowings under line of credit agreements 56,629,571 53,068,155 74,943,720
Repayments under line of credit agreements (57,802,024) (57,240,650) (52,264,517)
Increase (decrease) in bank overdraft (146,800) (2,721,485) 1,429,174
Proceeds from notes payable 109,523 1,338,022 13,844,872
Repayment of notes payable (12,852,362) (4,699,355) (16,461,380)
Proceeds from issuance of treasury stock 254,786 695,267 118,545
Proceeds from exercise of stock options and warrants 750,475 3,119,010
Proceeds from the issuance of common stock 511,329
------------ ------------ ------------
Net cash (used in) provided by financing activities (13,295,977) (8,809,571) 24,729,424
------------ ------------ ------------
(Continued)
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
EFFECT OF EXCHANGE RATE CHANGES ON CASH 28,909 (118,249) 57,067
------------ ------------ ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (1,973,824) (11,626,685) (33,893,367)
CASH AND CASH EQUIVALENTS:
Beginning of year 9,298,800 20,925,485 54,818,852
------------ ------------ ------------
End of year $ 7,324,976 $ 9,298,800 $ 20,925,485
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest (net of interest capitalized) $ 3,437,038 $ 3,772,635 $ 2,797,865
============ ============ ============
Income taxes $ 344,184 $ 217,952 $ 1,922,656
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES:
Stock received in exchange for assets disposed $ 3,604,571 $ 243,327 $ 1,008,503
============ ============ ============
Equipment acquired through capital leases $ 276,990 $ 243,327 $ 1,008,503
============ ============ ============
(Concluded)
See notes to consolidated financial statements.
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Isolyser Company, Inc. and subsidiaries (the "Company") develop,
manufacture, and market proprietary and other products and services for
patient care, occupational safety, and management of potentially infectious
and hazardous waste primarily for the domestic health care market which
represents one business segment. The Company's products provide an umbrella
of protection from potentially infectious and hazardous waste for patients,
staff, the public, and the environment by facilitating the safe and
cost-effective disposal of such waste at the Point-of-Generation(TM). The
Company markets its products to hospitals and other end users through
distributors and directly through its own sales force.
The Company'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 $4,721,000, $8,139,000 and $7,097,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Consolidation Policy - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition - Revenues from the sale of the Company's products are
recognized at the time of shipment. The Company generally only accepts
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, the
Company capitalized as part of property and equipment $220,000 of interest.
Intangible Assets - Intangible assets consist primarily of goodwill,
customer lists, and noncompete agreements. Goodwill represents the excess
of the cost of acquired businesses 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.
Investment in Joint Venture - Investment in the joint venture is accounted
for using the equity method of accounting. The joint venture investment
represented a 50% ownership interest in a mobile waste treatment operation
which was sold in conjunction with the August 11, 1998, disposition of
Safewaste.
Investment in Thantex - Investment in Thantex represents a 19.5% ownership
interest in a company formed to own and operate the Arden and Abbeville
manufacturing facilities and is accounted for under the cost method of
accounting (Note 3).
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, 1998,
1997, and 1996.
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 with
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 1998, 1997, and 1996, there were no
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 a public company reports select
information about operating segments. The Company adopted SFAS 130 and SFAS
131 in 1998. Adoption of these new pronouncements had no effect on the
Company's results of operations or financial position. In June 1998, the
Financial Accounting Standards Board issued SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. The Company is
currently evaluating the impact that this standard will have on its results
of operations and financial position upon adoption.
Reclassifications - Certain reclassifications have been made in the 1997
and 1996 financial statements to conform to the 1998 classifications.
2. DISPOSITIONS AND ACQUISITIONS
DISPOSITIONS
On February 25, 1998, the Company approved a plan to dispose of its Arden
and Charlotte, North Carolina and Abbeville, South Carolina OREX
manufacturing facilities and White Knight subsidiary and reflected the net
assets of these entities as available-for-sale at December 31, 1997.
On August 11, 1998, the Company disposed of its Arden and Charlotte, North
Carolina OREX manufacturing facilities, 4.5 million pounds of OREX
Inventory (Note 8), the industrial division of its White Knight subsidiary
and substantially all of the assets of its SafeWaste subsidiary (classified
as held for use at December 31, 1997) for proceeds of approximately $13.5
million in cash. On October 14, 1998, the Company disposed of its
Abbeville, South Carolina OREX manufacturing facility for proceeds of
approximately $8 million, consisting of $7.5 million in cash and a $500,000
8% note payable due October 14, 2003. The net cash proceeds from these
dispositions were used to repay amounts borrowed under the Company's Credit
Agreement (Note 5). In conjunction with these dispositions, the Company
also received a 19.5% ownership interest in Thantex, the company formed to
own and operate the Arden and Abbeville facilities (Note 1).
On December 15, the Company disposed of the Struble and Moffit division of
its White Knight subsidiary for proceeds of $1.2 million.
On February 4, 1999, the Company signed a letter of intent to dispose of
its former corporate headquarters located in Norcross, Georgia, for
estimated net cash proceeds of $2.0 million which will be used to repay
amounts borrowed under the Company's Credit Agreement. The Company
anticipates completing this disposition by March 31, 1999, and has
reflected this asset as held for sale at December 31, 1998.
At December 31, 1998 and 1997, net assets held for sale are comprised of
the following:
1998 1997
Assets:
Accounts receivable $ 3,589,000 $ 8,848,000
Inventory (LIFO basis) 6,156,000 11,748,000
Prepaid inventory (LIFO basis) 588,000 1,337,000
Prepaid expenses and other assets 71,000 186,000
Property and equipment, net 2,000,000 19,980,000
Other assets 73,000 286,000
----------- -----------
Total assets 12,477,000 42,385,000
Liabilities:
Accounts payable 1,441,000 2,247,000
Bank overdraft 361,000 508,000
Accrued compensation 261,000 766,000
Accrued expenses 525,000 1,278,000
Long-term debt 16,000 1,836,000
----------- -----------
Total liabilities 2,604,000 6,635,000
----------- -----------
Net assets held for sale 9,873,000 35,750,000
=========== ===========
The effect of not depreciating net assets held for sale was $3.1 million
and $0 in 1998 and 1997, respectively. The Company anticipates disposing of
these net assets during 1999.
The following represents the results of operations (including impairment
charges) of the above noted entities for the years ended December 31, 1998
and 1997, respectively:
1998 1997
Net sales $ 38,990,000 $ 49,931,000
Net loss (16,577,000) (86,357,000)
Net loss per share - Basic and Diluted (0.41) (2.20)
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)
Note: All eliminations are related to intercompany sales and purchases.
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.
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, 1998, $798,000 in additional consideration has been paid.
Goodwill arising from this acquisition is being amortized using the
straight-line method over 25 years. This acquisition has been accounted for
using the purchase method of accounting. The consolidated statements of
operations include the operations of this business since its acquisition
date.
The following unaudited pro forma information for 1996 gives effect to this
acquisition as if it had occurred on January 1, 1996:
1996
Net sales $166,492,000
Net loss (20,697,000)
Net loss per share - Basic and Diluted (0.53)
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 LOSS AND RESTRUCTURING CHARGE
IMPAIRMENT LOSS
During the fourth quarter of 1997, the Company determined that its Orex
manufacturing facilities in Arden and Charlotte, North Carolina and
Abbeville, South Carolina and its White Knight subsidiary were impaired
based on analyses of undiscounted future operating cash flows from these
entities. As a result, the Company recorded the following impairment
charges to adjust the carrying values of such entities to their estimated
fair market values based on appraisals and/or analyses of discounted future
operating cash flows from these entities:
Write-down of property and equipment $34,516,000
Write-down of intangible assets 22,794,000
-----------
$57,310,000
===========
In conjunction with the 1998 disposition of the Company's White Knight
industrial and Struble and Moffit divisions (Note 2), the Company recorded
additional impairment and other charges totaling $7.0 million to adjust the
carrying values of the net assets to their fair market value based upon
actual consideration received. The following charges were recorded:
Write-down of inventory (1) $ 900,000
Write-down of accounts receivable (2) 300,000
Write-down of property and equipment (3) 5,800,000
----------
$7,000,000
===========
(1) Included in cost of goods sold
(2) Included in selling, general and administrative expenses
(3) Included in impairment loss
In December, 1998, based upon revised estimated consideration to be
received from the disposition of the remainder of White Knight and the
Company's former corporate office, the Company recorded an additional
impairment loss of $1.6 million.
RESTRUCTURING CHARGES
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:
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 of its Safewaste subsidiary,
primarily equipment, with a carrying value of $1,642,000 at December 31,
1996 were classified as held for sale. During 1997, the Company determined
that this equipment would be held for use and, accordingly, reclassified
this equipment into property and equipment in the consolidated balance
sheet. In conjunction with the August 11, 1998 disposition of Arden and
Abbeville, the Company disposed of this equipment (Note 2).
4. INVENTORIES
Inventories are summarized by major classification at December 31, 1998 and
1997 as follows:
1998 1997
Raw materials $16,959,000 $24,121,000
Work-in-process 1,747,000 4,456,000
Finished goods 21,864,000 25,901,000
----------- -----------
40,570,000 54,478,000
Less reserves for slow moving and
obsolete inventory 16,923,000 22,411,000
----------- -----------
$23,647,000 $32,067,000
=========== ===========
At December 31, 1998 and 1997, the Company's LIFO inventory is included as
a component of net assets held for sale.
At December 31, 1998 and 1997, net OREX inventory is approximately
$4,920,000 and $7,500,000, respectively.
5. LONG-TERM DEBT
The Credit Agreement
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 $45,000,000 credit agreement as amended
through March 20, 1998 between the Company and a Bank, consisting of a
$30,000,000 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
In conjunction with the dispositions (Note 2) the Company repaid
outstanding borrowings under the term loan facility plus interest and
terminated such facility and repaid a portion of the revolving credit
facility, plus interest. Outstanding borrowings under the term loan
facility were $12,388,000 at December 31, 1997.
The Credit Agreement contains certain restrictive covenants, including the
maintenance of certain financial ratios, earnings before interest, taxes,
depreciation and amortization ("EBITDA"), and net worth, and places
limitations on acquisitions, dispositions, capital expenditures, and
additional indebtedness. The Company also is not permitted to pay any
dividends. At December 31, 1998, the Company was not in compliance with the
EBITDA and net worth covenants and due to the pending sale of the Company's
former corporate office (Note 2) will not be in compliance with the
disposition covenant. These existing covenant violations were waived by the
Bank on March 22, 1999.
In connection with the waiver of these covenant violations, the Bank and
the Company amended the Credit Agreement to extend the maturity date of the
revolving credit facility to June 30, 2000 and revise certain covenants
including certain of the financial ratios, EBITDA, net worth and capital
expenditure. Additionally, the Company is required to reduce the December
31, 1998 outstanding revolving credit facility balance by $8.0 million by
September 30, 1999.
As amended, borrowings under the revolving credit facility are based on the
lesser of a percentage of eligible accounts receivable and inventory or
$28,000,000 less any outstanding letters of credit issued under the Credit
Agreement. Current additional borrowing availability under the facility at
December 31, 1998 was $2, 254,000. Revolving credit borrowings bear
interest, at the Company's option, at either the Alternate Base Rate, plus
an Interest Margin as defined ("Interest Margin") or LIBOR plus an Interest
Margin (9.0% at December 31, 1998). Outstanding borrowings under the
revolving credit facility were $23,119,000 and $24,274,000 at December 31,
1998 and 1997, 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, 1998 were
$97,000. The Credit Agreement also provides for a fee of .25% per annum on
the unused commitment, an annual collateral monitoring fee of $50,000, and
an outstanding letter of credit fee of up to 2% per annum. The Company is
also subject to prepayment penalties through August, 1999 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.
Other Long-Term Debt
As a result of the Microtek merger, the Company is obligated under certain
long-term notes payable, relating primarily to Microtek acquisitions, which
aggregated $3,051,000 and $4,051,000 at December 31, 1998 and 1997,
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 $2,760,000 and $3,490,000 at December 31, 1998 and
1997, respectively, are subordinated to the Credit Agreement.
As a result of the White Knight acquisition, the Company is obligated under
certain long-term notes payable and capital leases which aggregated
$1,836,000 at December 31, 1997, and were included as a component of net
assets held for sale. One of these obligations related to a $1,284,000 7 %
note payable to a customer to be settled by trade discounts to be received
on purchases of White Knight products through January, 2000 at which time
the note payable and any accrued interest terminates. During 1996, this
customer was acquired by a competitor of the Company and has subsequently
discontinued its purchases of White Knight products. The Company believes
that this customer will no longer purchase White Knight products and,
accordingly, recorded an extraordinary gain of $1,404,000 in 1998, relating
to the extinguishment of this note payable plus accrued interest. Another
of these obligations relates to a $415,000 8% note payable due in August,
1999. The remaining $26,000 relates to capital lease obligations due
through August 2002, and are included as a component of net assets held for
sale at December 31, 1998.
During 1998 and 1997 the Company acquired certain equipment under capital
leases aggregating $277,000 and $243,000 at December 31, 1998 and 1997,
respectively.
At December 31, 1998, aggregate maturities of long-term debt, including
$26,000 as a component of net assets held for sale and amounts due under
capital leases, are summarized below:
1999 $ 9,405,000
2000 18,325,000
2001 537,000
2002 520,000
-----------
$28,787,000
===========
The carrying value of long-term debt at December 31, 1998 and 1997
approximates fair value based on interest rates that are believed to be
available to the Company for debt with similar prepayment provisions
provided for in the existing debt agreements.
6. LEASES
The Company leases office, manufacturing, and warehouse space, and
equipment under operating lease agreements expiring through 2004. Rent
expense was $2,849,000, $2,595,000, and $2,549,000 in 1998, 1997, and 1996,
respectively. At December 31, 1998, minimum future rental payments under
these leases are as follows:
1999 $2,309,000
2000 1,996,000
2001 1,840,000
2002 1,510,000
2003 1,284,000
Thereafter 579,000
----------
Total minimum payments $9,518,000
===========
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:
1998 1997 1996
Current:
Federal $ 349,000
State $ 80,001 67,000
Foreign $540,227 274,330 179,000
-------- -------- -----------
540,277 354,331 595,000
Deferred:
Federal (1,039,000)
State (195,000)
(1,234,000)
Income tax benefit related to extraordinary item (332,000)
-------- -------- -----------
Total income tax provision (benefit) $540,227 $354,331 $ (971,000)
======== ======== ===========
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,
------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------
Federal statutory rate $(6,017,000) (34)% $(31,807,000) (34)% $(7,016,000) (34)%
Items not deductible for tax
purposes, primarily
goodwill and merger costs 365,000 2% 8,595,000 9% 2,889,000 14%
Other, net 159,000 1% (12,000) -% 124,000 1%
Valuation allowance 6,033,000 34% 23,578,000 25% 3,372,000 16%
----------- ------ ------------ ------- ----------- =======
$540,000 3% $ 354,000 -% $( 639,000) ( 3)%
=========== ====== ============ ======= =========== =======
Deferred income taxes as of December 31, 1998 and 1997 are as follows:
1998 1997
Deferred income tax assets (liabilities):
Allowance for doubtful accounts 361,000 346,000
Inventory 8,305,000 10,367,000
Accrued expenses 753,000 1,210,000
Valuation allowance (9,419,000) (11,923,000)
----------- -----------
Net deferred income taxes - current
Operating loss carryforward 26,415,000 15,506,000
Capital loss carryforward 230,000 230,000
Intangible assets 177,000 1,284,000
Property and equipment 1,632,000 3,931,000
Credit carryforward 221,000 152,000
Accrued expenses 3,301,000 2,893,000
Other 122,000 122,000
Valuation allowance (32,098,000) (24,118,000)
----------- -----------
Net deferred income taxes - noncurrent 0 0
----------- -----------
Net deferred income taxes 0 0
=========== ===========
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.
Gross deferred income tax assets and liabilities equaled $41,517,000 and $0
respectively, at December 31, 1998 and $36,041,000 and $0, respectively, at
December 31, 1997.
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. During
1998, the Company increased their valuation allowance by $5,476,000 to
$41,517,000.
At December 31, 1998, the Company has net operating loss carryforwards of
$77,693,000 which expire at various dates through 2018.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in routine litigation and proceedings in the
ordinary course of business. Management believes that pending litigation
matters will not have a material adverse effect on the Company's financial
position or results of operations.
In conjunction with the August 11, 1998 disposition of the Arden
manufacturing facility (Note 2) the Company entered into a product
financing arrangement with Thantex whereby the Company agreed to repurchase
2.6 million pounds of OREX fiber originally sold to Thantex for $0.45 per
pound, either as fiber or converted product, for $0.80 per pound ratably
over a four year period. Accordingly, the Company continues to record this
inventory at historical carrying value and has recorded a liability for the
repurchase price in the accompanying financial statements. The difference
between the repurchase price and the sale price to Thantex represents
deferred interest expense which will be recognized on a straight line basis
over a four year period.
9. 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 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, 1998, 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.
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, 1998, currently exercisable options for 18,000 shares were outstanding
under this plan.
A summary of option activity during the three years ended December 31, 1998
is as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
Outstanding - December 31, 1995 4,032,999 $ 5.60
Granted 1,875,016 7.95
Exercised (983,165) 3.19
Canceled (1,111,819) 11.50
---------- --------
Outstanding - December 31, 1996 3,813,031 5.65
Granted 642,000 4.62
Exercised (213,705) 3.62
Canceled (346,022) 6.27
---------- --------
Outstanding - December 31, 1997 3,895,304 5.54
Granted 2,826,417 2.51
Exercised
Canceled (2,841,554) 5.81
---------- --------
Outstanding - December 31, 1998 3,880,167 3.13
========== ========
On February 25, 1998, the Company permitted option holders to exchange all
of their stock options having an exercise price at or above $3.49 for a
lesser number of replacement stock options at a new exercise price equal to
the then current fair market value of a share of Common Stock. The exchange
program was made available to all then current employees except one
executive officer. As a result 1,379,732 options at a weighted-average
exercise price of $7.13 were exchanged for 1,034,662 options with a
weighted-average exercise price of $3.37.
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, 1998:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
$0.83 - $3.79 3,371,366 4.7 $ 2.51 2,040,489 $ 2.68
4.00 - 4.60 38,000 8.0 4.01 12,500 4.04
4.64 - 9.00 386,801 2.6 6.05 371,629 6.03
13.13 - 18.00 84,000 2.0 14.40 57,332 14.38
----------- -------- ------- ----------- --------
3,880,167 4.4 3.13 2,481,950 3.46
At December 31, 1998 and 1997, exercisable options were 2,481,950 and
2,969,153, respectively, at weighted average exercise prices of $3.46 and
$5.20, respectively.
The fair value of options granted in 1998, 1997 and 1996 were $1.48, $2.44
and $6.93, respectively, using the Black Sholes option pricing model with
the following assumptions:
1998 1997 1996
Dividend yield % 0.00 0.00 0.00
Expected volatility % 0.48 0.44 0.54
Risk free interest rate % 0.05 0.07 0.06
Forfeiture rate % 0.16 0.03 0.03
Expected life, in years 7.08 6.09 4.05
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. Through December 31, 1997 the Company
had issued 189,615 shares under the ESPP. During 1998 the Company granted
the remaining 110,385 rights to purchase shares. Such shares were issued in
January 1999 and the ESPP was terminated. Pro forma compensation costs
associated with the rights granted under the ESPP is estimated based on
fair market value. This plan was terminated in December 1998.
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):
1998 1997 1996
Net loss $ (20,548,436) $ (94,796,000) $ (24,577,000)
============== ============== ==============
Net loss per share - Basic and Diluted $ (0.51) $ (2.41) $ (0.63)
============= ============== ==============
At December 31, 1998 and 1997, shares available for future grants are
829,000 and 857,000 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 1998, 1997, and 1996,
resulting in compensation expense of $27,616, $39,000, and $136,000,
respectively. At December 31, 1998, 66,000 common shares with a market
value of $70,125 remain unearned under the ESOP.
The Company's contributions to the ESOP each plan year will be determined
by the Board of Directors provided that for any year in which the ESOP Loan
remains outstanding, the contributions by the Company 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 1998, 1997, and 1996.
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
acquirer or related parties will entitle its holder to purchase, at the
right's exercise price, common stock or common stock equivalents having a
market value immediately prior to the triggering of the right of twice that
exercise price. In addition, after an acquirer obtains 15% ownership, if
the Company is involved in certain mergers, business combinations, or asset
sales, each right not owned by the acquirer or related persons will entitle
its holder to purchase, at the right's exercise price, shares of common
stock of the other party to the transaction having a market value
immediately prior to the triggering of the right of twice that exercise
price.
In September 1997, the Company amended its shareholder rights plan to
include a provision whereby it may not be amended and rights may not be
redeemed by the Board of Directors for a period of one year or longer. The
provision only limits the power of a new Board in those situations where a
proxy solicitation is used to evade protections afforded by the shareholder
rights plan. A replacement Board retains the ability to review and act upon
competing acquisition proposals.
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
The Company had 22%, 20%, and 17% of the Company's sales to one customer
for the years ended December 31, 1998, 1997, and 1996, respectively, and
accounts receivable from this customer of $2,472,000, $2,349,000, and
$2,688,000 at December 31, 1998, 1997, and 1996, respectively.
Included in the Company's consolidated balance sheet at December 31, 1998
are the net assets of the Company's manufacturing facilities located in the
United Kingdom, Mexico, and the Dominican Republic, which total $6,814,000.
Only the manufacturing facility in the United Kingdom sells products to
external customers. Sales from the United Kingdom were $4,460,000,
$4,471,000, and $5,396,000 in 1998, 1997, and 1996, respectively.
At December 31, 1998, approximately 13% 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 either in cash or
shares of the Company's common stock. Vesting in the Company's matching
contributions is based on years of continuous service. The Company
contributed $501,000, $510,000, and $140,000, and to the plan during 1998,
1997, and 1996, respectively.
14. UNAUDITED QUARTERLY FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
Year Ended Quarter
-----------------------------------------------------------------------------
DECEMBER 31, FIRST SECOND THIRD FOURTH
1998
Net sales $ 41,230 $ 38,874 $ 36,112 $ 32,610
Gross profit 10,642 8,742 (1) 9,973 8,350
Loss before extraordinary
items (1,287) (9,260)(2) (2,056) (7,037) (3)
Net loss (1,287) (9,260) (2,056) (5,633) (4)
Net loss per common share -
Basic & Diluted (0.03) (0.23) (0.05) (0.15)
1997
Net sales 40,003 42,434 41,877 35,626
Gross profit 9,157 9,472 (4,615) (5) 3,832
Loss before cumulative effect of
change in accounting principle (3,910) (3,566) (17,177) (68,450) (6)
Net loss (3,910) (3,566) (17,177) (69,250) (7)
Net loss per common share -
Basic & Diluted (0.10) (0.09) (0.44) (1.76)
1 Includes $900,000 of inventory write-downs.
2 Includes $6.5 million of impairment and other charges (Note 3).
3 Includes $2.1 million of impairment charges (Note 3).
4 Includes an extraordinary gain of $1.4 million net of tax of $0, relating
to the extinguishment of debt (Note 5).
5 Includes $13.0 million of excess and/or obsolete OREX inventory
write-downs.
6 Includes $57.3 million of impairment charges (Note 3).
7 Includes a cumulative charge of $800,000, net of tax of $0, relating to the
implementation of EITF 97-13 (Note 11).
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT COSTS AND CHARGED TO
BEGINNING (REVERSED FROM) EXPENSES DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES (NOTE 1) (NOTE 2) END OF PERIOD
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, 1997:
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
=========== =========== ========== =========== ============
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful trade accounts
receivable $ 1,850,092 $ 290,647 $ - $ 322,790 $ 1,817,949
=========== =========== ========== =========== ============
Reserve for obsolete and slow-moving
inventories $23,537,315 $ 43,215 $ - $ 5,593,201 $ 17,987,329
=========== =========== ========== =========== ============
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.
Note 3: Allowance for doubtful accounts include amounts classified as
net assets held for sale.